Attached files
file | filename |
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EX-32.2 - CHINACAST EDUCATION CORP | v201182_ex32-2.htm |
EX-31.1 - CHINACAST EDUCATION CORP | v201182_ex31-1.htm |
EX-31.2 - CHINACAST EDUCATION CORP | v201182_ex31-2.htm |
EX-32.1 - CHINACAST EDUCATION CORP | v201182_ex32-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
þ
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the quarterly period ended September 30, 2010
Or
|
o
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the transition period
from to
Commission
File Number: 001-33771
CHINACAST
EDUCATION CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
20-0178991
(I.R.S.
Employer Identification
Number)
|
Suite
08, 20/F, One International Financial Centre, 1 Harbour View
Street,
Central,
Hong Kong
(Address
of Principal Executive Offices) (Zip Code)
(852) 3960
6506
(Registrant’s
Telephone Number, Including Area Code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 þ
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes ¨
No ¨
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.:
Large accelerated filer
o
|
Accelerated
filer þ
|
Non-accelerated
filer o
(Do not check if a smaller reporting
company)
|
Smaller
reporting
company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No þ
There
were 49,778,952 shares of the Company’s common stock, par value $0.0001 per
share, outstanding as of November 5, 2010.
Page
|
||
PART I — FINANCIAL
INFORMATION
|
3
|
|
Item 1. Financial
Statements
|
3
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
28
|
|
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
|
34
|
|
Item 4. Controls
and Procedures
|
35
|
|
PART II — OTHER
INFORMATION
|
36
|
|
Item 1. Legal
Proceedings
|
36
|
|
Item 1A. Risk
Factors
|
36
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
36
|
|
Item 3. Defaults
Upon Senior Securities
|
36
|
|
Item 4. (Removed
and Reserved)
|
36
|
|
Item 5. Other
Information
|
36
|
|
Item 6.
Exhibits
|
36
|
|
SIGNATURES
|
37
|
|
EXHIBIT
INDEX
|
38
|
2
CHINACAST
EDUCATION CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In
thousands, except share-related data)
As of
|
||||||||||||
As of September 30,
|
December 31,
|
|||||||||||
2010
|
2010
|
2009
|
||||||||||
US$
|
RMB
|
RMB
|
||||||||||
(Note 1)
|
(Note 1)
|
|||||||||||
Assets
|
||||||||||||
Current
assets:
|
||||||||||||
Cash
and cash equivalents
|
60,471
|
405,153
|
327,628
|
|||||||||
Term
deposits
|
89,552
|
600,000
|
507,000
|
|||||||||
Accounts
receivable
|
7,470
|
50,050
|
53,828
|
|||||||||
Inventory
|
215
|
1,438
|
1,386
|
|||||||||
Prepaid
expenses and other current assets
|
4,303
|
28,825
|
19,212
|
|||||||||
Amounts
due from related parties
|
513
|
3,438
|
6,388
|
|||||||||
Deferred
tax assets
|
102
|
682
|
1,010
|
|||||||||
Current
portion of prepaid lease payments for land use rights
|
484
|
3,246
|
3,246
|
|||||||||
Total
current assets
|
163,110
|
1,092,832
|
919,698
|
|||||||||
Non-current
deposits
|
1,815
|
12,159
|
14,550
|
|||||||||
Property
and equipment, net
|
109,179
|
731,498
|
516,938
|
|||||||||
Prepaid
lease payments for land use rights - non-current
|
26,758
|
179,281
|
144,818
|
|||||||||
Acquired
intangible assets, net
|
17,471
|
117,055
|
71,286
|
|||||||||
Long-term
investments
|
450
|
3,015
|
3,101
|
|||||||||
Non-current
advances to related party
|
14,874
|
99,665
|
99,727
|
|||||||||
Goodwill
|
114,737
|
768,741
|
503,771
|
|||||||||
Total
assets
|
448,394
|
3,004,246
|
2,273,889
|
3
As of
|
||||||||||||
As of September 30,
|
December 31,
|
|||||||||||
2010
|
2010
|
2009
|
||||||||||
US$
|
RMB
|
RMB
|
||||||||||
(Note 1)
|
(Note 1)
|
|||||||||||
Current
liabilities:
|
||||||||||||
Accounts
payable (including accounts payable of the consolidated VIE without
recourse to ChinaCast Education Corporation of RMB1,705 and RMB719 as of
September 30, 2010 and December 31, 2009, respectively)
|
5,938 | 39,782 | 16,061 | |||||||||
Accrued
expenses and other current liabilities (including accrued expenses and
other liabilities of the consolidated VIE without recourse to ChinaCast
Education Corporation of RMB18,210 and RMB16,740 as of September 30, 2010
and December 31, 2009, respectively)
|
39,290 | 263,241 | 215,631 | |||||||||
Deferred
revenues (including deferred revenues of the consolidated VIE
without recourse to ChinaCast Education Corporation of nil as
of September 30, 2010 and December 31, 2009)
|
47,626 | 319,097 | 156,645 | |||||||||
Income
taxes payable (including income taxes payable of the
consolidated VIE without recourse to ChinaCast Education
Corporation of RMB4,179 and RMB2,293 as of September 30, 2010 and December
31, 2009, respectively)
|
13,998 | 93,793 | 68,731 | |||||||||
Current
portion of long-term bank borrowings (including current portion of
long-term bank borrowings of the consolidated VIE without
recourse to ChinaCast Education Corporation of nil as of
September 30, 2010 and December 31, 2009)
|
25,075 | 168,000 | 104,400 | |||||||||
Current
portion of capital lease obligation (including current portion of capital
lease obligation of the consolidated VIE without
recourse to ChinaCast Education Corporation of nil as of
September 30, 2010 and December 31, 2009)
|
196 | 1,313 | 1,323 | |||||||||
Other
borrowings (including other borrowings of the consolidated VIE
without recourse to ChinaCast Education Corporation of nil as
of September 30, 2010 and December 31, 2009)
|
224 | 1,500 | 200 | |||||||||
Total
current liabilities
|
132,347 | 886,726 | 562,991 | |||||||||
Non-current
liabilities:
|
||||||||||||
Long-term
bank borrowings (including long-term bank borrowings of the
consolidated VIE without recourse to ChinaCast Education
Corporation of nil as of September 30, 2010 and December 31,
2009)
|
16,418 | 110,000 | 134,000 | |||||||||
Deferred
tax liabilities – non-current (including deferred tax liabilities –
non-current of the consolidated VIE without
recourse to ChinaCast Education Corporation of nil as of
September 30, 2010 and December 31, 2009)
|
8,150 | 54,606 | 30,923 | |||||||||
Unrecognized
tax benefits – non-current (including unrecognized tax benefits of the
consolidated VIE without recourse to ChinaCast Education Corporation of
RMB5,662 and RMB5,257 as of September 30, 2010 and December 31, 2009,
respectively)
|
15,111 | 101,244 | 62,457 | |||||||||
Total
non-current liabilities
|
39,679 | 265,850 | 227,380 | |||||||||
Total
liabilities
|
172,026 | 1,152,576 | 790,371 | |||||||||
Commitments
and contingencies (Note 15)
|
||||||||||||
Equity:
|
||||||||||||
Ordinary
shares (US$0.0001 par value; 100,000,000 shares authorized; 49,778,952 and
45,170,698 shares issued and outstanding as of September 30, 2010 and
December 31, 2009, respectively)
|
5 | 36 | 33 | |||||||||
Additional
paid-in capital
|
228,379 | 1,530,140 | 1,290,651 | |||||||||
Statutory
reserve
|
5,842 | 39,139 | 39,139 | |||||||||
Accumulated
other comprehensive loss
|
(599 | ) | (4,011 | ) | (6,055 | ) | ||||||
Retained
earnings
|
36,093 | 241,822 | 136,583 | |||||||||
Total
ChinaCast Education Corporation shareholders’ equity
|
269,720 | 1,807,126 | 1,460,351 | |||||||||
Noncontrolling
interest
|
6,648 | 44,544 | 23,167 | |||||||||
Total
equity
|
276,368 | 1,851,670 | 1,483,518 | |||||||||
Total
liabilities and equity
|
448,394 | 3,004,246 | 2,273,889 |
See notes
to unaudited condensed consolidated financial statements.
4
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In
thousands, except share-related data)
For the three months ended September 30,
|
For the nine months ended September
30
|
|||||||||||||||||||||||
2010
|
2010
|
2009
|
2010
|
2010
|
2009
|
|||||||||||||||||||
US$
|
RMB
|
RMB
|
US$
|
RMB
|
RMB
|
|||||||||||||||||||
(Note 1)
|
(Note 1)
|
(Note
1)
|
(Note
1)
|
|||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||
Service
|
18,238 | 122,195 | 80,289 | 50,921 | 341,170 | 228,391 | ||||||||||||||||||
Equipment
|
436 | 2,924 | 1,896 | 441 | 2,955 | 6,065 | ||||||||||||||||||
18,674 | 125,119 | 82,185 | 51,362 | 344,125 | 234,456 | |||||||||||||||||||
Cost
of revenues:
|
||||||||||||||||||||||||
Service
|
(9,157 | ) | (61,358 | ) | (28,468 | ) | (24,136 | ) | (161,713 | ) | (83,479 | ) | ||||||||||||
Equipment
|
(423 | ) | (2,832 | ) | (1,875 | ) | (423 | ) | (2,832 | ) | (6,001 | ) | ||||||||||||
(9,580 | ) | (64,190 | ) | (30,343 | ) | (24,559 | ) | (164,545 | ) | (89,480 | ) | |||||||||||||
Gross
profit
|
9,094 | 60,929 | 51,842 | 26,803 | 179,580 | 144,976 | ||||||||||||||||||
Operating
(expenses) income:
|
||||||||||||||||||||||||
Selling
and marketing expenses (including share-based compensation of RMB nil and
RMB267 for the three months ended September 30 for 2010 and 2009,
respectively, share-based compensation of RMB410 and RMB1,373 for the nine
months ended September 30 for 2010 and 2009,
respectively)
|
(59 | ) | (394 | ) | (899 | ) | (254 | ) | (1,702 | ) | (3,442 | ) | ||||||||||||
General
and administrative expenses (including share-based compensation of
RMB1,922 and RMB2,868 for the three months ended September 30 for
2010 and 2009, respectively, share-based compensation of RMB6,114 and
RMB11,474 for the nine months ended September 30 for 2010 and 2009,
respectively)
|
(2,957 | ) | (19,817 | ) | (12,964 | ) | (7,816 | ) | (52,369 | ) | (43,603 | ) | ||||||||||||
Foreign
exchange gain (loss)
|
(1 | ) | (4 | ) | (51 | ) | (83 | ) | (557 | ) | 65 | |||||||||||||
Management
service fee
|
- | - | 510 | - | - | 3,806 | ||||||||||||||||||
Gain
from change in contingent consideration
|
1,413 | 9,467 | - | 1,413 | 9,467 | - | ||||||||||||||||||
Other
operating income
|
(5 | ) | (34 | ) | 41 | 27 | 180 | 548 | ||||||||||||||||
Total
operating expenses, net
|
(1,609 | ) | (10,782 | ) | (13,363 | ) | (6,713 | ) | (44,981 | ) | (42,626 | ) |
5
For the three months ended September 30,
|
For the nine months ended September
30,
|
|||||||||||||||||||||||
2010
|
2010
|
2009
|
2010
|
2010
|
2009
|
|||||||||||||||||||
US$
|
RMB
|
RMB
|
US$
|
RMB
|
RMB
|
|||||||||||||||||||
(Note 1)
|
(Note 1)
|
(Note
1)
|
(Note
1)
|
|||||||||||||||||||||
Income
from operations
|
7,485
|
50,147
|
38,479
|
20,090
|
134,599
|
102,350
|
||||||||||||||||||
Interest
income
|
572
|
3,829
|
2,134
|
1,540
|
10,316
|
6,922
|
||||||||||||||||||
Interest
expense
|
(606
|
)
|
(4,058
|
)
|
(2,421
|
)
|
(1,585
|
)
|
(10,623
|
)
|
(5,591
|
)
|
||||||||||||
Income
before provision for income taxes and earnings in equity method
investments
|
7,451
|
49,918
|
38,192
|
20,045
|
134,292
|
103,681
|
||||||||||||||||||
Provision
for income taxes
|
(1,163
|
)
|
(7,792
|
)
|
(7,619
|
)
|
(4,110
|
)
|
(27,540
|
)
|
(21,090
|
)
|
||||||||||||
Net
income before earnings in equity investments
|
6,288
|
42,126
|
30,573
|
15,935
|
106,752
|
82,591
|
||||||||||||||||||
Loss in
equity investments
|
(4
|
)
|
(26
|
)
|
(793
|
)
|
(13
|
)
|
(86
|
)
|
(1,370
|
)
|
||||||||||||
Income
from continuing operation, net of tax
|
6,284
|
42,100
|
29,780
|
15,922
|
106,666
|
81,221
|
||||||||||||||||||
Discontinued
operations
|
||||||||||||||||||||||||
Loss
from discontinued operations, net of taxes of RMB nil for the three months
and nine months ended September 30 for 2010 and 2009:
|
-
|
-
|
(388
|
)
|
-
|
-
|
(1,441
|
)
|
||||||||||||||||
Net
income
|
6,284
|
42,100
|
29,392
|
15,922
|
106,666
|
79,780
|
||||||||||||||||||
Less:
Net income attributable to noncontrolling interest
|
(84
|
)
|
(559
|
)
|
(2,036
|
)
|
(213
|
)
|
(1,427
|
)
|
(6,945
|
)
|
||||||||||||
Net
income attributable to ChinaCast Education Corporation
|
6,200
|
41,541
|
27,356
|
15,709
|
105,239
|
72,835
|
||||||||||||||||||
Net
income
|
6,284
|
42,100
|
29,392
|
15,922
|
106,666
|
79,780
|
||||||||||||||||||
Foreign
currency translation adjustments
|
50
|
338
|
43
|
298
|
1,994
|
(697
|
)
|
|||||||||||||||||
Comprehensive
income
|
6,334
|
42,438
|
29,435
|
16,220
|
108,660
|
79,083
|
||||||||||||||||||
Comprehensive
income attributable to noncontrolling interest
|
(76
|
)
|
(510
|
)
|
(2,040
|
)
|
(206
|
)
|
(1,377
|
)
|
(6,945
|
)
|
||||||||||||
Comprehensive
income attributable to ChinaCast Education Corporation
|
6,258
|
41,928
|
27,395
|
16,014
|
107,283
|
72,138
|
||||||||||||||||||
Net
income per share
|
||||||||||||||||||||||||
Net
income attributable to ChinaCast Education Corporation per
share:
|
||||||||||||||||||||||||
Basic
|
0.12
|
0.83
|
0.76
|
0.32
|
2.21
|
2.03
|
||||||||||||||||||
Diluted
|
0.12
|
0.82
|
0.75
|
0.32
|
2.18
|
2.03
|
||||||||||||||||||
Weighted
average shares used in computation:
|
||||||||||||||||||||||||
Basic
|
49,834,291
|
49,834,291
|
36,133,233
|
47,693,969
|
47,693,969
|
35,814,325
|
||||||||||||||||||
Diluted
|
50,370,903
|
50,370,903
|
36,379,884
|
48,176,902
|
48,176,902
|
35,945,264
|
See notes
to unaudited condensed consolidated financial statements.
6
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)
(In
thousands, except share-related data)
ChinaCast Education Corporation Shareholders
|
||||||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||||||
Additional
|
other
|
|||||||||||||||||||||||||||||||
Ordinary
|
paid-in
|
Statutory
|
Retained
|
comprehensive
|
Noncontrolling
|
Total
|
||||||||||||||||||||||||||
Shares
|
Amount
|
capital
|
Reserve
|
earnings
|
loss
|
interest
|
equity
|
|||||||||||||||||||||||||
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
||||||||||||||||||||||||||
Balance
at January 1, 2010
|
45,170,698 | 33 | 1,290,651 | 39,139 | 136,583 | (6,055 | ) | 23,167 | 1,483,518 | |||||||||||||||||||||||
Issuance
of shares of common stock
|
4,428,254 | 3 | 232,967 | — | — | — | — | 232,970 | ||||||||||||||||||||||||
Share-based
compensation
|
— | — | 6,522 | — | — | — | — | 6,522 | ||||||||||||||||||||||||
Issuance
of vested shares
|
180,000 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Noncontrolling
interest contribution in joint venture
|
— | — | — | — | — | — | 20,000 | 20,000 | ||||||||||||||||||||||||
Net
income
|
— | — | — | — | 105,239 | — | 1,427 | 106,666 | ||||||||||||||||||||||||
Foreign
currency translation adjustments
|
— | — | — | — | — | 2,044 | (50 | ) | 1,994 | |||||||||||||||||||||||
Balance
at September 30, 2010
|
49,778,952 | 36 | 1,530,140 | 39,139 | 241,822 | (4,011 | ) | 44,544 | 1,851,670 | |||||||||||||||||||||||
US$ | 5 | US$ | 228,379 | US$ | 5,842 | US$ | 36,093 | US$ | (599 | ) | US$ | 6,648 | US$ | 276,368 |
ChinaCast Education Corporation Shareholders
|
||||||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||||||
Additional
|
other
|
|||||||||||||||||||||||||||||||
Ordinary
|
paid-in
|
Statutory
|
Retained
|
comprehensive
|
Noncontrolling
|
Total
|
||||||||||||||||||||||||||
Shares
|
Amount
|
capital
|
reserve
|
Earnings
|
loss
|
interest
|
equity
|
|||||||||||||||||||||||||
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
RMB
|
||||||||||||||||||||||||||
Balance
at January 1, 2009
|
35,648,251 | 27 | 948,352 | 28,117 | 55,526 | (5,462 | ) | 44,579 | 1,071,139 | |||||||||||||||||||||||
Issuance
of restricted shares of common stock for acquisition of additional
interests in subsidiary
|
2,582,947 | 2 | 28,746 | — | — | — | (28,748 | ) | — | |||||||||||||||||||||||
Share-based
compensation
|
120,000 | — | 12,847 | — | — | — | — | 12,847 | ||||||||||||||||||||||||
Net
income
|
— | — | — | — | 72,835 | — | 6,945 | 79,780 | ||||||||||||||||||||||||
Foreign
currency translation adjustments
|
— | — | — | — | — | (697 | ) | (2 | ) | (699 | ) | |||||||||||||||||||||
Balance
at September 30, 2009
|
38,351,198 | 29 | 989,945 | 28,117 | 128,361 | (6,159 | ) | 22,774 | 1,163,067 | |||||||||||||||||||||||
US$ | 4 | US$ | 140,580 | US$ | 4,135 | US$ | 18,877 | US$ | (906 | ) | US$ | 3,349 | US$ | 171,039 |
See notes
to unaudited condensed consolidated financial statements.
7
(In
thousands)
For the nine months ended September 30,
|
||||||||||||
2010
|
2010
|
2009
|
||||||||||
US$
|
RMB
|
RMB
|
||||||||||
(Note 1)
|
(Note 1)
|
|||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
15,922
|
106,666
|
79,780
|
|||||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
|
5,497
|
36,832
|
18,268
|
|||||||||
Amortization
of acquired intangible assets
|
4,064
|
27,231
|
11,833
|
|||||||||
Amortization
of land use rights
|
375
|
2,510
|
1,973
|
|||||||||
Share-based
compensation
|
973
|
6,522
|
12,847
|
|||||||||
Loss
on disposal of property, plant and equipment
|
-
|
-
|
519
|
|||||||||
Loss
in equity investments
|
13
|
86
|
1,370
|
|||||||||
Changes
in assets and liabilities:
|
||||||||||||
Accounts
receivable
|
720
|
4,823
|
(23,080
|
)
|
||||||||
Inventory
|
(8
|
)
|
(52
|
)
|
(570
|
)
|
||||||
Prepaid
expenses and other current assets
|
(538
|
)
|
(3,607
|
)
|
3,019
|
|||||||
Non-current
deposits
|
804
|
5,390
|
(133
|
)
|
||||||||
Amounts
due from related parties
|
440
|
2,950
|
5,751
|
|||||||||
Accounts
payable
|
(397
|
)
|
(2,657
|
)
|
6,587
|
|||||||
Accrued
expenses and other current liabilities
|
(1,964
|
)
|
(13,158
|
)
|
(13,856
|
)
|
||||||
Deferred
revenues
|
23,834
|
159,699
|
23,120
|
|||||||||
Amount
due to related party
|
-
|
-
|
(599
|
)
|
||||||||
Income
taxes payable
|
2,934
|
19,656
|
13,415
|
|||||||||
Deferred
tax assets
|
139
|
931
|
-
|
|||||||||
Deferred
tax liabilities
|
(710
|
)
|
(4,765
|
)
|
(1,816
|
)
|
||||||
Unrecognized
tax benefits
|
1,987
|
13,320
|
5,791
|
|||||||||
Net
cash provided by operating activities
|
54,085
|
362,377
|
144,219
|
|||||||||
Cash
flows from investing activities:
|
||||||||||||
Advance
to related party
|
-
|
-
|
(20,000
|
)
|
||||||||
Purchase
of subsidiaries, net of cash acquired
|
(55,876
|
)
|
(374,374
|
)
|
||||||||
Cash
received from noncontrolling interest for establishing joint
venture
|
2,985
|
20,000
|
||||||||||
Repayment
from advance to related party
|
9
|
62
|
27,544
|
|||||||||
Purchase
of property and equipment
|
(8,165
|
)
|
(54,708
|
)
|
(26,153
|
)
|
||||||
Term
deposits
|
(13,881
|
)
|
(93,000
|
)
|
89,000
|
|||||||
Deposits
for investments
|
(448
|
)
|
(3,000
|
)
|
(103,000
|
)
|
||||||
Net
cash used in investing activities
|
(75,376
|
)
|
(505,020
|
)
|
(32,609
|
)
|
8
|
For the nine months ended September 30,
|
|||||||||||
|
2010
|
2010
|
2009
|
|||||||||
|
US$
|
RMB
|
RMB
|
|||||||||
|
(Note 1)
|
(Note 1)
|
||||||||||
Cash
flows from financing activities:
|
||||||||||||
Other
borrowings raised
|
13,955
|
93,500
|
10,350
|
|||||||||
Other
borrowings raised from related party
|
-
|
-
|
500
|
|||||||||
Repayment
of other borrowings
|
(13,761
|
)
|
(92,200
|
)
|
(11,367
|
)
|
||||||
Bank
borrowings raised
|
11,940
|
80,000
|
128,400
|
|||||||||
Bank
borrowings repaid
|
(14,090
|
)
|
(94,400
|
)
|
(58,400
|
)
|
||||||
Guarantee
deposit paid
|
-
|
-
|
(3,000
|
)
|
||||||||
Repayment
of capital lease obligation
|
(1
|
)
|
(10
|
)
|
88
|
|||||||
Proceeds
from issuance of shares, net of issuance costs
|
34,772
|
232,970
|
-
|
|||||||||
Net
cash provided by financing activities
|
32,815
|
219,860
|
66,571
|
|||||||||
Effect
of foreign exchange rate changes
|
46
|
308
|
-
|
|||||||||
Net
increase in cash and cash equivalents
|
11,524
|
77,217
|
178,181
|
|
||||||||
Cash
and cash equivalents at beginning of the period
|
48,901
|
327,628
|
220,131
|
|||||||||
Cash
and cash equivalents at end of the period
|
60,471
|
405,153
|
398,312
|
See notes
to unaudited condensed consolidated financial statements.
9
CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
(In
thousands, except share-related data)
1.
|
BASIS OF
PREPARATION
|
The
accompanying unaudited condensed consolidated financial statements of ChinaCast
Education Corporation (“CEC”) have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”) regarding interim
financial reporting. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States
of America (“US GAAP”) for complete annual financial statements and should be
read in conjunction with the audited financial statements included in CEC’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
In the
opinion of the management of CEC, the accompanying unaudited condensed
consolidated financial statements are prepared on the same basis as the audited
financial statements and these unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the operating results expected for any subsequent interim period or for CEC’s
fiscal year ending December 31, 2010.
The
accompanying unaudited condensed consolidated financial statements include the
accounts of CEC, its subsidiaries, and consolidated variable interest entity
(collectively, the “Company” or "ChinaCast"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Newly
Established Subsidiaries
In
October 2009, one of
the Company’s major operating subsidiaries, ChinaCast Technology (Shanghai)
Limited (“CCT Shanghai”), entered into an agreement with Qingdao China
University of Petroleum Holding Limited ("CUP") to establish Qingdao Petroleum
University Education Development Limited (“QPU”). The total registered capital
is RMB 50,000, with 60% owned by CCT Shanghai, and CUP to hold the rest of the
equity interest. In September 2010, the Company completed its capital injection
of RMB30,000. Since CCT Shanghai has a majority voting power after the
completion of all the capital injection, QPU has been consolidated by the
Company since September 2010.
The
VIE Arrangements
PRC laws
and regulations currently restrict direct foreign ownership of business entities
providing telecommunications services, Internet access and the distribution of
news and information in the PRC where certain licenses are required. As a
Delaware company, the Company is deemed a foreign legal person under the PRC
laws. To comply with the PRC laws and regulations, the Group provides
substantially all of its satellite broadband business activities in the PRC
through its variable interest entity (“VIE”), ChinaCast Li Xiang Co. Ltd.
(“CCLX”).
Arrangement with
CCLX
CCLX is a
variable interest entity established on May 7, 2003. ChinaCast and its
majority-owned subsidiaries do not have legal ownership of CCLX which is
licensed to provide value-added satellite broadband services in the PRC. CCLX is
legally owned by CCL and Li Wei, a PRC citizen. Each of these investors is the
related party of the Company acting as de facto agent for the Company. To
provide the Company the ability to receive the majority of the expected residual
returns of the VIE and their subsidiaries, the Company’s 98.5% owned subsidiary,
CCT Shanghai entered into a series of contractual arrangements with
CCLX.
10
Technology
services agreement: Pursuant to a technical services agreement (the "CCLX
TSA") and the Supplemental Agreement to CCLX TSA, CCT Shanghai assists CCLX in
implementing CCLX's businesses relating to the provision of computer,
telecommunications and information technology products and services, including
the provision of Internet service and content. As consideration for these
services, CCT Shanghai is entitled to charge CCLX monthly service fees equal to
the total revenue earned by CCLX, less operating expenses reasonably incurred in
the course of conducting the business for which CEC and its subsidiaries provide
technical services. In the event that CCLX operating expenses exceed CCLX
revenue for a given month, CCT Shanghai shall reimburse CCLX an amount
equivalent to such excess. Pursuant to the CCLX TSA, CCLX prepares an annual
budget for its business, which includes project revenue, operating expenses,
pricing policies and payment terms. CCLX submits this budget to CCT Shanghai for
approval and CCT Shanghai reviews it quarterly. Changes to or deviation from the
budget require approval of CCT Shanghai.
Equity
pledge agreement: Pursuant to the equity pledge agreement, as a
collateral security for the prompt and complete return of the equipment, CCLX's
shareholders pledged to CCT Shanghai all of their rights, title and interest in
the CCLX's shares, including ownership rights and rights to dividends and other
distributions.
The
Company is the primary beneficiary and absorbs 100% of the economic benefits of
CCLX. CCL and Li Wei contributed their own funds in an aggregate amount of
Renminbi ("RMB") 19,063, which no loans provided by ChinaCast or its
majority-owned subsidiaries. Accordingly, the investment was reported as
noncontrolling interest in the accompanying consolidated financial statements.
ChinaCast's subsidiaries have also provided funding to CCLX totaling RMB18,531
through December 31, 2009 to finance the development of CCLX's business
operations.
The
following unaudited financial statement amounts and balances of CCLX was
included in the accompanying unaudited condensed consolidated financial
statements as of and for the nine months ended September 30, 2010:
As of
|
||||||||||||
As of September 30,
|
December 31,
|
|||||||||||
2010
|
2010
|
2009
|
||||||||||
US$
|
RMB
|
RMB
|
||||||||||
Current
assets
|
5,503 | 36,872 | 45,388 | |||||||||
Non-current
assets
|
577 | 3,866 | 5,374 | |||||||||
Total
assets
|
6,080 | 40,738 | 50,762 | |||||||||
Current
liabilities
|
3,596 | 24,094 | 19,752 | |||||||||
Non-current
liabilities
|
845 | 5,663 | 5,257 | |||||||||
Total
liabilities
|
4,441 | 29,757 | 25,009 |
For the three months ended September
30,
|
For the nine months ended September
30,
|
|||||||||||||||||||||||
2010
|
2010
|
2009
|
2010
|
2010
|
2009
|
|||||||||||||||||||
US$
|
RMB
|
RMB
|
US$
|
RMB
|
RMB
|
|||||||||||||||||||
Revenues
|
4,621
|
30,961
|
33,557
|
13,881
|
93,006
|
91,974
|
||||||||||||||||||
Net
income (loss)
|
4
|
26
|
1,050
|
13
|
86
|
237
|
|
For the nine months ended September
30,
|
||||||||||||
2010
|
2010
|
2009
|
||||||||||
US$
|
RMB
|
RMB
|
||||||||||
Net
cash provided by /(used in) operating activities
|
2,214 | 14,834 | (28,964 | ) | ||||||||
Net
cash provided by /(used in) investing activities
|
(65 | ) | (434 | ) | 19,625 | |||||||
Net
cash provided by/(used in) financing activities
|
(2,205 | ) | (14,771 | ) | 11,187 |
There are
no consolidated CCLX assets that are collateral for the CCLX’s obligations and
can only be used to settle the CCLX’s obligations.
Significant
Accounting Policies
The
accompanying unaudited condensed consolidated financial statements have been
using the same accounting policies used in the preparation of the audited
financial statements included in CEC’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2009, except for the additional accounting policies
adopted as stated in (1) of Note 2.
Convenience
Translation
Amounts
in United States dollars (“US$”) are presented solely for the convenience of
readers and an exchange rate of RMB6.7 to US$1 was applied as of September 30,
2010. Such translation should not be construed to be the amounts that would have
been reported under US GAAP.
11
2.
|
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
|
(1)
|
Newly
Adopted Accounting Pronouncements
|
In June
2009, the FASB issued an authoritative pronouncement to amend the accounting
rules for variable interest entities. The amendments effectively replace
the quantitative-based risks-and-rewards calculation for determining which
reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity
has (1) the power to direct the activities of a variable interest entity that
most significantly affect the entity’s economic performance and (2) the
obligation to absorb losses of, or the right to receive benefits from, the
entity. Additionally, an enterprise is required to assess whether it has an
implicit financial responsibility to ensure that a variable interest entity
operates as designed when determining whether it has the power to direct the
activities of the variable interest entity that most significantly impact the
entity’s economic performance. The new guidance also requires additional
disclosures about a reporting entity’s involvement with variable interest
entities and about any significant changes in risk exposure as a result of that
involvement. The new guidance is effective at the start of a reporting entity’s
first fiscal year beginning after November 15, 2009, and all interim and annual
periods thereafter. During the nine months ended September 30, 2010, there
were no significant changes in previously adopted accounting policies or their
application, with the exception of additional disclosures upon adoption of ASC
810-10-45-25, under which the reporting entity needs to present separately on
the face of the condensed consolidated balance sheets the liabilities of a
consolidated variable interest entity for which creditors (or beneficial
interest holders) do not have recourse to the general credit of the primary
beneficiary. As a result, the Company presents the additional disclosures on the
face of the unaudited condensed financial statements as of September 30, 2010
and December 31, 2009.
In
January 2010, the FASB issued authoritative guidance to improve disclosures
about fair value measurements. This guidance amends previous guidance on fair
value measurements to add new requirements for disclosures about transfers into
and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurement on a gross basis
rather than on a net basis as currently required. This guidance also clarifies
existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. This guidance is
effective for annual and interim periods beginning after December 15, 2009,
except for the requirement to provide the Level 3 activities of purchases,
sales, issuances, and settlements on a gross basis, which will be effective for
annual and interim periods beginning after December 15, 2010. Early
application is permitted and, in the period of initial adoption, entities are
not required to provide the amended disclosures for any previous periods
presented for comparative purposes. The adoption of this pronouncement did not
have a significant impact on its the Company's financial condition or results of
operations.
(2)
|
Recently
Issued Accounting Pronouncements Not Yet
Adopted
|
In
October 2009, the FASB issued amended revenue recognition guidance for
arrangements with multiple deliverables. The new guidance eliminates the
residual method of revenue recognition and allows the use of management’s best
estimate of selling price for individual elements of an arrangement when vendor
specific objective evidence (VSOE), vendor objective evidence (VOE) or
third-party evidence (TPE) is unavailable. Prospective application of this new
guidance for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with earlier application permitted.
Alternatively, an entity can elect to adopt this guidance on a retrospective
basis. The Company does not expect the adoption of this pronouncement to have a
significant impact on its financial condition or results of
operations.
In
October 2009, the FASB issued authoritative guidance which amends the scope
of existing software revenue recognition accounting. Tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality would be scoped out of
the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance. Prospective application of this new guidance
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier application permitted.
Alternatively, an entity can elect to adopt this new guidance on a retrospective
basis. The Company does not expect the adoption of this pronouncement to have a
significant impact on its financial condition or results of
operations.
12
In April
2010, the FASB issued authoritative guidance on milestone method of revenue
recognition. The scope of this consensus is limited to arrangements that include
milestones relating to research or development deliverables. The guidance
specifies guidance that must be met for a vendor to recognize consideration that
is contingent upon achievement of a substantive milestone in its entirety in the
period in which the milestone is achieved. The guidance applies to milestones in
arrangements within the scope of this consensus regardless of whether the
arrangement is determined to have single or multiple deliverables or units of
accounting. The guidance will be effective for fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. Early application is
permitted. Companies can apply this guidance prospectively to milestones
achieved after adoption. However, retrospective application to all prior periods
is also permitted. The Company does not expect the adoption of this
pronouncement to have a significant impact on its financial condition or results
of operations.
In April
2010, the FASB issued authoritative guidance on effect of denominating the
exercise price of a share-based payment award in the currency of the market in
which the underlying equity securities trades and that currency is different
from (1) entity's functional currency, (2) functional currency of the foreign
operation for which the employee provides services, and (3) payroll currency of
the employee. The guidance clarifies that an employee share-based payment award
with an exercise price denominated in the currency of a market in which a
substantial portion of the entity's equity securities trades should be
considered an equity award assuming all other criteria for equity classification
are met. The guidance will be effective for interim and annual periods beginning
on or after December 15, 2010, and will be applied prospectively. Affected
entities will be required to record a cumulative catch-up adjustment for all
awards outstanding as of the beginning of the annual period in which the
guidance is adopted. The Company is in the process of evaluating the effect of
adoption of this pronouncement.
In July
2010, the FASB issued an authoritative pronouncement on disclosure about the
credit quality of financing receivables and the allowance for credit losses. The
objective of this guidance is to provide financial statement users with greater
transparency about an entity’s allowance for credit losses and the credit
quality of its financing receivables. The guidance requires an entity to provide
disclosures on a disaggregated basis on two defined levels: (1) portfolio
segment; and (2) class of financing receivable. The guidance includes additional
disclosure requirements about financing receivables, including: (1) Credit
quality indicators of financing receivables at the end of the reporting period
by class of financing receivables; (2) The aging of past due financing
receivables at the end of the reporting period by class of financing
receivables; and (3) The nature and extent of troubled debt restructurings that
occurred during the period by class of financing receivables and their effect on
the allowance for credit losses. For public entities, the disclosures as of the
end of a reporting period are effective for interim and annual reporting periods
ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period are effective for interim and annual reporting periods
beginning on or after December 15, 2010. The Company is in the process of
evaluating the effect of adoption of this pronouncement.
3.
|
DISCONTINUED
OPERATIONS
|
Starting
from 2007, the Company provided Modern English training services through Jiangsu
English Training Technology Limited (“JSET”). During 2009, the Company
gradually closed all the training centers. On December 29, 2009, the
Company completed the transaction under a sale and purchase agreement with a
third party to dispose of its brand name usage right associated with the English
training services with a consideration of RMB6,000. A gain amounting to
RMB1,552 was reported for the fiscal year ended December 31, 2009. The
Company ceased all English training services in JSET thereafter.
Summarized
operating results from the discontinued operations included in the Company's
condensed consolidated statements of operations were as follows for the three
months and nine months ended September 30, 2009 and 2010,
respectively:
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
RMB
|
RMB
|
RMB
|
RMB
|
|||||||||||||
Revenues
|
751 | - | 1,495 | - | ||||||||||||
Loss
before provision of income taxes from discontinued
operations
|
(223 | ) | - | (1,441 | ) | - | ||||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Noncontrolling
interest in discontinued operations
|
3 | - | 22 | - | ||||||||||||
Loss
from discontinued operations attributable to ChinaCast Education
Corporation, net of tax
|
(220 | ) | - | (1,419 | ) | - | ||||||||||
Net
loss on discontinued operations attributable to ChinaCast Education
Corporation per share – basic
|
(0.01 | ) | - | (0.03 | ) | - | ||||||||||
Net
loss on discontinued operations attributable to ChinaCast Education
Corporation per share – diluted
|
(0.01 | ) | - | (0.03 | ) | - |
All notes
to the accompanying unaudited condensed consolidated financial statements have
been retrospectively adjusted to reflect the effect of the discontinued
operations, where applicable.
13
4.
|
ACQUISITIONS
|
East Achieve
Limited
On
October 5, 2009, CCH, the Company's subsidiary in Bermuda, consummated the
acquisition of the entire interest in East Achieve Limited (“East Achieve”) from
the former sole owner of East Achieve. East Achieve holds the entire
interest in Shanghai Xijui Information Technology Co., Ltd. (“Xijiu”).
Xijiu holds the entire interest in China Lianhe Biotechnology Co., Ltd.
(“Lianhe”) which in turns holds the entire interest in Lijiang College of
Guangxi Normal University (“Lijiang College”). Lijiang College is a
private college affiliated with Guangxi Normal University. The total
consideration for the acquisition is up to RMB365,000, of which RMB295,000 was
paid during 2009. The remaining amount of the consideration is to be
calculated as below.
For the
academic year of 2009 (i.e. from September 1, 2009 to August 31, 2010), if the
net profit as determined under the relevant sale and purchase agreement of the
Lijiang College is less than RMB55,000, CCH is entitled to deduct an amount
equal to 6.6 times of the difference between the net profit and RMB55,000 from
the remaining amount of consideration.
The
contingent consideration was recorded as a liability at fair value of
RMB30,482 and the change of its fair value was recorded in earnings as of the
acquisition date and at each reporting date thereafter. As a result, the
expected total consideration was RMB325,482 as of the date of acquisition. In
September, 2010, the final payment of the consideration was determined to be
RMB20,540, and the gain of RMB9,942 from change in contingent consideration was
included in the operating income.
The
acquisition was recorded using the purchase method of accounting and,
accordingly, the acquired assets and liabilities were recorded at their fair
market value at the date of acquisition. The purchase price allocation was
as follows:
Amortization
|
|||||
RMB
|
period
|
||||
Cash
|
73,113 | ||||
Other
current assets
|
2,408 | ||||
Non-current
deposits
|
6,374 | ||||
Property
and equipment
|
261,543 |
3-20
years
|
|||
Prepaid
lease payments for land use rights
|
28,920 |
Over
the remaining lease
term
of 48 years
|
|||
Intangible
assets:
|
|||||
Customer
relationship
|
51,000 |
47
months
|
|||
Affiliation
agreement
|
14,000 |
59
months
|
|||
Goodwill
(allocated to TUG segment)
|
192,440 | ||||
Other
current liabilities
|
(105,424 | ) | |||
Deferred
revenues
|
(89,114 | ) | |||
Deferred
tax liabilities
|
(12,616 | ) | |||
Long-term
bank borrowings
|
(90,000 | ) | |||
Unrecognized
tax benefits
|
(7,162 | ) | |||
Total
|
325,482 |
14
An affiliation
agreement ("Affiliation Agreement") was signed between Lianhe and Guangxi Normal
University in relation to the operations of Lijiang College. Under
the Affiliation Agreement, Guangxi Normal University authorizes Lijiang College
to use its school name and offers certain management and operational supports
for an agreed amount of fees.
The
Company believes that the acquisition furthers its strategy of expanding into
the post-secondary bricks and mortar education market. The combination of
these factors is the rationale for the excess of purchase price over the value
of the assets acquired and liabilities assumed.
Pro
forma
The
following supplemental unaudited pro forma results of operations for the year
ended December 31, 2009 presented the acquisition as if it had occurred on
January 1, 2009. The unaudited pro forma results include estimates
and assumptions regarding amortization of acquired intangible assets, which the
Company believes are reasonable. However, pro forma results are not
necessarily indicative of the results that would have occurred if the
acquisition had occurred on the date indicated, or that may result in the
future:
For the year
|
||||
ended December 31,
|
||||
2009
|
||||
RMB
|
||||
Revenues
|
427,484 | |||
Net
income attributable to
|
||||
ChinaCast
Education Corporation
|
91,401 | |||
Net
income attributable to ChinaCast Education
|
||||
Corporation
per share – basic
|
2.47 | |||
Net
income attributable to ChinaCast Education
|
||||
Corporation
per share – diluted
|
2.46 |
Wintown
Limited
On August
23, 2010, CEH, the Company's subsidiary in the British Virgin Island,
consummated the acquisition of the entire interest in Wintown Limited
(“Wintown”) from the former sole owner of Wintown. Wintown ultimately
holds the entire interest in Business College of Hubei Industrial University
(“HIUBC”). HIUBC is a private college affiliated with Hubei Industrial
University. The total consideration for the acquisition is up to
RMB450,000, of which RMB360,000 was paid during 2010. The remaining amount
of the consideration is to be calculated as below.
For the
academic year of 2010 (i.e. from September 1, 2010 to August 31, 2011), if the
net profit as determined under the relevant sale and purchase agreement of the
HIUBC is less than RMB50,000, CEH is entitled to deduct an amount equal to 9
times of the difference between the net profit and RMB50,000 from the remaining
amount of consideration.
The
contingent consideration was recorded as a liability at fair value of
RMB78,721 and the change of its fair value will be recorded in earnings at each
reporting date. As a result, the expected total consideration was
RMB438,721 as of the date of acquisition.
The
acquisition was recorded using the purchase method of accounting and,
accordingly, the acquired assets and liabilities were recorded at their fair
market value at the date of acquisition.
HIUBC has
not obtained land use right certificates for the 4 land parcels purchased yet as
of September 30, 2010, however, the management of the Company believe they will
be able to get them and have the absolute right to use or dispose the
lands.
Due to
the fact that there is neither land use rights certificate nor official
government documents made available to the valuation firm, and disposal of the
subject land parcels to third party in the open market may need further approval
from the government, the assessment of the fair value of
the four land parcels is not completed as of the date of this Form
10-Q.
Since the
valuation and the purchase price allocation is not completed yet as of the date
of this Form 10-Q, based on the preliminary purchase price allocation,
provisional amounts were recognized for identifiable assets and liabilities. The
Company will retrospectively adjust the provisional amounts recognized at the
acquisition date before the end of the measurement period. The preliminary
purchase price allocation was as follows:
Amortization
|
|||||
RMB
|
period
|
||||
Cash
|
19,941
|
||||
Other
current assets
|
7,430
|
||||
Non-current
deposits
|
-
|
||||
Property
and equipment
|
218,981
|
3-20
years
|
|||
Prepaid
lease payments for land use rights
|
36,973
|
Over
the remaining lease term
|
|||
Intangible
assets:
|
|||||
Customer
relationship
|
41,000
|
48
months
|
|||
Affiliation
agreement
|
32,000
|
36
months
|
|||
Goodwill
(allocated to TUG segment)
|
264,970
|
||||
Other
current liabilities
|
(69,908
|
)
|
|||
Deferred
revenues
|
(2,753
|
)
|
|||
Deferred
tax liabilities
|
(27,844
|
)
|
|||
Long-term
bank borrowings
|
(54,000
|
)
|
|||
Unrecognized
tax benefits
|
(28,069
|
)
|
|||
Total
|
438,721
|
15
The
preliminary valuation analyses utilized and considered generally accepted
valuation methodologies such as income, market and cost approach.
An affiliation
agreement ("Affiliation Agreement") was signed between Jiyang and Hubei
Industrial University in relation to the operations of HIUBC. Under
the Affiliation Agreement, Hubei Industrial University authorizes HIUBC to use
its school name and offers certain management and operational supports for an
agreed amount of fees.
The
Company believes that the acquisition furthers its strategy of expanding into
the post-secondary bricks and mortar education market. The combination of
these factors is the rationale for the excess of purchase price over the value
of the assets acquired and liabilities assumed.
Pro
forma
The
following supplemental unaudited pro forma results of operations for the period
ended September 30, 2010 and September 30, 2009 presented the acquisition as if
it had occurred on January 1, 2010 and January 1, 2009. The unaudited
pro forma results include estimates and assumptions regarding amortization of
acquired intangible assets, which the Company believes are
reasonable. However, pro forma results are not necessarily indicative
of the results that would have occurred if the acquisition had occurred on the
date indicated, or that may result in the future:
For
the period
|
For
the period
|
|||||||
ended
September 30,
|
ended
September 30,
|
|||||||
2010
|
2009
|
|||||||
RMB
|
RMB
|
|||||||
Revenues
|
413,488 | 336,298 | ||||||
Net
income attributable to
|
||||||||
ChinaCast
Education Corporation
|
91,786 | 56,520 | ||||||
Net
income attributable to ChinaCast Education
|
||||||||
Corporation
per share – basic
|
1.92 | 1.58 | ||||||
Net
income attributable to ChinaCast Education
|
||||||||
Corporation
per share – diluted
|
1.91 | 1.57 |
16
5.
|
NON-CURRENT
DEPOSITS
|
Non-current
deposits consisted of the following:
As of
September 30,
2010
|
As of
December 31,
2009
|
|||||||
|
RMB
|
RMB
|
||||||
|
||||||||
Rental
deposits
|
415 | 358 | ||||||
Utilities
deposits
|
208 | 208 | ||||||
Guarantee
deposit for borrowings
|
4,000 | 3,000 | ||||||
Guarantee
deposits for construction projects
|
2,492 | 2,492 | ||||||
Deposit
for investment project
|
5,044 | 3,000 | ||||||
Deposit
for acquiring of land use rights
|
- | 5,492 | ||||||
Total
|
12,159 | 14,550 |
Rental
deposits represented office rental deposits for the Company’s daily
operations.
Guarantee
deposit represented deposits placed with Chongqing Education Guarantee Co.,
Ltd., a long-term investment of the Company, which in turn provided guarantee in
favor of the relevant bank for the Company’s bank borrowings of RMB30,000 and
RMB20,000, respectively.
Deposit
for investment project represented deposit for establishment of a wholly-owned
foreign enterprise in the PRC.
These
deposits are classified into non-current deposits since they will not be
refunded within one year.
17
ACQUIRED
INTANGIBLE ASSETS, NET
|
|
As of September
30,
|
As of
December 31,
|
||||||
|
2010
|
2009
|
||||||
|
RMB
|
RMB
|
||||||
Customer
relationships
|
||||||||
Cost
|
132,329 | 91,329 | ||||||
Less:
Accumulated amortization
|
(57,538 | ) | (33,331 | ) | ||||
|
74,791 | 57,998 | ||||||
|
||||||||
Affiliation
agreement
|
||||||||
Cost
|
46,000 | 14,000 | ||||||
Less:
Accumulated amortization
|
(3,736 | ) | (712 | ) | ||||
|
||||||||
|
42,264 | 13,288 | ||||||
|
||||||||
Acquired
intangible assets, net
|
117,055 | 71,286 |
On
April 11, 2008, the Company acquired a customer relationship through the
acquisition of Hai Lai Education Technology Limited. The customer relationship
is being amortized using accelerated amortization method over 41 months
based on the estimated progression of the students through the respective
courses, giving consideration to the revenue and cash flow
associated.
On
October 5, 2009, the Company acquired another customer relationship through the
acquisition of East Achieve (see Note 4). The customer relationship is
being amortized using accelerated amortization method over 47 months based on
the estimated progression of the students through the respective courses, giving
consideration to the revenue and cash flow associated.
On August
23, 2010, the Company acquired another customer relationship through the
acquisition of Wintown (see Note 4). The customer relationship is being
amortized using accelerated amortization method over 48 months based on the
estimated progression of the students through the respective courses, giving
consideration to the revenue and cash flow associated.
For the
three months and nine months ended September 30, 2010, the Company recorded
amortization expense in respect of the customer relationships amounting to
RMB8,395 and RMB24,207, respectively. The Company will record further
amortization expenses in respect of the customer relationships of RMB9,372,
RMB32,609, RMB19,726, RMB10,351 and RMB2,733 for the three months ended December
31, 2010 and year 2011, 2012 ,2013 and 2014, respectively.
On
October 5, 2009, the Company acquired an affiliation agreement through the
acquisition of East Achieve (see Note 4). The affiliation agreement is
being amortized on a straight-line basis over 59 months.
On August
23, 2010, the Company acquired an affiliation agreement through the acquisition
of Wintown (see Note 4). The affiliation agreement is being amortized on a
straight-line basis over 36 months.
For the
three months and nine months ended September 30, 2010, the Company recorded
amortization expense in respect of the affiliation agreement amounting to
RMB1,601 and RMB3,024, respectively. The Company will record amortization
expenses in respect of the affiliation agreement of RMB3,379, RMB13,514,
RMB13,514, RMB9,959 and RMB1,898 for the three months ended December 31,
2010 and year 2011, 2012, 2013 and 2014, respectively.
7.
|
NON-CURRENT
ADVANCES TO RELATED PARTY
|
The noncurrent advances to
a related party represent money spent on assets and expenses to help
ChinaCast Co., Ltd. ("CCL") build up its satellite
business over the years. CCL was an investment holding company
established in 1999 to invest in tradable shares, technology companies, real
estate and other long-term investments. The Company itself has no equity
investment in CCL. In 2002, CCL entered into a technical services agreement (the
"CCL TSA") and an equity pledge agreement with the Company, pursuant to which
the Company agreed to assist CCL in the implementation of business relating to
the provision of the broadband satellite services in the PRC. The Company
provided CCL with interest free cash advances to finance acquisition of related
satellite equipment. CCL established a branch office in Beijing, CCLBJ, (though
it is registered in Shanghai) to conduct CCL's Turbo 163 business, DDN
Enhancement business and Cablenet business, and agreed to pay monthly service
fees to the Company in an amount equal to the difference between total cash
revenue that CCLBJ received in the preceding month and CCLBJ's cash paid out or
allocated to pay for operating expenses for the preceding month. Through the CCL
TSA, the Company is effectively entitled to the net profit of CCLBJ, but is not
obligated to fund any losses of CCLBJ. CCL was treated as an VIE, but was never
included in the accompanying consolidated financial statements because the
Company was not considered to be the primary beneficiary of CCL. Effective
January 1, 2010, the CCL TSA was terminated and CCL is no longer considered a
VIE of the Company thereafter.
CCL is treated as a
related party, and the amounts advanced to this related party were
RMB99,665 and RMB99,727 as at September 30, 2010 and December 31, 2009,
respectively.
CCL has
undertaken that when regulation allows, the ownership of CCLX and all the
relevant assets attributable to the satellite business operations in the books
of CCL and CCLBJ will be transferred to the Company, the consideration of which
will be settled against the above advances to CCL in the books of the Company at
the sole discretion of the Company.
In
addition, the Company has obtained an undertaking from CCL that, at the time of
such transfer, CCL will make a payment to the Company for any shortfall if the
valuation of the advances is lower than the outstanding amount of the advances,
and therefore believes that the advances are recoverable.
For the
three months and nine months ended September 30, 2009, the Company received a
management service fee of RMB510 and RMB3,806, respectively. CCLBJ was
gradually scaling down its business operations, and effective January 1, 2010,
CCLBJ no longer provided any satellite related services, including those to the
Company. CCLX has been providing the satellite related services to the Company,
and the intercompany transactions between CCLX and the Company have been
eliminated upon consolidation.
18
8.
|
BORROWINGS
|
The
Company repaid the bank borrowing amounting to RMB58,400, RMB20,000 and
RMB16,000, respectively, in January, June and September 2010 as at their
maturity date.
In
March and April 2010, a bank borrowing amounting to RMB12,000 and RMB8,000
was raised by Foreign Trade and Business College of Chongqing Normal University
(“FTBC”). The bank borrowing carried interests at the benchmark interest rate
announced by the People’s Bank of China plus 10% per annum and was secured by
guarantees given by Chongqing Education Guarantee Co., Ltd. (“CQEG”) and in
favor of the relevant bank. In connection with the guarantee given by CQEG, a
deposit of RMB1,000 were pledged to CQEG. RMB10,000 of the borrowing will be
repayable in September 2011, the remaining RMB2,000 will be repayable in
September 2012.
In
May 2010, a bank borrowing amounting to RMB30,000 was raised by FTBC. The
bank borrowing carried interests at 9.5% per annum and was secured by guarantees
given by Chongqing Yutai Guarantee Co., Ltd. (“CQYT”) and in favor of the
relevant bank. In connection with the guarantee given by CQYT, certain buildings
of RMB45,000 are pledged to CQYT as counter-guarantee objective, and Hai Lai and
three employees of the Company are jointly liable to CQYT. RMB10,000 of the
borrowing will be repayable in October 2010, and remaining RMB20,000 will be
repayable in September 2011.
In
March 2010, a bank borrowing amounting to RMB30,000 was raised by Lijiang
College. The bank borrowing carried interests at 5.31% per annum and will be
repayable in March 2011.
In
connection with the acquisition of Wintown, a bank borrowing amounting to
RMB54,000 was assumed. The bank borrowing RMB24,000 carried interests at 5.31%
per annum and will be repayable in November 2010, RMB30,000 carried interests at
7.02% per annum and will be repayable in October 2010. The bank borrowing was
secured by guarantee Jiyang,
During
the nine months ended September 30, 2010, an aggregate amount of other
borrowings amounting to RMB93,500 was raised. RMB1,500 of other borrowings
carried interest at 7.2% per annum and will be repayable in 2010. Other
borrowings amounting to RMB92,200 were repaid by the Company as at its maturity
date.
9.
|
SHARE
OFFERINGS
|
On
January 5, 2010, the Company issued 692,520 shares of its common stock to
Thriving Blue Limited, a British Virgin Islands company that is 100% owned by
the Company’s Chief Executive Officer (“Thriving Blue”) pursuant to a
Subscription Agreement dated December 21, 2009 between the Company and Thriving
Blue for a total purchase price of US$5,000. The shares are held on behalf of
the Chief Executive Officer and certain other executives of the
Company.
On April
29, 2010, the Company entered into a Stock Purchase Agreement (the “Stock
Purchase Agreement”) with Wu Shi Xin, the sole stockholder of Wintown
Enterprises Limited, a British Virgin Islands company (“Wintown”), pursuant to
which Mr. Wu purchased 3,735,734 shares of the Company’s common stock (the
“Shares”) on June
2, 2010 for a total purchase price of US$29,300.
Pursuant
to the Stock Purchase Agreement, the Company granted Mr. Wu a one time demand
registration right with respect to the Shares, exercisable at any time on or
after October 1, 2010.
10.
|
STOCK
COMPENSATION PLAN
|
Under the
2007 Omnibus Securities and Incentive Plan (“2007 Plan”) adopted in
May 2007, CEC may grant any awards to eligible participants, including
employees, directors or consultants, to purchase up to 2,500,000 ordinary
shares.
Nonvested
shares
19
On
January 11, 2008, CEC agreed to grant, under the 2007 Plan, restricted shares to
its three independent directors at no consideration. Each of the three directors
was agreed to be granted 100,000 restricted shares of the Company's common
stock. All of the shares of restricted stock to be granted to the directors were
issued at fair market value based on the closing price on January 11, 2008 of
US$6.25 (RMB45.38). For each of the three directors of CEC, 10,000, 30,000 and
60,000 of the restricted shares were vested on February 9, 2008, February 9,
2009 and February 9, 2010, respectively. In December 2009, Mr. Richard
Xue decided not to stand for re-election to the board of directors of
CEC. CEC's board of directors accelerated the date of the vesting of his final
grant of 60,000 restricted shares from February 9, 2010 to the date of his
resignation.
On June
22, 2010, CEC granted, under the 2007 Plan, 396,678 restricted shares to six
employees at no consideration. All of the shares of restricted stock to the
employees were granted at fair market value based on the closing price of June
22, 2010 of US$6.07 (RMB41.26). 33,062 of the restricted shares were vested on
the date of granting. 33,056 of the restricted shares vested on July 31, 2010
and an equal number of restricted shares shall be vested at the end of every
three months thereafter until January 31, 2013.
Number
of
shares
|
Fair
values of
shares
|
Intrinsic
value
|
||||||||||
US$
|
US$
|
|||||||||||
Nonvested
share unvested at January 1, 2010
|
120,000
|
6.25
|
750
|
|||||||||
Granted
|
396,678
|
6.07
|
2,408
|
|||||||||
Vested
|
(186,118
|
)
|
6.19
|
(1,152
|
)
|
|||||||
Fortified
|
-
|
-
|
-
|
|||||||||
Nonvested
share unvested at September 30, 2010
|
330,560
|
6.07
|
2,006
|
Share
options
On
January 11, 2008, CEC granted, under the 2007 Plan, 1,200,000 share options on
the Company's common stock to selected employees at no consideration. The
exercise price of the share options granted is US$6.30 and the expiry date is
January 11, 2018. A total of 401,000, 401,000 and 398,000 share options were
vested on March 31, 2008, March 31, 2009 and March 31, 2010, respectively. Upon
exercise of these share options, a total of 1,200,000 common stock will be
issued.
A summary
of the share option activity under 2007 Plan was as follows:
Weighted
|
||||||||
average
|
||||||||
Number
|
exercise
|
|||||||
of
options
|
price
|
|||||||
US$
|
||||||||
Options
outstanding at December 31, 2009
|
1,200,000
|
6.30
|
||||||
Granted
|
—
|
—
|
||||||
Exercised
|
—
|
—
|
||||||
Cancelled
|
—
|
—
|
20
Weighted
|
||||||||
average
|
||||||||
Number
|
exercise
|
|||||||
of
options
|
price
|
|||||||
US$
|
||||||||
Options
outstanding at September 30, 2010
|
1,200,000
|
6.30
|
||||||
Options
exercisable at December 31, 2009
|
802,000
|
6.30
|
||||||
Options
exercisable at September 30, 2010
|
1,200,000
|
6.30
|
A
summary of the status of the Company's nonvested share options as of September
30, 2010 and changes during the nine months ended September 30, 2010, is
presented as below:
Weighted
average
|
Weighted
|
|||||||||||
grant
date
|
average
|
|||||||||||
Nonvested
share options
|
Shares
|
fair
value
|
exercise
price
|
|||||||||
US$
|
US$
|
|||||||||||
Nonvested
at January 1, 2010
|
398,000
|
2.67
|
6.30
|
|||||||||
Granted
|
-
|
-
|
-
|
|||||||||
Vested
|
(398,000
|
)
|
2.67
|
6.30
|
||||||||
Forfeited
|
-
|
-
|
-
|
|||||||||
Nonvested
at September 30, 2010
|
-
|
-
|
-
|
The per
share fair value of share options as of January 11, 2008, the grant date was
US$2.67 (RMB19.33).
The
aggregate intrinsic value of share options outstanding and exercisable as of
September 30, 2010 was US$ 310l.
The
weighted average remaining contractual life is 7.25 years as of September 30,
2010.
Total
share-based compensation expenses amounting to RMB1,922 and RMB3,134 were
recognized for the three months ended September 30, 2010 and 2009, respectively.
Total share-based compensation expenses amounting to RMB6,114 and RMB12,847 were
recognized for the nine months ended September 30, 2010 and 2009,
respectively.
There was
RMB12,705 of unrecognized compensation expense related to the stock based
compensation arrangements for the restricted shares and share options as of
September 30, 2010.
As of
September 30, 2010, no such restricted shares or share options have been
forfeited and no other awards have been granted under the 2007
Plan.
21
11.
|
INCOME
TAXES
|
On March
16, 2007, the National People’s Congress enacted a new enterprise income tax
law, which took effect on January 1, 2008. The new law applies a uniform 25%
enterprise income tax rate to both foreign invested enterprises and domestic
enterprises. The new law provides a five-year transition period from its
effective date for the entitled enterprises which were established before the
promulgation date of the new tax law and which were entitled to a preferential
tax treatment such as a reduced tax rate or a tax holiday. According to
transitional rules published after the new income tax law, one of the Company’s
major operating subsidiaries, CCT Shanghai, which was subject to the
preferential tax rate of 15%, is now eligible to the phased-in rates: 18% in
2008, 20% in 2009, 22% in 2010, 24% in 2011, 25% in 2012 and
thereafter.
FTBC and
Hai Yuen Company Limited (“Hai Yuen”) were incorporated in Chongqing of the PRC
and are subject to the preferential tax rate of 15% until 2010 in accordance
with the western development preferential policy.
Lijiang
College was incorporated in Guilin and is subject to the preferential tax rate
of 15% until the end
of 2010 in accordance with the western development preferential
policy.
HIUBC was
incorporated in Wuhan and is subject to the preferential tax rate of 25%. Due to
the acquisition of HIUBC, the unrecognized tax benefits increased by
RMB27,956.
The
Company considers itself to be permanently reinvested with respect to its
investment in its foreign subsidiaries. Accordingly, no deferred income tax
liability related to the unremitted earnings of its foreign subsidiaries has
been included in the Company’s provision for income taxes. Upon distribution of
subsidiaries earnings in the form of dividends or otherwise, the Company would
be subject to a withholding tax calculated based on 10% of the gross amount of
distribution.
During
the nine months ended September 30, 2010, the unrecognized tax benefits
increased from RMB62,457 to RMB101,244.
12.
|
GOODWILL
|
Changes
in the carrying amount of goodwill for the year ended December 31, 2009 and
nine-month period ended September 31, 2010 consisted of the
following:
As
of September
30,
|
As
of
December
31,
|
|||||||
2010
|
2009
|
|||||||
RMB
|
RMB
|
|||||||
Beginning
balance
|
503,771
|
311,331
|
||||||
Addition
from acquisitions
|
264,970
|
192,440
|
||||||
Ending
balances
|
768,741
|
503,771
|
No
impairment charges have been recorded for the nine-month period ended September
30, 2010.
22
13.
|
NET INCOME PER
SHARE
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Numerator
used in basic and diluted net income per share:
|
||||||||||||||||
Income
from continuing operations attributable to ChinaCast Education
Corporation
|
RMB
|
41,541
|
RMB
|
27,744
|
RMB
|
105,239
|
RMB
|
74,276
|
||||||||
Loss
on discontinued operations attributable to ChinaCast Education
Corporation
|
-
|
RMB
|
(388
|
)
|
-
|
RMB
|
(1,441
|
)
|
||||||||
Net
income attributable to ChinaCast Education Corporation
|
RMB
|
41,541
|
RMB
|
27,356
|
RMB
|
105,239
|
RMB
|
72,835
|
||||||||
Shares
(denominator):
|
||||||||||||||||
Weighted
average ordinary shares outstanding used in computing basic net income per
share
|
49,834,291
|
36,133,233
|
47,693,969
|
35,814,325
|
||||||||||||
Plus:
|
||||||||||||||||
Incremental
ordinary shares from assumed conversions of stock options, vesting of
restricted shares and exercises of Underwriter Warrants
|
536,612
|
246,651
|
482,933
|
130,939
|
||||||||||||
Weighted
average ordinary shares outstanding used in computing diluted net income
per share
|
50,370,903
|
36,379,884
|
48,176,902
|
35,945,264
|
||||||||||||
Net
income per share – basic:
|
||||||||||||||||
Income
from continuing operations attributable to ChinaCast Education
Corporation
|
RMB
|
0.83
|
RMB
|
0.77
|
RMB
|
2.21
|
RMB
|
2.07
|
||||||||
Loss
on discontinued operations attributable to ChinaCast Education
Corporation
|
-
|
RMB
|
(0.01
|
)
|
-
|
RMB
|
(0.04
|
)
|
||||||||
Net
income attributable to ChinaCast Education Corporation
|
RMB
|
0.83
|
RMB
|
0.76
|
RMB
|
2.21
|
RMB
|
2.03
|
||||||||
Net
income per share – diluted:
|
||||||||||||||||
Income
from continuing operations attributable to ChinaCast Education
Corporation
|
RMB
|
0.82
|
RMB
|
0.76
|
RMB
|
2.18
|
RMB
|
2.07
|
||||||||
Loss
on discontinued operations attributable to ChinaCast Education
Corporation
|
-
|
RMB
|
(0.01
|
)
|
-
|
RMB
|
(0.04
|
)
|
||||||||
Net
income attributable to ChinaCast Education Corporation
|
RMB
|
0.82
|
RMB
|
0.75
|
RMB
|
2.18
|
RMB
|
2.03
|
23
14.
|
SEGMENT
INFORMATION
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
RMB
|
RMB
|
RMB
|
RMB
|
|||||||||||||
Revenues
from external customers:
|
||||||||||||||||
ELG
|
49,881
|
50,747
|
143,901
|
144,631
|
||||||||||||
TUG
|
75,238
|
31,438
|
200,224
|
89,825
|
||||||||||||
125,119
|
82,185
|
344,125
|
234,456
|
|||||||||||||
Additional
analysis of revenues from ELG by product or service:
|
||||||||||||||||
Service
|
46,957
|
48,851
|
140,946
|
138,566
|
||||||||||||
Equipment
|
2,924
|
1,896
|
2,955
|
6,065
|
||||||||||||
49,881
|
50,747
|
143,901
|
144,631
|
|||||||||||||
Additional
analysis of revenues from ELG by business lines:
|
||||||||||||||||
Post
secondary education distance learning
|
28,575
|
28,857
|
85,040
|
81,308
|
||||||||||||
K-12
and content delivery
|
15,996
|
16,047
|
47,977
|
48,310
|
||||||||||||
Vocational
training, enterprise/government training and networking
services
|
5,310
|
5,843
|
10,884
|
15,013
|
||||||||||||
49,881
|
50,747
|
143,901
|
144,631
|
|||||||||||||
Income
from operations:
|
||||||||||||||||
ELG
|
36,702
|
27,505
|
89,537
|
72,162
|
||||||||||||
TUG
|
13,445
|
10,974
|
45,062
|
30,188
|
||||||||||||
50,147
|
38,479
|
134,599
|
102,350
|
As
of September
|
As
of
December
|
|||||||
30,
2010
|
31,
2009
|
|||||||
RMB
|
RMB
|
|||||||
Segment
assets:
|
||||||||
ELG
|
762,631
|
805,116
|
||||||
TUG
|
2,241,615
|
1,468,773
|
||||||
3,004,246
|
2,273,889
|
The
Company’s revenues and net income are substantially derived from the PRC. Most
of the assets and capital expenditure of the Company are employed in the
PRC.
24
There were no customers
accounting for 10% or more of total net revenues for the three months and nine
months ended September 30, 2010.
Three
customers as of September 30, 2010 and three customers as of December 31, 2009
each accounted for 10% or more of the Company’s accounts receivable balances,
representing an aggregate of 35.7% and 35.8% of the Company’s accounts
receivable balances at September 30, 2010 and December 31, 2009,
respectively.
15.
|
WARRANTS AND UNIT PURCHASE
OPTIONS
|
In
connection with the share offering which was consummated in October 2008, the
Company sold to the underwriter in December 2008, for nominal consideration, an
aggregate of 255,000 Underwriter Warrants with a price of US$3.15 per share. The
Underwriter Warrants will be exercisable for five years from the closing date of
the share offering and are classified as Equity in the accompanying consolidated
financial statements. As of September 30, 2010, there were 255,000 Underwriter
Warrants outstanding.
25
16.
|
CONTINGENCIES
|
a)
|
On March 21, 2006, after
obtaining the approval of its shareholders, the Company amended its
certificate of incorporation, the effect of which was, among other things,
to eliminate the provision of the certificate of incorporation that
purported to prohibit the amendment of the “business combination”
provisions contained therein and to extend the date before which the
Company must complete a business combination, to avoid being required to
liquidate, from March 23, 2006 to December 31, 2006. Because extending the
period during which the Company could consummate a business combination
was not contemplated by the initial public offering (“IPO”) prospectus,
shareholders may have securities law claims against the Company for
rescission (under which a successful claimant would have the right to
receive the total amount paid for his or her shares, plus interest and
less any income earned on the shares, in exchange for surrender of the
shares) or damages (compensation for loss on an investment caused by
alleged material misrepresentations or omissions in the sale of the
security). Such claims might entitle shareholders asserting them to up to
US$6.00 per share of common stock, based on the initial offering price of
the public units comprised of stock and warrants, less any amount received
from sale of the original warrants purchased with them and plus interest
from the date of the IPO. A successful claimant for damages under federal
or state law could be awarded an amount to compensate for the decrease in
value of his or her shares caused by the alleged violation (including,
possibly, punitive damages), together with interest, while retaining the
shares. The Company believes the shareholder claims for rescission or
damages are remote. As such, the Company has not recorded a liability for
such possible rescission. However, the Company cannot definitively predict
whether shareholders will bring such claims, how many might bring them or
the extent to which they might be
successful.
|
26
b)
|
The Company may be subject to
claims for rescission or other securities law claims resulting from the
failure to disclose that the charter provision purporting to prohibit
certain amendments was possibly inconsistent with Delaware’s General
Corporation Law. The Company may also be subject to such claims as a
result of inaccuracies in other disclosures, as follows: It may be argued
that the IPO prospectus misstated the vote required by its charter to
approve a business combination by providing that “[w]e will proceed with a
business combination only if the public shareholders who own at least a
majority of the shares of common stock sold in [that] offering vote in
favor [of it] ...,” and that the Exchange Act reports have been inaccurate
in describing ChinaCast as a leading provider of e-learning content (as
opposed to being primarily a content carrier). On November 13, 2006, the
Company filed a Current Report on Form 8-K with the SEC regarding this
last item. The Company is unable to predict the likelihood that claims
might be made with regard to the foregoing or estimate any amounts for
which it might be liable if any such claim was made. As such, the Company
has not recorded a liability for such possible
rescission.
|
c)
|
On
August 23, 2010, CEH, the Company's subsidiary in British Virgin Islands,
consummated the acquisition of the entire interest in Wintown from the
former sole owner of Wintown. Wintown holds the entire interest in
Rubao. Rubao holds the entire interest in Jiyang which in turns holds
the entire interest in HIUBC. HIUBC is a private college
affiliated with Hubei Industrial University. The total
consideration for the acquisition is up to RMB450,000, of which RMB360,000
was paid during 2010. The remaining amount of the consideration
is to be calculated based on the net profit of HIUBC. For the academic
year of 2010 (i.e. from September 1, 2010 to August 31, 2011), if the net
profit as determined under the relevant sale and purchase agreement of
HIUBC is less than RMB50,000, CEH is entitled to deduct an amount equal to
9 times of the difference between the net profit and RMB50,000 from the
remaining amount of consideration. The contingent consideration was
recorded as a liability at fair value of RMB78,721 and the change of its
fair value was recorded in earnings at each reporting date. As
a result, the expected total consideration was RMB438,721 as of the date
of acquisition. There was no change in the fair value of the remaining
consideration up to September 30,
2010.
|
17.
|
RELATED PARTY
TRANSACTIONS
|
The
Company had the following balances with related parties as of December 31, 2009
and September 30, 2010, respectively:
|
(a)
|
Amounts
due to a shareholder
|
As
of
|
As
of
|
|||||||
December
31,
|
September
30,
|
|||||||
2009
|
2010
|
|||||||
Mr.
Wu Shi Xin
|
RMB | - | RMB | (74,887 | ) (i) |
|
i.
|
The
amount represents consideration payable to Mr. Wu for the acquisition of
HIUBC (See Note 4).
|
|
(b)
|
Amounts
due to/from a unconsolidated VIE
|
As
of
|
As
of
|
|||||||
December
31,
|
September
30,
|
|||||||
2009
|
2010
|
|||||||
Due
to CCL
|
RMB | - | RMB | - | (ii) | |||
Due
from CCL
|
RMB | 99,727 | RMB | 99,665 | (ii) |
|
ii.
|
The
amount due to CCL represents satellite usage service fee due from CCT
Shanghai to CCLBJ. The amount due from CCL represents the technical
service fee due from CCLBJ to CCT
Shanghai.
|
18.
|
SUBSEQUENT
EVENTS
|
The
Company has evaluated events subsequent to the balance sheet date of September
30, 2010 through November 9, 2010, the date the unaudited condensed consolidated
financial statements were available to be issued.
In
October, 2010, CEI established a wholly owned subsidiary, ChinaCast(Beijing)
Education Technolgy Limited("CET"). The principle activities of CET are to
provide educational service. The initial capital inject of US$750 was completed
in September 25, 2010, and the capital verfication is still in progress as of
November 09, 2010.
27
Forward
Looking Statements
Portions
of the discussion and analysis below contain certain statements that are not
descriptions of historical facts, but are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934. These forward-looking statements may
include statements about our plans and objectives for future expansion,
including into post-secondary brick and mortar education market; expectations
for E-learning and training services the PRC; anticipated margins for our
solutions; general and cyclical economic and business conditions, and, in
particular, those in the PRC’s education market; our ability to enter into and
renew key corporate and strategic relationships with our customers and
suppliers; changes in the favorable tax incentives enjoyed by our PRC operating
companies; and other statements containing forward looking terminology such as
“may”, “expects”, “believes”, “anticipates”, “intends”, “projects”, “looking
forward” or similar terms, variations of such terms or the negative of such
terms. Such information is based upon various assumptions made by, and
expectations of, our management that were reasonable when made but may prove to
be incorrect. All of such assumptions are inherently subject to uncertainties
and contingencies beyond our control and upon assumptions with respect to future
business decisions which are subject to change. Accordingly, there can be no
assurance that actual results will meet expectations and actual results may vary
(perhaps materially) from certain of the results anticipated herein. For a
further description of these and other risks and uncertainties, see our most
recent Annual Report filed with the Securities and Exchange Commission (SEC) on
Form 10-K, and our subsequent SEC filings. The following discussion of our
financial condition and results of operations should also be read in conjunction
with our unaudited condensed consolidated financial statements and the notes to
those financial statements appearing elsewhere in this Form 10-Q.
Overview
We were
formed on August 20, 2003 to serve as a vehicle to effect a merger, capital
stock exchange, asset acquisition or other similar business combination with a
company having its primary operations in the PRC.
On
December 22, 2006, we consummated the acquisition of ChinaCast Communication
Holdings Limited (“CCH”). As of December 22, 2006, shareholders of CCH that had
previously executed Letters of Undertaking with us with respect to the sale of
their shares of CCH and that collectively held 239,648,953 shares of CCH or
51.22% of CCH’s outstanding shares accepted the voluntary conditional offer (the
“Offer”) made in Singapore by DBS Bank, for and on our behalf, to acquire all of
the outstanding ordinary shares of CCH. On January 18, 2007, at the end of the
Offer period, acceptance of the Offer totaled 80.27% which is the basis we
accounted for the acquisition. As a result of this acceptance of the Offer by
CCH shareholders, CCH became our subsidiary and such acquisition qualified as a
“business combination” under our amended and restated certificate of
incorporation. During 2007, CEC acquired additional shares by issuing shares of
CEC to certain original ChinaCast shareholders and increased its holdings to
100% of the outstanding ordinary shares of ChinaCast. The 19.73% of the
additional shares acquired were accounted for on the same basis as the
acquisition of the 80.27% shares.
We are
subject to risks common to companies operating in China, including risks
inherent in our distribution and commercialization efforts, uncertainty of
foreign regulatory approvals and laws, the need for future capital and retention
of key employees. We cannot provide assurance that we will generate revenues or
achieve and sustain profitability in the future.
Critical
Accounting Policies
For
summary of the critical accounting policies and the significant judgments and
estimates made on the part of the management, see item 7 of Form 10-K for the
year ended December 31, 2009 filed by the Company on March 29,
2010.
28
For the
purpose of the discussion and analysis of the results of ChinaCast Education
Corporation (“CEC”), its subsidiaries, and variable interest entity in this
section, the consolidated group is referred to as the “Company”. CCL was not
accounted for as a consolidated variable interest entity, because the Company
was not considered to be the primary beneficiary of CCL. The US dollar figures
presented below were based on the historical exchange rate of US$1 = RMB6.7 at
September 30, 2010 for the three months and nine months ended September 30,
2010.
Since our
acquisition of Hai Lai, we have been organized as two business segments, the
E-learning and training service Group (the “ELG”), encompassing all the
Company’s businesses before the acquisition, and the Traditional University
Group (the “TUG”), offering bachelor and diploma programs to students in
China.
The
revenue of the Company for the three months and nine months ended September 30,
2010 amounted to RMB125.1 million (US$18.7 million) and RMB344.1 million
(US$51.4 million) respectively, representing an increase of 52.2% and 46.8% over
the revenue of the corresponding periods in 2009. The increase in revenue was
mainly due to the acquisition of East Achieve in the fourth quarter of 2009 and
the acquisition of Wintown in the third quarter of 2010.
Revenue
of the ELG amounted to RMB49.9 million (US$7.4 million) and RMB143.9 million
(US$21.5 million) for the three months and nine months ended September 30, 2010
respectively, as compared to revenue of RMB50.7 million and RMB144.6 million of
the ELG for the three months and nine months ended September 30, 2009
respectively. Service income amounted to RMB47.0 million (US$7.0 million) and
RMB140.9 million (US$21.0 million) for the three months and nine months ended
September 30, 2010, compared to RMB48.9 million and RMB138.6 million for the
corresponding periods in 2009. Equipment sales amounted to RMB2.9 million
(US$0.4 million) and RMB3.0 million (US$0.4 million) for the three months and
nine months ended September 30, 2010, against RMB1.9 million and RMB6.1 million
for the same periods last year. The following table provides a summary of the
ELG’s revenue by business lines:
Three
Months ended
|
||||||||||||
September
30, 2010
|
September
30, 2009
|
|||||||||||
(millions)
|
(millions)
|
|||||||||||
US$
|
RMB
|
RMB
|
||||||||||
Post
secondary education distance learning
|
4.2
|
28.6
|
28.9
|
|||||||||
K-12
and content delivery
|
2.4
|
16.0
|
16.0
|
|||||||||
Vocational
training, enterprise / government training
|
0.8
|
5.3
|
5.8
|
|||||||||
Total
ELG revenue
|
7.4
|
49.9
|
50.7
|
Nine
Months ended
|
||||||||||||
September
30, 2010
|
September
30, 2009
|
|||||||||||
(millions)
|
(millions)
|
|||||||||||
US$
|
RMB
|
RMB
|
||||||||||
Post
secondary education distance learning
|
12.7
|
85.0
|
81.3
|
|||||||||
K-12
and content delivery
|
7.2
|
48.0
|
48.3
|
|||||||||
Vocational
training, enterprise / government training
|
1.6
|
10.9
|
15.0
|
|||||||||
Total
ELG revenue
|
21.5
|
143.9
|
144.6
|
Net
revenue from post secondary education distance learning services increased from
RMB81.3 million in the nine months ended September 30, 2009 to
RMB85.0 million (US$12.7 million) in nine months ended
September 30, 2010. Net revenue from post secondary education distance
learning services decreased slightly from RMB28.9 million in the three
months ended September 30, 2009 to RMB28.6 million
(US$4.2 million) in three months ended September 30, 2010. The total
number of post-secondary students enrolled in courses using the Company’s
distance learning platforms increased to 143,000 at September 30, 2010 from
141,000 at September 30, 2009. The increase was due to the growth of
students enrolled in distance learning degree courses with the
universities.
29
The revenue from the K-12 and
content delivery business decreased slightly by approximately 0.6% from RMB48.3
million for the nine months ended September 30, 2009 to RMB48.0 million (US$7.2
million) for the nine months ended September 30, 2010. The revenue from the K-12
and content delivery business remained the same at RMB16.0 million (US$2.4
million) for the three months ended September 30, 2010 and for the three months
ended September 30, 2009. The number of subscribing schools for K-12 distance
learning services has stabilized at 6,500.
Net revenue from vocational and
career training services, enterprise government training and networking services
decreased from RMB15.0 million during the nine months ended September 30, 2009
to RMB10.9 million (US$1.6 million) during the nine months ended September 30,
2010. Net revenue from vocational and career training services, enterprise
government training and networking services decreased from RMB5.8 million during
the three months ended September 30, 2009 to RMB5.3 million (US$0.8 million)
during the three months ended September 30, 2010. The decrease was mainly due to
fluctuations in equipment sales. Equipment sales included in the revenue of this
business line amounted to RMB2.9 million (US$0.4 million) and RMB3.0 million
(US$0.4 million)for the three months and nine months ended September 30, 2010,
against RMB1.9 million and RMB6.1 million during the same periods last
year.
The
revenue of TUG increased from RMB31.4 million and RMB89.8 million in the three
months and nine months ended September 30, 2009 respectively to RMB75.2 million
(US$11.2 million) and RMB200.2 million (US$29.9 million) in the three months and
nine months ended September 30, 2010. The increase was mainly due to the
acquisition of East Achieve in the fourth quarter of 2009 and the acquition of
Wintown in the third quarter of 2010. TUG’s total student enrolment increased
from approximately 12,200 as at September 30, 2009 to approximately 32,700 as at
September 30, 2010. Average revenue per student for 2010 amounted to RMB3,100
per student per quarter as compared to RMB2,700 per student per quarter for
2009.
Cost of
sales of the Company increased by 83.9% from RMB89.5 million during the first
three quarters of 2009 to RMB164.5 million (US$24.6 million) during the first
three quarters of 2010. Cost of sales of the Company increased by 111.9% from
RMB30.3 million during the third quarter of 2009 to RMB64.2 million (US$9.6
million) during the third quarter of 2010. The increase was mainly due to the
acquisition of East Achieve in the fourth quarter of 2009 and Wintown in the
third quarter of 2010, which increased the cost of sales of the
TUG.
ELG’s
cost of sales decreased from RMB34.3 million during the first three quarters of
2009 to RMB22.6 million (US$3.4 million) during the first three quarters of
2010. ELG’s cost of sales decreased from RMB11.7 million during the third
quarter of 2009 to RMB9.4 million (US$1.4 million) during the third quarter of
2010. The decrease was mainly due to the termination of the payment of satellite
platform usage fee to CCLBJ. ELG’s cost of materials for the three months and
nine months ended September 30, 2010 amounted to RMB2.8 million (US$0.4 million)
and RMB2.8 million (US$0.4 million) respectively whereas ELG’s cost of materials
were RMB1.9 million and RMB6.0 million for the three months and nine months
ended September 30, 2009. The cost of service for the ELG amounted to RMB6.6
million (US$1.0 million) and RMB19.7 million (US$2.9 million) for the three
months and nine months ended September 30, 2010, as compared to RMB9.8 million
and RMB28.3 million for the same periods in 2009. Satellite platform fee to
CCLBJ amounted to RMB1.7 million and RMB5.1 million for the third quarter and
the first three quarters of 2009 quarter respectively and the payment of the
satellite platform fee to CCLBJ was terminated with effect from January 1,
2010.
TUG’s
cost of sales amounted to RMB54.8 million (US$8.2 million) and RMB142.0 million
(US$21.2 million) for the three months and nine months ended September 30, 2010
as compared to RMB19.2 million and RMB56.9 million for the same periods in 2009.
The increase was due to the acquisition of East Achieve in the fourth quarter of
2009 and Wintown in the third quarter of 2010, after which there were three
universities operated under TUG.
ELG’s
gross profit margin increased by 3.9 percentage points, from 77.3% in the third
quarter of 2009 to 81.2% in the third quarter of 2010. The increase was due to
the increase in economy of scale as well as the reduction in equipment sales,
which has a low margin and the termination of the satellite platform usage fee
to CCLBJ. TUG’s gross profit margin was 27.1% for the third quarter of 2010 as
compared to 38.8% for the same period of 2009. The decrease was mainly due to
the lower margin of the newly acquired LJC and HIUBC, which had a higher revenue
split to the parent university as compared to FTBC.
For the
three months and nine months ended September 30, 2009, the Company received a
management service fee of RMB0.5 million and RMB3.8 million. The management
service fee arose from various agreements with CCL that entitled the Company to
the economic benefits of its Beijing Branch — CCLBJ. The management service fee
was terminated with effect from January 1, 2010.
Selling
and marketing expenses decreased from RMB3.6 million in the first three quarters
of 2009 to RMB1.7 million (US$0.3 million) in the first three quarters of 2010.
Selling and marketing expenses decreased from RMB0.9 million in the third
quarter of 2009 to RMB0.4 million (US$0.06 million) in the third quarter of
2010. The decrease was due to the drop in share option expense from RMB0.3
million and RMB1.4 million for the three months and nine months ended September
30, 2009 respectively to RMB nil (US$ nil) and RMB0.4 million (US$0.06 million)
for the corresponding periods in 2010.
30
General and administrative
expenses increased by 48.9% and 17.8% to RMB19.8 million (US$3.0 million) and
RMB52.4 million (US$7.8 million) in the three months and nine months ended
September 30, 2010 as compared to the same periods last year. The reduction of
share option expense from RMB11.5 million for the first three quarters of 2009
to RMB6.1 million (US$0.9 million) for the first three quarters of 2010 was
offset by the increase in general and administrative expenses of the East
Achieve Group and the Wintown Group after its acquisition.
The
Company has foreign exchange loss of RMB0.6 million (US$0.09 million) for the
first three quarters of 2010 compared to a gain of RMB0.1 million during the
first three quarters of 2009. The Company has foreign exchange loss of RMB0.004
million (US$0.001 million) for the thrid quarter of 2010 compared to a loss of
RMB0.05 million during the third quarter of 2009. The change was a result of the
change in the RMB/US exchange rate.
The last
tranche of the consideration for acquiring East Achieve amounting to RMB20.5
million (US$3.1 million) was settled in the third quarter of 2010. The amount
was less than the contingent consideration recorded by the Company resulting in
a gain of RMB9.9 million (US$1.5 million) for the third quarter of
2010.
Interest
income increased from RMB6.9 million in the first three quarters of 2009 to
RMB10.3 million (US$1.5 million) in the first three quarters of 2010. Interest
income increased from RMB2.1 million in the third quarter of 2009 to RMB3.8
million (US$0.6 million) in the third quarter of 2010. The increase was due to
the increase in the amount of the Company’s term deposits.
Interest
expense increased from RMB5.6 million in the first three quarters of 2009 to
RMB10.6 million (US$1.6 million) in the first three quarters of 2010. Interest
expense increased from RMB2.4 million in the third quarter of 2009 to RMB4.1
million (US$0.6 million) in the third quarter of 2010. Interest expense was
mainly associated with the loan of the TUG to finance the construction of the
campus. The increase was due to the increase in bank loan and the reduction in
interest capitalized in the construction project of TUG.
Overall,
profit before income tax and loss in equity investments increased from RMB37.8
million in the three months ended September 30, 2009 to RMB49.9 million (US$7.4
million) in the three months ended September 30, 2010, an increase of 32.0%. The
increase was mainly due to the increase in revenue.
The
Company recorded a loss in equity investments amounted to RMB0.03 million
(US$0.004 million) in the third quarter of 2010 compared to a loss of RMB0.8
million in the third quarter of 2009.
Income
taxes increased by 28.6% from RMB21.1 million in the first three quarters of
2009 to RMB27.5 million (US$4.1 million) in the first three quarters of 2010.
The increase was due to the increase in business.
Noncontrolling
interest amounted to RMB0.6 million (US$0.09 million) for the three months ended
September 30, 2010 as compared to RMB2.0 million for the three months ended
September 30, 2009. On September 18, 2009, the Company acquired the 20% minority
stake in Hai Lai, which resulted in a reduction of the noncontrolling
interest.
Net
income attributable to the Company increased by 51.5% to RMB41.5 million (US$6.2
million) in the three months ended September 30, 2010 from RMB27.4 million in
the three months ended September 30, 2009.
On March
16, 2007, the National People’s Congress of China enacted a tax law, under which
foreign-invested enterprises and domestic companies will be subject to
enterprise income tax at a uniform rate of 25% . The new tax law became
effective on January 1, 2008. There is a transition period, during which
enterprises may continue to enjoy existing preferential tax treatment or in
which their tax rates may be gradually adjusted to 25%. Following the
effectiveness of the new tax law, one of the Company’s major operating
subsidiaries, CCT Shanghai, which was subject to the preferential tax rate of
15%, is now eligible to the phased-in rates, which is 18% in 2008, 20% in 2009,
22% in 2210, 24% in 2011, 25% in 2012 and thereafter.
31
The
following is a summary of the key items from the consolidated balance
sheets.
As
of
|
||||||||||||
As
of
|
December
31,
|
|||||||||||
September
30, 2010
|
2009
|
|||||||||||
(millions)
|
(millions)
|
|||||||||||
RMB
|
US$
|
RMB
|
||||||||||
Cash
and cash equivalents
|
405.2
|
60.5
|
327.6
|
|||||||||
Term
deposits
|
600.0
|
89.6
|
507.0
|
|||||||||
Subtotal
|
1,005.2
|
150.1
|
834.6
|
|||||||||
Accounts
receivable
|
50.1
|
7.5
|
53.8
|
|||||||||
Inventory
|
1.4
|
0.2
|
1.4
|
|||||||||
Prepaid
expenses and other current assets
|
28.8
|
4.3
|
19.2
|
|||||||||
Total
current assets
|
1,092.8
|
163.1
|
919.7
|
|||||||||
Non-current
advances to a related party
|
99.7
|
14.9
|
99.7
|
|||||||||
Total
assets
|
3,004.2
|
448.4
|
2,273.9
|
Cash and
cash equivalents balances increased from RMB327.6 million as at December 31,
2009, to RMB405.2 million (US$60.5 million) as at September 30, 2010. The
increase was mainly due to the issuance of new shares to an investor as well as
the collection of account receivable.
There was
net cash from operating activities of RMB362.4 million (US$54.8 million) for the
nine months ended September 30, 2010 as compared to net cash from operating
activities of RMB144.2 million for the nine months ended September 30, 2009. The
universities under the TUG enroll students at the beginning of an academic year
and collect most of the tuition and other fee in September as well as the
subsequent months every year. For the remaining of the academic year, the TUG
would have a net cash outflow. The increase of net cash from operating
activities for the first three quarters of 2010 as compared to the first three
quarters of 2009 was mainly because of the addition of two universities under
TUG. Cash generated from deferred revenues amounted to RMB159.7 million (US$23.8
million) for the nine months ended September 30, 2010 as compared to RMB23.1
million for the same period in 2009. Account receivables reduced by RMB4.8
million (US$0.7 million) in the first three quarters of 2010 whereas account
receivables increased by RMB23.1 million in the first three quarters of 2009.
Revenue is recognized ratably throughout the periods services are provided, but
payments may be received ahead of or behind the revenue being recognized.
Payments received before recognition of revenue are recorded as deferred revenue
while payments not received at the time goods and service have been provided are
recorded as accounts receivable. For revenue related to project sales, the
timing of payments depended upon the terms of the contracts.
Net cash
used in investment activities in the nine months ended September 30, 2010 was
RMB505.0 million (US$75.4 million), mainly reflecting the payment of
consideration for the acquisition of Wintown and East Achieve amounting to
RMB374.4 million (US$55.9 million) and the transfer from term deposit of RMB93.0
million (US$13.9 million) For the nine months ended September 30, 2009, transfer
from term deposit amounted to RMB89.0 million, which resulted in a cash inflow
of RMB32.6 million for the period.
Net cash
provided by financing activities in the first three quarters of 2010 was
RMB219.9 million (US$32.8 million) as compared to RMB66.5 million in the first
three quarters of 2009. New shares were issued in the first three quarters of
2010 to investors to finance future acquisition of the TUG, the proceeds of
which amounted to RMB233.0 million (US$34.8 million).
The
Company believes that its cash and cash equivalents balances, together with its
access to financing sources, will continue to be sufficient to meet the working
capital needs associated with its current operations on an ongoing basis,
although that cannot be assured. Also, it is possible that the Company’s cash
flow requirements could increase as a result of a number of factors, including
unfavorable timing of cash flow events, the decision to increase investment in
marketing and development activities or the use of cash for acquisitions to
accelerate its growth.
Total
assets at September 30, 2010 amounted to RMB3,004.2 million (US$448.4 million),
an increase of 32.1%, when compared to the total assets amounting to RMB2,273.9
million at December 31, 2009. Total current assets increased by 18.8% to
RMB1,092.8 million at September 30, 2010.
Accounts
receivable decreased slightly from RMB53.8 million as at December 31, 2009 to
RMB50.1 million (US$7.5 million) at September 30, 2010. Most of the business
partners are long term customers and settle their accounts promptly. All
accounts receivable are reviewed regularly and provisions have been made for any
balances that are disputed or doubtful.
Inventory,
mainly made up of satellite transmission and receiving equipment, amounted to
RMB1.4 million (US$0.2 million) at September 30, 2010.
32
The
noncurrent advances to a related party represent money spent on assets and
expenses to build up the satellite business of CCL over the years. CCL has
undertaken that when regulation allows, the ownership of CCLX and all the
relevant assets attributable to the satellite business operations in the books
of CCL and CCLBJ will be transferred to the Company, the consideration of which
will be settled against the above advances to CCL in the books of the Company at
the sole discretion of the Company.
In
addition, we have obtained an undertaking from CCL that, at the time of such
transfer, CCL will make a payment to the Company for any shortfall if the
valuation of the advances is lower than the outstanding amount of the advances,
and therefore believe that the advances are recoverable. Amounts advanced to the
related party were RMB99.7 million (US$14.9 million) as at September 30, 2010.
As at December 31, 2009, the amount advanced was RMB99.7
million.
As at
September 30, 2010, the Company had total bank loans of RMB278.0 million
(US$41.5 million). RMB168.0 million of the bank loans are expiring within one
year were secured by pledge of certain land use rights and buildings, the
entitlement to accommodation income of the student apartments and guarantees
given by certain individuals. The remaining RMB110.0 million of the bank loan is
expiring over one year and was secured by the guarantees provided by Chongqing
Education Guarantee Co., Ltd. (“CQEG”) and Hai Lai. In consideration of the
guarantees provided by CQEG, the entitlement to tuition fee of FTBC and a
deposit of RMB4 million paid to CQEG were used as securities.
Off-Balance
Sheet Arrangements
The
Company has not entered any financial guarantees or other commitments to
guarantee the payment obligations of any third parties.
33
Foreign
Exchange Risk
Our reporting currency is the Renminbi
(“RMB”). Transactions in other currencies are recorded in RMB at the rates of
exchange prevailing when the transactions occur. Monetary assets and liabilities
denominated in other currencies are remeasured into RMB at rates of exchange in
effect at the balance sheet dates. Exchange gains and losses are recorded in our
statements of operations as a component of current period earnings.
The PRC State Administration for
Foreign Exchange, under the authority of the People’s Bank of China, controls
the conversion of Renminbi into foreign currencies. The principal regulation
governing foreign currency exchange in China is the Foreign Currency
Administration Rules (1996), as amended, or the “Rules.” Under the Rules, once
various procedural requirements are met, RMB is convertible for current account
transactions, including trade and service-related foreign exchange transactions
and dividend payments, but not for capital account transactions, including
direct investment, loans or investments in securities outside China, without
prior approval of the State Administration of Foreign Exchange of the People’s
Republic of China, or its local counterparts.
Since July 2005, the RMB has no longer
been pegged to the U.S. dollar. Although currently the Renminbi exchange rate
versus the U.S. dollar is restricted to a rise or fall of no more than 0.3% per
day and the People’s Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, the
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the medium to long term. Moreover, it is possible that in the future,
the PRC authorities may lift restrictions on fluctuations in the Renminbi
exchange rate and lessen intervention in the foreign exchange market. As of the
close of business on September 30, 2010, the exchange rate between the RMB and
the U.S. dollar was RMB6.7 to US$1.
We conduct substantially all of our
operations through our PRC operating companies, and their financial performance
and position are measured in terms of RMB. The majority of our net sales and
purchases are denominated in RMB.
Any devaluation of the RMB against the
U.S. dollar would consequently have an adverse effect on our financial
performance and asset values when measured in terms of U.S. dollars. In
addition, from time to time we may have U.S. dollar denominated fixed deposits,
and therefore a decoupling of the RMB may affect our financial performance in
the future.
We recognized a foreign exchange loss
of approximately RMB0.004 million (US$0.001 million) and RMB0.6 million (US$0.09
million) for the three months and nine months ended September 30, 2010,
respectively. We do not currently engage in hedging activities, as such, we may
in the future experience economic loss as a result of any foreign currency
exchange rate fluctuations.
Interest
Rate Risk
We have a long history of investing
excess cash under a conservative corporate policy that only allows investments
in bank fixed deposits, with preservation of capital and liquidity as the
primary objectives. For the three months and nine months ended September 30,
2010, we recorded an interest income of RMB3.8 million (US$0.6 million) and
RMB10.3 million (US$1.5 million), respectively. Any significant changes in
interest rate might have an adverse effect on this interest income.
We have short-term and long-term debt
amounting to RMB278.0 million (US$41.5 million) as at September 30, 2010.
Interest paid in the three months and nine months ended September 30, 2010 was
RMB4.1 million (US$0.6 million), and RMB10.6 million (US$1.6 million)
respectively. Any significant changes in interest rate might have an adverse
effect on interest expense. There have been no material changes associated with
the impact of inflation and concentration of credit risk from that previously
disclosed in our 2009 Annual Report on Form 10-K.
Inflation
There have been no material changes
associated with the impact of inflation from that previously disclosed in our
2009 Annual Report on Form 10-K.
34
We maintain “disclosure controls and
procedures,” as such term is defined under Exchange Act Rule 13a-15(e) and
15d-15(e), that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and in reaching
a reasonable level of assurance our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. We have carried out an evaluation under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2010. Based upon their
evaluation and subject to the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that as of September 30, 2010 our disclosure
controls and procedures were effective.
There were no changes in our internal
control over financial reporting that occurred during the third fiscal quarter
of 2010 covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
35
We are not currently a party to any
pending material legal proceeding.
There are no material changes from risk
factors previously disclosed in the Annual Report on Form 10-K for the year
ended December 31, 2009, filed with the SEC on March 29, 2010.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults upon Senior Securities.
None.
None.
10.1
|
English
Translation of Share Transfer Agreement dated August 19, 2010 by and among
ChinaCast Education Holdings Limited, Wu Shi Xing, Wintown Enterprises
Limited, Shanghai Rubao Information Technology Co., Ltd., Wuhan Jiyang
Education Investment Co., Ltd. and Hubei Industrial University Business
College. (1)
|
31.1
|
Certification of Chief Executive
Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
31.2
|
Certification of Chief Financial
Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
32.1
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
(1)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on August
27, 2010
36
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINACAST
EDUCATION CORPORATION
|
|||
(Registrant)
|
|||
Date:
November 9, 2010
|
By:
|
/s/
Ron Chan Tze Ngon
|
|
Name:
|
Ron
Chan Tze Ngon
|
||
Title:
|
Chairman
of the Board,
|
||
Chief
Executive Officer (Principal Executive Officer)
|
|||
Date:
November 9, 2010
|
By:
|
/s/
Antonio Sena
|
|
Name:
|
Antonio
Sena
|
||
Title:
|
Chief
Financial Officer and
|
||
Secretary
(Principal Accounting and Financial
Officer)
|
Exhibit
No.
|
Description
|
|
10.1
|
English
Translation of Share Transfer Agreement dated August 19, 2010 by and among
ChinaCast Education Holdings Limited, Wu Shi Xing, Wintown Enterprises
Limited, Shanghai Rubao Information Technology Co., Ltd., Wuhan Jiyang
Education Investment Co., Ltd. and Hubei Industrial University Business
College. (1)
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
|
(1)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 27, 2010
38