Attached files
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| 8-K - CHINACAST EDUCATION CORP | v211618_8k.htm |
| EX-99.1 - CHINACAST EDUCATION CORP | v211618_ex99-1.htm |
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February
14, 2011
Dear
Shareholders:
On February 8, 2011, an analyst
contacted ChinaCast management with a number of material questions surrounding
two university acquisitions the Company had previously completed. In
order to provide full transparency to our shareholders and other interested
investors, the management team is providing the list of questions and the
Company’s responses below.
Please know that our management team
and board take this matter extremely seriously, since any implication of
wrongdoing directly implicates me as the Chairman and CEO of ChinaCast
Education. We fear, given the nature of the questions, that the
analyst might have misapprehended our transactions and jumped to a wrong and
harmful conclusion about them. Our fears are reinforced by the number
of negative, and according to their targets, false reports about Chinese
companies issued by or in concert with short sellers for their own
financial benefit.
We
recognize that it is easy to misapprehend public information about public
companies, especially when acquisitions are involved. We expect that
these responses will help you to understand the nature and particulars of our
acquisitions. We have witnessed frequently that some analysts arrive
at questions but do not seek out Company input in order to obtain
answers. We are cooperating in hopes of avoiding a similar
situation.
The analyst was clearly focused on the
prices we paid to acquire assets. We recognize that these complex
transactions can easily confuse even professionals with an industry
analyst’s level of sophistication and
experience. Our goal in responding is to illustrate that there is no discrepancy
between what the seller (the new holding company) paid for the assets it
obtained and what we paid for the school.
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As you
are aware, management and our board of directors, including myself, have
purchased approximately $9.5 million in stock during the past year, signifying
our belief in the business and its growth prospects. We hope and
expect that you, our shareholders and interested investors, will understand and
credit our answers and recognize that ChinaCast is a strong, vibrant company and
that its management is dedicated to maximizing shareholder value.
Question #1 - Based
on CAST 8K filings, the WOFE (wholly owned foreign enterprise) holding companies
of two universities acquired by CAST, namely, Shanghai Xijiu (the WOFE holding
company of Lijiang College or ‘LJC’) and Shanghai
Rubao (the WOFE holding company of Hebei Industrial University Business College
or ‘HIUBC’), office
locations were next to each other (Suite 716-L vs. Suite
716-N). Given that the owners of Shanghai Xijiu and Shanghai Rubao
are two different individuals, why are they renting the same office
location?
Answer #1 – Please understand
that these locations are only the addresses of the WOFE (wholly owned foreign
enterprise) holding companies that were acquired solely to facilitate these
transactions. The WOFEs were pre-existing, acquired from the same
source, and therefore have almost the same address. The close
proximity of the WOFE offices does not evidence a connection between Xijiu or
Rubao and there is none.
For various regulatory, tax, and
accounting reasons in China, after our first acquisition, we structured our
subsequent acquisitions as offshore transactions, utilizing a WOFE
structure. The companies that sell schools to us are holding
companies that have been in existence at least since the inception of the school
(here, the schools were almost a decade old when we bought them) and
therefore in all cases they have assets other than the schools we are
buying. Accordingly, the holding company must be reorganized to
create a company that holds only the school that we acquire. That
reorganized holding company is the WOFE. Because it takes a long time
(usually 4 to 6 months) to create a new WOFE, and there are other logistical
issues, the sellers used pre-existing WOFEs, -- Shanghai Xijiu (for the LJC
acquisition) and Shanghai Rubao (for the HIUBC acquisition) – which had no
active operating activities, a clean structure, a clean balance sheet, and a
legal representative/director whom the seller finds
trustworthy. Those are the entities whose addresses you are asking
about. It would be wrong to draw any inference from the close
proximity of the two WOFE addresses. That proximity does not evidence
any connection between the two sellers, and there is none.
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Question #2 - How
much did Shanghai Xijiu pay for China Lianhe Biotechnology Co., Ltd. (or ‘Lianhe’, the original
holding company of LJC) on September 9, 2009? We would like you to
share the original share transfer agreement in Chinese with us.
Answer #2 – The transaction
involved a multi-step transfer of interests involving four separate
entities. At the end of the transaction, the total paid by Xijiu was
RMB 235 million.
Once again, these transactions are
complicated and, to the extent that you are trying to follow the cash, you need
to be careful to understand how the transaction works. We obviously
cannot in this short statement provide a thorough explanation of the
transaction, but let me make an important general point about the structure of
the transaction and how that bears on the prices paid along the
way.
As we noted above, prior to the
transaction, the school is owned by a holding company with multiple shareholders
and additional assets beyond the school we want to
buy. In order to facilitate the transaction, the seller
must reorganize itself into a new, offshore holding company with one asset: the
school. The new holding company, which is the WOFE, acquires the old
holding company – including the
un-purchased assets – and then
distributes the un-purchased assets to the shareholders of the old holding
company. For that reason, the money that changes hands between the
old holding company and the new holding company might bear no relation to the
price we pay for the single asset – the
school.
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In the
LJC deal, the reorganization by the sellers was completed on Sept 17, 2009,
after which we entered into a Sale & Purchase agreement (S&P) on Sept
28, 2009.
You asked us to supply the original
agreements in Chinese. These agreements were made before our
acquisition and involve parties other than us. We do not feel it
appropriate to provide them to you without you first seeking and obtaining the
permission of the contracting parties. In the meantime, we believe
the agreements are publicly available from the PRC government.
Question #3 - Please
elaborate on the background of Mr. Xie Ji Qing. What was Mr. Xie’s role and
responsibility with respect to LJC prior to CAST acquisition? What is Mr.
Xie’s current
role at LJC?
Answer #3 - Mr. Xie
was the shareholder of the offshore holding company after the reorganization
undertaken by the sellers. He has no role in LJC after our acquisition and has
never had any involvement with ChinaCast.
Question #4 - How
much did Shanghai Rubao pay for Wuhan Jiyang on July 20, 2010? We would like you
to share the original share transfer agreement in Chinese with us.
Answer #4 - Three
individuals transferred a total of 100% stake in Jiyang to Rubao at an aggregate
price of RMB20 million. In the HIUBC deal, the reorganization by the
sellers was completed on August 9, 2010, after which we entered into a S&P
on August 19, 2010. As was the case with the agreement you requested
above, we request that you seek the permission of the contracting parties and
believe that the contract is publicly available from the PRC
government.
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Question #5 - Please
elaborate on the background of Mr. Wu Shi Xing. What was Mr. Wu’s role and
responsibility with respect to HIUBC prior to CAST acquisition? What is Mr.
Wu’s current
role at HIUBC?
Answer #5 - Mr. Wu
was the shareholder of the offshore holding company after the reorganization
undertook by the sellers. He has no role in HIUBC after our acquisition and
has never had any involvement with ChinaCast.
Question #6 - SEC
filings indicate that Wuhan Jiyang’s capital
contribution to HIUBC was RMB 20 million and HIUBC’s registered
capital was RMB 50 million. How much was Wuhan Jiyang’s ownership % in
HIUBC?
Answer
#6 - Jiyang's ownership in
HIUBC was 100%. The RMB50 million investment in HIUBC included Jiyang's shareholder loan,
which, upon our acquisition, was waived.
There was full transparency for these
transactions. All of the relevant information about the transactions,
including the name of the school, identity of the owner, pricing, number of
students in the schools, land size, and the like, was made public 6 months
before the actual closing of these transactions, leaving plenty of time for all
parties to cross reference all details. All documentation was
constructed by our PRC legal counsel and reviewed by the auditors. At
least one of our independent directors visited the schools and their respective
seller before closing. A lot of our shareholders, analysts and
potential investors visited all of our schools and communicated with our
students, faculty and management teams.
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More importantly, and perhaps more
simply, please understand that the prices we paid for the assets are
fair. Fair values for
the land, buildings and intangible assets were determined by
professionals and their
conclusions have been accepted by our auditors. The prices we paid
compare favorably to
market comparables, as the following chart
demonstrates:
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Date
of transaction
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Acquirer
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Name
of university
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Education
License
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No.
of students
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Land
area
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Acquisition
price
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Bank
borrowings assumed
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April
3, 2009
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Ambow
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Century
College, Beijing
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Required
to obtain updated education license
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2009:
3,350
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220mu
(146.7K sq. m.)
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RMB
450 million
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RMB
170 million
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Aug
8, 2009
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Ambow
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Applied
Technology College,
Soochow
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Current
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2009:
3,499
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Not
specified
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RMB
187 for 70% i.e. RMB 267m for 100%
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RMB
278 million
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Oct
5, 2009
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ChinaCast
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Lijiang
College, Guilin
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Current
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2009:
8,314
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236.3K
sq. m.
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RMB
365 million
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RMB
90 million
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Aug
27, 2010
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ChinaCast
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Hubei
Industrial University Business College, Wuhan
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Current
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2009:
9,897
2010:
10,844
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71.4K
sq. m.
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RMB
450 million
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RMB
54 million
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All the
information contained in the table is public information extracted from SEC
filings. The information is public in both the US and China. That our
acquisitions were at or below market price should allay any fears or concerns
that there was any wrongdoing in the acquisition process.
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We’ve held annual
education conferences for two consecutive years, providing ample opportunities
for any investor to scrutinize and cross reference our public
information. In 2011, our annual education conference will be held in
Wuhan in October. If you would like to attend, please contact
us.
I am
proud of the Company and all that it has achieved. Once again, we
remain willing to answer any questions you may have to the extent we can under
the applicable laws and regulations and thank you again for your continued
support.
Sincerely,
Ron Chan,
Chairman and Chief Executive Officer
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