UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): February 8, 2010
Green Star Mining Corp.
(Exact name of registrant as specified in its charter)
Delaware 333-150385 26-1806348
(State of Incorporation) (Commission File No.) (IRS Employer ID No.)
No.27, Jinsha Road, Jinnan Village, Lijingpu Township,
Shahe Section, Ningxiang County, Hunan Province, China 410600
(Address of Principal Executive Offices)
Tel: (86 731) 87828601
Fax: (86 731) 87828601
(Registrant's Telephone Number, Including Area Code)
Room 42, 4th Floor, New Henry House, 10 Ice Street, Central, Hong Kong
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
TABLE OF CONTENTS
Item No. Description of Item Page No.
-------- ------------------- --------
Item 1.01 Entry Into a Material Definitive Agreement 3
Item 2.01 Completion of Acquisition or Disposition of Assets 3
Item 3.02 Unregistered Sales of Equity Securities 56
Item 4.01 Changes in Registrant's Certifying Accountant 57
Item 5.01 Changes in Control of Registrant 57
Item 5.02 Departure of Directors or Certain Officers; Election of 57
Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change 58
in Fiscal Year
Item 5.06 Change in Shell Company Status 58
Item 8.01 Other Events 58
Item 9.01 Financial Statements and Exhibits 58
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which reflect our views with
respect to future events and financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. These
forward-looking statements are identified by, among other things, the words
"anticipates", "believes", "estimates", "expects", "plans", "projects",
"targets" and similar expressions. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Important factors that may cause actual results to differ
from those projected include the risk factors specified below.
USE OF DEFINED TERMS
Except as otherwise indicated by the context, references in this report to
"Green Star" or "Company" are references to Green Star Mining Corp., a Delaware
corporation, references to "Risetime" are references to Risetime Group Limited,
a British Virgin Islands corporation that is wholly-owned by Green Star, and
references to "Global Education" are references to Global Education
International Limited, a Hong Kong corporation that is wholly-owned by Risetime.
References to "WFOE" are to Xiangtan Nicestar Business Administration Co., Ltd,
our wholly owned Chinese subsidiary, and references to "Oya" are to Hunan Oya
Education Technology Co., Ltd. References to "Nicestar" are references to
Nicestar International Limited, a British Virgin Islands corporation that was
2
the former shareholder of Risetime prior to the reverse acquisition. References
to "we", "us" or "our" are references to the combined business of Green Star,
Risetime, Global Education, WFOE, Oya, Changsha Huanqiu Vocational Secondary
School and Shaoshan Huanqiu Vocational Technical Secondary School. The term
"Securities Act" means the Securities Act of 1933, as amended, and the term
"Exchange Act" means the Securities Exchange Act of 1934, as amended, the term
"RMB" means Renminbi, the legal currency of China and the terms "U.S. dollar",
"$" and "US$" mean the legal currency of the United States. According to the
currency exchange website www.xe.com, on February 10, 2010, $1.00 was equivalent
to RMB 6.8269. References to "China" and "PRC" are references to "People's
Republic of China." References to "BVI" are references to the "British Virgin
Islands." Below are the abbreviations of two private vocational schools and six
public vocational schools.
"Changsha Huanqiu" is the abbreviation of "Changsha Huanqiu Vocational Secondary
School";
"Shaoshan Huanqiu" is the abbreviation of "Shaoshan Huanqiu Vocational
Technical Secondary School";
"Shaoshan Vocational School" is the abbreviation of "Shaoshan Vocational
Secondary School";
"Yingjing Vocational School" is the abbreviation of "Yingjing Vocational
Secondary School";
"Tianquan Vocational School" is the abbreviation of "Tianquan Vocational
Secondary School";
"Shimian Vocational School" is the abbreviation of "Shimian Vocational Secondary
School";
"Lushan Vocational School" is the abbreviation of "Lushan Vocational Secondary
School"; and
"Shaoyang Vocational School" is the abbreviation of "Shaoyang Industrial
Vocational Technical School".
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
BACKGROUND
THE REVERSE MERGER TRANSACTION
On February 8, 2010, we entered into a share exchange agreement with Risetime
Group Limited, a British Virgin Islands company, and its sole shareholder,
Nicestar International Limited ("Nicestar"), a British Virgin Islands company
(the "Share Exchange Agreement"). Pursuant to the Share Exchange Agreement,
Nicestar agreed to transfer all of its shares of the capital stock of Risetime,
in exchange for 20,500,000 newly issued shares of our common stock that would,
in the aggregate, constitute 62.12% of our issued and outstanding capital stock
as of and immediately after the consummation of the transactions contemplated by
the Share Exchange Agreement.
As a result of the reverse acquisition, we acquired 100% of the capital stock of
Risetime and consequently, control of the business and operations of Risetime,
WFOE, Oya and its affiliated entities. Prior to the reverse acquisition, we were
in the development stage of engaging in the acquisition and exploration of
mining properties and had not yet realized any revenues from our operations.
From and after the closing of the Share Exchange Agreement, our primary
operations consist of the business and operations of Risetime, which are
conducted by Oya and its affiliated entities.
Our board of directors (the "Board") as well as the director and the shareholder
of Risetime, each approved the reverse acquisition.
A copy of the Share Exchange Agreement is filed as Exhibit 2.1 to this report.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
As described in detail in Item 1.01 above, on February 11, 2010, we completed an
acquisition of Risetime pursuant to the Share Exchange Agreement. The
acquisition was accounted for as a recapitalization effected by a share exchange
under the purchase method of accounting since there is a change of control,
wherein Risetime is considered the accounting acquirer for financial reporting
purposes. The assets and liabilities of the acquired entity have been brought
forward at their book value. As a result of the reverse acquisition, our
principal business became the business of Risetime, which is to provide
vocational education and vocational skill training services to a varied student
population throughout China.
FORM 10 DISCLOSURE
As disclosed elsewhere in this report, we acquired Risetime in a reverse
acquisition transaction. Item 2.01(f) of Form 8-K states that if the registrant
was a shell company like we were immediately before the reverse acquisition
3
transaction disclosed under Item 2.01, then the registrant must disclose the
information that would be required if the registrant were filing a general form
for registration of securities on Form 10.
Accordingly, we are providing below the information that would be included in a
Form 10 if we were to file a Form 10. Please note that the information provided
below relates to the combined enterprises after the acquisition of Risetime,
except that information relating to periods prior to the date of the reverse
acquisition only relates to Green Star unless otherwise specifically indicated.
DESCRIPTION OF BUSINESS
OUR CORPORATE STRUCTURE
OVERVIEW
We are a Delaware corporation incorporated on January 22, 2008 and we are
headquartered in Hunan Province, China. From our inception until February 11,
2010, when we completed a reverse acquisition transaction with Risetime, we were
primarily engaged in the acquisition and exploration of mining properties and
had not realized any revenues from our planned operations.
On November 23, 2009, our board of directors (the "Board") approved a 5-for-1
forward stock split of all issued and outstanding shares of common stock of the
Company. On November 25, 2009, the Financial Industry Regulatory Authority
(FINRA) approved our application for forward stock split. As the result, the
total issued and outstanding shares of common stock of the Company prior to the
reverse acquisition were 12,500,000.
By three stock purchase agreements dated November 28, 2009, we experienced a
change in control whereby a number of investors, acquired an aggregate of
7,500,000 post forward split shares of common stock from a former shareholder.
Upon this change in control, our Board determined that the implementation of our
business plan prior to the change in control was no longer financially feasible,
and we adopted an acquisition strategy focused on pursuing growth by acquiring
undervalued businesses with a history of operating revenues. Our Board approved
the Share Exchange Agreement and we entered into the Share Exchange Agreement
with Risetime and Nicestar on February 8, 2010.
On July 22, 2008, we sold 1,000,000 shares of common stock to 30 investors for
$.025 per share pursuant to our S-1 registration statement for $25,000.
BACKGROUND AND HISTORY OF RISETIME AND ITS SUBSIDIARIES AND CHINESE CONSOLIDATED
ENTITIES
Risetime was incorporated in the British Virgin Islands on December 17, 2007.
Global Education International Limited was incorporated under the laws of the
Hong Kong on November 15, 2007. Global Education became the wholly owned
subsidiary of Risestar Group Limited on July 31, 2009. Global Education formed
Xiangtan Nicestar Business Administration Co., Ltd. as a wholly foreign owned
enterprise under the laws of the PRC on September 30, 2009.
Oya is our Chinese consolidated entity directly owned by Mr. Guangwen He and
Mrs. Yabin Zhong. Oya was organized under the laws of the PRC in November 20,
2008. Under the laws of the PRC, we cannot acquire Oya directly. As a result,
WFOE entered into a series of agreements with Oya which we believe give us
effective control over the business of Oya. Our relationships with Oya and its
stockholders are governed by a series of contractual arrangements between WFOE
and Oya, the operating company in the PRC. These agreements are described under
"Contractual Arrangements between WFOE, Oya and its Shareholders".
We operate two private secondary vocational schools (Changsha Huanqiu and
Shaoshan Huanqiu) and a public secondary vocational school (Shaoshan Vocational
School) in China through Oya. Both Changsha Huanqiu and Shaoshan Huanqiu are
owned by Mr. Guangwen He. Through Changsha Huanqiu, we operate five public
secondary vocational schools, Yingjing Vocational School, Tianquan Vocational
School, Shimian Vocational School, Lushan Vocational School and Shaoyang
Vocational School. For a description of these arrangements, see "Contractual
Arrangements for the Operation of Two Private Vocational Schools" and
"Contractual Arrangements for the Operation of Six Public Vocational Schools".
Mr. Guangwen He established Ningxiang Huanqiu Computer Training School (the
predecessor of Changsha Huanqiu) in Ningxiang County, Changsha, China in August
1994 to offer computer training services. Since its inception, Changsha Huanqiu
4
has grown rapidly and transformed itself from primarily a computer training
school to a comprehensive provider of vocational education and vocational skill
training services offering a wide range of educational programs, services and
products to a varied student population throughout China. Mr. He established
Shaoshan Huanqiu in Shaoshan City on May 15, 2006 to provide secondary
vocational education and training services.
Our structure prior to the reverse acquisition is as below:
[TEXT OF GRAPHIC BELOW]
Nicestar International Limited
Risetime Group Limited Outside PRC
Global Education International Limited
--------------------------------------------------------------------------------
In PRC
Yabin Zhong Guangwen He
Xiangtan Nicestar Business Hunan Oya Education
Administration Co., Ltd. (WFOE) Technology Co., Ltd.
Shaoshan Secondary Changsha Huanqiu Shaoshan Huanqiu
Vocational School* Vocational Secondary Vocational Technical
School Secondary School
Yingjing Vocational School*
Tianquan Vocational School*
Shimian Vocational School*
Lushan Vocational School*
Shaoyang Vocational School*
Equity interests.
Contractual arrangements for the control of Oya. See "Contractual Arrangements
between WFOE, Oya and Its Shareholders".
Contractual arrangements for the operation of vocational schools. See
"Contractual Arrangements for the Operation of Two Private Vocational Schools"
and "Contractual Arrangements for the Operation of Six Public Vocational
Schools".
* Consisting of six public vocational schools operated by Oya or Changsha
Huanqiu under relevant Business Cooperation Agreement and Joint
School-Running Agreements.
5
ACQUISITION OF RISETIME GROUP LIMITED
Through the reverse acquisition of Risetime we acquired all of the issued and
outstanding capital stock of Risetime, which became our wholly-owned subsidiary,
and in exchange for that capital stock we issued to Nicestar, the former
stockholder of Risetime, 20,500,000 shares of our common stock. Upon the
consummation of the reverse acquisition, Nicestar becomes our controlling
stockholder.
Upon the closing of the reverse acquisition, on February 11, 2010, our sole
director and officer, Mr. Yi Chen, submitted his resignation letter pursuant to
which he resigned effective immediately from all offices of the Company that he
held and from his position as our director. Simultaneously, five new directors
were appointed, including three independent directors. Mr. Guangwen He was
appointed as our Chief Executive Officer and Chairman of the Board at the
closing of the reverse acquisition of Risetime. Descriptions of our proposed
directors and officers can be found below.
The structure after the reverse acquisition is as below:
[TEXT OF GRAPHIC BELOW]
Former shareholders Nicestar International Limited
Green Star Mining Corp.
Risetime Group Limited
Global Education International Limited Outside PRC
--------------------------------------------------------------------------------
In PRC
Yabin Zhong Guangwen He
Xiangtan Nicestar Business Hunan Oya Education
Administration Co., Ltd. (WFOE) Technology Co., Ltd.
Shaoshan Secondary Changsha Huanqiu Shaoshan Huanqiu
Vocational School* Vocational Secondary Vocational Technical
School Secondary School
Yingjing Vocational School*
Tianquan Vocational School*
Shimian Vocational School*
Lushan Vocational School*
Shaoyang Vocational School*
Equity interests.
Contractual arrangements for the control of Oya. See "Contractual Arrangements
between WFOE, Oya and Its Shareholders".
Contractual arrangements for the operation of vocational schools. See
"Contractual Arrangements for the Operation of Two Private Vocational Schools"
and "Contractual Arrangements for the Operation of Six Public Vocational
Schools".
* Consisting of six public vocational schools operated by Oya or Changsha
Huanqiu under relevant Business Cooperation Agreement and Joint
School-Running Agreements.
6
Following the reverse acquisition, we, through our Chinese consolidated
entities, provide vocational education and vocational skill training services to
a varied student population throughout China. Our executive office is located at
Changsha Huanqiu Vocational Secondary School, No.27, Jinsha Road, Jinnan
Village, Lijingpu Township, Shahe Section, Ningxiang County, Hunan Province,
China 410600, our telephone number is (86 731) 8782 8601, and our fax number is
(86 731) 8782 8601. Our website is www.hnhuanqiu.com. Information on our website
or any other website is not a part of this report.
CONTRACTUAL ARRANGEMENTS BETWEEN WFOE, OYA AND ITS SHAREHOLDERS
We have been and are expected to continue to be dependent on Oya to operate our
education business until we qualify for direct ownership of an education
business in China under PRC laws and regulations and acquire Oya as our direct,
wholly owned subsidiary. Through our Chinese subsidiary, WFOE, we have entered
into a series of contractual arrangements with Oya and its shareholders which
enable us to:
* exercise effective control over Oya;
* receive a substantial portion of the economic benefits from Oya in
consideration for the services provided by our wholly owned subsidiary
in China; and
* have an exclusive option to purchase all or part of the equity
interests in Oya in each o case when and to the extent permitted by
PRC law.
EXCLUSIVE BUSINESS COOPERATION AGREEMENT. Through our wholly-owned Chinese
subsidiary, WFOE, we have entered into an Exclusive Business Cooperation
Agreement with Oya. The Exclusive Business Cooperation Agreement has an initial
term of ten years and will be renewed upon WFOE's written consent. Under this
agreement, WFOE provides comprehensive technical support, teaching support and
relevant consulting services to Oya. As consideration for such services provided
by WFOE, Oya will pay monthly service fee to WFOE equal to 100% of the monthly
net income of Oya. Through the two parties' negotiation and with the prior
written consent of WFOE, the monthly service fees may be adjusted based on the
actual services provided by WFOE and the actual business demands of Oya.
LOAN AGreements. Under the Loan Agreements, WFOE will make loans in the
aggregate principal amount of RMB 130 million (approximately $19 million) to the
shareholders of Oya, each shareholder receiving a share of the loan proceeds
proportional to its shareholding in Oya. WFOE agrees to grant loans to the
shareholders of Oya within 20 days after receiving written drawdown notice from
the shareholders. The terms of these loans are 10 years and may be extended with
the consent of the parties. These loans do not bear interest.
PROXY LETTERS. On November 28, 2009, each of the shareholders of Oya executed a
Proxy Letter. Under the Proxy Letters, Mr. Guangwen He and Ms. Yabin Zhong each
irrevocably entrusted WFOE with the right to act as his/her proxy and vote all
of his/her equity interests in Oya. Each of the Proxy Letters will remain
effective as long as Mr. He or Ms. Zhong remains a shareholder in Oya.
EXCLUSIVE PURCHASE OPTION AGREEMENTS. Under the Exclusive Purchase Option
Agreements dated as of November 28, 2009 among WFOE, Oya and the shareholders of
Oya, the shareholders granted WFOE an irrevocable and exclusive right to
purchase all or part of their equity interests in Oya. The purchase option may
be exercised by WFOE in its sole discretion at any time that the exercise would
be permissible under PRC laws, and the total purchase price for the WFOE's
acquisition of the entitle equity interests of Oya is RMB20 (equivalent to
$3.0), subject to necessary adjustment under applicable PRC laws at the time
when such share transfer occurs. The terms of these agreements are 10 years and
may be extended at the option of WFOE. The Exclusive Purchase Option Agreements
contain agreements from Oya and its shareholders that they will refrain from
taking some actions without the prior written consent of WFOE, such as amending
the bylaws of Oya, increasing or reducing the registered capital of Oya, or
declaring dividends of Oya.
EQUITY PLEDGE AGREEMENTS. Pursuant to the Equity Pledge Agreements dated as of
November 28, 2009 between WFOE and the shareholders of Oya, each shareholder
agreed to pledge his or her equity interest of Oya to WFOE to secure the
performance of the shareholders' obligations under the Loan Agreements. Under
the Equity Pledge Agreements, each of the shareholders has agreed not to
transfer or create any encumbrance on his or her equity interest in Oya without
the prior written consent of WFOE.
7
CONTRACTUAL ARRANGEMENTS FOR THE OPERATION OF TWO PRIVATE VOCATIONAL SCHOOLS
BUSINESS COOPERATION AGREEMENTS. On July 28, 2009, Oya entered into Business
Cooperation Agreements with Changsha Huanqiu and Shaoshan Huanqiu respectively,
our consolidated private schools owned by Guangwen He. Each Business Cooperation
Agreement has a term of fifteen years, which may be extended with the written
consent of the two parties. Under these agreements, Oya agreed to provide
comprehensive and exclusive technical support, business support and relevant
consulting services to the two private schools, including but not limited to
making diversified investments, formulating student enrollment policies and
financial policies, and authorizing the schools to use the "HQ" brand.
Meanwhile, all the revenues of these two schools belong to Oya; Oya has the
right to distribute their profits, to appoint all their senior management and to
dispose the net assets of these two private schools.
CONTRACTUAL ARRANGEMENTS FOR THE OPERATION OF SIX PUBLIC VOCATIONAL SCHOOLS
JOINT SCHOOL-RUNNING AGREEMENT WITH RESPECT TO SHAOSHAN VOCATIONAL SCHOOL. On
March 30, 2009, Oya entered into a Joint School-Running Agreement with the
People's Government of Shaoshan City for the joint operation of Shaoshan
Vocational School. The term of the joint operation is 20 years, from April 8,
2009 to June 30, 2029. Under this agreement, Oya has the right to run and manage
Shaoshan Vocational School, to appoint personnel, to accumulate working capital
and to distribute profits during the term of the joint operation.
JOINT SCHOOL-RUNNING AGREEMENT WITH RESPECT TO YINGJING VOCATIONAL SCHOOL. On
May 9, 2005, Changsha Huanqiu entered into a Joint School-Running Agreement with
Yingjing Vocation School. The Education Bureau of Yingjing City is an
intermediary to this agreement. The term of the joint operation is 15 years,
from April 30, 2005 to April 30, 2020. During the term of the joint operation,
Changsha Huanqiu has the right to run and manage Yingjing Vocational School and
to accumulate working capital.
JOINT SCHOOL-RUNNING AGREEMENT WITH RESPECT TO TIANQUAN VOCATIONAL SCHOOL. On
February 20, 2006, Changsha Huanqiu entered into a Joint School-Running
Agreement with the Education Bureau of Tianquan County. The term of the joint
operation is 15 years, from February 20, 2006 to July 15, 2021. During the term
of the joint operation, Changsha Huanqiu has the right to run and manage
Tianquan Vocational School, to accumulate working capital and to distribute
profits.
JOINT SCHOOL-RUNNING AGREEMENT WITH RESPECT TO SHIMIAN VOCATIONAL SCHOOL. On
January 23, 2006, Changsha Huanqiu entered into a Joint School-Running Agreement
with the Education Bureau of Shimian County. The term of the joint operation is
15 years, from January 23, 2006 to July 30, 2021. During the term of the joint
operation, Changsha Huangqiu has the right to run and manage Shimian Vocational
School, to accumulate working capital and to distribute profits.
JOINT SCHOOL-RUNNING AGREEMENT WITH RESPECT TO LUSHAN VOCATIONAL SCHOOL. On May
18, 2006, Changsha Huanqiu entered into a Joint School-Running Agreement with
the Education Bureau of Lushan County. The term of the joint operation is 15
years, from May 18, 2006 to July 30, 2021. During the term of the joint
operation, Changsha Huanqiu has the right to run and manage Lushan Vocational
School, to accumulate working capital and to distribute profits.
JOINT SCHOOL-RUNNING AGREEMENT WITH RESPECT TO SHAOYANG VOCATIONAL SCHOOL. On
January 25, 2008, Changsha Huanqiu entered into a Joint School-Running Agreement
with the People's Government of Shaoyang County. The term of the joint operation
is 18 years, from January 25, 2008 to January 24, 2026. During the term of the
joint operation, Changsha Huanqiu has the right to run and manage Shaoyang
Vocational School, to appoint personnel, to accumulate working capital and to
distribute profits.
OUR BUSINESS
We are a provider of customized private educational services in China. These
services are developed with many target employers to provide them with the
skilled workers they require. As a consequence, 100% of our graduates obtain
jobs with our cooperative companies. We offer a wide range of educational
programs and services through vocational schools, consisting primarily of
"Customized Education" programs for various vocational skills and school
logistic services and have a 100% graduation rate. We provide educational
services under our "HQ" brand. We believe our "HQ" brand is a famous brand in
China's private vocational education sector, as evidenced by awards we received
8
from many government authorities and semi-government entities, including the
title of "State-level Key Secondary Vocational Schools" granted by the Ministry
of Education of the People's Republic of China, and the title of "Famous
Non-government Funded School" and the "Entity with Outstanding Contributions"
granted by the Chinese People's Political Consultative Conference (the "CPPCC").
Since our inception in 1994, we have had 85,000 cumulative student enrollments.
In the twelve months ended November 30, 2009, we had 15,036 newly-enrolled
students. We deliver our educational programs to students through eight schools
and approximately 2,100 teachers as of November 30, 2009.
We have experienced significant growth in our business in recent years. For the
twelve months ended August 31, 2009, our total revenue was $36,111,358,
representing an increase of $7,307,375 or 25.37% as compared with $28,803,983
for the same period of 2008. Our gross profit for the twelve months ended August
31, 2009 was $13,274,936, representing an increase of $3,664,132 or 38.13% as
compared with $9,610,804 for the prior year. Net revenues from our "Customized
Education" accounted for 71.21%, 70.31% and 68.78%, respectively, of our total
net revenues in the twelve months ended August 31, 2007, 2008 and 2009. Our net
income increased from $7,797,558 in the twelve months ended August 31, 2008 to
$10,667,175 in the twelve months ended August 31, 2009, demonstrating an annual
growth rate of 36.80%.
MARKET OPPORTUNITY
EDUCATION IN CHINA
Reflecting the magnitude of the overall population, the size of the education
and training market in China is the largest in the world and growing rapidly.
According to the World Bank Study, among China's approximately 1.3 billion
people, around 260 million are students enrolled in basic, secondary and higher
education programs and an additional 68 million adults are enrolled in a variety
of other education and training programs. Education spending in China is
expected to grow rapidly as demand for more skilled labor force grows and the
participation rate in the educational system increases consequently. According
to the Eleventh Five-Year Plan of China, the Chinese government has targeted a
significant increase in the overall level of spending on education, which
includes both public and private spending, to 4.0% of China's GDP by 2010,
compared with 2.8% of China's GDP in 2005. Assuming China's GDP increases to
$2.3 trillion by 2010, as projected by China's State Council Development
Research Center, achieving the Chinese government's target for the education
sector would result in total education spending, both public and private,
increasing from $75.0 billion in 2003 to $242.0 billion by 2010. The growth in
educational spending will likely be driven by several factors, including
favorable demographic trends, growth in per capita and disposable income, the
limited supply of educational resources and growing demand and government
initiatives.
VOCATIONAL EDUCATION AND TRAINING
In 1986, the PRC government implemented a system of compulsory education that
requires each child to have at least nine years of formal education. When
students finish the nine-year compulsory education, they have two educational
options: (a) high schools or (b) secondary vocational schools. High school
graduates also have two educational options: (a) bachelor degree colleges and
(b) higher vocational schools. Secondary vocational school students can be
admitted to higher vocational schools if they pass the required tests. Higher
vocational school students can be admitted to bachelor degree colleges if they
pass the required tests.
STUDENT ENROLLMENT IN VARIOUS TYPES OF SCHOOLS IN CHINA
(Person)
(Source: National Bureau of Statistics of China,
http://www.stats.gov.cn/tjgb/ndtjgb/qgndtjgb/index.htm, January 7, 2010)
School Type 2006 2007 2008
----------- --------- --------- ---------
Secondary Education High School 8,710,000 8,400,000 8,370,000
Secondary 7,410,000 8,000,000 8,100,000
Vocational School
Higher Education (including bachelor 5,400,000 5,660,000 6,077,000
degree college and higher vocational school)
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China has one of the fastest growing economies in the world. As China's economy
continues to develop, the demand for skilled workers increases and exceeds the
supply. According to China Human Resources Market Information Web, a
governmental organization in China, in the third quarter of 2009, the overall
job opening-to-application ratio of technical workers exceeded 1, and the
opening-to-application ratio for senior professional qualification holders and
senior technicians reached 2.28 and 2.24, respectively, showing a wide-spread
shortage of senior blue collar workers in China. In Yangtze River Delta, Pearl
River Delta and some coastal areas, many enterprises suffer from shortage of
skilled workers. Some factories have to be shut down due to the failure to
recruit proper workers.
Job Opening-to-application Ratio of Workers with Various Levels of Skill
in 102 Cities in China in the Third Quarter of 2009 *
(Source: China Human Resources Market Information Web,
http://www.lm.gov.cn/gb/data/2009-11/09/content_332846.htm, January 13, 2010)
Application Opening-to-application
Opening (person) (person) Ratio (%)
---------------- -------- ---------
Vocational Certificate Grade V (Primary Skill) 1,071,150 1,122,361 1.43
Vocational Certificate Grade IV (Intermediate Skill) 521,753 528,490 1.46
Vocational Certificate Grade III (Senior Skill) 191,293 162,809 1.65
Vocational Certificate Grade II (Technician) 107,222 72,969 1.95
Vocational Certificate Grade I (Senior Technician) 47,976 27,218 2.24
Junior Professional Qualification 609,016 586,568 1.52
Intermediate Professional Qualification 254,245 245,375 1.51
Senior Professional Qualification 52,053 28,845 2.28
* The statistics was based on a survey conducted by China Human Resources Market
Information Web, a governmental organization under the Ministry of Human
Resources and Social Security of PRC in 102 cities of China. The 102 cities have
a combined urban population of 190 million, accounting for 49% of combined urban
population of all regional-level cities in China.
In this circumstance, secondary vocational schools training skilled workers have
witnessed great booms and their graduates are in high demand. Many large
companies establish cooperative relationship with vocational schools, pay
schools for training workers and take these schools as their labor resource
reservation.
The vocational education has also gained support from the Chinese government.
The Chinese government believes that there should be more vocational schools and
graduates than degree colleges and graduates for the healthy development of
China's economy. All levels of government are required to speed up the
development of vocational education. In 2005, the State Council issued THE
DECISION ON PROMOTING THE VOCATIONAL EDUCATION, which sets the state policy to
speed up the development of secondary vocational education. Moreover, vocational
education has been listed as one of major development objectives in the Eleventh
Five-year Development Plan of China.
Driven by the market and state policy, vocational education in China has
experienced rapid growth, as demonstrated in the following chart.
STUDENTS IN SECONDARY VOCATIONAL SCHOOLS IN CHINA
(Person)
(Source: National Bureau of Statistics of China,
http://www.stats.gov.cn/tjgb/ndtjgb/qgndtjgb/index.htm, January 7, 2010)
Year Newly-enrolled Students Students at School Graduates
---- ----------------------- ------------------ ---------
2004 5,480,000 13,679,000 3,510,000
2005 6,470,000 15,590,000 4,030,000
2006 7,400,000 18,090,000 4,760,000
2007 8,000,000 20,000,000 5,300,000
2008 8,100,000 20,563,000 5,706,000
10
OUR STRENGTHS
We believe that the following competitive strengths contribute to our success
and differentiate us from our competitors:
WELL RECOGNIZED VOCATIONAL EDUCATION BRAND IN CHINA. With a 15-year history, our
"HQ" brand is a well-recognized brand in China. We have received numerous awards
and recognitions. For example, Changsha Huanqiu has been granted the title of
"State-level Key Secondary Vocational Schools" by the Ministry of Education of
the People's Republic of China; Tianquan Vocational School and Shaoshan
Vocational School have been awarded as "Provincial Key Schools" by the
Department of Education of Sichuan Province and Hunan Province, respectively;
Changsha Huanqiu has been granted the title of "Famous Non-government Funded
School" and the "Entity with Outstanding Contributions" by the Chinese People's
Political Consultative Conference (the "CPPCC"); and the title of "Outstanding
School-running Entity" by Hunan Provincial Government. Furthermore, the
achievements of Company have been widely reported by news media, such as CCTV,
the People's Daily, Guangming Daily, Hong Kong Wenhui Daily, and Gov.cn, the
Chinese Central Government's Official Web Portal. We believe that our
established "HQ" brand allows us to further expand our market share in existing
markets and target new markets and areas of vocational education.
SUCCESSFUL ORDER-ORIENTED EDUCATION MODE. Order-oriented Education, or
"Customized Education", is essential to the success of the Company.
Order-oriented Education refers to the educational program that tailors
vocational education and training via cooperation agreements between us and
various enterprises. Under Order-oriented Education, we design and offer courses
to meet the specific needs of target employers. We first try to understand the
requirements of the industry, such as the specific skills and the number of
potential employees that are needed, and sign cooperation contracts with the
enterprises. "Order-oriented Education" reflects the resource sharing between
schools and enterprises. It benefits our students in their job hunting endeavors
after graduation. As a consequence, student recruitment witnessed a significant
expansion in recent years for our eight schools, and up to the twelve months
ended August 31, 2009, the employment rate remained 100% for the students who
graduated from our educational programs. We set up cooperative relationships
with 114 enterprises as of November 30, 2009, to carry out the customized
training program.
EXTENSIVE PROGRAM AND SERVICE OFFERINGS. We offer a wide range of educational
programs and services to a varied student population with diverse career
development needs. Our offerings primarily consist of various levels and types
of vocational training programs for graduates from junior secondary schools,
high schools and colleges, unemployed people and rural labor force, customized
pursuant to the need and requirement of our cooperating enterprises. As of
November 30, 2009, we had the following 17 categories of programs available for
enrollment: Mould Design and Manufacture, Numerical Control Technology, Computer
and Computer Application, Computer Information Management, Computer Software
Engineering, Computer-aided Design, Computer Repair and Maintenance, Computer
Network Engineering, Apparel Design and Technique, Electronic Commerce,
Accounting, Tour and Hotel Management, Secretary, Electronic Technology
Application, Electronic & Electrical, International Trade and Electromechanical
Integration. These 17 categories include about sixty programs. We believe the
breadth and the diversity of our programs and services increase our addressable
markets and enhance our overall revenue stability.
BROAD NATIONAL SCALE AND NETWORK. We have a broad national scale and network as
compared to other providers of vocational educational services in China. We
deliver our educational programs and services through a physical network of
eight schools, located in Hunan Province and Sichuan Province, as of November
30, 2009. We typically locate our schools in and around selected area with large
amount of labor force supply. We believe this strategy allows us to leverage the
geographic difference of labor force supply and efficiently attract prospective
students.
SUCCESSFUL TRACK RECORD. We were founded in 1994 by our Chairman and Chief
Executive Officer, Guangwen He. Since then, we have developed ourselves from a
single school to educational group providing a wide range of educational
programs and services to a varied student population with diverse career
development needs in China. We have demonstrated significant growth in our
business since our inception, especially in recent years. Our physical school
network increased from one schools in 1994 to eight schools as of November 30,
2009. The number of students increased from 34,000 for the twelve months ended
August 31, 2005 when we operated one vocational school, to 85,000 for the eight
schools we operated during twelve months ended August 31, 2009. Our total net
income increased from $7,797,558 for the twelve months ended August 31, 2008 to
$10,667,175 for the twelve months ended August 31, 2009, representing an
increase of $2,869,617 or 36.80%.
11
EXPERIENCED MANAGEMENT TEAM WITH A PASSION FOR EDUCATION. Our board members have
an average of approximately 16 years of experience in the education industry.
Our senior management team is committed to and passionate about education. They
are familiar with the vocational education sector and relevant regulatory
environment in China and continue to be actively involved in our management and
strategic planning. In particular, Mr. Guangwen He, our Chairman and Chief
Executive Officer, is a renowned expert in vocational education with over 15
years of experience in the education industry and is a leader in the vocational
education community in China. He has served as director of the Association for
Non-Government Education of China, vice president of Association for
Non-Government Education of Hunan Province, vice president of Association for
Non-Government Education of Changsha City, and vice president of the Education,
Science, Culture and Health Board of 10th Changsha CPPCC. He has been selected
as an Expert Enjoying Special Government Allowances of the State Council. We
believe that our management team's passion for education and extensive
experience in the vocational education sector and relevant regulatory
environment in China have enabled us to successfully manage our operations and
growth, promote our brand and achieve our goals.
OUR STRATEGY
Our goal is to grow rapidly as a leading provider of vocational educational
services in China. We intend to leverage our brand and national network to
achieve our goal by pursuing the following strategies:
ESTABLISH NEW SCHOOLS. Under the customized education mode, we will build
several new teaching facilities at our existing schools so as to expand the
capacity of student enrollment. Meanwhile, we are expecting to add three
vocational or technical schools in 2010, in addition to the eight schools we
currently operate.
CONTINUE TO EXPLOIT MARINER TRAINING MARKET. We will continue to reach
agreements to cooperate in running maritime schools in coastal cities such as
Dongying, Weifang, Qingdao, Rizhao and Weihai in Shandong Province, in the
coming years, so that we may expand our maritime-related programs to students in
these cities
DEVELOP OUR OWN TEACHING MATERIALS. We have set up a department responsible for
editing and compiling the teaching materials for our educational programs, which
we believe will safeguard our education quality. In coming years, publication of
teaching material will be incorporated in our business operation and we expect
to distribute this material nationwide to outside schools. We are planning to
publish and sell about 20 sets of teaching materials, with 100,000 books for
each set in 2010. The revenue derived from selling teaching materials is
anticipated to increase in future years.
ENHANCE BRAND IMAGE BUILDING. To seek sustainable development, we will enhance
image building of our brand and create distinctiveness of our brand. Management
believes this is essential for stable long term growth. We continue to see
improvement in the core capacity of our management team, marketing team and
auditing team as well as in our overall business capability.
OUR NETWORK
As of November 30, 2009, we deliver our education programs and services to
students through a physical network of eight schools, four of which are in Hunan
province and the other four are in Sichuan province and we have enrolled
students in 21 provinces across China.
In addition, as we have had over 85,000 cumulative student enrollments since our
inception, we have an extensive network of students and alumni. This network has
been essential in promoting our brand and our programs, services and products by
word-of-mouth referrals and through our students' and alumni's career
achievements.
The following table sets forth information concerning our schools as of November
30, 2009.
Newly Enrolled Students during the
School Location twelve months ended November 30, 2009
------ -------- -------------------------------------
Changsha Huanqiu Hunan Province 3,741
Shaoshan Huanqiu Hunan Province 2,227
Shaoshan Vocational School Hunan Province 1,808
12
Shaoyang Vocational School Hunan Province 527
Tianquan Vocational School Sichuan Province 1,157
Shimian Vocational School Sichuan Province 1,700
Lushan Vocational School Sichuan Province 2,075
Yingjing Vocational School Sichuan Province 1,801
------
TOTAL 15,036
======
BUSINESS MODE
ORDER-ORIENTED EDUCATION
Mr. Guangwen He is the founder and CEO of Oya, the principal of Changsha
Huangqiu and Shaoshan Huanqiu. Mr. He has been engaged in vocational education
and related investments since 1994. "Order-oriented Education", our main
operation mode, was initiated by Mr. Guangwen He.
Order-oriented Education refers to the educational program that tailors
vocational education and training via cooperation agreements between us and
various enterprises. Under Order-oriented Education, we design and offer courses
to meet the specific needs of target employers. We first try to understand the
requirements of the industry, such as the specific skills and the number of
potential employees that are needed and sign cooperation contracts with the
enterprises. Our schools then customize the curriculums according to the
specific requirements of target employers. At this stage, our revenue is derived
from the students' tuition and is recognized proportionately within the
semester.
In the winter and summer break, work-study programs, i.e. off-campus
internships, are arranged for students. Our teachers work as the team leaders
for these students who are sent to different enterprises in groups. Through such
on-field practice, students get familiar with the business atmosphere and the
production process. They equip themselves with skills to meet the specific
requirements of the target enterprises. As a result, students are competent for
their position without further training once they graduate from our secondary
schools.
For the internship arrangement, commissions are charged to the enterprises based
on the number of students they receive, with a standard charge per student each
time. We also obtain management fees from students with a fixed rate per student
per month. Such revenue is recognized upon the completion of the internship
arrangement. Upon graduation, eligible students are usually hired by the same
enterprises in which they take the internship. In such instances, students are
to make a one-off payment to us for employment recommendations. Based on the
majors we design and the number of students we offer, we collect commissions
from recruiters for employment recommendation at different rates per person. We
recognize such revenue upon the completion of all the services related to the
job arrangement.
To carry out the customized training program, we set up cooperative
relationships with 114 enterprises as of November 30, 2009, including Fuji Xerox
Technology (Shenzhen) Co., Ltd., Flextronics International (Zhuhai Doumen)
Industrial Park, BYD Company Limited, Shenzhen Sanyo Huaqiang Laser Electronic
Co., Ltd., Foxconn Technology Group, Olympus Shenzhen Industrial, Shenzhen
Seg-Hitachi and NEC Wuxi Branch, among many others.
ORDER-ORIENTED EDUCATION FLOW CHART
Step I Place Order Employing enterprises sign an agreement on
training with school (the "Training Order")
Step II Set Tuition The school applies to governmental pricing
authority for approval of the tuition
standard for new programs, if any, and to
obtain tuition permission accordingly.
Step III Establish Programs The school establishes programs.
13
Step IV Recruit students The school recruits students independently,
or Recruit Students via: (See Student
Recruitment section for details) Government
poverty relief offices Local education
authorities.
Step V Students study Students take courses and receive trainings.
in the school
Step VI Off-campus Students are sent to various enterprises for
internships internships, according to respective
Training Order.
Step VII Students return Students return to school to take further
to school professional courses, take the final exams
and then graduate.
Step VIII Students get Enterprises choose graduates and sign
employed employment agreements with them.
SCHOOL OPERATION MODE
We operate schools in four basic modes described as follow:
AFFILIATED PRIVATE SCHOOLS. Oya operates two affiliated private vocational
schools (Changsha Huanqiu and Shaoshan Huanqiu) through contractual
arrangements. For a description of these arrangements, see "Contractual
Arrangements for the Operation of Two Private Vocational Schools".
JOINTLY-RUN PUBLIC SCHOOLS. Oya operates a public secondary vocational school
(Shaoshan Vocational School) in China through contractual arrangements. Changsha
Huanqiu operates five public secondary vocational schools, Yingjing Vocational
School, Tianquan Vocational School, Shimian Vocational School, Lushan Vocational
School and Shaoyang Vocational School through contractual arrangements. For a
description of these arrangements, see "Contractual Arrangements for the
Operation of Two Private Vocational Schools" and "Contractual Arrangements for
the Operation of Six Public Vocational Schools".
COOPERATIVE MARITIME SCHOOLS. Changsha Huanqiu has contractual arrangements with
a maritime school, Shengli Maritime Vocational Secondary School in Dongying City
("Shengli School"), and three shipping service companies. Through such
arrangements, students recruited by Oya are sent to the maritime school to be
trained, and they will be hired by the shipping service companies upon
graduation. Tuition profits are distributed among Changsha Huaqiu, Shengli
School and shipping service companies. The terms of these agreements are from
September 1, 2009 to August 31, 2015.
OTHER COOPERATIVE SCHOOLS. Changsha Huanqiu has contractual arrangements with
several independent private or public schools. Through such arrangements,
Changsha Huangqiu provides various services, typically including recruiting
students, providing school facilities and providing faculty and management
service. Changsha Huanqiu receives commissions from the cooperative schools. The
current cooperative schools include Xiangtan Radio and Television University,
Changsha University of Science and Technology, Hunan Normal University, Yiyang
Radio and Television University.
OUR PROGRAMS AND SERVICES
We provide a wide variety of educational services intended to address the needs
of employers and our students. We deliver education to our students both in
traditional classroom settings and through field instruction.
MAIN TRAINING PROGRAMS
We offer a total of around 60 programs under 17 categories. Below is a list of
our most-attractive key programs:
14
1. Mechanical Design and Manufacture
Length of Program: 3~4 years
Program objectives: To train
intermediate and senior technicians
[PHOTO OF CAD SYSTEM] capable of computer-aided design,
mechanical design and manufacture,
equipment manufacture, maintenance,
debugging and management.
Target Jobs: CAD/CAM design, production
and equipment management in mechanical
manufacture industry.
2. Mechanical Design and Automaton
Length of Program: 3-4 years
Training objectives: To train
intermediate and senior technicians
[PHOTO OF MECHANICAL DESIGN capable of modern mechanical
AND AUTOMATON SYSTEM] manufacturing, basic automation theory,
and design, manufacturing, control and
management of modern mechanical
equipment. Target Jobs: Installation,
debugging, maintenance and management
of machinery for manufacture
enterprises; sale and manufacture of
electromechanical equipment.
3. Numerical Control Technology
Length of Program: 3 years
Training objectives: To train senior
technicians capable of NC principle, NC
[PHOTO OF NC SYSTEM] programming, NC processing, NC
equipment operation, debugging, repair
and technical management. Target Jobs:
NC programming, NC equipment operation,
maintenance and technical management,
NC design selling and after-sales
service, etc. in manufacture
enterprises.
4. Mold Design And Manufacture
Length of Program: 3~4 years
Training objectives: To train senior
technicians specializing in mold
PHOTO OF MOLD DESIGN AND processing technique, mold fabrication
MANUFACTURE SYSTEM] and repair. Target Jobs: Mold design,
manufacture and repair, mold equipment
installation, debugging, maintenance
and management in industries of
machinery, electronics, electric
appliance, light industry and plastic.
5. Computer-aided Design And Manufacture
Length of Program: 2 years
Training objectives: To train senior
technicians capable of CAD and CAM
[PHOTO OF CAD CAM SYSTEM] technologies.
Target Jobs: Computer-aided design
and manufacturing of machinery,
secondary development of mechanical
CAD software and technical management.
15
6. Computer and Computer Application
Training objective: To train
technicians having a solid computer
foundation and basic skills and
[PHOTO OF COMPUTER ROOM] specializing in computer repair and
maintenance, network engineering,
computer installation, debugging and
software application on the front line
of production and service. Target
Jobs: computer operation and
management in enterprises and public
service entities, and technicians in
computer companies.
7. Electronic Technology Application
Training objectives: To train
technicians having a good command of
fundamental theories and professional
[PHOTO OF ELECTRONIC EQUIPMENT] theories related to electronics and
household electric appliances and
having skills in electronic product
application and repair. Target Jobs:
Technicians and technique designers of
electronic product companies.
8. Electronic Commerce (Secretary)
Length of Program: 2 years
Training objectives: To train
intermediate and senior technicians
[PHOTO OF ELECTRONIC COMMERCE having a good command of office
(SECRETARY) automation, secretarial skills and
other professional skills. Target
Jobs: Secretary in enterprises, public
service entities, and financial
institutions.
9. Apparel Design And Technique
Length of Program: 2 years
Training objectives: To train
personnel specializing in costume
[PHOTO OFAPPAREL DESIGN AND design, manufacturing and management.
TECHNIQUE] Target Jobs: Apparel design, new
product development, costume
production technique and inspection in
costume enterprises.
INTERNATIONAL MARINER TRAINING
With the rapid growth of international trade, the maritime market is recovering
and the demand for skilled mariner is growing. Currently, mariner training in
China is unable to meet such increasing demand. As a result, mariners are
popular in the market and highly paid, and maritime jobs are very attractive.
Changsha Huanqiu has contractual arrangements with a maritime school, Shengli
Maritime Vocational Secondary School in Dongying City ("Shengli School") and
three shipping service companies. Through such arrangements, students recruited
by Changsha Huanqiu are sent to the maritime school to be trained, and they are
hired by the shipping service companies upon graduation. Tuition profits are
distributed among Changsha Huaqiu, Shengli School and shipping service
companies. Under these arrangements, Changsha Huanqiu is responsible for
enrolling students and is entitled to receive RMB14,500 (approximately $2,125)
for enrolling each new entrant. The terms of these agreements are from September
1, 2009 to August 31, 2015.
The following table sets forth the maritime related programs offered by Shengli
School and the students enrolled by Changsha Huanqiu.
16
Student enrollment in the twelve
Program months ended November 30, 2009
------- ------------------------------
Marine Navigation 26
Marine Engine Management 23
Marine Engineering 56
TOTAL 105
MARKETING AND STUDENT RECRUITMENT
PROSPECTIVE STUDENTS
Our prospective students include graduates from junior secondary schools, high
schools and colleges, unemployed people and rural labor force. Currently, we
have students coming from 21 provinces across China. Our students live in the
dorms of the corresponding schools where they study. The average accommodation
fee is about RMB280 (approximately $41) per student each semester.
PROSPECTIVE EMPLOYERS FOR OUR GRADUATES
The prospective employers for our graduates include various types of
enterprises, including both domestic companies and foreign funded companies in
China, in the industries of electronics, computer, machinery, service, tourism,
hotel management and shipping.
STUDENT RECRUITMENT
We employ a variety of marketing and recruiting methods to attract students and
increase enrollments. We believe prospective students are attracted to our
schools due to our excellent brand name, the quality of our programs and the
high employment rate of our graduates.
We employ the following methods to recruit students:
INDEPENDENT RECRUITMENT. We formulate our student recruitment plan based on the
operation capacity of each school. We employ various marketing methods to
attract students, including media advertisement, distribution of marketing
materials and referrals of social celebrities, students, alumni and their
parents and friends.
GOVERNMENT RECRUITMENT. We participate in several government-initiated education
projects, such as the "Rain-dew Plan o Take-off Project" (as described below),
and laid-off worker training project. Under these projects, the government is
responsible for student recruitment, and we are responsible for providing
training service.
RAIN-DEW PLAN * TAKE-OFF PROJECT. On December 28, 2007, the State Council
Leading Group Office of Poverty Alleviation and Development of the People's
Republic of China launched "Rain-dew Plan o Take-off Project" (the "Project")
together with China Overseas Scholarship Development Foundation in Hunan
Province. The Project aims to support the students with financial hardship,
below the age of 25, who newly graduate from junior and high schools in middle
and western China, to receive the continuing educational program. Students under
the Project are recommended for work at enterprises located in Yangtze River
Delta and Pearl River Delta after they finish the vocational or technical
training programs in our schools that last for one to three years. Some of the
students can even apply for overseas education after they graduate from our
schools. China Overseas Scholarship Development Foundation is responsible for
paying subvention to the students under the Project, including the tuitions and
miscellaneous fees as required by the customized educational program. Students
only need to pay their living expenses and travel expenses during the
educational program.
Changsha Huanqiu became one of the educational program providers under the
Project since the second semester of 2008. The Project provides an important
source of our students. During the first year of the project, 5,310 students
were enrolled from 18 cities or areas and majoring in Computer and Application,
Application of Electronics Technology, Apparel Design and Manufacturing,
E-commerce and others. The number of students from the Project increased to
11,673 as at November 30, 2009 and is expected to increase further in the coming
years.
17
FACULTY
We believe that our dedicated and capable faculty is critical to our success. As
our teachers interact with our students on a daily basis, they are critical to
maintaining the quality of our programs and services and to maintaining our
brand and reputation. We seek to continue to hire teachers who have a strong
command of the subject areas to be taught and meet our qualifications.
They are required to undergo a job training period, during which they receive
trainings in teaching skills and subject matter of relevant courses. We also
provide various forms of continuous training, such as cross-subject training,
expert seminar and practice in enterprises, so that our teachers can stay
abreast of changes in industry requirements and student demands.
As of November 30, 2009, we have 2,094 faculty members in total, of whom 74
teachers have senior professional qualification and 207 teachers have
intermediate professional qualification. In addition, we have 625 supporting
staff, and a think-tank consisting of 20 part-time expert consultants.
COMPETITION
The vocational education sector in China is rapidly evolving, highly fragmented
and competitive, and we expect competition in this sector to persist and
intensify. Most of our competitors focus on targeted markets, both in terms of
the particular segments of students they aim to attract and the local markets in
which they operate.
For example, we face nationwide competition for our computer courses from Xinhua
Computer School, which offers computer-related courses in many cities in China.
We face regional competition for our computer, electronic technique, and
apparel-making programs from several competitors, such as Shandong Lanxiang
Senior Technology School. We also face limited competition from many competitors
that focus on providing vocational training courses in specific geographic
markets in China.
We believe that the principal competitive factors in our markets include the
following:
* brand recognition;
* employment rate for graduates;
* overall student experience;
* ability to effectively market programs, services and products to a
broad base of prospective students;
* scope and quality of program, service and product offerings; and
* alignment of programs, services and products catering to specific
needs of students and employers.
We believe that our primary competitive advantages are our well-known "HQ"
brand, our order-oriented education mode, our high employment rate of graduates,
our close link with employers and the breadth and quality of our programs and
services. However, some of our existing and potential competitors may have more
resources than we do. These competitors may be able to devote greater resources
to the development, promotion and sale of their programs, services and products
of specific professional areas in specific geographic regions.
INTELLECTUAL PROPERTY
TRADEMARKS
We have registered two trademarks with the Trademark Bureau under the State of
Administration for Industry & Commerce, PRC, as follows
Trademarks Registered Owner Certificate No. Valid Term
---------- ---------------- --------------- ----------
[CHINESE GRAPHIC] Hunan Oya Education No.4025352 April 14, 2007 to April 13, 2017
Technology Co., Ltd.
18
[CHINESE GRAPHIC] Hunan Oya Education No.3968713 April 28, 2007 to April 27,2017
Technology Co., Ltd.
DOMAIN NAMES
We have registered the following domain name: www.hnhuanqiu.com.
LAND USE RIGHT
We have obtained land use right to the following plots of lands:
Form of Expiration
No. Certificate No. User of the Land Area (m2) Acquisition Date Encumbrances
------------------- ---------------- --------- ----------- ---------- ------------
1 Shao Guo Yong (2009) Oya 15,807.9 By Transfer 5/13/2059 N/A
No. 09130
2 Ning (1) Guo Yong (2000) Changsha Huanqiu 2,053.975 By Transfer 6/17/2049 Pledged to Ningxiang
No. 0050 County Lijingpu Credit
Union. Pledge
Period: 11/13/2008 -
11/13/2011
3 Ning (1) Guo Yong (2000) Changsha Huanqiu 3,935 By Transfer 3/18/2050 N/A
No. 0051
4 Ning (1) Guo Yong (2000) Changsha Huanqiu 1,388.65 By Administrative N/A N/A
No. 0124 Grant
5 Ning (1) Guo Yong (2002) Changsha Huanqiu 15,124.8 By Transfer 10/23/2051 Pledged to Ningxiang County
No. 159 Lijingpu Credit Union.
Pledge Period: 12/13/2005 -
12/13/2010
6 Ning (2) Guo Yong (2003) Yabin Zhong* 228 By Transfer 12/31/2070 N/A
No. 2142
7 Ning (2) Guo Yong (2008) Yabin Zhong* 494.8 By Transfer 12/22/2059 N/A
No. 1226
8 Ning (2) Guo Yong (2002) Guangwen He * 192 By Transfer 10/30/2070 N/A
No. 1245
9 Ning (1) Guo Yong (2000) Hunan Changsha 629 By Transfer 3/13/2065 N/A
No. 0039 Binshan Industry
Co. Ltd. *
10 Ning (1) Guo Yong (2000) Hunan Changsha 3,550.15 By Transfer 9/5/2050 N/A
No. 0104 Binshan Industry
Co. Ltd. *
19
11 Ning (2) Guo Yong (2002) Guangwen He * 3,991.7 By Transfer 7/25/2052 The land use right of the
No. 01035 plot of land affiliated to
the building (Certificate
No: Ning Fang Quan Zheng Li
Jing Pu Zi No.00037612) has
been pledged to Ningxiang
County Lijingpu Credit
Union. Pledge Period:
5/30/2007 - 5/30/2010 The
land use right of the plot
of land affiliated to the
building (Certificate No:
Ning Fang Quan Zheng Li
Jing Pu Zi No.00037613) has
been pledged to Ningxiang
County Lijingpu Credit
Union. Pledge Period:
11/13/2008 - 11/13/2011
* These properties are held on behalf of Changsha Huanqiu under the name of
Guangwen He, Yabin Zhong or Hunan Changsha Binshan Industry Co. Ltd. (the
"Binshan Company"). Binshan Company is owned by Yabin Zhong. On March 1, 2004,
Changsha Huanqiu signed the Entrustment Agreement on Land and Real Properties
with Guangwen He, Yabin Zhong and Binshan Company. This agreement stipulates
that Changsha Huanqiu will from time to time authorize Guangwen He, Yabin Zhong
and Binshan Company to invest in lands and properties in their names using funds
from Changsha Huanqiu for the interest of Changsha Huanqiu, that Changsha
Huanqiu holds all the rights to these properties, that upon Changsha Huanqiu's
request, Guangwen He, Yabin Zhong and Binshan Company shall cause relevant
authorities to register these properties in the name of Changsha Huanqiu, and
that Guangwen He, Yabin Zhong and Binshan Company shall have no right to dispose
or encumber these properties.
BUILDING OWNERSHIP
We own the following buildings:
No. Certificate No. Owner Area (m2) Encumbrances
--- --------------- ----- --------- ------------
1 Ning Fang Quan Ningxiang Huanqiu 1,659.13 N/A
Zheng Li Jing Computer Training
Pu Zi No.00010484 School**
2 Ning Fang Quan Ningxiang Huanqiu 1,231.51 N/A
Zheng Li Jing Computer Training
Pu Zi No.00010482 School**
3 Ning Fang Quan Ningxiang Huanqiu 1,144.78 N/A
Zheng Li Jing Computer Training
Pu Zi No.00010483 School**
4 Ning Fang Quan Yabin Zhong* 624.36 N/A
Zheng Li Jing
Pu Zi No.00037614
5 Ning Fang Quan Yabin Zhong* 1056.12 N/A
Zheng Li Jing
Pu Zi No.00015919
6 Ning Fang Quan Yabin Zhong* 614.41 N/A
Zheng Li Jing
Pu Zi No.00015918
7 Ning Fang Quan Guangwen He* 3203.95 Pledged to Ningxiang County Lijingpu Credit Union.
Zheng Li Jing Pledge Period 11/13/2008 - 11/13/2011
Pu Zi No.00037613
8 Ning Fang Quan Guangwen He* 1166.2 N/A
Zheng Li Jing
Pu Zi No.00037611
20
9 Ning Fang Quan Hunan Changsha Binshan 3155.95 N/A
Zheng Yu Tan Industry Co. Ltd. *
Zi No.00015465
10 Ning Fang Quan Hunan Changsha Binshan 2911.5 Pledged to Ningxiang County Lijingpu Credit Union.
Zheng Yu Tan Industry Co. Ltd. * Pledge Period: 11/13/2008 - 11/13/2011
Zi No.00015466
11 Ning Fang Quan Hunan Changsha Binshan 2252.53 N/A
Zheng Yu Tan Industry Co. Ltd. *
Zi No.00015467
12 Ning Fang Quan Hunan Changsha Binshan 825.77 N/A
Zheng Yu Tan Industry Co. Ltd. *
Zi No.00019796
13 Ning Fang Quan Hunan Changsha Binshan 4719.53 N/A
Zheng Yu Tan Industry Co. Ltd. *
Zi No.00019793
14 Ning Fang Quan Hunan Changsha Binshan 6015.73 N/A
Zheng Yu Tan Industry Co. Ltd. *
Zi No.00019795
15 Ning Fang Quan Hunan Changsha Binshan 3876.22 N/A
Zheng Yu Tan Industry Co. Ltd. *
Zi No.00019797
16 Ning Fang Quan Guangwen He* 6658.82 Pledged to Ningxiang County Lijingpu Credit Union.
Zheng Yu Pledge Period: 5/30/2007 - 5/30/2010
Tan Zi No.00037612
* These properties are held by Guangwen He, Yabin Zhong or Hunan Changsha
Binshan Industry Co. Ltd (the "Binshan Company") on behalf of Changsha Huanqiu.
Binshan Company is owned by Yabin Zhong. On March 1, 2004, Changsha Huanqiu
signed the Entrustment Agreement on Land and Real Properties with Guangwen He,
Yabin Zhong and Binshan Company. This agreement stipulates that Changsha Huanqiu
will from time to time authorize Guangwen He, Yabin Zhong and Binshan Company to
invest in lands and properties in their names using funds from Changsha Huanqiu
for the interest of Changsha Huanqiu, that Changsha Huanqiu holds all the rights
to these properties, that upon Changsha Huanqiu's request, Guangwen He, Yabin
Zhong and Binshan Company shall cause relevant authorities to register these
properties in the name of Changsha Huanqiu, and that Guangwen He, Yabin Zhong
and Binshan Company shall have no right to dispose or encumber these properties.
** Ningxiang Huanqiu Computer Training School is the former name of Changsha
Huanqiu.
REGULATIONS
The Chinese government regulates the education services industry. This section
summarizes the principal Chinese regulations relating to our business.
We operate our business in China under a legal framework that consists of the
State Council, which is the highest executive authority of the Chinese central
government, and several ministries and agencies under its authority, including
the Ministry of Education ("MOE"), the State Administration of Foreign Exchange
("SAFE"), the General Administration of Press and Publication ("GAPP"), the
State Administration for Industry and Commerce ("SAIC"), the Ministry of Civil
Affairs ("MCA"), and their respective authorized local counterparts.
REGULATIONS ON OPERATING PRIVATE SCHOOLS
The principal regulations governing private education in China consist of the
Education Law of China, the Vocational Education Law of China, the Law for
Promoting Private Education (2003), the Implementation Rules for the Law for
Promoting Private Education (2004) and the Regulations on Chinese-Foreign
Cooperation in Operating Schools and the Implementing Rules for the Regulations
on Operating Chinese-Foreign Schools. These regulations are summarized below.
21
EDUCATION LAW OF CHINA
The Education Law of China, or the Education Law, was enacted on March 18, 1995.
The Education Law sets forth provisions relating to the fundamental education
systems of China, including a system of pre-school education, primary education,
secondary education and higher education, a system of nine-year compulsory
education and a system of education certificates. The Education Law requires the
government to formulate plans for the development of education and the
establishment and operation of schools and other education institutions. In
principle, enterprises, social organizations and individuals are encouraged to
operate schools and other types of educational organizations in accordance with
Chinese laws and regulations. Nevertheless, no school or any other educational
institution may be established for profit-making purposes. However, private
schools may be operated for "reasonable returns," as described in more detail
below.
THE VOCATIONAL EDUCATION LAW
The Vocational Education Law of China, or the Vocational Education Law, was
enacted on May 15, 1995. Under the Vocational Education Law, China encourages
institutions, non-governmental organizations, other public organizations and
individual citizens to establish vocational schools and vocational training
institutions in accordance with relevant regulations. Measures for the
establishment of vocational schools and vocational training institutions within
Chinese territory by a foreign organization or individual shall be formulated by
the State Council. The Vocational Education Law sets forth the basic conditions
for the establishment of vocational schools and training institutions. The
Vocational Education Law also sets forth provisions on the joint establishment
and operation of vocational education schools and institutions. Our consolidated
Chinese entity, Oya has entered into a Joint School-Running Agreement with the
People's Government of Shaoshan City for the joint operation of Shaoshan
Vocational School. Changsha Huanqiu has entered into Joint School-Running
Agreements with relevant government authorities for the joint operation of five
public vocational schools, Yingjing Vocational School, Tianquan Vocational
School, Shimian Vocational School, Lushan Vocational School and Shaoyang
Vocational School.
THE LAW FOR PROMOTING PRIVATE EDUCATION (2003) AND THE IMPLEMENTATION RULES FOR
THE LAW FOR PROMOTING PRIVATE EDUCATION (2004)
The Law for Promoting Private Education (2003) became effective on September 1,
2003, and its implementing regulations, the Implementation Rules for the Law for
Promoting Private Education (2004), became effective on April 1, 2004. Under
these regulations, "private schools" are defined as schools established by
individuals or private social organizations using private funds. Private schools
providing degree education, pre-school education, education for self-study aid
and other academic education are subject to approval by the education
authorities, while private schools engaging in occupational qualification
training and occupational skill training are subject to approvals from the
authorities in charge of labor and social welfare. An approved private school
will be granted an operating permit, and it must be registered with the MCA or
its local counterpart as a privately run non-enterprise legal person. Our
private vocational schools, Changsha Huanqiu and Shaoshan Huanqiu, have obtained
operating permits and have been registered with the relevant local office of the
MCA.
The operation of private schools is highly regulated. For example, the types and
amounts of fees charged by private schools offering certifications must be
approved by the relevant governmental authority and be publicly disclosed, and
the types and amounts of fees charged by private schools that do not offer
certifications need only be filed with the relevant governmental authority and
be publicly disclosed. Our consolidated private schools, Changsha Huanqiu and
Shaoshan Huanqiu, currently offer certifications to students, and the charged
fees have been approved by the local price control administrations and publicly
disclosed.
Private education is treated as a public welfare undertaking under the
regulations. Nonetheless, investors in a private school may elect to require
"reasonable returns" from the schools. Under the regulations, an election to
establish a private school as one requiring reasonable returns must be made in
the articles of association of the school. For schools that have made this
election, the amount of reasonable return that can be distributed to investors
each year is determined based on a percentage of the school's "operating
surplus," which is equal to the school's annual net income less the aggregate
amount of donations received, government subsidies, if any, the amount required
to be reserved for the school's development fund and other expenses as required
by the regulations. This percentage is determined by the school's board of
directors, taking into consideration the following factors: (i) the school's
tuition and other fees, (ii) the ratio of the school's expenses used for
educational activities and improving the educational conditions to the total
22
fees collected; and (iii) the school's admission standards and educational
quality. Information relating to these factors must be publicly disclosed before
the school's board determines the percentage of the school's annual net balance
that can be distributed as reasonable returns. This disclosed information and
the decision to distribute reasonable returns must also be filed with the
approval authorities within 15 days from the decision made by the board.
However, none of the current Chinese laws and regulations provides a formula or
other guidelines for determining "reasonable returns." In addition, none of the
current Chinese laws and regulations sets forth different requirements or
restrictions on a private school's ability to operate its education business
based on such school's status as a school that requires reasonable returns or a
school that has not made this election.
At the end of each fiscal year, private schools are required to allocate a
certain amount to their development fund for the construction and maintenance of
the school and the procurement and upgrade of educational equipment. For private
schools that require reasonable returns, this amount must be no less than 25% of
the annual net income or the annual increase in the net assets of the school,
while for other private schools, this amount must be no less than 25% of the
annual increase in the net assets of the school, if any. Private schools that
have not elected to require reasonable returns are entitled to the same
preferential tax treatment as public schools. The regulations require that
preferential tax treatment policies applicable to private schools requiring
reasonable returns to be formulated by the finance authority, taxation authority
and other authorities under the State Council, but to date no such regulations
have been promulgated by the relevant authorities. Neither of our consolidated
private schools is established as a school that requires reasonable returns. We
may change the status of our consolidated private schools to schools requiring
reasonable returns in future.
REGULATIONS ON CHINESE-FOREIGN COOPERATION IN OPERATING SCHOOLS
Chinese-foreign cooperation in the operation of schools and training programs is
specifically governed by the Regulations on Operating Chinese-Foreign Schools,
issued by the State Council in 2003 and the Implementing Rules for the
Regulations on Operating Chinese-Foreign Schools issued by the MOE in 2004 (the
"Implementing Rules").
The Regulations on Operating Chinese-Foreign Schools and the Implementing Rules
encourage substantive cooperation between overseas educational organizations
with relevant qualifications and experience in providing high-quality education
and Chinese educational organizations to jointly operate various types of
schools in the PRC, with such cooperation in the areas of higher education and
occupational education being encouraged. Chinese-foreign cooperative schools are
not permitted, however, to engage in compulsory education and military, police,
political and other kinds of education that are of a special nature in the PRC.
Besides, foreign educational institutions, other organizations or individuals
are prohibited from unilaterally establishing schools or other educational
institutions providing education mainly to Chinese citizens within the territory
of China.
Permits for Chinese-foreign cooperation in operating schools must be obtained
from the relevant education authorities or the authorities that regulate labor
and social welfare in China. We have not applied for a permit for
Chinese-foreign Cooperation in Operating Schools at this stage since all of our
private schools are operated by Oya.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings that arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have a
material adverse affect on our business, financial condition or operating
results.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, WHICH CONSTITUTE ALL OF
THE MATERIAL RISKS FACING US. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS COULD BE HARMED. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION ABOUT
US CONTAINED IN THIS REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED
NOTES.
23
RISKS RELATED TO OUR BUSINESS
IF WE ARE NOT ABLE TO CONTINUE TO ATTRACT STUDENTS TO ENROLL IN OUR COURSES, OUR
REVENUES MAY DECLINE AND WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY.
The success of our business depends primarily on the number of student
enrollments in our courses. Therefore, our ability to continue to attract
students to enroll in our courses is critical to the continued success and
growth of our business. This in turn will depend on several factors, including
our ability to develop new programs and enhance existing programs to respond to
changes in market trends and student demands, expand our geographic reach,
manage our growth while maintaining the consistency of our teaching quality,
effectively market our programs to a broader base of prospective students,
develop and license additional high-quality educational content and respond to
competitive pressures. If we are unable to continue to attract students to
enroll in our courses, our revenue may decline and we may not be able to
maintain profitability.
IF WE FAIL TO SUCCESSFULLY EXECUTE OUR GROWTH STRATEGIES, WE MAY NOT BE ABLE TO
CONTINUE TO ATTRACT STUDENTS TO ENROLL IN OUR COURSES, AND OUR BUSINESS AND
PROSPECTS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our growth strategies include developing the order-oriented education mode,
expanding our program, service and product offerings and our network of schools,
updating and expanding the content of our programs, services and products in a
cost-effective and timely manner, as well as maintaining and continuing to
establish strategic relationships with cooperative enterprises. If we fail to
teach our students based on the specific demand of our cooperative enterprises,
we may not be able to win the trust of our students and cooperative enterprises.
The expansion of our programs, services and products in terms of types of
offerings and geographic locations may not succeed due to competition, our
failure to effectively market our new programs, services and products and
maintain their quality and consistency, or other factors. In addition, we may
fail to attract students and increase student enrollments or recruit, train and
retain qualified teachers for our new schools. If we fail to successfully
execute our growth strategies, we may not be able to continue to attract
students to enroll in our courses without a significant decrease in course fees,
and our business and prospects may be materially and adversely affected.
IF WE FAIL TO EXTEND THE TERM OF OUR COOPERATION WITH LOCAL GOVERNMENT
AUTHORITIES TO RUN PUBLIC VOCATIONAL SCHOOLS, WE MAY LOSE A SUBSTANTIAL PART OF
OUR BUSINESS AND OUR REVENUES MAY DECLINE.
We have relied and expect to continue to rely on the Joint School Running
Agreements between Changsha Huanqiu/Oya and local government authorities for the
operation of public vocational schools. For a description of these contractual
arrangements, see "Contractual Arrangements for the Operation of Six Public
Vocational Schools". The terms of the Joint School Running Agreements vary from
fifteen to twenty years. If we fail to renew those Joint School Running
Agreements after the term expires, we may lose a substantial part of our
business and our revenues may decline correspondingly.
OUR SUCCESS DEPENDS ON THE CONTINUING EFFORTS OF OUR SENIOR MANAGEMENT TEAM AND
OTHER KEY PERSONNEL AND OUR BUSINESS MAY BE HARMED IF WE LOSE THEIR SERVICES.
Our future success depends heavily upon the continuing services of the members
of our senior management team, in particular, our chairman and chief executive
officer, Guangwen He, who has been the leader of Changsha Huanqiu since its
inception in 1994. If one or more of our senior executives or other key
personnel are unable or unwilling to continue in their present positions, we may
not be able to replace them easily or at all, and our business may be disrupted
and our financial condition and results of operations may be materially and
adversely affected. Competition for experienced management personnel in the
private education sector is intense, the pool of qualified candidates is very
limited, and we may not be able to retain the services of our senior executives
or key personnel, or attract and retain high-quality senior executives or key
personnel in the future. In addition, if any member of our senior management
team or any of our other key personnel joins a competitor or forms a competing
company or school, we may lose teachers, students, key professionals and staff
members.
WE DEPEND ON OUR DEDICATED AND CAPABLE FACULTY, AND IF WE ARE NOT ABLE TO
CONTINUE TO HIRE, TRAIN AND RETAIN QUALIFIED TEACHERS, WE MAY NOT BE ABLE TO
MAINTAIN CONSISTENT TEACHING QUALITY THROUGHOUT OUR SCHOOL NETWORK AND OUR
BRAND, BUSINESS AND OPERATING RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our teachers are critical to maintaining the quality of our programs, services
and products and maintaining our brand and reputation, as they interact with our
students on a daily basis. We must continue to attract qualified teachers who
24
have a strong command of the subject areas to be taught and meet our
qualification. We also seek to hire teachers who are capable of delivering
innovative and inspirational instruction. We must provide competitive
compensation packages to attract and retain qualified teachers. In addition,
criteria such as commitment and dedication are difficult to ascertain during the
recruitment process, in particular as we continue to expand and add teachers to
meet rising student enrollments. We must also provide continuous training to our
teachers so that they can stay abreast of changes in student demands, market
demands and other key trends necessary to effectively teach their respective
courses. We may not be able to hire, train and retain enough qualified teachers
to keep pace with our anticipated growth while maintaining consistent teaching
quality across many different schools in different geographic locations.
Shortages of qualified teachers or decreases in the quality of our instruction,
whether actual or perceived in one or more of our markets, may have a material
and adverse effect on our business.
OUR BUSINESS DEPENDS ON OUR "HQ" BRAND, AND IF WE ARE NOT ABLE TO MAINTAIN AND
ENHANCE OUR BRAND, OUR BUSINESS AND OPERATING RESULTS MAY BE HARMED.
We believe that market awareness of our "HQ" brand has contributed significantly
to the success of our business. We also believe that maintaining and enhancing
the "HQ" brand is critical to maintaining our competitive advantage. We offer a
diverse set of programs, services and products to middle school students and
other adults in different geographic locations. As we continue to grow in size,
expand our programs, services and products and extend our geographic reach,
maintaining quality and consistency may be more difficult to achieve.
We have initiated brand promotion efforts in recent years, but we cannot assure
you that our new marketing efforts will be successful in further promoting our
brand to remain competitive. If we are unable to further enhance our brand
recognition and increase awareness of our programs, services and products, or if
we incur excessive marketing and promotion expenses, our business and results of
operations may be materially and adversely affected.
WE MAY LOSE OUR COMPETITIVE ADVANTAGE AND OUR REPUTATION, BRAND AND OPERATIONS
MAY SUFFER IF WE FAIL TO PREVENT THE LOSS OR MISAPPROPRIATION OF, OR DISPUTES
OVER, OUR INTELLECTUAL PROPERTY RIGHTS.
We consider our trademarks and trade name invaluable to our ability to continue
to develop and enhance our brand recognition. We have spent over a decade
building our "HQ" brand by developing the order-oriented education mode and
building trust among students and cooperative enterprises. However, preventing
trademark and trade name infringement, particularly in China, is difficult,
costly and time-consuming and continued unauthorized use of our trademarks and
trade name by unrelated third parties may damage our reputation and brand. In
addition, we have spent significant time and expense developing the content of
certain educational materials, such as books, magazines and other periodicals,
to enrich our product offerings and meet students' needs. The measures we take
to protect our trademarks, copyrights and other intellectual property rights,
which presently are based upon a combination of trademark, copyright and trade
secret laws, may not be adequate to prevent unauthorized use by third parties.
Furthermore, the application of laws governing intellectual property rights in
China and abroad is uncertain and evolving, and could involve substantial risks
to us. If we are unable to adequately protect our trademarks, copyrights and
other intellectual property rights, we may lose these rights, our brand name may
be harmed, and our business may suffer materially.
WE MAY BE EXPOSED TO INFRINGEMENT CLAIMS BY THIRD PARTIES, BASED ON THE CONTENT
OF THE BOOKS AND REFERENCE MATERIALS OR MARKETING MATERIALS THAT WE OR OUR
LECTURERS AUTHOR OR DISTRIBUTE OR FOR INFORMATION DELIVERED OR SHARED THROUGH
OUR SERVICES, WHICH COULD DISRUPT OUR BUSINESS AND CAUSE US TO INCUR SUBSTANTIAL
LEGAL COSTS, OR DAMAGE OUR REPUTATION.
We cannot assure you that our services and products do not or will not infringe
any intellectual property rights held by third parties. Though we have not been
involved in any claims for intellectual property infringement, we cannot ensure
you that in the future we would not receive claims of infringement of third
parties' proprietary rights or claims for indemnification resulting from
infringement arising from our services or products. We may also become subject
to claims that content in the books and reference materials or marketing
materials that we or our lecturers author or distribute is in fact protected by
third parties' copyright ownership rights or trademark.
WE FACE SIGNIFICANT COMPETITION IN THE VOCATIONAL TRAINING INDUSTRY, AND IF WE
FAIL TO COMPETE EFFECTIVELY, WE MAY LOSE OUR MARKET SHARE AND OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED.
The vocational training industry in China is rapidly evolving, highly fragmented
and competitive, and we expect competition in this sector to persist and
intensify. Our student enrollments may decrease due to intense competition. Our
25
competitors may be able to devote greater resources than we can to the
development, promotion and sale of their programs, services and products and
respond more quickly than we can to changes in student needs, market needs or
new technologies. In addition, the increasing use of the Internet and advances
in Internet- and computer-related technologies, such as web video conferencing
and online testing simulators, are eliminating geographic and cost-entry
barriers to providing private educational services. We cannot assure you that we
will be able to compete successfully against current or future competitors. If
we are unable to maintain our competitive position or otherwise respond to
competitive pressures effectively, we may lose our market share and our
profitability may be adversely affected.
OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH MAY CAUSE OUR OPERATING
RESULTS TO FLUCTUATE FROM QUARTER TO QUARTER. THIS MAY RESULT IN VOLATILITY AND
ADVERSELY AFFECT THE PRICE OF OUR STOCKS.
We have experienced, and expect to continue to experience, seasonal fluctuations
in our revenues and results of operations, primarily due to seasonal changes in
student enrollments. Historically, our courses tend to have the largest student
enrollments in the first semester from September 1 of each year to January 10 of
the next year. These seasonal factors resulted in the higher revenue in the
quarter from September 1 to November 30 when compared with the quarter from
March 1 to May 31. Our cost of revenues fluctuates in proportion with the
variation in revenues. Our expenses, however, vary slightly and do not
necessarily correspond with changes in our student enrollments and revenues. We
expect quarterly fluctuations in our revenues and results of operations to
continue. These fluctuations could result in volatility and adversely affect the
price of our stocks. As our revenues grow, these seasonal fluctuations may
become more pronounced.
OYA AND ITS AFFILIATED ENTITIES MAY BE SUBJECT TO SIGNIFICANT LIMITATIONS ON
THEIR ABILITY TO OPERATE PRIVATE SCHOOLS OR MAKE PAYMENTS TO RELATED PARTIES OR
OTHERWISE BE MATERIALLY AND ADVERSELY AFFECTED BY CHANGES IN PRC LAWS AND
REGULATIONS.
The principal regulations governing private education in China are the Law for
Promoting Private Education and the Implementation Rules for the Law for
Promoting Private Education. Under these regulations, a private school may elect
to be a school that does not require reasonable returns or a school that
requires reasonable returns. At the end of each fiscal year, every private
school is required to allocate a certain amount to its development fund for the
construction or maintenance of the school or procurement or upgrade of
educational equipment. In the case of a private school that requires reasonable
returns, this amount shall be no less than 25% of annual net income of the
school, while in the case of a private school that does not require reasonable
returns, this amount shall be equivalent to no less than 25% of the annual
increase in the net assets of the school, if any. A private school that requires
reasonable returns must publicly disclose such election and additional
information required under the regulations. A private school shall consider
factors such as the school's tuition, ratio of the funds used for
education-related activities to the course fees collected, admission standards
and educational quality when determining the percentage of the school's net
income that would be distributed to the investors as reasonable returns.
However, none of the current PRC laws and regulations provides a formula or
guidelines for determining "reasonable returns." In addition, none of the
current PRC laws and regulations sets forth different requirements or
restrictions on a private school's ability to operate its education business
based on such school's status as a school that requires reasonable returns or a
school that does not require reasonable returns.
With regard to income tax, according to the Implementation Rules for the Law for
Promoting Private Education, private schools that do not require reasonable
returns are entitled to the same preferential tax treatment as public schools,
while preferential tax treatment policies applicable to private schools
requiring reasonable returns are separately formulated by the relevant
authorities under the State Council. To date, however, no separate regulations
or policies have been promulgated by the relevant authorities in this regard. As
a result, our private schools are subject to the specific requirements of their
respective local tax authorities, which vary from location to location.
Currently, neither Changsha Huanqiu nor Shaoshan Huanqiu is registered as a
school that requires reasonable returns.
The current PRC laws and regulations governing private education may be amended
or replaced by new laws and regulations that (i) impose significant limitations
on the ability of our schools to operate their business, charge course fees or
make payments to related parties for services received, (ii) specify the formula
for calculating "reasonable returns," or (iii) change the preferential tax
treatment policies applicable to private schools. Changes in PRC laws and
regulations governing private education or otherwise affecting Oya's and its
affiliated entities' operations could materially and adversely affect our
business prospects and results of operations.
26
WE MAY NEED ADDITIONAL FINANCING BUT MAY NOT BE AVAILABLE TO FIND SUCH FINANCING
ON SATISFACTORY TERMS OR AT ALL.
Our capital requirements may be accelerated as a result of many factors,
including timing of development activities, underestimates of budget items,
unanticipated expenses or capital expenditures, and future business acquisitions
and combinations. Consequently, we may need to seek additional debt or equity
financing, which may not be available on favorable terms, if at all, and which
may be dilutive to our stockholders.
We may seek to raise additional capital through public or private equity
offerings, debt financings or additional corporate collaboration and licensing
arrangements. To the extent we raise additional capital by issuing equity
securities, our stockholders may experience dilution. To the extent that we
raise additional capital by issuing debt securities, we may incur substantial
interest obligations, may be required to pledge assets as security for the debt
and may be constrained by restrictive financial and/or operational covenants.
Debt financing would also be superior to our stockholders' interest in
bankruptcy or liquidation.
We cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all. Any failure by us to raise additional funds on
terms favorable to us, or at all, could have a material adverse effect on our
business, financial condition and results of operations.
FUTURE ACQUISITIONS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS OPERATIONS.
If we are presented with appropriate opportunities, we may acquire additional
schools, assets, or businesses that are complementary to our existing business.
Future acquisitions and the subsequent integration of new assets and businesses
into our own would require significant attention from our management and could
result in a diversion of resources from our existing business, which in turn
could have an adverse effect on our business operations. Acquired assets or
businesses may not generate the financial results we expect. In addition,
acquisitions could result in the use of substantial amounts of cash, potentially
dilutive issuances of equity securities, the occurrence of significant goodwill
impairment charges and exposure to potential unknown liabilities of the acquired
business. Moreover, the costs of identifying and consummating acquisitions may
be significant. In addition to possible shareholders' approval, we may also have
to obtain approvals and licenses from the relevant government authorities in the
PRC for the acquisitions and to comply with any applicable PRC laws and
regulations, which could result in increased costs and delay. We cannot assure
you that we will be able to effectively and efficiently manage the growth of our
operations, recruit and retain qualified teachers and management personnel and
integrate new schools into our operations. Any failure to effectively and
efficiently manage our expansion may materially and adversely affect our ability
to capitalize on new business opportunities, which in turn may have a material
adverse impact on our financial condition and results of operations.
OUR FINANCIAL PERFORMANCE AND PROSPECTS COULD BE AFFECTED BY NATURAL CALAMITIES
OR HEALTH EPIDEMICS.
Our business could be materially and adversely affected by natural calamities or
health epidemics such as avian influenza, severe acute respiratory syndrome or
other epidemics. In recent years, there were reports regarding the occurrences
of avian influenza in various parts of China, including a few confirmed human
cases and deaths. Any occurrences of natural calamities or epidemics may result
in the postponement or rescheduling of the courses we provide, which may in turn
have an adverse impact on our revenues and performance. In addition, if our
employees are affected by natural calamities or contagious or virulent diseases,
we may fail to provide our training courses, materials and services in a timely
manner, which will have an adverse impact on our financial performance. We have
not adopted any written preventive measures or contingency plans to combat any
future natural calamities or outbreak of epidemics. Any natural calamities or
prolonged recurrence of adverse public health developments in China may have a
material and adverse effect on our business operations.
WE DO NOT HAVE ANY LIABILITY OR BUSINESS DISRUPTION INSURANCE, AND A LIABILITY
CLAIM AGAINST US DUE TO INJURIES SUFFERED BY OUR STUDENTS OR OTHER PERSON AT OUR
FACILITIES OR OTHER WORKPLACES COULD ADVERSELY AFFECT OUR REPUTATION AND OUR
FINANCIAL RESULTS.
We could be held liable for accidents that occur at our schools and other
workplaces where our students accept practical trainings. In the event of
on-site food poisoning, personal injuries, fires or other accidents suffered by
students or other people, we could face claims alleging that we were negligent,
provided inadequate supervision or were otherwise liable for the injuries. We
currently do not have any liability insurance or business disruption insurance.
A successful liability claim against us due to injuries suffered by our students
or other people at our facilities or other workplaces could adversely affect our
reputation and our financial results. Even if unsuccessful, such a claim could
27
cause unfavorable publicity, require substantial cost to defend and divert the
time and attention of our management.
RISKS RELATED TO OUR CORPORATE STRUCTURE
IF THE PRC GOVERNMENT FINDS THAT THE AGREEMENTS THAT ESTABLISH THE STRUCTURE FOR
OPERATING OUR EDUCATION BUSINESS DO NOT COMPLY WITH APPLICABLE PRC LAWS AND
REGULATIONS, WE COULD BE SUBJECT TO SEVERE PENALTIES.
PRC laws and regulations currently require any foreign entity that invests in
the education business in China to be an educational institution with relevant
experience in providing educational services outside China. Global Education is
not an educational institution and does not provide educational services. Under
the Regulations of the People's Republic of China on Chinese-Foreign Cooperation
in Operating Schools, foreign educational institutions, other organizations or
individuals are prohibited from unilaterally establishing schools or other
educational institutions providing education mainly to Chinese citizens within
the territory of China. Accordingly, WFOE, which is considered foreign-invested,
is currently ineligible to apply for the required education licenses and permits
in China. We conduct our education business in China through contractual
arrangements with Oya, its shareholders and affiliated entities. Oya is our
consolidated entity directly owned by Guangwen He and Yabin Zhong. Changsha
Huanqiu and Shaoshan Huanqiu, owned by Guangwen He, hold the requisite licenses
and permits necessary to conduct our education business and operate our schools
in China. We have been and are expected to continue to be dependent on Oya and
its affiliated entities to operate our education business until we qualify for
direct ownership of educational businesses in China. We have entered into
contractual arrangements with Oya and its shareholders, pursuant to which we,
through our wholly owned subsidiary in China, provide exclusive technical
support, education service support and other consulting services to Oya in
exchange for payments from them. In addition, we have entered into agreements
with Oya and each of the shareholders of Oya, which provide us with a
substantial ability to control Oya and its affiliated entities.
If we, WFOE, Oya or our consolidated private schools (Changsha Huanqiu and
Shaoshan Huanqiu) are found to be in violation of any existing or future PRC
laws or regulations or fail to obtain or maintain any of the required permits or
approvals, the relevant PRC regulatory authorities including the Ministry of
Education ("MOE"), which regulates the education industry, would have broad
discretion in dealing with such violations, including:
* revoking the business and operating licenses of our PRC subsidiary and
consolidated entities;
* discontinuing or restricting the operations of any related-party
transactions among our PRC subsidiary and consolidated entities;
* imposing fines or other requirements with which we or our PRC
subsidiary and consolidated entities may not be able to comply;
* requiring us or our PRC subsidiary and consolidated entities to
restructure the relevant ownership structure or operations; or
* restricting or prohibiting our use of the proceeds of our future
offering to finance our business and operations in China.
The imposition of any of these penalties could result in a material and adverse
effect on our ability to conduct our business.
WE RELY ON CONTRACTUAL ARRANGEMENTS WITH OYA AND ITS SHAREHOLDERS FOR OUR
OPERATIONS, WHICH MAY NOT BE AS EFFECTIVE IN PROVIDING OPERATIONAL CONTROL AS
DIRECT OWNERSHIP.
We have relied and expect to continue to rely on contractual arrangements with
Oya and its shareholders to operate our education business. For a description of
these contractual arrangements, see "Contractual Arrangements between WFOE, Oya
and Its Shareholders", "Contractual Arrangements for the Operation of Two
Private Vocational Schools" and "Contractual Arrangements for the Operation of
Six Public Vocational Schools". These contractual arrangements may not be as
effective in providing us with control over Oya as direct ownership. If we had
direct ownership of Oya, we would be able to exercise our rights as a
shareholder to effect changes in the board of directors of Oya, which in turn
could effect changes, subject to any applicable fiduciary obligations, at the
management level. However, under the current contractual arrangements, as a
legal matter, if Oya or any of its shareholders and affiliated entities fails to
28
perform its or his respective obligations under these contractual arrangements,
we may have to incur substantial costs and resources to enforce such
arrangements, and rely on legal remedies under PRC laws, including seeking
specific performance or injunctive relief, and claiming damages, which may not
be effective. For example, if the shareholders of Oya were to refuse to transfer
their equity interest in Oya to us or our designee when we exercise the call
option pursuant to these contractual arrangements, or if they were otherwise to
act in bad faith toward us, then we may have to take legal action to compel them
to fulfill their contractual obligations. In addition, we may not be able to
renew these contracts with Oya and/or its shareholders if the beneficial owners
of Oya do not act in the best interests of our company when conflicts of
interest arise between their dual roles as shareholders of Oya and directors of
our company. See "The shareholders of Oya may have potential conflicts of
interest with us, which may materially and adversely affect our business and
financial condition."
Many of these contractual arrangements are governed by PRC laws and provide for
the resolution of disputes through arbitration in the PRC. Accordingly, these
contracts would be interpreted in accordance with PRC laws and any disputes
would be resolved in accordance with PRC legal procedures. Uncertainties in the
PRC legal system could limit our ability to enforce these contractual
arrangements. In the event we are unable to enforce these contractual
arrangements, we may not be able to exert effective control over our Chinese
consolidated entities, and our ability to conduct our business may be negatively
affected.
THE SHAREHOLDERS OF OYA MAY HAVE POTENTIAL CONFLICTS OF INTEREST WITH US, WHICH
MAY MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION.
The shareholders of Oya are also the directors of our company. Conflicts of
interests between their dual roles may arise. We cannot assure you that when
conflicts of interest arise, any or all of these individuals will act in the
best interests of our company or those conflicts of interests will be resolved
in our favor. In addition, these individuals may breach or cause Oya and its
affiliated entities to breach or refuse to renew the existing contractual
arrangements that allow us to effectively control Oya and its affiliated
entities, and receive economic benefits from them. Currently, we do not have
existing arrangements to address potential conflicts of interest between these
individuals and our company. We rely on these individuals to abide by the laws
of the United States and China, both of which provide that directors owe a
fiduciary duty to the company, which requires them to act in good faith and in
the best interests of the company and not to use their positions for personal
gain. If we cannot resolve any conflicts of interest or disputes between us and
the beneficial owners of Oya, we would have to rely on legal proceedings, which
could result in disruption of our business and substantial uncertainty as to the
outcome of any such legal proceedings.
CONTRACTUAL ARRANGEMENTS WE HAVE ENTERED INTO AMONG WFOE, OYA AND ITS
SHAREHOLDERS MAY BE SUBJECT TO SCRUTINY BY THE PRC TAX AUTHORITIES AND A FINDING
THAT WE OR OYA AND ITS SHAREHOLDERS OWE ADDITIONAL TAXES COULD SUBSTANTIALLY
REDUCE OUR CONSOLIDATED NET INCOME AND THE VALUE OF YOUR INVESTMENT.
Under PRC laws and regulations, arrangements and transactions among related
parties may be subject to audit or challenge by the PRC tax authorities. We
could face material and adverse tax consequences if the PRC tax authorities
determine that the contractual arrangements among WFOE, Oya and its shareholders
do not represent an arm's-length price and adjust Oya's income in the form of a
transfer pricing adjustment. A transfer pricing adjustment could, among other
things, result in a reduction, for PRC tax purposes, of expense deductions
recorded by Oya, which could in turn increase its tax liabilities. In addition,
the PRC tax authorities may impose late payment fees and other penalties to our
consolidated entities for under-paid taxes. Our consolidated net income may be
materially and adversely affected if our affiliated entities' tax liabilities
increase or if they are found to be subject to late payment fees or other
penalties.
RISKS RELATED TO DOING BUSINESS IN CHINA
ALL OF OUR ASSETS ARE LOCATED IN THE PRC AND ANY ADVERSE CHANGES IN PRC ECONOMIC
AND POLITICAL POLICIES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE OVERALL
ECONOMIC GROWTH OF CHINA, WHICH COULD REDUCE THE DEMAND FOR OUR SERVICE AND HARM
OUR RESULTS OF OPERATIONS.
We carry on all of our business and generate all of our revenues in the PRC.
Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in the PRC. The PRC economy differs from the economies of most
developed countries in many respects, including:
29
* the higher level of government involvement;
* the early stage of development of the market-oriented sector of the
economy;
* the rapid growth rate;
* the higher level of control over foreign exchange;
* the allocation of resources; and
* The balance of payment position.
The PRC economy has been transitioning from a planned economy to a more
market-oriented economy, and as a key market in the global economy, is also
influenced by worldwide economic conditions including the recent global economic
slowdown. For the past three decades the PRC government has implemented economic
reform measures emphasizing utilization of market forces in the development of
the PRC economy. Some of these measures will benefit the overall PRC economy,
but may have a negative effect on us. Our business, financial condition and
results of operations may be adversely affected by:
* changes in PRC political, economic and social conditions;
* changes in policies of the PRC government, including without
limitation, changes in policies affecting private business, foreign
investment and vocational training industry;
* changes in laws and regulations or the interpretation of laws and
regulations;
* measures which may be introduced to control inflation or deflation;
* changes in the rate or method of taxation; and
* imposition of additional restrictions on currency conversion and
remittances abroad.
China's social and political conditions are also not as stable as those of the
United States and other developed countries. The PRC government has previously
taken actions to stabilize the country's economy and any possible social unrest.
It has implemented various measures intended to create stable momentum and
growth. We cannot assure that such growth will be sustained in the future. Any
sudden changes to China's political system or the occurrence of widespread
social unrest could have a material adverse effect on the overall economic
growth, which in turn could have a material adverse effect on our businesses.
OUR BUSINESS IS LARGELY SUBJECT TO THE UNCERTAIN LEGAL ENVIRONMENT IN CHINA AND
LEGAL PROTECTION COULD BE LIMITED TO YOU AND US.
We are a holding company, and we conduct our business primarily through our
consolidated entities incorporated in China. We and our consolidated entities
are generally subject to laws and regulations applicable to foreign investments
in China. Furthermore, Chinese law governs almost all of our material
agreements. The PRC legal system is based on written statutes. Unlike common law
systems, it is a system in which prior court decisions may be cited for
reference but have limited precedential value. Since 1979, the PRC government
has been developing a comprehensive system of commercial laws, and considerable
progress has been made in introducing laws and regulations dealing with economic
matters, such as foreign investment, corporate organization and governance,
commerce, taxation and trade. However, as these laws and regulations are
relatively new, and due to the limited volume of published cases and judicial
interpretation and their lack of precedential force, interpretation and
enforcement of these laws and regulations involve significant uncertainties,
which may limit legal protections available to us. In addition, some regulatory
requirements issued by certain PRC government authorities may not be
consistently applied by other government authorities (including local government
authorities), thus making strict compliance with all regulatory requirements
impractical. Furthermore, intellectual property rights and confidentiality
protections in China may not be as effective as in the U.S. These uncertainties
could limit the legal protections available to us and investors.
IT IS DIFFICULT TO ACQUIRE JURISDICTION AND ENFORCE LIABILITIES AGAINST OUR
OFFICERS, DIRECTORS AND ASSETS BASED IN CHINA.
As majority of our officers and our executive directors are residents of China
and not of the U.S., and substantially all the assets of these persons are
located outside the U.S. As a result, it could be difficult for United States
investors to enforce their legal rights, effect service of process in the U.S.,
or to enforce a judgment obtained in the U.S. against our Chinese officers,
directors and entities. There is also uncertainty as to whether the courts in
China would enforce judgments of United States courts against us or our
directors and officers based on the civil liabilities provisions of the
securities laws of the United States or any other state, or adjudicate an
original action brought in China based upon the securities laws of the United
States or any other state. Further, it is unclear if extradition treaties now in
30
effect between the United States and China would permit effective enforcement of
criminal penalties of the Federal securities laws. In addition, any litigation
in China may be protracted and result in substantial costs and diversion of our
resources and management attention.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR
REVENUES EFFECTIVELY AND LIMIT THE ABILITY OF OUR CHINESE SUBSIDIARIES TO OBTAIN
FINANCING.
All of our revenues and expenses are denominated in Renminbi. As a result, any
restrictions on currency exchange may limit its ability to use revenue generated
in Renminbi to:
* fund business activities outside the PRC;
* settle and repay its indebtedness; and
* pay out dividends to its shareholders.
Under China's existing foreign exchange regulations, our Chinese subsidiaries
may purchase foreign currencies for settlement of current account transactions,
including payments of dividends to us, without prior approval from the State
Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, we cannot assure you that that the Chinese
government will not take further measures in the future to restrict access to
foreign currencies for current account transactions. Furthermore, Foreign
exchange transactions under the capital account will be subject to significant
foreign exchange controls and require the approval of or need to register with
Chinese government authorities, including SAFE. Capital account transactions
refer to inflows and outflows of capital, produce increases or reductions in
debt and equity, including direct investments, various types of borrowings and
investments in securities. If our Chinese subsidiaries borrow foreign currency
through loans from us or other foreign lenders, these loans must be registered
with SAFE and if the loans exceed certain borrowing limits, must be approved by
SAFE. In addition, if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce, or their respective
local counterparts. These limitations could affect our Chinese subsidiaries'
ability to obtain foreign exchange through debt or equity financing, including
by means of loans or capital contributions from us.
RECENT PRC REGULATIONS RELATING TO CROSS-BORDER MERGERS AND ACQUISITIONS MAY
IMPACT US.
On August 8, 2006, six Chinese regulatory agencies, including the Ministry of
Commerce, China Securities Regulatory Commission ("CSRC") and the SAFE, jointly
issued the Regulation on Mergers and Acquisitions of Domestic Companies by
Foreign Investors, or the New M&A Rule, which became effective on September 8,
2006, to more effectively regulate foreign investment in PRC domestic
enterprises. The new M&A Rule also has certain provisions that require offshore
special purpose vehicles formed for the purpose of acquiring Chinese domestic
companies and directly or indirectly established or controlled by Chinese
entities or individuals, to obtain the approval of the CSRC prior to publicly
listing their securities on an overseas stock market. On September 21, 2006, the
CSRC published on its official website a notice specifying the documents and
materials that are required to be submitted for obtaining CSRC approval.
It is not clear how the provisions in the new regulation regarding the offshore
listing and trading of the securities of a special purpose vehicle apply to us.
We believe, based on the interpretation of the new regulation, that CSRC
approval is not required for this reverse acquisition. Since the new regulation
has only recently been adopted, there remains some uncertainty as to how this
regulation will be interpreted or implemented. If the CSRC or another Chinese
regulatory agency subsequently determines that the CSRC's approval is required,
we may face sanctions by the CSRC or another Chinese regulatory agency. If this
happens, these regulatory agencies may impose fines and penalties on our
operations in China, limit our operating privileges in China, delay or restrict
the repatriation of our net proceeds from future offering into China, restrict
or prohibit payment or remittance of dividends to us or take other actions that
could have a material adverse effect on our business, financial condition,
results of operations, and our reputation.
WE ARE SUBJECT TO RISKS PRESENTED BY THE FOREIGN EXCHANGE RATE BETWEEN U.S.
DOLLARS AND RENMINBI.
We publish our financial statements in U.S. dollars, while all of our revenue is
denominated in Renminbi. The value of our common stock will be affected by the
foreign exchange rate between U.S. dollars and Renminbi. Since 2005, the PRC
government has managed floating exchange rate system to allow the value of the
Renminbi to fluctuate within a regulated band based on market supply and demand
and by reference to a basket of currencies. However, we cannot predict when the
31
PRC government will allow free conversion of Renminbi into foreign currencies.
For example, to the extent that we need to convert U.S. dollars into Renminbi
for our operational needs and should the Renminbi appreciate against the U.S.
dollar at that time, our financial position may be harmed. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiaries in China would be reduced.
RISKS RELATED TO THE MARKET FOR OUR STOCK
OUR COMMON STOCK IS QUOTED ON THE OTC BULLETIN BOARD WHICH MAY HAVE AN
UNFAVORABLE IMPACT ON OUR STOCK PRICE AND LIQUIDITY.
Our common stock is quoted on the OTCBB under the symbol "GSTR.OB". The OTC
Bulletin Board is a significantly more limited market than the New York Stock
Exchange or NASDAQ system. The quotation of our shares on the OTC Bulletin Board
may result in a less liquid market available for existing and potential
stockholders to trade shares of our common stock, could depress the trading
price of our common stock and could have a long-term adverse impact on our
ability to raise capital in the future.
OUR PRINCIPAL STOCKHOLDER HAS THE POWER TO CONTROL OUR BUSINESS.
Our principal stockholder, Nicestar International Limited, owns 62.12% of our
common stock as of February 11, 2010. As a result, Nicestar International
Limited has the ability to elect all of our directors and to approve any action
requiring stockholder action, without the vote of any other stockholders. Our
principal stockholder may also have the effect of delaying or preventing a
future change in control, impeding a merger, consolidation, takeover or other
business combination or discourage a potential acquirer from making a tender
offer.
WE ARE SUBJECT TO PENNY STOCK REGULATIONS AND RESTRICTIONS.
The SEC has adopted regulations which generally define so-called "penny stocks"
to be an equity security that has a market price less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exemptions. As a
"penny stock," our common stock may become subject to Rule 15g-9 under the
Exchange Act of 1934, or the "Penny Stock Rule". This rule imposes additional
sales practice requirements on broker-dealers that sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
Rule 15g-9, a broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the ability of purchasers
to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about sales commissions payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from
the Penny Stock Rule. In any event, even if our common stock were exempt from
the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the
Securities Exchange Act of 1934, or "Exchange Act", which gives the SEC the
authority to restrict any person from participating in a distribution of penny
stock, if the SEC finds that such a restriction would be in the public interest.
STANDARDS FOR COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 ARE
UNCERTAIN, AND IF WE FAIL TO COMPLY IN A TIMELY MANNER, OUR BUSINESS COULD BE
HARMED AND OUR STOCK PRICE COULD DECLINE.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of
2002 require annual assessment of our internal control over financial reporting,
and attestation of this assessment by our company's independent registered
public accountants. We may encounter problems or delays in completing activities
necessary to make an assessment of our internal control over financial
reporting. In addition, the attestation process by our independent registered
public accountants is new and we may encounter problems or delays in completing
32
the implementation of any requested improvements and receiving an attestation of
our assessment by our independent registered public accountants. If we cannot
assess our internal control over financial reporting as effective, or our
independent registered public accountants are unable to provide an unqualified
attestation report on such assessment, investor confidence and share value may
be negatively impacted.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Following is management's discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words "believes,"
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
placed on these forward-looking statements which speak only as of the date
hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 8-K.
OVERVIEW
The Company was organized under the laws of the State of Delaware under the name
of Green Star Mining Corp. The Company became an OTC-listed reporting (Section
15(d)) issuer on September 11, 2008 under the ticker "GSTR.OB". The Company's
CUSIP Number is 393409 107.
On February 11, 2010, the Company completed a reverse acquisition transaction
with Risetime Group Limited ("Risetime"), a company incorporated under the laws
of British Virgin Islands. The exchange was consummated under the laws of the
State of Delaware and pursuant to the terms of the Share Exchange Agreement
dated as of February 8, 2010 ("Share Exchange Agreement").
Pursuant to the Share Exchange Agreement, the Company issued 20,500,000 shares
of its common stock, par value $0.0001 per share, to the stockholder of
Risetime, Nicestar International Limited ("Nicestar"), representing 62.12% of
the Company's issued and outstanding common stock, in exchange for the one
outstanding share of Risetime held by Nicestar. Immediately after giving effect
to the reverse transaction, the Company had 33,000,000 shares of its common
stock outstanding. Pursuant to this exchange, Risetime became a wholly-owned
subsidiary of the Company.
Most of the business operations of Risetime, namely our operation, are conducted
through Risetime's Chinese variable interest entity - Hunan Oya Education
Technology Co., Ltd. ("Oya"), a customized educational service provider. Oya
carries out the "Customized Education" models in China and offers a wide range
of educational programs and services through vocational secondary schools,
consisting primarily of education programs for various vocational skills, school
logistic services and development of educational materials. We have abundant
student sources that cover 21 provinces, including graduates from junior high
schools, senior high schools and junior colleges, unemployed people and rural
labor force. Up to the twelve months ended August 31, 2009, the employment rate
remained 100% for the students who graduated from our educational programs.
Since the entry into WTO, China has become the manufacturing center of the world
and one of the best fund destinations. In line with the high economic growth
rate, demands for technicians with specific skills have increased dramatically.
To meet the requirements, the Chinese government issued several regulations such
as Vocational Education Law of the People's Republic of China, Regulations of
the People's Republic of China on Chinese-Foreign Cooperation in Operating
Schools, and Law of the People's Republic of China on the for Promoting Private
Education to enhance the development of the vocational education industry. Under
such preferential policies, we have experienced significant growth in our
business in recent years. Our net income increased from $7,797,558 in the twelve
months ended August 31, 2008 to $10,667,175 in the twelve months ended August
31, 2009, demonstrating an annual growth rate of 36.80%. As of November 30,
2009, we have 2,094 faculty members, 625 supporting staff and a think-tank
consisting of 20 part-time expert consultants. As of November 30, 2009, we have
33
operated eight vocational schools, established employee supplying and training
relationships with nearly 120 enterprises, which are located mainly in the
Yangtze River Delta (radiating from Shanghai to Nanjing, Hangzhou, Wuxi, Ningbo
and other coastal areas), the Pearl River Delta (radiating from Shenzhen to
Dongguan, Guangzhou, Huizhou, Panyu, Qingyuan, Shaoguan and other coastal
areas), and many inland provinces in China.
For the twelve months ended August 31, 2009, our total revenue was $36,111,358,
representing an increase of $7,307,375 or 25.37% as compared with $28,803,983
for the same period of 2008. Our gross profit for the twelve months ended August
31, 2009 was $13,274,936, representing an increase of $3,664,132 or 38.13% as
compared with $9,610,804 for the same period of prior year. The gross profit
accounted for 36.76% of revenues, the net income accounted for 29.54% of
revenues for the twelve months ended August 31, 2009, representing increases as
33.37% and 27.07% respectively with the same period of prior year. As of August
31, 2009, the balance of current assets was $15,891,344; the net book value of
fixed assets and intangible assets was $14,862,590 and $477,339 respectively;
total assets were $31,231,273. Current liabilities were $3,862,203, long-term
liabilities were $402,601 and the balance of total liabilities was $4,264,804,
as of August 31, 2009.
OPERATING ACTIVITIES
ORDER-ORIENTED EDUCATION
Mr. Guangwen He is the founder and CEO of Oya Education Technology Co., Ltd.,
Changsha Huanqiu Vocational Secondary School and Shaoshan Huanqiu Vocational
Technical Secondary School. He has been engaged in vocational education and
related investments since 1994. "Order-oriented Education", or customized
education, was initiated by Mr. Guangwen He and currently is our main operation
mode. As of August 31, 2009, we run eight vocational schools in total, namely,
Changsha Huanqiu Vocational Secondary School, Shaoshan Huanqiu Vocational
Technical Secondary School., Shaoshan Vocational Secondary School, Yingjing
Vocational School, Tianquan Vocational School, Shimian Vocational School, Lushan
Vocational School and Shaoyang Industrial Vocational Technical School. All are
via exclusive business cooperation agreements. As of August 31, 2009, we have
29,883 current students in total.
Order-oriented Education refers to the educational program that tailors
vocational education and training via cooperation agreements between us and
various enterprises. Under Order-oriented Education, we design and offer courses
to meet the specific needs of target employers. We first try to understand the
requirements of the industry, such as the specific skills and the number of
potential employees that are needed, and sign cooperation contracts with the
enterprises. Our schools then customize the curriculums according to the
specific requirements. At this stage, our revenue is derived from the students'
tuition and is recognized proportionately within the semester.
In the winter and summer break, work-study programs, i.e. off-campus
internships, are arranged for students. Our teachers work as the team leaders
for these students who are sent to different enterprises in groups. Through such
on-field practice, students understand the business atmosphere and the
production process. They prepare themselves with skills to meet the specific
requirements of the enterprises. As a result, students are competent for their
position without further training once they graduate from our secondary schools.
For the internship arrangement, commissions are charged to the enterprises based
on the number of students they receive and we also obtain management fees from
students with a fixed rate per student per month. Such revenue is recognized
upon the completion of the internship arrangement. Upon graduation, eligible
students are usually hired by the same enterprises in which they take the
internship. In such instances, students are to make a one-off payment to us for
employment recommendations. Based on the majors we design and the number of
students we offer, we collect commissions for employment recommendation from
recruiters at a fixed amount per person. We recognize such revenue upon the
completion of all the services related to the job arrangement.
"Order-oriented Education" reflects the resource sharing between schools and
enterprises. It benefits our students in their job hunting endeavors after
graduation. As a consequence, student recruitment witnessed a significant
expansion in recent years for our 8 schools that are located in Shaoshan,
Changsha and Shaoyang of Hunan Province, and in Lushan, Shimian, Tianquan and
Yingjing of Sichuan Province, respectively. To carry out the customized training
program, we set up cooperative relationships with approximately 120 enterprises
as of August 31, 2009, including Fuji Xerox Technology (Shenzhen) Co., Ltd.,
34
Flextronics International (Zhuhai Doumen) Industrial Park, BYD Company Limited,
Shenzhen Sanyo Huaqiang Laser Electronic Co., Ltd., Foxconn Technology Group,
Olympus Shenzhen Industrial, Shenzhen Seg-Hitachi and NEC Wuxi Branch, among
many others.
RAIN-DEW PLAN, TAKE-OFF PROJECT
On December 28, 2007, the State Council Leading Group Office of Poverty
Alleviation and Development of the People's Republic of China launched "Rain-dew
Plan o Take-off Project" (the "Project") together with China Overseas
Scholarship Development Foundation in Hunan Province. The Project aims to
support the students with financial hardship, below the age of 25, who newly
graduate from junior and high schools in middle and western China, to receive
the continuing educational program. Students under the Project are recommended
for work at enterprises located in Yangtze River Delta and Pearl River Delta
after they finish the vocational or technical training programs in our schools
that last for one to three years. Some of the students can even apply for
overseas education after they graduate from our schools. China Overseas
Scholarship Development Foundation is responsible for paying subvention to the
students under the Project, including the tuitions and miscellaneous fees as
required by the customized educational program. Students only need to pay their
living expenses and travel expenses during the educational program.
Our school in Changsha became one of the educational program providers under the
Project since the second semester of 2008. The Project provides an important
source of our students. During the first year of the project, 5,310 students
were enrolled from 18 cities or areas and majoring in Computer and Application,
Application of Electronics Technology, Apparel Design and Manufacturing,
E-commerce and others. The number of students from the Project increased to
11,673 as at November 30, 2009 and is expected to increase further in the coming
year.
PROSPECT
Under economic globalization, enterprises in China are expanding faster than
ever and this has resulted in a serious shortage of skilled personnel. According
to the Vocational Education 5-Year Development Plan issued on May 17, 2007 by
the Ministry of Education, the number of secondary vocational students shall
reach 21 million in 2010. A study conducted by National Institute for
Educational Research showed that the shortage of technical talents will range
from 17.46 million to 26.65 million as of 2010. This provides a huge expansion
space for the vocational education in mainland China and provides desirable
opportunities for the development of our business.
Our business development plan includes:
* Under the customized education mode, we will build several new
teaching facilities at our existing schools so as to expand the
capacity of student enrollment. Meanwhile, we are expecting to add
three vocational or technical schools in the coming year, in addition
to the eight schools we currently operate.
* We will continue to reach agreements to cooperate in running maritime
schools in coastal cities such as Dongying, Weifang, Qingdao, Rizhao
and Weihai in Shandong Province, in the coming years, so that we may
expand our maritime-related programs to students in these cities.
* We have set up a department responsible for editing and compiling the
teaching materials for our educational programs, which we believe will
safeguard our education quality. In coming years, publication of
teaching material will be incorporated in our business operation and
we expect to distribute this material nationwide to outside schools.
We are planning to publish and sell about 20 sets of teaching
materials, with 100,000 books for each set in 2010. The revenue
derived from selling teaching materials is anticipated to increase in
future years.
* To keep sustain our development, we will enhance image building of our
brand and create distinctiveness of our brand. Management believes
this is essential for stable long term growth. We continue to see
improvement in the core capacity of our management team, marketing
team and auditing team as well as in our overall business capability.
35
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect our reported assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an on-going basis and use them on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances as the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates because of different
assumptions or conditions.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED AUGUST 31, 2009 AND 2008
Results of operation are a general reflection of our experience in providing
customized educational programs, the reputation of our schools, the scalability
of our schools and the total number of students, all of which demonstrated a
growth trend in the past two years and are expected to expand in the future. Our
expansion can be reflected specifically in the increase of our student
enrollment, the development of new customized educational programs, the
cooperation with more target employers, the education appropriations from local
government for running new schools. The total number of students (including
current students and students graduated from our schools) increased from 34,000
for the semester ended August 31, 2005 when we operated one vocational school,
to 85,000 for the eight schools we operated during the semester ended August 31,
2009.
In line with the business expansion, we generated higher revenue in twelve
months ended August 31, 2009 compared with the same period of the year earlier
and this resulted in an increase of $2,869,617 or 36.80% in our net income from
$7,797,558 in the twelve months ended August 31, 2008 to $10,667,175 in the
twelve months ended August 31, 2009.
The following table summarizes our operating results for the twelve months ended
August 31, 2009 and August 31, 2008, respectively:
For the twelve months
ended August 31, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Revenues 36,111,358 28,803,983 7,307,375 25.37
Cost of revenue (22,836,422) (19,193,179) (3,643,243) 18.98
----------- ----------- ----------- -------
Gross profit 13,274,936 9,610,804 3,664,132 38.13
Selling expenses (640,576) (725,075) 84,499 (11.65)
General and administrative expenses (1,818,177) (1,000,439) (817,738) 81.74
----------- ----------- ----------- -------
Income from operations 10,816,183 7,885,290 2,930,893 37.17
Other expenses (149,008) (87,732) (61,276) 69.84
----------- ----------- ----------- -------
Income before income taxes 10,667,175 7,797,558 2,869,617 36.80
REVENUES
For the twelve months ended August 31, 2009, the Company achieved total revenue
of $36,111,358, representing an increase of $7,307,375 or 25.37% when compared
to $28,803,983 for the twelve months ended August 31, 2008. The significant
increase in revenue was mainly attributable to the expansion of our operation as
reflected in the following:
36
1) Student at school in the first semester of 2008 which started from
September 1, 2007 totaled 23,882. It increased to 29,883 in the second
semester of 2009 which started from January 1, 2009, representing an
increase of 25.13%.
2) Standard tuition per capita increased in four schools by 20-30% in 2009
compared with 2008, which was adjusted in accordance with the regulation of
local government.
3) As of January 25, 2008, one of our variable interest entities, Changsha
Huanqiu, entered into an exclusive business cooperation agreement with
Shaoyang Vocational School, operated in Shaoyang, Sichuan Province and from
then on the operating results of Shaoyang Vocational School was
consolidated into our financial statements. As a result, Shaoyang
Vocational School contributed $1 million to the total revenue.
The table below illustrates the revenue from different services for the twelve
months ended August 31, 2009 and August 31, 2008:
For the twelve months
ended August 31, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Tuition revenue 22,404,356 18,369,384 4,034,972 21.97
Revenue of off-campus internship
arrangement 2,440,439 1,882,519 557,920 29.64
Revenue of other services 11,266,563 8,552,080 2,714,483 31.74
---------- ---------- ---------- ------
Total revenue 36,111,358 28,803,983 7,307,375 25.37
(1) Tuition revenue is collected from students after we file and update our fee
schedules with each local authority. An increase in tuition revenue
resulted from the increase in the students enrolled and the tuition
standard.
(2) Revenue from our off-campus internship arrangement service is collected at
a fixed amount per student each time from recruiters, and a fixed amount
from the student per month. We concluded this arrangement with more
enterprises in 2009 as compared with 2008 and this has led to the revenue
increase.
(3) Revenue of "other services" consists of revenue from campus logistics
services and governmental subsidies for vocational education. Revenue of
other services grew at the same pace with the increase in the students
enrolled. Such revenue increase also resulted from increased consumption
and a price surge in campus logistics services. The table below illustrates
the revenue from other services for the twelve months ended August 31, 2009
and August 31, 2008:
For the twelve months
ended August 31, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Restaurant revenue 9,440,794 7,408,432 2,032,362 27.43
Contract operation revenue 231,574 146,844 84,730 57.70
Government subsidy 1,594,195 996,804 597,391 59.93
---------- ---------- ---------- ------
Total revenue 11,266,563 8,552,080 2,714,483 31.74
37
SELLING EXPENSES
The table below set forth the selling expenses for the twelve months ended
August 31, 2009 and August 31, 2008:
For the twelve months
ended August 31, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Salary and staff welfare 137,052 134,699 2,353 1.75
Office expenses 179,599 177,748 1,851 1.04
Advertising 47,720 65,546 (17,826) (27.20)
Travel expenses 149,421 200,282 (50,861) (25.39)
Others 126,784 146,800 (20,016) (13.63)
------- ------- ------- -------
Total of selling expenses 640,576 725,075 (84,499) (11.65)
Our selling expenses decreased by 11.65% from $725,075 in the twelve months
ended August 31, 2008 to $640,576 in the twelve months ended August 31, 2009,
primarily due to the decrease of advertising and travel expenses. With the
growth of our business and reputation, more enterprises sought our customized
education programs in 2009, which ensured the reduced marketing effort on our
part. More students also got to know our vocational education and training
program and travel, advertising as well as other related expenses were reduced,
and this led to the decrease in total selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
The table below illustrates the details of General and administrative expenses
for the twelve months ended August 31, 2009 and August 31, 2008:
For the twelve months
ended August 31, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Salary and staff welfare 792,647 469,096 323,551 68.97
Office expenses 281,654 138,035 143,619 104.05
Maintenance 347,465 184,252 163,213 88.58
Rental 135,153 101,306 33,847 33.41
Others 261,258 107,750 153,508 142.47
--------- --------- --------- -------
Total of G&A expenses 1,818,177 1,000,439 817,738 81.74
Our general and administrative expenses increased by 81.74% from $1,000,439 for
the twelve months ended August 31, 2008 to $1,818,177 for the twelve months
ended August 31, 2009. This increase was primarily due to the increase in the
total compensation and benefits paid to our administrative staff, including
senior managers and other employees in finance and accounting, and general
administration. These employees were hired to support our expanded operations in
the twelve months ended August 31, 2009. In line with such expansion, office
expenses increased. The increase in maintenance and other expenses for the
twelve months ended August 31, 2009, as compared with that of the same period of
prior year, was attributable to the increase in the number of students in the
twelve months ended August 31, 2009.
38
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited consolidated selected quarterly
results of operations for the eight quarters ended August 31, 2009. You should
read the following table in conjunction with our audited financial statements
and related notes included elsewhere in this Form 8K. We have prepared the
unaudited consolidated financial information on the same basis as our audited
consolidated financial statements. The unaudited consolidated financial
information includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for the quarters presented.
Stated in US$ 2009 2008
---------------------------------------------------- -----------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Sep 08- Dec 08- Mar 09- Jun 09- Sep 07- Dec 07- Mar 08- Jun 08-
Nov 08 Feb 09 May 09 Aug 09 Nov 07 Feb 08 May 08 Aug 08
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues 11,709,022 9,942,113 9,531,336 4,928,887 9,159,054 6,668,609 7,826,072 5,150,248
Cost of revenue (7,422,172) (5,650,459) (6,443,984) (3,319,807) (5,788,670) (4,257,354) (5,311,462) (3,835,693)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit 4,286,850 4,291,654 3,087,352 1,609,080 3,370,384 2,411,255 2,514,610 1,314,555
Selling expenses (197,020) (149,343) (156,767) (137,446) (199,832) (145,755) (140,054) (239,434)
G&A expenses (426,626) (463,242) (470,621) (457,688) (222,349) (246,693) (269,906) (261,491)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(623,646) (612,585) (627,388) (595,134) (422,181) (392,448) (409,960) (500,925)
Income from
operation 3,663,204 3,679,069 2,459,964 1,013,946 2,948,203 2,018,807 2,104,650 813,630
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
There are seasonal fluctuations in our revenues and results of operations due to
seasonal changes in student enrollments. Our schools have two semesters each
year in China. Two semesters, together with the winter and summer vacations,
coincide with four quarters, as indicated below:
Fiscal Quarters
Months Semesters Quarters for school
---------------------------- --------------- -------- ----------
September 1 - November 30 Q3 Q1
---------------------------- First Semester -------- ----------
December 1 to January 10
---------------------------- --------------- Q4 Q2
January 10 - February 28 Winter Vacation
---------------------------- --------------- -------- ----------
March 1 - May 31 Q1 Q3
---------------------------- Second Semester -------- ----------
June 1 - July 7
---------------------------- --------------- Q2 Q4
July 7 - August 31 Summer Vacation
---------------------------- --------------- -------- ----------
Historically, our educational programs tend to have the largest number of
student enrollments in our first semester. These seasonal factors resulted in
the higher revenue in the first quarter when compared with the third quarter.
Our cost of revenues fluctuates in proportion with the variation in revenues.
Less revenue was generated in the second quarter and the fourth quarter as
compared with the first quarter and the third quarter in both twelve months
ended August 31, 2008 and 2009 because most students leave school for one month
for winter and summer vacation.
Our expenses, however, vary slightly and do not fluctuate proportionately with
changes in our student enrollments and revenues. More senior managers were hired
and we raised the salary and staff welfare for the management in the twelve
months ended August 31, 2009. As a result, total general and administrative
expenses were about $1 million for the third quarter and fourth quarter of the
twelve months ended August 31, 2009, a 74.69% increase over the corresponding
quarters in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash generated from operating
activities and financing activities.
As of August 31, 2009, our total assets were $31,231,273, representing an
increase of $10,030,563 or 47.31% when compared with $21,200,710 on August 31,
2008. As of August 31, 2009, we had $15,891,344 in current assets, representing
an increase of $7,747,764 or 95.14% when compared with $8,143,580 on August 31,
39
2008. As of August 31, 2009, non-current assets were $15,339,929, representing
an increase of $2,282,799 or 17.48% as compared to $13,057,130 on August 31,
2008.
Current assets as of August 31, 2009 consist of cash and cash equivalents of
$3,848,040, inventory of $1,504,764, accounts receivable of $5,713,491, other
debtors of $2,449,685 and advances to vendors of $2,375,364.
Most of our transactions with customers are settled in cash. Accounts receivable
increased $4,920,891, from $792,600 as of August 31, 2008 to $5,713,491 as of
August 31, 2009. Such increase is attributable to the accounts receivable due
from China Overseas Scholarship Development Foundation under the Rain-dew
project that started from September 2008. As of August 31, 2009, $1,390,721 or
approximately 24.11% of accounts receivable, aged less than three months;
$1,142,757 or 19.81% of accounts receivable, aged from four months to six
months; $3,179,002 or 55.10% of accounts receivable aged from six months to 12
months; and $56,847 or 0.98% only of accounts receivable aged for more than 12
months.
As of August 31, 2009, our total liabilities were $4,264,804, representing an
increase of $262,183 or 6.55% as compared to $4,002,621 on August 31, 2008. We
had a new short term loan in the fourth quarter of 2009. This has led to the
increase in loan balance. As of August 31, 2009, the balance of loan outstanding
was $1,764,125, representing an increase of $441,122 or 25.01% as compared to
$1,323,003 on August 31, 2008. Accounts payable were $1,327,622 as of August 31,
2009, representing a decrease of $493,598 or 27.10% as compared with $1,821,220
on August 31, 2008. Accounts payable were primarily due to Changsha University
of Science & Technology for the cooperative education program and to Xinhua Book
Store for the textbooks we purchased, as of August 31, 2009.
As of August 31, 2009, stockholder's equity was $26,966,469, representing an
increase of $9,768,380 or 56.80% as compared to $17,198,089 on August 31, 2008.
As of August 31, 2009, the gearing ratio is 13.66%.
CASH FLOWS
As of August 31, 2009, the Company's cash and cash equivalents were $3,848,040,
representing an increase of $3,328,231 as compared with $519,809 on August 31,
2008.
As of August 31, 2009, net cash flows provided by operating activities were
$7,614,922, representing a decrease of $1,347,605 as compared with $8,962,527 on
August 31, 2008. The decrease was mainly due to tuitions receivable from China
Overseas Scholarship Development Foundation in 2009.
As of August 31, 2009, net cash flows used in investing activities were
$6,204,352, representing an increase of $5,329,533 as compared with $874,819 on
August 31, 2008. The major investment during the 12 months ended August 31, 2009
refers to the prepayment of land use right, construction of the apartment
building and dining hall in Shaoyang campus, construction of dormitory building
in Tianquan campus and construction of multiple-function buildings and teaching
facilities in Yingjing campus. The financial resources were generated from
operating activities, credit funds and capital injection.
As of August 31, 2009, net cash used in financing activities were $896,827,
representing a decrease of $5,871,159 as compared with $6,767,986 on August 31,
2008. The decrease was due to the repayment of loans we made to shareholders and
related parties, in the amount of $5.2 million approximately, during the twelve
months ended August 31, 2008 whereas there was no such payment in the twelve
months ended August 31, 2009.
FUTURE INVESTMENT PLAN
Pursuant to the cooperation agreements with the schools, our total investment
amount during the contract period is $17,977,976. Up to August 31, 2009, we have
invested $2,986,908 in several schools and the amount of $14,991,068 will be
paid within the cooperation period. The table below illustrates the details of
the cooperation agreements with exact investment amount and implementation
status of these agreements:
40
Total contract Amount Investment amount
amount invested committed in future
Location of School Cooperation period US$ US$ US$
------------------ ------------------ ---------- --------- ----------
Shaoshan From Apr 2009 to Jun 2029 8,784,027 101,750 8,682,277
Shaoyang From Jan 2008 to Jan 2026 4,392,014 439,201 3,952,813
Lushan From May 2006 to Jul 2021 1,464,005 805,203 658,802
Tianquan From Feb 2006 to Jul 2021 1,873,926 930,712 943,214
Shimian From Jan 2006 to Jul 2021 1,464,004 710,042 753,962
---------- --------- ----------
Total 17,977,976 2,986,908 14,991,068
========== ========= ==========
FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in US dollars. The functional
currency of the Company is Renminbi ("RMB"), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People's Bank of
China prevailing at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than that RMB are
included in statements of operations as exchange gains. The period end exchange
rate as of August 31, 2009 was 6.8306, fluctuated not much compared with the
exchange rate 6.8405 as of August 31, 2008. The average exchange rate for the
twelve months ended August 31, 2009 was 6.8343, decreased materially compared
with the exchange rate 7.1528 of the same period of prior year.
TAXATION
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
rates, tax exemptions and other measures. According to Law of the People's
Republic of China on Promotion of Privately-run Schools, implemented from
September 1, 2003, and the Notice of Tax Policy for Education Activities
(Caishui [2004] No.39), issued and effective on February 5, 2004, some specific
enterprises, organizations and schools enjoy the same tax incentives as the
schools run by the government, and could be exempt from business tax and income
tax accordingly. As the operation of the Company meets the requirements of the
aforementioned regulations, the Company is exempt from business tax and income
tax.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, FASB established Accounting Standards CodificationTM
("Codification") as the single source of authoritative accounting principles
recognized by the FASB in the preparation of financial statements in conformity
with the GAAP. The Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Codification is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. Adoption of the
Codification is not expected to have a material impact on the Company's results
of operations or financial position.
In June 2009, FASB updated the accounting standards related to the consolidation
of variable interest entities ("VIEs"). The standard amends current
consolidation guidance and requires additional disclosures about an enterprise's
involvement in VIEs. The standard shall be effective as of the beginning of each
reporting entity's first annual reporting period that begins after November 15,
2009, for interim periods within the first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. The Company does not expect the adoption to have a material impact
on the Company's results of operations or financial position.
In May 2009, FASB issued FAS No. 165, Subsequent Events. The standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
41
are available to be issued. An entity should apply the requirements of FAS No.
165 to interim or annual financial periods ending after June 15, 2009. Adoption
of this standard does not have a material impact on the Company's results of
operations or financial position.
In April 2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009,
and is to be applied prospectively. The adoption did not have a material effect
on the Company's results of operations and financial condition.
In April 2009, the FASB updated the accounting standards for the recognition and
presentation of other-than-temporary impairments. The standard amends existing
guidance on other-than-temporary impairments for debt securities and requires
that the credit portion of other-than-temporary impairments be recorded in
earnings and the noncredit portion of losses be recorded in other comprehensive
income. The standard requires separate presentation of both the credit and
noncredit portions of other-than-temporary impairments on the financial
statements and additional disclosures. This standard is effective for interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. At the date of adoption, the
portion of previously recognized other-than-temporary impairments that represent
the noncredit related loss component shall be recognized as a cumulative effect
of adoption with an adjustment to the opening balance of retained earnings with
a corresponding adjustment to accumulated other comprehensive income (loss). The
adaption of this standard did not have a material effect on the preparation of
the Company's consolidated financial statements.
In August 2009, the FASB updated the accounting standards to provide additional
guidance on estimating the fair value of a liability in a hypothetical
transaction where the liability is transferred to a market participant. The
standard is effective for the first reporting period, including interim periods,
beginning after issuance. The Company does not expect the adoption to have a
material effect on the Company's consolidated results of operations and
financial condition.
OFF BALANCE SHEET ARRANGEMENTS
We have not entered into any financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholders' equity, or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
42
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
Results of operation are a general reflection of our experience in providing
customized educational programs, the reputation of our schools, the scalability
of our schools and the total number of students, all of which demonstrated a
growth trend in the past two years and are expected to expand in the future. Our
expansion can be reflected specifically in the increase of our student
enrollment, the development of new customized educational programs, the
cooperation with more target employers, the education appropriations from local
government for running new schools. The total number of students (including
current students and students graduated from our schools) increased from 34,000
for the semester ended August 31, 2005 when we operated one vocational school,
to 85,000 for the eight schools we operated in the semester ended August 31,
2009.
In line with the business expansion, we generated higher revenue in the three
months ended November 30, 2009 compared with the same period in 2008 and this
resulted in an increase of $898,261 or 24.51% in our income from operations from
$3,664,667 in the three months ended November 30, 2008 to $4,562,928 in the
three months ended November 31, 2009.
The following table summarizes our operating results for the three months ended
November 30, 2009 and November 30, 2008, respectively:
For the three months
ended November 30, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Revenues 13,009,078 11,713,701 1,295,377 11.06
Cost of revenue (7,858,492) (7,425,138) (433,354) 5.84
----------- ----------- ----------- --------
Gross profit 5,150,586 4,288,563 862,023 20.10
Selling expenses (136,094) (197,099) 61,005 (30.95)
General and administrative expenses (451,564) (426,797) (24,767) 5.80
----------- ----------- ----------- --------
Income from operations 4,562,928 3,664,667 898,261 24.51
Other expenses (988,758) (26,319) (962,439) 3,656.82
----------- ----------- ----------- --------
Income before income taxes 3,574,170 3,638,348 (64,178) (1.76)
REVENUES
For the three months ended November 30, 2009, the Company achieved total revenue
of $13,009,078, representing an increase of $1,295,377 or 11.06% when compared
to $11,713,701 for the same period of 2008. The significant increase in revenue
was mainly attributable to the expansion of our operation as reflected in the
following:
(1) The number of Students at school in the first semester of 2009 which
started from September 1, 2008 totaled 28,782 and the number increased to
32,238 in the first semester of 2010 which started from September 1, 2009,
representing an increase of 12.01%.
(2) Cooperation agreements we entered into with maritime school in Shandong
Province took effect from the semester started September 1, 2009. According
to the agreements, we provide the service of enrollment of new students to
the maritime school and the maritime school pays a fixed amount for each
student we enrolled on behalf of them. We sent 105 students in total to the
maritime school during the three months ended November 30, 2009 and this
new business contributed RMB1.5 million (approximately $219,719) to the
increase of total revenue as compared with the same period of prior year.
43
(3) As of April 30, 2009, our variable interest entities, Hunan Oya Education
Technology Co., Ltd. entered into an exclusive business cooperation
agreement with Shaoshan Vocational School, operated in Shaoshan, Hunan
Province and from then on the operating results of Shaoshan Vocational
School was consolidated into our financial statements. As of September 1,
2009, Shaoshan Vocational School commenced operation and contributed $0.85
million to the total revenue for the three months ended November 30, 2009.
The table below illustrates the revenue from different services for the three
months ended November 30, 2009 and November 30, 2008:
For the three months
ended November 30, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Tuition revenue 7,885,641 6,610,483 1,275,158 19.29
Revenue of off-campus internship
arrangement 915,636 284,208 631,428 222.17
Revenue of other services 4,207,801 4,819,010 (611,209) (12.68)
---------- ---------- ---------- -------
Total revenue 13,009,078 11,713,701 1,295,377 11.06
(1) Tuition revenue is collected from students after we file and update our fee
schedules with each local authority. An increase in tuition revenue
resulted from the increase in the students enrolled and the start of a new
campus in Shaoshan, Hunan Province.
(2) Revenue from our off-campus internship arrangement service is collected at
a fixed amount per student each time from recruiters, and a fixed amount
from the student per month. We concluded this arrangement with more
enterprises in 2009 as compared with 2008 and this has led to the revenue
increase. During the three months ended November 30, 2009, our cooperative
enterprises requested more students and this led to an increase of 5,595 in
the total number of students under off-campus internship arrangement
compared with the same period of prior year.
(3) Revenue of "other services" consists of revenue from campus logistics
services and governmental subsidies for vocational education. The decrease
in the amount was due to the government subsidies received in the three
months ended November 30, 2008 were more than that received in the three
months ended November 30, 2009 according to the local government policy.
SELLING EXPENSES
The table below set forth the selling expenses for the three months ended
November 30, 2009 and November 30, 2008:
For the three months
ended November 30, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Salary and staff welfare 51,926 43,585 8,341 19.14
Office expenses 2,614 1,942 672 34.64
Advertising 3,532 57,885 (54,353) (93.90)
Travel expenses 45,424 60,975 (15,551) (25.50)
Others 32,598 32,712 (114) (0.35)
------- ------- ------- -------
Total of selling expenses 136,094 197,099 (61,005) (30.95)
Our selling expenses decreased by 30.95% from $197,099 in the three months ended
November 30, 2008 to $136,094 in the three months ended November 30, 2009,
primarily due to the decrease of advertising and travel expenses. With the
growth of our business and reputation, more enterprises sought our customized
44
education programs in 2009, which ensured the reduced marketing effort on our
part. More students also got to know our vocational education and training
program and travel, advertising as well as other related expenses were reduced,
and this led to the decrease in total selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
The table below illustrates the details of General and administrative expenses
for the three months ended November 30, 2009 and November 30, 2008:
For the three months
ended November 30, Comparison
----------------------------- -------------------------
2009 2008 Amount Percent
US$ US$ US$ %
----------- ----------- ----------- -------
Salary and staff welfare 193,147 165,582 27,565 16.65
Office expenses 109,802 114,261 (4,459) (3.90)
Maintenance 647 2,344 (1,697) (72.40)
Rental 29,441 27,755 1,686 6.07
Depreciation 22,408 4,451 17,957 403.44
Others 96,119 112,404 (16,285) (14.49)
------- ------- ------- -------
Total of G&A expenses 451,564 426,797 24,767 5.80
Our general and administrative expenses increased by 5.80% from $426,797 for the
three months ended November 30, 2008 to $451,564 for the three months ended
November 30, 2009. This increase was primarily due to the increase in the total
compensation and benefits paid to our administrative staff, including senior
managers and other employees in finance and accounting, and general
administration. These employees were hired to support our expanded operations in
2009 and the year after.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash generated from operating
activities and financing activities.
As of November 30, 2009, our total assets were $38,297,634, representing an
increase of $7,066,361 or 22.63% when compared with $31,231,273 on August 31,
2009. As of November 30, 2009, we had $19,160,234 in current assets,
representing an increase of $3,268,890 or 20.57% when compared with $15,891,344
on August 31, 2009. As of November 30, 2009, non-current assets were
$19,137,400, representing an increase of $3,797,471or 24.76% as compared to
$15,339,929 on August 31, 2009.
Current assets as of November 30, 2009 consist of cash and cash equivalents of
$5,609,339, inventory of $53,218, accounts receivable of $8,219,776, other
debtors of $1,625,365 and advances to vendors of $3,652,476.
Most of our transactions with customers are settled in cash. The balance of
accounts receivable (net of allowance) increased $2,506,285, from $5,713,491 as
of August 31, 2009 to $8,219,776 as of November 30, 2009. Such increase is
attributable to the accounts receivable due from China Overseas Scholarship
Development Foundation under the Rain-dew project that started from September
2008. As of November 30, 2009, $4,242,438 or approximately 51.26% of accounts
receivable, aged less than three months; $520,073 or 6.28% of accounts
receivable, aged from four months to six months; $3,050,771 or 36.86% of
accounts receivable aged from six months to 12 months; and $462,330 or 5.60%
only of accounts receivable aged for more than 12 months.
As of November 30, 2009, our total liabilities were $7,743,130, representing an
increase of $3,478,326 or 81.56% as compared to $4,264,804 on August 31, 2009.
As of November 30, 2009, the balance of loan outstanding was $1,706,427,
representing a decrease of $57,698 or 3.27% as compared to $1,764,125 on August
31, 2009. Accounts payable were $1,198,736 as of November 30, 2009, representing
a decrease of $128,886 or 9.71% as compared with $1,327,622 on August 31, 2009.
Accounts payable were primarily due to Changsha University of Science &
45
Technology for the cooperative education program and to maritime schools for the
tuition we collected on behalf of them under the cooperation agreements, as of
November 30, 2009.
As of November 30, 2009, stockholder's equity was $30,554,504, representing an
increase of $3,588,035 or 13.31% as compared to $26,966,469 on August 31, 2009.
As of August 31, 2009, the gearing ratio is 20.22%.
CASH FLOWS
As of November 30, 2009, the Company's cash and cash equivalents were
$5,609,399, representing an increase of $1,761,359 as compared with $3,848,040
on August 31, 2009.
For the three months ended November 30, 2009, net cash flows provided by
operating activities were $7,364,886, representing an increase of $333,744 as
compared with $7,031,142 for the same period in 2008. The increase was mainly
due to tuitions receivable from China Overseas Scholarship Development
Foundation in 2009.
For the three months ended November 30, 2009, net cash flows used in investing
activities were $6,425,790, representing an increase of $6,168,153 as compared
with $257,637 for the same period in 2008. The major investment in the three
months ended November 30, 2009 refers to the construction of the buildings for
practice training in Shaoyang campus, construction of dormitory buildings and
teaching facilities in Shaoyang, Tianquan and Shaoshan campus. The financial
resources were generated from operating activities and credit funds.
As of November 30, 2009, net cash flows provided by financing activities were
$820,203, representing an increase of $1,313,171 as compared with net cash used
in financing activities of $492,968 for the three months ended November 30,
2008. During the three months ended November 30, 2008, there was capital
contribution of $877,963 and the cash inflow was offset by the repayment of
loans we made to the related parties in the amount of $1.3 million
approximately. During the three months ended November 30, 2009 whereas there was
receipt of repayment of related party loan in the amount of $878,789. With the
combined effect of above mentioned factors, the net cash flows provided by
financing activities increased.
FUTURE INVESTMENT PLAN
Pursuant to the cooperation agreements with the schools, our total investment
amount during the contract period is $17,977,976. Up to November 30, 2009, we
have invested $4,306,705 in several schools and the amount of $13,671,271 will
be paid within the cooperation period. The table below illustrates the details
of the cooperation agreements with exact investment amount and implementation
status of these agreements:
Total contract Amount Investment amount
amount invested committed in future
Location of School Cooperation period US$ US$ US$
------------------ ------------------ ---------- --------- ----------
Shaoshan From Apr 2009 to Jun 2029 8,784,027 1,420,077 7,363,949
Shaoyang From Jan 2008 to Jan 2026 4,392,014 439,425 3,952,589
Lushan From May 2006 to Jul 2021 1,464,005 805,613 658,392
Tianquan From Feb 2006 to Jul 2021 1,873,926 931,186 942,740
Shimian From Jan 2006 to Jul 2021 1,464,004 710,404 753,601
---------- --------- ----------
Total 17,977,976 4,306,705 13,671,271
========== ========= ==========
FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in US dollars. The functional
currency of the Company is Renminbi ("RMB"), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People's Bank of
China prevailing at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than that RMB are
included in statements of operations as exchange gains. The period end exchange
rate as of November 30, 2009 was 6.8271, fluctuated not much compared with the
exchange rate 6.8254 as of November 30, 2008. The average exchange rate for the
three months ended November 30, 2009 was 6.8276, slightly decreased compared
with the exchange rate 6.8316 of the same period of prior year.
46
TAXATION
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
rates, tax exemptions and other measures. According to Law of the People's
Republic of China on Promotion of Privately-run Schools, implemented from
September 1, 2003, and the Notice of Tax Policy for Education Activities
(Caishui [2004] No.39), issued and effective on February 5, 2004, some specific
enterprises, organizations and schools enjoy the same tax incentives as the
schools run by the government, and could be exempt from business tax and income
tax accordingly. As the operation of the Company meets the requirements of the
aforementioned regulations, the Company is exempt from business tax and income
tax.
OFF BALANCE SHEET ARRANGEMENTS
We have not entered into any financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholders' equity, or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices and other market-driven rates or
prices. The Company, in its normal course of business, is exposed to market risk
through changes in interest rates with respect to bank loans. As of November 30,
2009, the Company bank loans were RMB 11,650,000 (approximately $1,708,200). The
interest rate with respect to our bank loans for the three months ended November
30, 2009 was between 0% and 12.096% per annum.
CURRENCY RISK
The Company considers RMB its functional currency since a substantial portion of
the Company's business activities are based in RMB. However, the Company has
chosen the United States dollar as its reporting currency. Our sales and
purchases are conducted within the PRC in RMB. Conversion of RMB into foreign
currencies is regulated by the People's Bank of China through a unified floating
exchange rate system. Although the PRC government has stated its intention to
support the value of the RMB, there can be no assurance that its rate of
exchange will not again become volatile or that the RMB will not devalue
significantly against the U.S. dollar. Exchange rate fluctuations may adversely
affect the value, in U.S. dollar terms, of our net assets and income derived
from our operations in the PRC. In addition, the RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place
through authorized institutions.
Transactions in currencies other than the functional currency during the period
are translated into the functional currency at the applicable rates of exchange
at the time of the transactions. Monetary assets and liabilities denominated in
currencies other than functional currency are translated into functional
currency at the applicable rates of exchange in effect at the balance sheet
date. Exchange gains and losses are recorded in the combined statements of
operations.
For translation of financial statements into the reporting currency, assets and
liabilities are translated at the exchange rate at the balance sheet date,
equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period. When there are material adjustments under
this process, they are recorded in accumulated other comprehensive income under
the stockholders' equity section of the balance sheet.
COUNTRY RISK
Our business, assets and operations are located and conducted in the PRC. While
the PRC's economy has experienced significant growth in the past twenty years,
growth has been uneven, both geographically and among various sectors of the
47
economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall economy of the PRC, but may also have a negative effect on
us. For example, our operating results and financial condition may be adversely
affected by government control over capital investments or changes in tax
regulations applicable to us. If there are any changes in any policies by the
PRC government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits, will
also be negatively affected.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our
voting stock as of February 11, 2010 (i) by each person who is known by us to
beneficially own more than 5% of any class of our voting stock; (ii) by each of
our officers and directors; and (iii) by all of our officers and directors as a
group.
Unless otherwise stated, the address of all persons in the table is No.27,
Jinsha Road, Jinnan Village, Lijingpu Township, Shahe Section, Ningxiang County,
Hunan Province.
Shares beneficially owned (1)
Name and address of beneficial owner common stock % of class owned (2)
------------------------------------ ------------ --------------------
OWNER OF MORE THAN 5% OF CLASS
Nicestar International Limited (3) 20,500,000 62.12%
2nd Floor, Abbott Building, Road
Town, Tortola, British Virgin
Islands
Siu Choi Fat (2) 20,500,000 62.12%
Room 42, 4th Floor, New Henry
House, 10 Ice House Street,
Central, Hong Kong
DIRECTORS AND EXECUTIVE OFFICERS
Guangwen He (CEO) 0 *
Yunjie Fang (CFO) 0 *
Room 2005, Biaozhi Real Estate
Building, No.119, 1st Section of
Furong Central Road, Changsha
City, Hunan Province
Yabin Zhong 0 *
Junming Peng 0 *
No.14, Liren Alley, Furong
District, Changsha City,
Hunan Province
48
Shaozeng Wang 0 *
Room 905, Building 4, Dormitory of
Department of Audit of Hunan, No. 6,
Jiayu Road, Furong District
Changsha City, Hunan Province
Erik Vonk 0 *
773 Hideaway Bay Drive, Longboat
Key, FL 34228
ALL DIRECTORS AND EXECUTIVE 0 *
OFFICERS (SIX PERSONS)
----------
* Less than 1% of the issued and outstanding shares as of February 11, 2010.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Each of the beneficial owners listed above has direct ownership
of and sole voting power and investment power with respect to the shares of
our common stock.
(2) A total of 33,000,000 shares of our Common Stock are considered to be
outstanding as of February 11, 2010 pursuant to SEC Rule 13d-3(d)(1).
(3) On February 11, 2010, we acquired Risetime Group Limited in a reverse
acquisition with Nicestar International Limited. As merger consideration
for the Risetime shares we received from the former shareholder of
Risetime, we issued and delivered 20,500,000 of our newly-issued shares of
common stock to Nicestar International Limited.
(4) Mr. Siu Choi Fat owns 100% of Nicestar International Limited, which owns
20,500,000 shares of our Common Stock. Therefore, Mr. Siu Choi Fat may be
considered to beneficially own 20,500,000 shares of our Common Stock.
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
In connection with the change in control of the Company described in Item 5.01
of this report, effective on February 11, 2010, Mr. Yi Chen resigned as our
chief executive officer and we appointed Mr. Guangwen He as our Chief Executive
Officer and the Chairman of the Board upon the closing of the reverse
acquisition.
The following sets forth the name and position of each of our current executive
officers and directors.
Name Age Position
---- --- --------
Guangwen He 41 Chairman of the Board, Chief Executive Officer,
President, and Secretary
Yunjie Fang 44 Chief Financial Officer and Treasurer
Yabin Zhong 43 Director
Junming Peng 61 Independent director
Shaozeng Wang 66 Independent director
Erik Vonk 57 Independent director
The following is a summary of the biographical information of our directors and
officers:
49
GUANGWEN HE, Mr. He became a director and our Chief Executive Officer on
February 11, 2010 when we completed our reverse acquisition of Risetime. Mr. He,
doctor of education, is CEO of Hunan Oya Education Technology Co., Ltd and
Global Education International Limited. He was born on July 8, 1968 in
Ningxiang, Hunan. His other titles include the director of China Association of
Private Education, the vice-president of Hunan Association of Private Education,
the 9th and 10th Standing Committee member of the CPPCC of Changsha, the
vice-director of the 10th Committee of Education Science Culture and Health of
the CPPCC of Changsha, the vice-president of Changsha Association of Private
Education and a pluralistic researcher of Hunan Education Science Research
Institute, Private Education Research Office. Mr. He began to engage in
vocational education and established Changsha Huanqiu Vocational Education Group
in 1994. He was received by state leaders Jia Qinglin, Han Qide and so on due to
his outstanding school's achievements. He was awarded the "Expert Enjoying
Special Government Allowance", the "Advanced Individual of National Vocational
Education", the "News Figure of National Private Education", the "National
Excellent Migrant Workers in Cities", the "Candidate for Hunan New Century 121
Human Talents Engineering", one of the "Ten Outstanding Young Persons of
Changsha City" by the government successively. He was invited to present the
first Boao Forum for Asia in 2002 and was invited to participate in the first
Forum for Chinese Education Innovation in 2003. He has written 20 papers about
vocational education series, compiled 8 suits of school teaching materials and
composited 6 works such as THE ORDER EDUCATION and VOCATIONAL EDUCATION SCHOOL
THEORY EXPLORATION AND PRACTICE. More than 10 news media such as CCTV, People's
Daily, Guangming Daily, China Education News, Hong Kong's Wen Wei Po and so on
has reported his great deeds which have been incorporated into the "Who's Who in
the World".
YUNJIE FANG, Mr. Fang became a director and our Chief Financial Officer on
February 11, 2010. Fang Yunjie has worked as CFO at Hunan Oya Education
Technology Co., Ltd and Global Education International Limited since September
2008. He was born on July 26, 1965 in Dianbai, Guangdong. He received his
Bachelor degree of Accounting from Zhongnan University of Economics and Law in
1989. He has great experience in accounting and financial management, as well as
strategic investment management of the public companies. He is Chinese Certified
Tax Agent and Senior Accountant. During the past decade, he worked as Financial
Manager in several large enterprises. From January 2001 to January 2002, he
worked as CFO at Dongguan Yellow River Furniture Industry Corp., Ltd. From
January 2002 to August 2002, he was transferred to Yitelu Fashion (Hong Kong)
Corp., Ltd as CFO. He worked as CFO in Cosun Group from September 2002 to August
2008.
YABIN ZHONG, Ms. Zhong is the Spouse of Mr. Guangwen He. Ms. Zhong became a
director of the Company on February 11, 2010. Ms. Zhong was born on August 28,
1966 in Ningxiang, Hunan. She graduated with Jinan University with Junior
College degree in Accounting. She began to work in Changsha Huanqiu Vocational
Secondary School after resigning the former work in 1994. She is the
vice-principal of Changsha Huanqiu at present. During these years, she has made
great contribution to the development of school education and teaching systems.
JUNMING PENG, Mr. Peng became an independent director of the Company on February
11, 2010. Mr. Peng,was born on Dec. 23, 1948 in Shaoyang, Hunan. He received his
Associate degree of automobile from Changsha Communications College. From Dec.
1968 to 1978, he worked as a teacher at Changsha Traffic College. From 1979 to
1998, he was transferred to the United Front Work Department of Changsha
Municipal Committee of CCP as the deputy chief and later as section chief. He
was appointed vice-chairman and later chairman to Scientific Technology
Committee of CPPCC of Changsha City from 1999 to February 2008 and retired in
April 2008.
SHAOZENG WANG, Mr. Wang became an independent director of the Company on
February 11, 2010. Mr. Wang was born in May 1943 in Changsha, Hunan. He
graduated from Department of Physics of Hunan Normal University in 1965. He once
successively served as high school teacher, dean of students and high school
principal. Since 1987, he successively took the post as the section chief of
Secondary Education Department of Changsha Education Bureau, the chairman of the
Secondary School Admissions Office of Changsha Education Bureau and educational
inspector of Education Inspection Office of Changsha Municipal Government. He
was also appointed as the educational inspector of provincial government and
commended and awarded by municipal recognition several times. He retired in
2003.
ERIK VONK, Mr. Vonk has acted as the independent director of the Company since
February 11, 2010. From 2002 to 2007 he was Chairman and CEO of Gevity HR, a
NASDAQ listed Company. Previously, he was President and CEO of Randstad North
America and a Member of the Group Executive Board of Randstad NV, the world's
third largest staffing company. This followed 14 years in international banking
where he began his career. Mr. Vonk earned an undergraduate degree in Holland
and holds an MBA from Golden Gate University, San Francisco (1984).
50
All of our directors hold their positions on the Board until our next annual
meeting of the shareholders and until their successors have been qualified after
being elected or appointed. Officers serve at the discretion of the Board.
BOARD COMPOSITION AND COMMITTEES
We believe that the members of the Board are collectively capable of analyzing
and evaluating our financial statements and understanding internal controls and
procedures for financial reporting.
A majority of our directors are independent directors. Our Board determines
whether a director is independent through a broad consideration of facts and
circumstances, including an assessment of the materiality of any relation
between us. Our board believes that our independent directors satisfy the
criteria for independence.
We appointed Junming Peng, Shaozeng Wang and Erik Vonk as members of the Audit,
Nominating, and Compensation Committees.
AUDIT COMMITTEE
Our audit committee initially consists of Erik Vonk and Shaozeng Wang. Erik Vonk
is the chairman of our audit committee. The audit committee will oversee our
accounting and financial reporting processes and the audits of the financial
statements of our company.
COMPENSATION COMMITTEE
Our compensation committee initially consists of Junming Peng and Erik Vonk.
Junming Peng is the chairman of our compensation committee initially. Members of
the compensation committee will not be prohibited from direct involvement in
determining their own compensation.
NOMINATING COMMITTEE
Our nominating committee initially consists of Junming Peng and Shaozeng Wang.
Shaozeng Wang is the chairman of our corporate governance and nominating
committee. The nominating committee will assist the Board in identifying
individuals qualified to become our directors and in determining the composition
of the board and its committees.
DIRECTOR COMPENSATION
As of the date of this report, our directors have received no compensation for
their service on the board of directors. We do reimburse our directors for
reasonable travel expenses related to attendance at board of director meetings.
FAMILY RELATIONSHIPS
Ms. Yabin Zhong is the spouse of Mr. Guangwen He. There are no other family
relationships among our directors or officers.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
The following is a discussion of our program for compensating our named
executive officers and director. Our compensation committee will be responsible
for determining the compensation of our named executive officers.
Our Compensation Committee will consider a variety of factors in determining
compensation of executives, including their particular background and
circumstances, such as their training and prior relevant work experience, their
success in attracting and retaining savvy and technically proficient managers
and employees, increasing our revenues, broadening our product line offerings,
managing our costs and otherwise helping to lead our company through a period of
rapid growth.
51
STOCK-BASED AWARDS UNDER THE EQUITY INCENTIVE PLAN.
Historically, we have not granted equity awards as a component of compensation,
and we presently do not have an equity-based incentive program. In the future,
we will likely adopt and establish an equity incentive plan pursuant to which
equity awards may be granted to eligible employees, including each of our named
executive officers, if our compensation committee determines that it is in the
best interest of the Company and our stockholders to do so.
RETIREMENT BENEFITS
Currently, we do not provide any company sponsored retirement benefits to any
employee, including the named executive officers.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the following persons for services
performed for us and our subsidiaries during 2009 in all capacities. No
executive officers received compensation of $100,000 or more in 2009.
Annual Compensation Long Term Compensation
--------------------------------------- --------------------------------------
Awards Payouts
------------------------- ----------
Name and Other Restricted Securities
Principal Annual Stock Underlying LTIP All Other
Position Year Salary($) Bonus($) Compensation($) Award(s)($) Options/SARs Payouts($) Compensation($)
-------- ---- --------- -------- --------------- ----------- ------------ ---------- ---------------
Nan E. Weaver 2009 0 0 0 0 0 0 0
former
Director, CEO,
CFO and
secretary (1)
Yi Chen 2009 0 0 0 0 0 0 0
Former Director,
CEO, CFO and
secretary (2)
Guangwen He (3) 2009 0 0 0 0 0 0 0
Chairman,
CEO,
President and
Secretary,
Yunjie Fang (4) 2009 0 0 0 0 0 0 0
CFO and
Treasurer
----------
(1) Ms. Nan E. Weaver served as our Director, CEO, CFO, president, treasurer
and secretary from February 22, 2008 (inception) until her resignation on
December 4, 2009.
(2) Mr. Yi Chen served as our Director, CEO, CFO and secretary from December 4,
2009 until his resignation on February 11, 2010.
52
(3) Mr. Guangwen He became our Chief Executive Officer and Chairman of the
Board on February 11, 2010.
(4) Mr. Yunjie Fang became our Chief Financial Officer on February 11, 2010.
The following is a summary of the compensation paid by Oya and/or Changsha
Huanqiu to Guangwen He, Yabin Zhong and Yunjie Fang for the twelve months period
ended August 31, 2009 and 2008, respectively. No executive officer of WFOE, Oya,
Changsha Huanqiu or Shaoshan Huanqiu received compensation in excess of $100,000
for any of those years.
Annual Compensation Long Term Compensation
--------------------------------------- --------------------------------------
Awards Payouts
------------------------- ----------
Name and Other Restricted Securities
Principal Annual Stock Underlying LTIP All Other
Position Year Salary($) Bonus($) Compensation($) Award(s)($) Options/SARs Payouts($) Compensation($)
-------- ---- --------- -------- --------------- ----------- ------------ ---------- ---------------
Guangwen He(1) 2007.9.1- 3,632 0 322 0 0 0 3,944
(Chief 2008.8.31
Executive 2008.9.1- 70,015 0 278 0 0 0 70,293
Officer) 2009.8.31
Yabin Zhong(2) 2007.9.1- 3,632 0 322 0 0 0 3,944
(Director) 2008.8.31
2008.9.1- 33,358 0 278 0 0 0 33,636
2009.8.31
Yunjie Fang(3) 2009.9.1- 55,456 0 279 0 0 0 55,735
(Chief 2009.8.31
Financial
Officer)
----------
(1) Mr. Guangwen He served as the WFOE's CEO on October 1, 2009.
(2) Ms. Yabin Zhong served as a director of WFOE on October 1, 2009.
(3) Mr. Yunjie Fang served as the WFOE' CFO on October 1, 2009.
BONUSES AND DEFERRED COMPENSATION
We do not have any bonus, deferred compensation or retirement plan. All
decisions regarding compensation are determined by our compensation committee.
STOCK OPTION AND STOCK APPRECIATION RIGHTS
We do not currently have a stock option plan or stock appreciation rights plan.
No stock options or stock appreciation rights were awarded during the period
ended November 30, 2009 and for the fiscal year ended February 28, 2009.
EMPLOYMENT AGREEMENTS
Our Chinese subsidiary has employment agreements with the following executive
officers and directors:
MR. GUANGWEN HE - Mr. He's employment agreement with WFOE became effective as of
October 1, 2009. The employment agreement has a term of ten years.
MR. YUNJIE FANG - Mr. Fang's employment agreement with WFOE became effective as
of October 1, 2009. The employment agreement has a term of five years.
MS. YABIN ZHONG - Ms. Zhong's employment agreement with WFOE became effective as
of October 1, 2009. The employment agreement has a term of ten years.
53
Each of the employment agreements provide that the executives will be provided
cash compensation. The employment agreements do not provide any change in
control or severance benefits to the executives, and we do not have any separate
change-in-control agreements with any of our executive officers.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
At the present time, there is no pending litigation or proceeding involving a
director, officer, employee or other distributor of ours in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification. Our Certificate of Incorporation, as amended, provides for the
indemnification of any and all persons whom it shall have power to indemnify
under the Delaware General Corporation Law from and against any and all of the
expenses, liabilities, or other matters referred to in or covered by such law.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the ownership of the Company's securities, and except as set forth
below, none of the directors, executive officers, holders of more than five
percent of the Company's outstanding common stock, or any member of the
immediate family of any such person have, to the knowledge of the Company, had a
material interest, direct or indirect, in any transaction or proposed
transaction which may materially affect the Company.
On March 1, 2004, Changsha Huanqiu signed an Entrustment Agreement on Land and
Real Properties with Guangwen He, Yabin Zhong and Binshan Company. The agreement
stipulates that Changsha Huanqiu will from time to time authorize Guangwen He,
Yabin Zhong and Binshan Company to invest in lands and properties in their names
using funds from Changsha Huanqiu for the interest of Changsha Huanqiu, that
Changsha Huanqiu holds all the rights to these properties, that upon Changsha
Huanqiu's request, Guangwen He, Yabin Zhong and Binshan Company shall cause
relevant authorities to register these properties in the name of Changsha
Huanqiu, and that Guangwen He, Yabin Zhong and Binshan Company shall have no
right to dispose or encumber these properties.
As of November 30, 2009, Changsha Huanqiu, Shaoshan Huanqiu, Shaoyang Vocational
School and Oya had receivables from Shenzhen Linghai International Cargo Agent
Co., Ltd. ("Shenzhen Linghai"). Shenzhen Linghai is owned by Ms. Juanjuan Zhong,
sister of Yanbin Zhong. All the loans provided to Shenzhen Linghai are unsecured
and bear no interest, and had no fixed payment date.
AGREEMENTS AMONG WFOE, OYA AND ITS SHAREHOLDERS
See "Contractual Arrangements between WFOE, Oya and Its Shareholders".
AGREEMENTS BETWEEN OYA AND CHANGSHA HUANQIU/SHAOSHAN HUANQIU
See "Contractual Arrangements for the Operation of Two Private Vocational
Schools"
Our board of directors is charged with reviewing and approving all potential
related party transactions. All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 140,000,000 shares, consisting of 100,000,000
shares of common stock, par value $0.0001 per share ("Common Stock") and
40,000,000 shares of preferred stock, par value $0.001 per share ("Preferred
Stock").
Each share of common stock entitles the holder thereof to one vote. Directors
shall be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
54
The holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our Board. Should we decide in the
future to pay dividends, as a holding company, our ability to do so and meet
other obligations depends upon the receipt of dividends or other payments from
our operating subsidiaries and other holdings and investments. In addition, our
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. In the event of our liquidation, dissolution or winding
up, holders of our common stock are entitled to receive, ratably, the net assets
available to stockholders after payment of all creditors.
All of the issued and outstanding shares of our common stock are duly
authorized, validly issued, fully paid and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders will be diluted.
PREFERRED STOCK
We are authorized to issue 40,000,000 shares of preferred stock, par value
$0.001 per share. We may issue shares of preferred stock in one or more classes
or series within a class as may be designated by our board of directors, who may
establish the number of shares to be included in each class or series, may fix
the designations, rights, preferences or other variations of each class or
series within each class of the shares of preferred stock. Any preferred stock
so issued may rank senior to the common stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up of the Company,
or both. Moreover, under certain circumstances, the issuance of preferred stock
or the existence of the un-issued preferred stock might tend to discourage or
render more difficult a merger or other change in control.
WARRANTS
We have not issued any warrants.
TRANSFER AGENT AND REGISTRAR
Our independent stock transfer agent is Signature Stock Transfer, Inc. Their
mailing address is 2632 Coachlight Court, Plano, TX 75093. Their phone number is
(972) 612-4120.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Reference is made to the disclosure set forth under Item 4.01 of this report,
which disclosure is incorporated herein by reference.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 11, 2008, our common stock was listing for trading on the Over the
Counter Bulletin Board under the symbol "GSTR.OB". There has been no trading of
our securities, and, therefore, no high and low bid pricing.
REPORTS TO STOCKHOLDERS
We plan to furnish our stockholders with an annual report for each fiscal year
ending February 28 or February 29 containing financial statements audited by our
independent certified public accountants. We intend to comply with the periodic
reporting requirements of the Exchange Act.
APPROXIMATE NUMBER OF HOLDERS OF OUR COMMON STOCK
On February 11, 2010, there are 33 stockholders of record of our common stock.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of the common
stock have no preemptive rights and no right to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock.
55
DIVIDENDS
We have not paid dividends on our common stock. Any future decisions regarding
dividends will be made by our board of directors. We will rely on dividends from
our Chinese Subsidiaries for our funds and PRC regulations may limit the amount
of funds distributed to us from Chinese Subsidiaries, which will affect our
ability to declare any dividends.
We currently intend to retain and use any future earnings for the development
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
PENNY STOCK REGULATIONS
Our shares of common stock are subject to the "penny stock" rules of the
Securities Exchange Act of 1934 and various rules under this Act. In general
terms, "penny stock" is defined as any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rules provide that
any equity security is considered to be a penny stock unless that security is
registered and traded on a national securities exchange meeting specified
criteria set by the SEC, issued by a registered investment company, and excluded
from the definition on the basis of price (at least $5.00 per share), or based
on the issuer's net tangible assets or revenues. In the last case, the issuer's
net tangible assets must exceed $3,000,000 if in continuous operation for at
least three years or $5,000,000 if in operation for less than three years, or
the issuer's average revenues for each of the past three years must exceed
$6,000,000.
Trading in shares of penny stock is subject to additional sales practice
requirements for broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 (or $300,000 together with their spouse), and certain
institutional investors. For transactions covered by these rules, broker-dealers
must make a special suitability determination for the purchase of the security
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
RESENT SALE OF UNREGISTERED SECURITIES
Reference is made to the disclosure set forth under Item 3.02 of this report,
which disclosure is incorporated by reference into this section.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES
On February 11, 2010, we consummated the transactions contemplated under the
Share Exchange Agreement with the stockholder of the issued and outstanding
capital stock of Risetime. Pursuant to the Share Exchange Agreement, we acquired
100% of the outstanding capital stock of Risetime in exchange for 20,500,000
shares of our newly issued common stock, par value $.0001 per share,
constituting approximately 62.12% of the issued and outstanding capital stock of
the Company. As a result of this transaction, Nicestar International Limited, a
British Virgin Islands company, became the beneficial owner of approximately
62.12% of our outstanding capital stock.
On November 28, 2009, one former shareholder entered into three Stock Purchase
Agreements with certain purchasers, pursuant to which, such shareholder agreed
to sell 7,500,000 restricted shares of common stock of the Company. We reported
the consummation of the stock purchase in the Form 8-K filed with the Securities
and Exchange Commission on December 8, 2009 and the Stock Purchase Agreements
were included as an exhibit to such report.
On July 22, 2008, we sold 1,000,000 shares of common stock to 30 investors for
$.025 per share pursuant to our S-1 registration statement for $25,000.
56
ITEM 4.01 CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
(a) Dismissal of Previous Independent Registered Public Accounting Firm
On February 8, 2010, we dismissed George Stewart, CPA as our independent
auditor, effective on February 8, 2010. A copy of the letter from George
Stewart, CPA addressed to the SEC will be also filed as Exhibit 16.2.
George Stewart, CPA's reports on the Company's financial statements as of and
for the fiscal year ended February 28, 2009, and for the periods ended May 30,
2009, August 31, 2009 and Novmeber 30, 2009 did not contain an adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles.
During our recent fiscal year and from March 1, 2009 to the date of this report,
there were no disagreements with George Stewart, CPA on any matter of accounting
principles or practices, financial disclosure, or auditing scope or procedure.
There were no reportable events, as described in Item 304(a)(1)(v) of Regulation
S-K, during our recent fiscal year and from March 1, 2009 to the date of this
report.
(b) Engagement of New Independent Registered Public Accounting Firm
On February 8, 2010, concurrent with the decision to dismiss George Stewart, CPA
as our independent auditor, our board elected to appoint Friedman LLP as our
independent auditor.
During the fiscal year ended February 28, 2009 and from March 1, 2009 to the
date of this report, neither the Company nor anyone acting on its behalf
consulted Friedman LLP.with respect to (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements,
and neither a written report was provided to the Company or oral advice was
provided that Friedman LLP concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was the subject of a disagreement or
reportable events set forth in Item 304(a)(1)(iv) and (v), respectively, of
Regulation S-K.
Prior to engaging Friedman LLP, they did not provide our company with either
written or oral advice that was an important factor considered by our company in
reaching a decision to change our independent registered public accounting firm
from George Stewart, CPA to Friedman LLP.
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT
Reference is made to the disclosure set forth under Item 2.01 of this report,
which disclosure is incorporated herein by reference. On February 11, 2010, we
consummated the reverse acquisition with Risetime Group Limited and the former
shareholder of Risetime, through which the shareholder of Risetime delivered to
us all the issued and outstanding shares of stock of Risetime. As merger
consideration for the Risetime shares, we issued and delivered 20,500,000 shares
of Common Stock to Nicestar International Limited.
Prior to the closing of the reverse acquisition, we were authorized to issue
100,000,000 shares of Common Stock, of which 12,500,000 shares of Common Stock
were issued and outstanding, and 40,000,000 shares of preferred stock, of which
none was issued and outstanding. As a result of the reverse acquisition,
Nicestar became our majority shareholder. Mr. Siu Choi Fat, is the controlling
stockholder of Nicestar.
In connection with this change in control, and as explained more fully in Item
2.01 above and in Item 5.02 below, effective on February 11, 2010, Yi Chen
resigned as our Chief Executive Officer. Concurrently, Guangwen He was appointed
as our Chief Executive Officer.
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF
CERTAIN OFFICERS
Upon the closing of the reverse acquisition, as of February 11, 2010, Mr. Yi
Chen, our sole director, submitted his resignation letter pursuant to which he
resigned from all offices of the Company that he holds and from his position as
our director effective immediately. The resignation of Mr. Chen is not in
57
connection with any known disagreement with us on any matter. Mr. Guangwen He
was appointed to the Board at the closing time of the reverse acquisition.
A copy of this report has been provided to Mr. Yi Chen. Mr. Chen has been
provided with the opportunity to furnish us as promptly as possible with a
letter addressed to us stating whether he agrees with the statements made by us
in this report, and if not, stating the respects in which he does not agree. No
such letter has been received by us.
On February 11, 2010, in connection with the closing of the reverse acquisition,
Mr. Guangwen He was appointed as our Chief Executive Officer, President and
Secretary. Mr. Yunjie Fang was appointed as Chief Financial Officer and
Treasurer.
For certain biographical and other information regarding the newly appointed
officers and directors, see the disclosure under Item 2.01 of this report, which
disclosure is incorporated herein by reference.
ITEM 5.03 AMENDMENT TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR
On February 8, 2010, our board approved to adopt the Amended and Restated
Certificate of Incorporation to change our name to "HQ Global Education Inc.".
We will file the Amended and Restated Certificate of Incorporation to the
Secretary of State of Delaware and will notify the Financial Industry Regulatory
Authority ("FINRA") of the reverse acquisition and the name change. The name
change will take effect in the market upon its approval by FINRA. Once FINRA
processes the name change, we will be issued a new symbol and will disclose the
change on a Current Report on Form 8-K.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS
As explained more fully in Item 2.01 above, we were a "shell company" (as such
term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended) immediately before the closing of the reverse acquisition. As a result
of the reverse acquisition, Risetime became our wholly owned subsidiary and main
operating business.
ITEM 8.01 OTHER EVENTS
On February 12, 2010, we issued the press release annexed hereto as Exhibit
99.1.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Filed herewith are consolidated financial statements of Hunan Oya Education
Technology Co., Ltd. for the fiscal years ended August 31, 2009, and 2008 and
unaudited consolidated financial statements of Risetime Group Limited as for the
three months ended November 30, 2009 and 2008.
(b) Pro forma financial information
Filed herewith is the unaudited pro forma condensed consolidated financial
information concerning the acquisition of the business operations of Risetime
Group Limited.
(c) Exhibits
2.1 Share Exchange Agreement, dated as of February 8, 2010 among the
Company, Nicestar International Limited and Risetime Group Limited
3.1 Certificate of Incorporation*
3.2 Certificate of Amendment of Certificate of Incorporation**
58
3.3 Amended and Restated Certificate of Incorporation
3.4 Bylaws*
10.1 Exclusive Business Cooperation Agreement dated November 28, 2009
10.2 Loan Agreements dated November 28, 2009
10.3 Proxy Letters dated November 28, 2009
10.4 Exclusive Purchase Option Agreements dated November 28, 2009
10.5 Equity Pledge Agreements dated November 28, 2009
10.6 Business Cooperation Agreement between Oya and Shaoshan Huanqiu
Vocational Secondary School dated July 28, 2009
10.7 Joint School-Running Agreement with respect to Shimian Vocational
School dated January 23, 2006
10.8 Loan Agreement, dated March 20, 2009, by and between Oya and Changsha
Education Foundation
10.9 Employment Agreement, dated October 1, 2009, by and between Xiangtan
Nicestar Business Administration Co., Ltd. and Guangwen He
10.10 Employment Agreement, dated October 1, 2009, by and between Xiangtan
Nicestar Business Administration Co., Ltd. and Yunjie Fang
10.11 Employment Agreement, dated October 1, 2009, by and between Xiangtan
Nicestar Business Administration Co., Ltd. and Yabin Zhong
10.12 Cooperation Agreement, dated September 5, 2007, by and between Fujinon
(Shenzhen) Technologies Co., Ltd. and Changsha Huanqiu Vocational
Secondary School
10.13 Business-Living Building Lease Contract, dated May 19th, 2009 by and
between Oya and Biaozhi Estates Management Co., Ltd.
16.1 Letter from the Company to George Stewart, CPA, dated as of February 8,
2010
16.2 Letter from George Stewart, CPA to the SEC
21.1 List of Subsidiaries
99.1 Press Release of the Company issued on February 12, 2010
----------
* Incorporated by reference to the exhibit of the same number to our
registration statement on Form S-1 filed with the SEC on April 23, 2008.
** Incorporated by reference to our Form 8-K filed with the SEC on January 14,
2010.
59
SIGNATURES
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 hereunto duly authorized.
Date: February 12, 2010
Green Star Mining Corp.
By: /s/ Guangwen He
---------------------------------------
Guangwen He
Chief Executive Officer
60
Green Star Mining Corp.
Pro Forma Condensed Consolidated Financial Statements
Index to Pro Forma Condensed Consolidated Financial Statements Page
----
Introduction to Unaudited Pro Forma Condensed Consolidated
Financial Statements F-2
Pro Forma Condensed Consolidated Balance Sheet as at
November 30, 2009 (Unaudited) F-4
Pro Forma Condensed Consolidated Statements of Operations for
the Year Ended February 28, 2009 (Unaudited) F-5
Pro Forma Condensed Consolidated Statements of Operations for
the Nine Month Ended November 30, 2009 (Unaudited) F-6
Notes to Condensed Consolidated Pro Forma Financial Statements (Unaudited) F-7
F-1
Green Star Mining Corp.
Introduction to Pro Forma Condensed Consolidated Financial Statements
(stated in US Dollars)
On February 8, 2010, Green Star Mining Corp., a corporation formed under the
laws of the State of Delaware ("GSTR" or the "Company") entered into a Share
Exchange Agreement with Risetime Group Limited ("Risetime"), a British Virgin
Islands business company, and its sole shareholder, Nicestar International
Limited ("Nicestar"), a British Virgin Islands company.
Pursuant to the Share Exchange Agreement, Nicestar shall transfer and assign to
GSTR all of its issued and outstanding shares of the capital stock of Risetime,
in exchange for 20,500,000 newly issued shares of GSTR's common stock, $0.0001
par value, (the "Share Exchange"), representing, in the aggregate, 62.12% of our
issued and outstanding capital stock as of and immediately after the
consummation of the transactions contemplated by the Share Exchange Agreement.
As a result of this Share Exchange, Risetime will become a wholly-owned
subsidiary of GSTR.
In connection with the change of control contemplated by the Share Exchange, Mr.
Yi Chen, the sole director and officer of GSTR, will be resigning from his
positions at the closing of the reverse acquisition of Risetime. Simultaneously,
five new directors will be appointed, including three independent directors. Mr.
Guangwen He will be appointed as GSTR's Chief Executive Officer and Chairman of
the Board.
The transaction will be accounted for as a reverse merger under the purchase
method of accounting since there was a change of control. Accordingly, Risetime
will be treated as the continuing entity for accounting purposes.
The accompanying unaudited pro forma condensed consolidated balance sheet has
been presented with consolidated subsidiaries at November 30, 2009. The
unaudited pro forma condensed consolidated statement of operations for the nine
months ended November 30, 2009 and for the year ended February 28, 2009 has been
presented as if the share exchange had occurred on March 1, 2008. The unaudited
pro forma condensed consolidated financial statements do not necessarily
represent the actual results that would have been achieved had the companies
been combined at the beginning of the year, nor may they be indicative of future
operations. These unaudited pro forma condensed consolidated financial
statements should be read in conjunction with the companies' respective
historical financial statements and notes included thereto.
F-2
Green Star Mining Corp.
Pro Forma Condensed Consolidated Balance Sheets
As of November 30, 2009
As of November 30, 2009
----------------------------
The Pro Forma Pro Forma
Company Risetime Adjustments Combined Total
----------- ----------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 1,913 $ 5,609,399 (1,913) $ 5,609,399
Accounts receivable -- 8,219,776 8,219,776
Other receivables -- 55,493 55,493
Due from related party -- 1,569,872 1,569,872
Inventories -- 53,218 53,218
Advances for construction -- 3,652,476 3,652,476
--------- ----------- -----------
Total current assets 1,913 19,160,234 19,160,234
PROPERTY AND EQUIPMENT, NET -- 18,105,156 18,105,156
INTANGIBLE ASSETS, NET -- 1,032,244 1,032,244
--------- ----------- -----------
TOTAL ASSETS $ 1,913 $38,297,634 $38,297,634
========= =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term Loans $ -- $ 732,372 $ 732,372
Long term loans- current portion -- 336,891 336,891
Accounts payable -- 1,198,736 1,198,736
Due to shareholder -- -- --
Taxes payable -- 29,368 29,368
Payroll Payable -- 434,109 434,109
Advances from customers -- 3,357,521 3,357,521
Other payables and accrued liabilities -- 1,016,969 1,016,969
--------- ----------- -----------
Total current liabilities -- 7,105,966 7,105,966
LONG TERM LOANS -- 637,164 637,164
--------- ----------- -----------
TOTAL LIABILITIES -- 7,743,130 7,743,130
--------- ----------- -----------
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $0.0001 par value 100,000,000 shares authorized, 1,250 1 2,049 b 3,300
33,000,000 shares issued and outstanding at November 30, 2009
Additional paid-in capital 38,750 1,229,973 (42,049) a,b 1,226,674
Accumulated other comprehensive income -- 1,686,389 1,686,389
Statutory reserve -- 7,840,314 7,840,314
Retained earnings (38,087) 19,797,827 38,087 a,b 19,797,827
--------- ----------- -----------
Total shareholders' equity 1,913 30,554,504 30,554,504
--------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,913 $38,297,634 $38,297,634
========= =========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements
F-3
Green Star Mining Corp.
Pro Forma Condensed Consolidated Statements of Operations
For the Year Ended February 28, 2009
For the year ended
February 28, 2009
------------------------------ Pro Forma Pro Forma
The Company Risetime Adjustments Combined Total
----------- ----------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ -- $ 34,936,967 $ 34,936,967
Cost of revenue -- (22,456,307) (22,456,307)
------------ ------------ ------------
Gross profit -- 12,480,660 12,480,660
Selling expenses (737,306) (737,306)
General and administrative expenses 12,687 (1,433,913) (12,687) a (1,433,913)
------------ ------------ ------------
Income from operations 12,687 10,309,441 10,309,441
Other expenses
Interest income (expenses) -- (68,581) (68,581)
Other expenses -- (50,938) (50,938)
------------ ------------ ------------
Total other expenses -- (119,519) (119,519)
------------ ------------ ------------
Income before income taxes 12,687 10,189,922 10,189,922
Provision for income taxes -- --
------------ ------------ ------------
Net income 12,687 10,189,922 10,189,922
------------ ------------ ------------
Other comprehensive item
Foreign currency translation gain -- 724,106 724,106
------------ ------------ ------------
Comprehensive Income $ 12,687 $ 10,914,028 $ 10,914,028
============ ============ ============
Basic and diluted income per common share $ 0.00 $10,189,922.00 (10,189,922) b $ 0.33
============ ============ ============
Basic and diluted weighted average common
shares outstanding 31,041,096 1 31,041,096
============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
F-4
Green Star Mining Corp.
Pro Forma Condensed Consolidated Statements of Operations
For the Nine Months Ended November 30, 2009
Nine months ended
November 30, 2009
------------------------------ Pro Forma Pro Forma
The Company Risetime Adjustments Combined Total
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ -- $ 27,472,271 $ 27,472,271
Cost of revenue -- (17,624,670) (17,624,670)
------------ ------------ ------------
Gross profit -- 9,847,601 9,847,601
Selling expenses (430,421) (430,421)
General and administrative expenses 16,400 (1,380,221) (16,400) a (1,380,221)
------------ ------------ ------------
Income from operations 16,400 8,036,959 8,036,959
Other expenses
Interest income (expenses) -- (75,701) (75,701)
Other expenses -- (1,007,490) (1,007,490)
------------ ------------ ------------
Total other expenses -- (1,083,191)
------------ ------------ ------------
Income before income taxes 16,400 6,953,768 8,036,959
Provision for income taxes -- --
------------ ------------ ------------
Net income 16,400 6,953,768 8,036,959
------------ ------------ ------------
Other comprehensive item
Foreign currency translation gain -- 49,366 49,366
------------ ------------ ------------
Comprehensive Income $ 16,400 $ 7,003,134 $ 8,086,325
============ ============ ============
Basic and diluted income per common share $ 0.00 $6,953,768.00 (6,953,767.76) b $ 0.24
============ ============ ============
Basic and diluted weighted average common
shares outstanding 33,000,000 1 33,000,000
============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
F-5
Green Star Mining Corp.
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
The following unaudited pro forma adjustments are included in the accompanying
unaudited pro forma condensed consolidated balance sheet as of November 30, 2009
and the unaudited pro forma condensed consolidated statement of operations for
the nine months ended November 30, 2009 and for the year ended February 28, 2009
to reflect the Share Exchange between GSTR and Risetime:
a. To record the spin-off of the Shell Company's (GSTR) assets and liabilities
prior to the Share Exchange;
b. These adjustments reflect the recapitalization as a result of the
transactions related to the Share Exchange.
F-6
Risetime Group Limited
Consolidated Financial Statements
(Stated in US dollars)
Contents Page
-------- ----
November 30, 2009 And 2008 (Unaudited)
Consolidated Balance Sheets F-8
Consolidated Statements of Income F-9
Consolidated Statement of Stockholders' Equity F-10
Consolidated Statement of Cash Flows F-11
Notes to Consolidated Financial Statements F-12
F-7
Risetime Group Limited
Consolidated Balance Sheet
As of November 30, 2009 and 2008
November 30, August 31,
2009 2009
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 5,609,399 $ 3,848,040
Accounts receivable, net of allowance of $55,836 as of
November 30, 2009 and August 31, 2009, respectively 8,219,776 5,713,491
Other receivables 55,493 2,203
Due from related party 1,569,872 2,447,482
Inventory 53,218 1,504,764
Advances to vendors 3,652,476 2,375,364
----------- -----------
Total current assets 19,160,234 15,891,344
PROPERTY AND EQUIPMENT, NET 18,105,156 14,862,590
INTANGIBLE ASSETS, NET 1,032,244 477,339
----------- -----------
TOTAL ASSETS $38,297,634 $31,231,273
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $ 732,372 $ 732,002
Long term loans - current portion 336,891 629,522
Accounts payable 1,198,736 1,327,622
Taxes payable 29,368 20,580
Payroll payable 434,109 241,477
Unearned revenues 3,357,521 8,275
Other payables and accrued liabilities 1,016,969 902,725
----------- -----------
Total current liabilities 7,105,966 3,862,203
LONG TERM LOANS 637,164 402,601
----------- -----------
TOTAL LIABILITIES 7,743,130 4,264,804
----------- -----------
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 50,000 shares authorized, 1 share issued 1 1
and outstanding as of November 30, 2009 and August 31, 2009
Additional paid-in capital 1,229,973 1,229,973
Accumulated other comprehensive income 1,686,389 1,672,524
Statutory reserve 7,840,314 6,946,771
Retained earnings 19,797,827 17,117,200
----------- -----------
Total shareholders' equity 30,554,504 26,966,469
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $38,297,634 $31,231,273
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-8
Risetime Group Limited
Consolidated Statement of Income
For The Three Months Ended November 30, 2009 and 2008
For the three months ended
November 30,
2009 2008
------------ ------------
(Unaudited) (Unaudited)
Revenues $ 13,009,078 $ 11,713,701
Cost of revenue (7,858,492) (7,425,138)
------------ ------------
Gross profit 5,150,586 4,288,563
Selling expenses (136,094) (197,099)
General and administrative expenses (451,564) (426,797)
------------ ------------
Income from operations 4,562,928 3,664,667
Other expenses
Interest expense (19,361) (18,868)
Other expenses (969,397) (7,451)
------------ ------------
Total other expenses (988,758) (26,319)
------------ ------------
Income before income taxes 3,574,170 3,638,348
Provision for income taxes -- --
------------ ------------
Net income 3,574,170 3,638,348
------------ ------------
Other comprehensive item
Foreign currency translation gain 13,865 42,466
------------ ------------
Comprehensive Income $ 3,588,035 $ 3,680,814
============ ============
Basic and diluted income per common share $ 3,588,035 $ 3,638,348
============ ============
Basic and diluted weighted average common
shares outstanding 1 1
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-9
Risetime Group Limited
Consolidated Statements of Shareholders' Equity (Unaudited)
For The Three Months Ended November 30, 2009 and 2008
Additional Other
Common paid-in comprehensive Statutory Retained
stock capital income reserve earnings Total
----- ------- ------ ------- -------- -----
BALANCE AT AUGUST 31, 2008 $ 1 $ 352,010 $ 1,641,236 $ 4,279,977 $10,924,865 $17,198,089
Capital contribution 877,963 877,963
Net income for the period 3,638,348 3,638,348
Transfer to statutory reserves 909,587 (909,587) --
Foreign currency translation gain 42,466 42,466
------- ----------- ----------- ----------- ----------- -----------
BALANCE AT NOVEMBER 30, 2008 1 1,229,973 1,683,702 5,189,564 13,653,626 21,756,866
BALANCE AT AUGUST 31, 2009 1 1,229,973 1,672,524 6,946,771 17,117,200 26,966,469
Net income for the period 3,574,170 3,574,170
Transfer to statutory reserves 893,543 (893,543) --
Foreign currency translation gain 13,865 13,865
------- ----------- ----------- ----------- ----------- -----------
BALANCE AT NOVEMBER 30, 2009 $ 1 $ 1,229,973 $ 1,686,389 $ 7,840,314 $19,797,827 $30,554,504
======= =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-10
Risetime Group Limited
Consolidated Statements of Cash Flow
For The Three Months Ended November 30, 2009 and 2008
Three months ended November 30,
2009 2008
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,574,170 $ 3,638,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 391,099 392,018
Loss on disposal of property & equipment 969,397 --
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable (2,503,233) (1,262,559)
Other receivables (53,285) (116,079)
Inventories 1,452,210 981,739
Increase (decrease) in -
Accounts payables (129,549) (197,027)
Payroll payable 192,497 323,913
Taxes payable 8,777 2,186
Unearned revenues 3,349,022 3,329,708
Other payables and accrued liabilities 113,781 (61,105)
----------- -----------
Net cash provided by operating activities 7,364,886 7,031,142
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intangible assets (30,758) --
Acquisition of property & equipment (6,395,032) (257,637)
----------- -----------
Net cash used in investing activities (6,425,790) (257,637)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions -- 877,963
Repayment of long term loan (58,586) --
Proceeds from shareholder loans -- 634
Collection/repayments of related party loans 878,789 (1,371,565)
----------- -----------
Net cash provided by (used in) financing activities 820,203 (492,968)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS 2,060 13,385
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 1,761,359 6,293,922
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 3,848,040 3,328,231
----------- -----------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 5,609,399 $ 9,622,153
=========== ===========
Supplemental disclosures of cash flow information:
Income tax paid $ -- $ --
=========== ===========
Interest paid $ 27,155 $ 34,192
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-11
Risetime Group Limited
Notes to Consolidated Financial Statements (Unaudited)
For The Three Months Ended November 30, 2009 and 2008
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Risetime Group Limited ("Risetime" or "the Company") was incorporated in British
Virgin Islands as a BVI Business Company on December 17, 2007. On July 30, 2009,
the Company purchased 100% of the equity of Global Education International Ltd.
("GEI"), an investment holding company incorporated in Hong Kong on November 15,
2007. GEI owns 100% of the equity of Xiangtan Nicestar Business Administration
Co., Ltd. ("Xiangtan Nicestar"), a wholly foreign-owned entity incorporated in
Xiangtan City, Hunan Province, People's Republic of China on September 30, 2009
and is primarily engaged in providing business administration, planning and
consulting services.
Risetime and GEI have not carried on any substantive operations of their own.
Instead, Risetime and GEI, through their subsidiary, Xiangtan Nicestar, had
entered certain exclusive contractual agreements with Hunan Oya Education
Technology Co., Ltd. ("Oya"), a company incorporated in Changsha City, Hunan
Province, People's Republic of China in November 20, 2008. Oya is primarily
engaged in providing vocational education service and vocational skills training
service.
PRC law currently has limits on foreign ownership of companies. To comply with
these foreign ownership restrictions, on November 28, 2009, Xiangtan Nicestar
entered into certain exclusive agreements with Oya and its shareholders.
Pursuant to these agreements, Xiangtan Nicestar provides exclusive consulting
and other general business operation services to Oya in exchange for
substantially all net income of Oya. All voting rights of Oya are assigned to
Xiangtan Nicestar and Xiangtan Nicestar has the right to appoint all directors
and senior management personnel of Oya. In addition, Oya's shareholders have
pledged their equity interest in Oya to Xiangtan Nicestar as collateral for the
fees for consulting and other services due to Xiangtan Nicestar.
As a result of these contractual arrangements, which obligates Xiangtan Nicestar
to absorb a majority of the risk of loss from Oya's activities and enables
Xiangtan Nicestar to receive a majority of its expected residual returns,
Xiangtan Nicestar accounts for Oya as variable interest entities ("VIE") under
FASB Interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51". Accordingly, Xiangtan Nicestar
consolidates Oya's results, assets and liabilities.
On July 28, 2009, Oya entered into certain exclusive agreements with Changsha
Huanqiu Vocational Secondary School ("Changsha Huanqiu") and Shaoshan Huanqiu
Vocational Technical Secondary School ("Shaoshan Huanqiu") and their
shareholders. Pursuant to these agreements, Oya provides exclusive consulting
and other general business operation services to Changsha Huanqiu and Shaoshan
Huanqiu in exchange for substantially all net income of Changsha Huanqiu and
Shaoshan Huanqiu. Oya has the right to appoint all senior management personnel
of Changsha Huanqiu and Shaoshan Huanqiu.
As a result of these contractual arrangements, which obligates Oya to absorb a
majority of the risk of loss from Changsha Huanqiu and Shaoshan Huanqiu's
activities and enable Oya to receive a majority of its expected residual
returns, Oya accounts for Changsha Huanqiu and Shaoshan Huanqiu as variable
interest entities under FASB Interpretation No. 46R ("FIN 46R"), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51". Accordingly,
Oya consolidates Changsha Huanqiu and Shaoshan Huanqiu's results, assets and
liabilities.
The detailed information about the establishment of Changsha Huanqiu and
Shaoshan Huanqiu are as follows:
(a) Changsha Huanqiu Vocational Secondary School was established in Changsha,
Hunan Province as a privately-run school on August 8, 1994, by Mr. He
Guangwen with the registered capital of RMB 1,000,000, and was engaged in
provision of vocational education and vocational skill training services.
(b) Shaoshan Huanqiu Vocational Technical Secondary School was established in
Shaoshan, Hunan Province as a privately-run school on May 15, 2006, by Mr.
He Guangwen with the registered capital of RMB 500,000, and was also
engaged in provision of vocational education and vocational skill training
services.
F-12
As of November 30, 2009, Oya and its VIEs have been providing such services to
six public schools other than Changsha and Shaoshan campus, including Shaoyang
Industrial Vocational Technical School and Shaoshan Vocational Secondary School
in Hunan Province, Yingjing Vocational Secondary School, Tianquan Vocational
Secondary School, Lushan Vocational Secondary School and Shimian Vocational
Secondary School in Sichuan Province.
Since Oya, Changsha Huanqiu and Shaoshan Huanqiu are all under the control of
GEI and Xiangtan Nicestar, the consolidation of the Company has been accounted
for at historical cost and prepared on the basis as if the aforementioned
two-level exclusive contractual arrangements, first level between Xiangtan
Nicestar and Oya and the second level is between Oya and Changsha Huanqiu and
Shaoshan Huanqiu, had become effective as of the beginning of the first period
presented in the accompanying consolidated financial statements.
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP").
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes, and disclosure of contingent
liabilities at the date of the financial statements. Estimates are used for, but
not limited to, the selection of the useful lives and residual values of
property and equipment and intangible assets, provision necessary for contingent
liabilities, fair values, revenue recognition, budgeted costs and other similar
charges. Management believes that the estimates utilized in preparing its
financial statements are reasonable and prudent. Actual results could differ
from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company
maintains bank accounts in the PRC. Total cash at November 30, 2009 and August
31, 2009 amounted to $5,609,399 and $3,848,040, respectively, of which no
deposits are covered by insurance. The Company has not experienced any losses in
such accounts and management believes it is not exposed to any risks on its cash
in bank accounts.
ACCOUNTS RECEIVABLE
Accounts receivable consists of balances due from the enterprises for the
education services provided and due from China Overseas-Educated Scholars
Development Foundation for tuition revenues. Accounts receivable are recorded at
net realizable value consisting of the carrying amount less an allowance for
uncollectible amounts.
The Company does periodical reviews as to whether the carrying values of
accounts have become impaired. The assets are considered to be impaired if the
collectability of the balances become doubtful, accordingly, the management
estimates the valuation allowance for anticipated uncollectible receivable
balances. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. The Company determines that no allowance is
necessary for the three months ended November 30, 2009 and 2008. As of November
30, 2009 and August 31, 2009, the allowance for doubtful debts was $55,836.
ADVANCES TO VENDORS
Advances to vendors consist of balances paid for materials for construction of
classrooms and related teaching facilities that have not been provided to or
received by the Company. Advances to vendors are reviewed periodically to
determine whether their carrying value has become impaired. The Company
considers the assets to be impaired if the collectability of the services and
materials become doubtful. The Company determines that no reserve is necessary
for the three months ended November 30, 2009 and 2008.
F-13
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation and
any impairment losses. The cost of an asset comprises of its purchase price and
any directly attributable costs of bringing the asset to its working condition
and location for its intended use. Expenditure incurred after the fixed assets
have been put into operation, such as repairs and maintenance and overhaul
costs, is normally charged to the profit and loss account in the year in which
it is incurred.
In situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be obtained
from the use of the asset beyond its originally assessed standard of
performances, the expenditure is capitalized as an additional cost of the asset.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, less any estimated residual value. Estimated useful
lives of the assets are as follows:
Teaching and dormitory facilities 10-30 years
Educational equipments and books 5 years
Office equipments and other equipments 5 years
Automobiles 5 years
Any gain or loss on disposal or retirement of a fixed asset is recognized in the
profit and loss account and is the difference between the net sales proceeds and
the carrying amount of the relevant asset. When property and equipment are
retired or otherwise disposed of, the assets and accumulated depreciation are
removed from the accounts and the resulting profit or loss is reflected in
income.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions, renewals and betterments are capitalized.
CONSTRUCTION-IN-PROGRESS
The Company constructs certain of its property, plant and equipment. In addition
to cost under the construction contracts, external costs directly related to the
construction of such facilities, including equipment installation and shipping
costs, are capitalized. Depreciation is recorded at the time assets are placed
in service.
F-14
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets are land use rights, which are recorded at cost less
accumulated amortization. Amortization is provided on a straight-line basis over
the estimated useful lives, which is generally 50 years and represents the
shorter of the estimated usage periods or the terms of the agreements.
LONG-LIVED ASSETS
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", SFAS No. 144 requires long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
other assets, for recoverability at least annually or more frequently upon the
occurrence of an event or when circumstances indicate that the net carrying
amount is greater than its fair value. Assets are grouped and evaluated at the
lowest level for their identifiable cash flows that are largely independent of
the cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the future
estimated cash flows expected to result from the use of the asset. If the
carrying amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows as the rate the Company
utilizes to evaluate potential investments. The Company estimates fair value
based on the information available in making whatever estimates, judgments and
projections are considered necessary. There was no impairment of long-lived
assets during the period.
UNEARNED REVENUES
Unearned revenues represent amounts received from students for tuition and
service fee relating to the outside-school practice service. The Company
recognizes these funds as a current liability until the revenue can be
recognized.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which allows for the recognition and measurement of deferred tax assets based
upon the likelihood of realization of tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future deductibility is uncertain.
The Company records a valuation allowance for deferred tax assets, if any, based
on its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company's
net income when those events occur. As the Company still enjoys the tax
incentives during the three months ended November 30, 2009 and 2008 (details
please refer to note11 Taxes), the Company had no deferred tax assets or
liabilities of liabilities as of November 30, 2009 and August 31, 2008.
REVENUE RECOGNITION
The Company's revenue policies are in compliance with the generally accepted
accounting principles as outlined in the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). The Company
recognizes revenue when the following fundamental criteria are met: (i)
F-15
persuasive evidence of an arrangement exists, (ii) the services have been
rendered, (iii) the fees are fixed or determinable and (iv) collection of the
resulting receivable is reasonably assured.
Details are as follows:
(a) Tuition revenue received for educational programs and services is
recognized proportionately according to the progress the students complete
the educational programs in the school. Tuition paid in advance is recorded
as advance from customers.
(b) The Company provides off-campus internship arrangement for students and
collects service charges at fixed amount from both recruiters and students.
Revenue is recognized upon completion of the internship program.
(c) The Company provides other services mainly logistic services for students
and the revenue from such services is recognized upon completion of the
service.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs consist primarily of salaries and
commissions for sales representatives, salaries for administrative staffs, rent
expenses, depreciation expense and employee benefits for administrative staffs.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting
Comprehensive Income" requires disclosure of all components of comprehensive
income and loss on an annual and interim basis. Comprehensive income and loss is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Accumulated other comprehensive income arose from the changes in foreign
currency exchange rates.
STATEMENT OF CASH FLOWS
In accordance with SFAS 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
SUBSEQUENT EVENTS
The Company has evaluated subsequent events that have occurred through the
filing date and has determined there were no material events since the balance
sheet date of this report.
EARNINGS PER SHARE
The Company computes earnings per share ("EPS') in accordance with SFAS 128,
"Earnings Per Share", which requires companies with complex capital structures
to present basic and diluted EPS. Basic EPS is measured as net income divided by
the weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an anti-dilutive
effect (i.e., those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
F-16
FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in US dollars. The functional
currency of the Company is Renminbi ("RMB"), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People's Bank of
China prevailing at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than that RMB are
included in statements of operations as exchange gains. The financial statements
of the Company have been translated into U.S. dollars in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 52, "Foreign Currency
Translation". The financial information is first prepared in RMB and then is
translated into U.S. dollars at period-end exchange rates as to assets and
liabilities and average exchange rates as to revenue and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred. The effects of foreign currency translation adjustments
are included as a component of accumulated other comprehensive income in
shareholders' equity.
November 30, 2009 August 31, 2009
----------------- ---------------
Period end RMB: US$ exchange rate 6.8271 6.8306
Average RMB: US$ exchange rate 6.8276 6.8343
The RMB is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable and other receivables. The
Company does not require collateral or other security to support these
receivables. The Company conducts periodic reviews of its clients' financial
condition and customer payment practices to minimize collection risk on accounts
receivable.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses were included in
selling expenses and amounted to $3,723 and $60,187 for the three months ended
November 30, 2009 and 2008, respectively.
OPERATING LEASES
Leases where substantially all the rewards and risks of ownership of assets
remain with the lessor are accounted for as operating leases. Rental payables
under operating lease are recognized as expense on a straight-line basis over
the lease term.
RISKS AND UNCERTAINTIES
The operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, FASB established Accounting Standards CodificationTM
("Codification") as the single source of authoritative accounting principles
recognized by the FASB in the preparation of financial statements in conformity
with the GAAP. The Codification will supersede all then-existing non-SEC
F-17
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Codification is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. Adoption of the
Codification is not expected to have a material impact on the Company's results
of operations or financial position.
In June 2009, FASB updated the accounting standards related to the consolidation
of variable interest entities ("VIEs"). The standard amends current
consolidation guidance and requires additional disclosures about an enterprise's
involvement in VIEs. The standard shall be effective as of the beginning of each
reporting entity's first annual reporting period that begins after November 15,
2009, for interim periods within the first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. The Company does not expect the adoption to have a material impact
on the Company's results of operations or financial position.
In May 2009, FASB issued FAS No. 165, Subsequent Events. The standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. An entity should apply the requirements of FAS No.
165 to interim or annual financial periods ending after June 15, 2009. Adoption
of this standard does not have a material impact on the Company's results of
operations or financial position.
In April 2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009,
and is to be applied prospectively. The adoption did not have a material effect
on the Company's results of operations and financial condition.
In April 2009, the FASB updated the accounting standards for the recognition and
presentation of other-than-temporary impairments. The standard amends existing
guidance on other-than-temporary impairments for debt securities and requires
that the credit portion of other-than-temporary impairments be recorded in
earnings and the noncredit portion of losses be recorded in other comprehensive
income. The standard requires separate presentation of both the credit and
noncredit portions of other-than-temporary impairments on the financial
statements and additional disclosures. This standard is effective for interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. At the date of adoption, the
portion of previously recognized other-than-temporary impairments that represent
the noncredit related loss component shall be recognized as a cumulative effect
of adoption with an adjustment to the opening balance of retained earnings with
a corresponding adjustment to accumulated other comprehensive income (loss). The
adaption of this standard did not have a material effect on the preparation of
the Company's consolidated financial statements.
In August 2009, the FASB updated the accounting standards to provide additional
guidance on estimating the fair value of a liability in a hypothetical
transaction where the liability is transferred to a market participant. The
standard is effective for the first reporting period, including interim periods,
beginning after issuance. The Company does not expect the adoption to have a
material effect on the Company's consolidated results of operations and
financial condition.
In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) "Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force". This update provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The management is in the process of evaluating
the impact of adopting this standard on the Company's financial statements.
F-18
NOTE 3. ADVANCE TO VENDORS
The Company periodically makes advances to certain vendors for purchases of
materials for construction of classrooms and related facilities, and records
those advances as advance to vendors. Advances to vendors as of November 30,
2009 and August 31, 2009 amounted to $3,652,476 and $2,375,364, respectively.
NOTE 4. INVENTORY
Inventory consists of the following:
As of As of
November 30, August 31,
2009 2009
---------- ----------
(Unaudited) (Audited)
Course materials $ 6,559 $ 45,525
Logistic supplies 40,221 364,122
Office supplies 2,347 202,362
Other materials and supplies 4,090 176,316
Textbooks -- 716,439
---------- ----------
Total $ 53,218 $1,504,764
========== ==========
NOTE 5. RELATED PARTY TRANSACTIONS
As of November 30, 2009 and August 31, 2009, the balance of due from related
party represents loans to Shenzhen Linghai International Cargo Agent Co., Ltd
("Shenzhen Linghai"). Shenzhen Linghai is owned by Ms. Juanjuan Zhong, sister of
Ms. Yabin Zhong (10% shareholder of the Oya). The loan is unsecured, interest
free and repayable on demand.
F-19
NOTE 6. PROPERTY, PLANT AND EQUIPMENTS
As of November 30, 2009 and August 31, 2009, the detail of property, plant and
equipments was as follows:
As of As of
November 30, August 31,
2009 2009
------------ ------------
(Unaudited) (Audited)
Teaching and dormitory facilities $ 11,340,888 $ 10,288,401
Educational equipments and books 3,682,106 4,068,173
Office equipments and other equipments 3,831,301 2,235,171
Automobiles 269,347 269,211
------------ ------------
Sub-total 19,123,642 16,860,956
Less: accumulated depreciation (4,472,738) (5,165,936)
Add: Construction in progress 3,454,252 3,167,570
------------ ------------
Property, plant and equipment, net $ 18,105,156 $ 14,862,590
============ ============
Depreciation expense for the three months ended November 30, 2009 and 2008 was
$385,423 and $389,160, respectively.
NOTE 7. LAND USE RIGHTS, NET
The details of land use rights are as follows:
As of As of
November 30, August 31,
2009 2009
---------- ----------
(Unaudited) (Audited)
Land use rights $ 1,122,549 $ 561,926
Less: accumulated amortization (90,305) (84,587)
----------- -----------
Land use rights, net $ 1,032,244 $ 477,339
=========== ===========
Amortization expenses for the land use rights totaled $5,676 and $2,858 for the
three months ended November 30, 2009, and 2008, respectively.
NOTE 8. SHORT-TERM LOANS
The short-term borrowings outstanding as at November 30, 2009 and August 31,
2009 consisted of two loans of $292,949 (RMB 2,000,000) and $439,423 (RMB
3,000,000) from Changsha Foundation for Education. The two loans were unsecured
and bore an interest at 5% and were repayable on March 17, 2010 and July 31,
2010, respectively.
NOTE 9. LONG-TERM LOANS
The long-term loans include the following:
The details of long-term loans outstanding as at November 30, 2009 are as
follows:
F-20
Term Interest Principal
Lender From To rate RMB US$
---------------------------------------- ------------ ------------ ------- --------- -------
Ningxiang Rural Credit Cooperative Union Dec 28, 2007 Dec 28, 2009 12.096% 1,800,000 263,654
Changsha Foundation for Education Jul 31, 2008 Jul 18, 2010 -- 500,000 73,237
--------- -------
2,300,000 336,891
Ningxiang Rural Credit Cooperative Union Sep 1, 2009 Aug 21, 2011 8.64% 1,600,000 234,359
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 197,740
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 23, 2011 10.80% 1,400,000 205,064
--------- -------
4,350,000 637,164
The details of long-term loans outstanding as at August 31, 2009 are as follows:
Term Interest Principal
Lender From To rate RMB US$
---------------------------------------- ------------ ------------ ------- --------- -------
LONG-TERM LOAN - CURRENT PORTION
Ningxiang Rural Credit Cooperative Union May 30, 2009 May 30, 2010 10.80% 2,000,000 292,801
Ningxiang Rural Credit Cooperative Union Dec 28, 2007 Dec 28, 2009 12.096% 1,800,000 263,521
Changsha Foundation for Education Jul 31, 2008 Jul 18, 2010 - 500,000 73,200
--------- -------
4,300,000 629,522
long-term loan - Non-Current Portion
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 197,641
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 23, 2011 10.80% 1,400,000 204,960
--------- -------
2,750,000 402,601
The four loans borrowed from Ningxiang rural Credit Cooperative Union were
collateralized by the buildings with cost of $743,249 and land use rights with
cost of $899,595. Another loan of RMB 500,000 borrowed from Changsha Foundation
for Education was unsecured and bore no interest. For the three months ended
November 30, 2009 and 2008, the Company incurred $24,381 and $31,923 interests
for the above loans.
NOTE 10. OTHER PAYABLES AND ACCRUED LIABILITIES
As of November 30, 2009 and August 31, 2009, other payables and accrued
liabilities are as follow:
As of As of
November 30, August 31,
2009 2009
---------- ----------
(Unaudited) (Audited)
Staff welfare payable $ 952,256 $ 836,434
Others 64,714 66,291
---------- ----------
Total $1,016,970 $ 902,725
========== ==========
NOTE 11. TAXES
(A) CORPORATION INCOME TAX ("CIT") AND BUSINESS TAX
The Company is governed by the Income Tax Law of the People's Republic of China
concerning the private-run enterprises, which are generally subject to tax at a
new statutory rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments. The applicable business tax rate
for educational service is currently 5%.
F-21
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
rates, tax exemptions and other measures. According to Law of the People's
Republic of China on Promotion of Privately-run Schools, implemented from
September 1, 2003, and the Notice of Tax Policy for Education Activities
(Caishui [2004] No.39), issued and became effective on February 5, 2004, some
specific enterprises, organizations and schools could enjoy the same tax
incentives as the schools run by the government, and could be exempt from
business tax and income tax accordingly. As the operation of the Company meets
the requirements of the regulations aforementioned, the Company is therefore
exempt from business tax and income tax.
No income tax and business tax were provided for the reporting period in
accordance with the regulations of the relevant taxing authorities.
NOTE 11. TAXES (CONTINUED)
(B) TAX PAYABLE
As of November 30, 2009 and August 31, 2009, the Company had tax payable as
follows:
As of As of
November 30, August 31,
2009 2009
---------- ----------
(Unaudited) (Audited)
Individual income tax withholding $ 29,368 $ 20,580
--------- ---------
Total $ 29,368 $ 20,580
========= =========
NOTE 12. SHAREHOLDERS' EQUITY
Risetime Group Limited was incorporated in British Virgin Islands as a BVI
Business Company on December 17, 2007, with 50,000 shares of common stock
authorized at par value of US$1.
As of November 30, 2009 and August 31, 2009, there was 1 share of common stock
issued and outstanding.
NOTE 13. STATUTORY RESERVE
According to Law of the People's Republic of China on Promotion of Privately-run
Schools, implemented from September 1, 2003, the Company and the related
subsidiaries are required to set aside at least 25% of their after-tax net
profits each year, if any, to fund the statutory reserves for the future
development of educational activities. The statutory reserves are not
distributable in the form of cash dividends to the shareholders.
For the three months ended November 30, 2009 and 2008, the Company has made
appropriations in the amount of $893,542 and $909,587 to this statutory reserve,
respectively. As of November 30, 2009 and August 31, 2009, the balances of the
statutory reserve were $7,840,313 and $6,946,771, respectively.
NOTE 14. COMMITMENTS
OPERATING LEASE
The commitments are primarily the rental for the Company's office space and
warehouse. As of November 30, 2009, the commitments related to the above rental
are as follows:
F-22
Periods Ended August 31, RMB US$
------------------------ ---------- --------
2010 726,533 106,411
2011 967,682 141,731
2012 944,686 138,363
2013 1,008,109 147,652
2014 1,075,844 157,573
Thereafter 898,895 131,656
---------- ---------
Total $5,621,749 $ 823,386
========== =========
CAPITAL COMMITMENT
As of November 30, 2009, the Company had commitments with local government to
expend in the total amount of $13,711,133 (RMB93,607,690) for the expansion of
the schools in Hunan Province and Sichuan Province in the PRC.
F-23
Hunan Oya Education Technology Co., Ltd.
Consolidated Financial Statements
(Stated in US dollars)
Contents Page
-------- ----
AUGUST 31, 2009 AND 2008
Report of Independent Registered Public Accounting Firm F-25
Consolidated Balance Sheets F-26
Consolidated Statements of Income F-27
Consolidated Statements of Stockholders' Equity F-28
Consolidated Statements of Cash Flows F-29
Notes to Consolidated Financial Statements F-30
F-24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Hunan Oya Education Technology Co., Ltd.
We have audited the accompanying consolidated balance sheets of Hunan Oya
Education Technology Co., Ltd. as of August 31, 2009 and 2008, and the related
consolidated statements of income and comprehensive income, shareholders'
equity, and cash flows for each of the years in the two-year period ended August
31, 2009. Hunan Oya Education Technology Co., Ltd.'s management is responsible
for these financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hunan Oya Education Technology
Co., Ltd. as of August 31, 2009 and 2008, and the results of its operations and
its cash flows for each of the years in the two-year period ended August 31,
2009 in conformity with accounting principles generally accepted in the United
States of America.
/s/Bagell Josephs, Levine & Company, LLC
-----------------------------------------------
Bagell Josephs, Levine & Company, LLC
Marlton, New Jersey
November 15, 2009
F-25
Hunan Oya Education Technology Co., Ltd.
Consolidated Balance Sheet
As of August 31,
--------------------------------
2009 2008
----------- -----------
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 3,848,040 $ 3,328,231
Accounts receivable, net of allowance of $55,836 and $-
as of August 31, 2009 and 2008, respectively 5,713,491 792,600
Other receivables 2,203 --
Due from related party 2,447,482 2,053,212
Inventory 1,504,764 1,949,071
Advances to vendors 2,375,364 20,466
----------- -----------
Total current assets 15,891,344 8,143,580
PROPERTY AND EQUIPMENT, NET 14,862,590 12,569,066
INTANGIBLE ASSETS, NET 477,339 488,064
----------- -----------
TOTAL ASSETS $31,231,273 $21,200,710
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term Loans $ 732,002 $ 292,376
Long term loans- current portion 629,522 694,394
Accounts payable 1,327,622 1,821,220
Due to shareholder -- 14,619
Taxes payable 20,580 30
Payroll Payable 241,477 176,744
Unearned revenues 8,275 12,170
Other payables and accrued liabilities 902,725 654,835
----------- -----------
Total current liabilities 3,862,203 3,666,388
LONG TERM LOANS 402,601 336,233
----------- -----------
TOTAL LIABILITIES 4,264,804 4,002,621
----------- -----------
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Registered Capital 1,061,232 183,269
Additional paid-in capital 168,742 168,742
Accumulated other comprehensive income 1,672,524 1,641,236
Statutory reserve 6,946,771 4,279,977
Retained earnings 17,117,200 10,924,865
----------- -----------
Total shareholders' equity 26,966,469 17,198,089
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,231,273 $21,200,710
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-26
Hunan Oya Education Technology Co., Ltd.
Consolidated Statement of Income
For The Years Ended August 31, 2009 and 2008
For the years ended August, 31
2009 2008
------------ ------------
Revenues $ 36,111,358 $ 28,803,983
Cost of revenue (22,836,422) (19,193,179)
------------ ------------
Gross profit 13,274,936 9,610,804
Selling expenses (640,576) (725,075)
General and administrative expenses (1,818,177) (1,000,439)
------------ ------------
Income from operations 10,816,183 7,885,290
Other expenses
Interest income (expenses) (95,759) (48,998)
Other expenses (53,249) (38,734)
------------ ------------
Total other expenses (149,008) (87,732)
------------ ------------
Income before income taxes 10,667,175 7,797,558
Provision for income taxes -- --
------------ ------------
Net income 10,667,175 7,797,558
------------ ------------
Other comprehensive item
Foreign currency translation gain 31,288 1,377,555
------------ ------------
Comprehensive Income $ 10,698,463 $ 9,175,113
============ ============
Basic and diluted income per common share $ 1.72 $ 5.20
============ ============
Basic and diluted weighted average common shares outstanding 6,184,932 1,500,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-27
Hunan Oya Education Technology Co., Ltd.
Consolidated Statements of Shareholders' Equity
For The Years Ended August 31, 2009 and 2008
Additional Other
Registered paid-in comprehensive Statutory Retained
Capital capital income reserve earnings Total
----- ------- ------ ------- -------- -----
BALANCE AT AUGUST 31, 2007 $ 183,269 $ 99,122 $ 263,681 $2,330,587 $ 6,991,762 $ 9,868,421
Capital contribution 69,620 69,620
Net income for the year 7,797,558 7,797,558
Transfer to statutory reserves 1,949,390 (1,949,390) --
Dividend declared (1,915,065) 1,915,065)
Foreign currency translation gain -- 1,377,555 -- 1,377,555
---------- -------- ---------- ---------- ----------- -----------
BALANCE AT AUGUST 31, 2008 183,269 168,742 1,641,236 4,279,977 10,924,865 17,198,089
Capital contribution 877,963 877,963
Net income for the year 10,667,175 10,667,175
Transfer to statutory reserves 2,666,794 (2,666,794) --
Dividend declared (1,808,046) (1,808,046)
Foreign currency translation gain 31,288 31,288
---------- -------- ---------- ---------- ----------- -----------
BALANCE AT AUGUST 31, 2009 $1,061,232 $168,742 $1,672,524 $6,946,771 $17,117,200 $26,966,469
========== ======== ========== ========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-28
Hunan Oya Education Technology Co., Ltd.
Consolidated Statements of Cash Flow
For The Years Ended August 31, 2009 and 2008
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,667,175 $ 7,797,558
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,588,188 1,311,187
Allowance for bad debts 55,805 --
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable (4,972,839) (57,937)
Other receivables (2,202) --
Inventory 446,892 (866,816)
Increase (decrease) in -
Accounts payables (495,969) 457,870
Payroll Payable 64,441 65,435
Taxes payable 20,539 17
Unearned revenues (3,912) (8,859)
Other payables and accrued liabilities 246,804 264,072
------------ ------------
Net cash provided by operating activities 7,614,922 8,962,527
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intangible assets (745,517) --
Acquisition of property & equipment (5,458,835) (874,819)
------------ ------------
Net cash used in investing activities (6,204,352) (874,819)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 877,963 69,620
Dividend paid to shareholders (1,808,046) (1,915,065)
Proceeds from long term loan 438,960 321,552
Repayments on shareholders' loans (14,632) (3,280,529)
Repayments on related party loans (391,072) (1,963,564)
------------ ------------
Net cash used in financing activities (896,827) (6,767,986)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS 6,066 321,976
NET INCREASE IN CASH & CASH EQUIVALENTS 519,809 1,641,698
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR 3,328,231 1,686,533
------------ ------------
CASH & CASH EQUIVALENTS, END OF YEAR $ 3,848,040 $ 3,328,231
============ ============
Supplemental disclosures of cash flow information:
Income tax paid $ -- $ --
============ ============
Interest paid $ 123,746 $ 97,833
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-29
Hunan Oya Education Technology Co., Ltd.
Notes to Consolidated Financial Statements
For the Years Ended August 31, 2009 And 2008
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Hunan Oya Education Technology Co., Ltd. ("the Company"), was incorporated in
Changsha City, Hunan Province, People's Republic of China in November 20, 2008.
The Company is primarily engaged in providing vocational education service and
vocational skills training service.
On July 28, 2009, the Company entered into certain exclusive agreements with
Changsha Huanqiu Vocational Secondary School ("Changsha Huanqiu") and Shaoshan
Huanqiu Vocational Technical Secondary School ("Shaoshan Huanqiu") and their
shareholders. Pursuant to these agreements, the Company provides exclusive
consulting and other general business operation services to Changsha Huanqiu and
Shaoshan Huanqiu in exchange for substantially all net income of Changsha
Huanqiu and Shaoshan Huanqiu. The Company has the right to appoint all senior
management personnel of Changsha Huanqiu and Shaoshan Huanqiu.
As a result of these contractual arrangements, which obligates the Company to
absorb a majority of the risk of loss from Changsha Huanqiu and Shaoshan
Huanqiu's activities and enable the Company to receive a majority of its
expected residual returns, the Company accounts for Changsha Huanqiu and
Shaoshan Huanqiu as variable interest entities ("VIE") under FASB Interpretation
No. 46R ("FIN 46R"), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". Accordingly, the Company consolidates Changsha
Huanqiu and Shaoshan Huanqiu's results, assets and liabilities.
The detailed information about the establishment of Changsha Huanqiu and
Shaoshan Huanqiu are as follows:
(a) Changsha Huanqiu Vocational Secondary School was established in Changsha,
Hunan Province as a privately-run school on August 8, 1994, by Mr. Guangwen
He with the registered capital of RMB 1,000,000, and was engaged in
provision of vocational education and vocational skill training services.
(b) Shaoshan Huanqiu Vocational Technical Secondary School was established in
Shaoshan, Hunan Province as a privately-run school on May 15, 2006, by Mr.
Guangwen He with the registered capital of RMB 500,000, and was also
engaged in provision of vocational education and vocational skill training
services.
As of August 31, 2009, the Company and its VIEs have been providing such
services to six public schools other than Changsha and Shaoshan campus,
including Shaoyang Industrial Vocational Technical School and Shaoshan
Vocational Secondary School in Hunan Province, Yingjing Vocational Secondary
School, Tianquan Vocational Secondary School, Lushan Vocational Secondary School
and Shimian Vocational Secondary School in Sichuan Province.
Since the Company, Changsha Huanqiu and Shaoshan Huanqiu are all under common
control of the same majority shareholder, the consolidation of the Company has
been accounted for at historical cost and prepared on the basis as if the
aforementioned exclusive contractual arrangements between the Company and
Changsha Huanqiu and Shaoshan Huanqiu had become effective as of the beginning
of the first period presented in the accompanying consolidated financial
statements.
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP").
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLE OF CONSOLIDATION
The financial statements include the accounts of the Company and its VIEs,
Changsha Huanqiu and Shaoshan Huanqiu. Intercompany transactions and balances
have been eliminated. Equity investments in which we exercise significant
influence but do not control are accounted for using the equity method.
F-30
Investments in which we are not able to exercise significant influence over the
investee and which do not have readily determinable fair values are accounted
for under the cost method.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes, and disclosure of contingent
liabilities at the date of the financial statements. Estimates are used for, but
not limited to, the selection of the useful lives and residual values of
property and equipment and intangible assets, provision necessary for contingent
liabilities, fair values, revenue recognition, budgeted costs and other similar
charges. Management believes that the estimates utilized in preparing its
financial statements are reasonable and prudent. Actual results could differ
from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company
maintains bank accounts in the PRC. Total cash at August 31, 2009 and 2008
amounted to US$3,848,040 and US$3,328,231, respectively, of which no deposits
are covered by insurance. The Company has not experienced any losses in such
accounts and management believes it is not exposed to any risks on its cash in
bank accounts.
ACCOUNTS RECEIVABLE
Accounts receivable consists of balances due from the enterprises for the
education services provided and due from China Overseas-Educated Scholars
Development Foundation for tuition revenues. Accounts receivable are recorded at
net realizable value consisting of the carrying amount less an allowance for
uncollectible amounts.
The Company does periodical reviews as to whether the carrying values of
accounts have become impaired. The assets are considered to be impaired if the
collectability of the balances become doubtful, accordingly, the management
estimates the valuation allowance for anticipated uncollectible receivable
balances. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. As of August 31, 2009 and 2008, the
allowance for doubtful debts was $55,836 and $-0-, respectively.
ADVANCES TO VENDORS
Advances to vendors consist of balances paid for materials for construction of
classrooms and related teaching facilities that have not been provided to or
received by the Company. Advances to vendors are reviewed periodically to
determine whether their carrying value has become impaired. The Company
considers the assets to be impaired if the collectability of the services and
materials become doubtful. The Company determines that no reserve is necessary
for the years ended August 31, 2009 and 2008.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation and
any impairment losses. The cost of an asset comprises of its purchase price and
any directly attributable costs of bringing the asset to its working condition
and location for its intended use. Expenditure incurred after the fixed assets
have been put into operation, such as repairs and maintenance and overhaul
costs, is normally charged to the profit and loss account in the year in which
it is incurred.
In situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to be obtained
from the use of the asset beyond its originally assessed standard of
performances, the expenditure is capitalized as an additional cost of the asset.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, less any estimated residual value. Estimated useful
lives of the assets are as follows:
F-31
Teaching and dormitory facilities 10-30 years
Educational equipments and books 5 years
Office equipments and other equipments 5 years
Automobiles 5 years
Any gain or loss on disposal or retirement of a fixed asset is recognized in the
profit and loss account and is the difference between the net sales proceeds and
the carrying amount of the relevant asset. When property and equipment are
retired or otherwise disposed of, the assets and accumulated depreciation are
removed from the accounts and the resulting profit or loss is reflected in
income.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions, renewals and betterments are capitalized.
CONSTRUCTION-IN-PROGRESS
The Company constructs certain of its property, plant and equipment. In addition
to cost under the construction contracts, external costs directly related to the
construction of such facilities, including equipment installation and shipping
costs, are capitalized. Depreciation is recorded at the time assets are placed
in service.
INTANGIBLE ASSETS
Intangible assets are land use rights, which are recorded at cost less
accumulated amortization. Amortization is provided on a straight-line basis over
the estimated useful lives, which is generally 50 years and represents the
shorter of the estimated usage periods or the terms of the agreements.
LONG-LIVED ASSETS
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", SFAS No. 144 requires long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
other assets, for recoverability at least annually or more frequently upon the
occurrence of an event or when circumstances indicate that the net carrying
amount is greater than its fair value. Assets are grouped and evaluated at the
lowest level for their identifiable cash flows that are largely independent of
the cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the future
estimated cash flows expected to result from the use of the asset. If the
carrying amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows as the rate the Company
utilizes to evaluate potential investments. The Company estimates fair value
based on the information available in making whatever estimates, judgments and
projections are considered necessary. There was no impairment of long-lived
assets for years ended August 31, 2009 and 2008.
F-32
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVANCES FROM CUSTOMERS
Advance from customers consist of amounts received from students for tuition and
service fee relating to the outside-school practice service. The Company
recognizes these funds as a current liability until the revenue can be
recognized.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which allows for the recognition and measurement of deferred tax assets based
upon the likelihood of realization of tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future deductibility is uncertain.
The Company records a valuation allowance for deferred tax assets, if any, based
on its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company's
net income when those events occur. As the Company still enjoys the tax
incentives during 2008 and 2009 (details please refer to note11 Taxes), the
Company had no deferred tax assets or liabilities of liabilities as of August
31, 2009 and 2008, and the Company determines that no valuation allowance was
necessary for the above years.
Commencing January 1, 2008, the PRC's new Enterprise Income Tax ("EIT") law
replaced the laws for Domestic Enterprises ("DES") and Foreign Invested
Enterprises ("FIEs"). The new standard EIT rate of 25% replaced the 33% rate
formerly applicable to both DES and FIEs.
F-33
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's revenue policies are in compliance with the generally accepted
accounting principles as outlined in the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). The Company
recognizes revenue when the following fundamental criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) the services have been
rendered, (iii) the fees are fixed or determinable and (iv) collection of the
resulting receivable is reasonably assured.
Details are as follows:
(a) Tuition revenue received for educational programs and services is
recognized proportionately according to the progress the students complete
the educational programs in the school. Tuition paid in advance is recorded
as advance from customers.
(b) The Company provides off-campus internship arrangement for students and
collects service charges at fixed amount from both recruiters and students.
Revenue is recognized upon completion of the internship program.
(c) The Company provides other services mainly logistic services for students
and the revenue from such services is recognized upon completion of the
service.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs consist primarily of salaries and
commissions for sales representatives, salaries for administrative staffs, rent
expenses, depreciation expense and employee benefits for administrative staffs.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting
Comprehensive Income" requires disclosure of all components of comprehensive
income and loss on an annual and interim basis. Comprehensive income and loss is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Accumulated other comprehensive income arose from the changes in foreign
currency exchange rates.
F-34
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
In accordance with SFAS 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
SUBSEQUENT EVENTS
The Company has evaluated subsequent events that have occurred through the
filing date and has determined there were no material events since the balance
sheet date of this report.
EARNINGS PER SHARE
The Company computes earnings per share ("EPS') in accordance with SFAS 128,
"Earnings Per Share", which requires companies with complex capital structures
to present basic and diluted EPS. Basic EPS is measured as net income divided by
the weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an anti-dilutive
effect (i.e., those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
F-35
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in US dollars. The functional
currency of the Company is Renminbi ("RMB"), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People's Bank of
China prevailing at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than that RMB are
included in statements of operations as exchange gains. The financial statements
of the Company have been translated into U.S. dollars in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 52, "Foreign Currency
Translation". The financial information is first prepared in RMB and then is
translated into U.S. dollars at period-end exchange rates as to assets and
liabilities and average exchange rates as to revenue and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred. The effects of foreign currency translation adjustments
are included as a component of accumulated other comprehensive income in
shareholders' equity.
August 31, 2009 August 31, 2008
--------------- ---------------
Year end RMB: US$ exchange rate 6.8306 6.8405
Average yearly RMB: US$ exchange rate 6.8343 7.1528
The RMB is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable and other receivables. The
Company does not require collateral or other security to support these
receivables. The Company conducts periodic reviews of its clients' financial
condition and customer payment practices to minimize collection risk on accounts
receivable.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses were included in
selling expenses and amounted to $113,069 and $76,543 for the years ended August
31, 2009 and 2008, respectively.
F-36
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OPERATING LEASES
Leases where substantially all the rewards and risks of ownership of assets
remain with the lessor are accounted for as operating leases. Rental payables
under operating lease are recognized as expense on a straight-line basis over
the lease term.
RISKS AND UNCERTAINTIES
The operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, FASB established Accounting Standards CodificationTM
("Codification") as the single source of authoritative accounting principles
recognized by the FASB in the preparation of financial statements in conformity
with the GAAP. The Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Codification is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. Adoption of the
Codification is not expected to have a material impact on the Company's results
of operations or financial position.
In June 2009, FASB updated the accounting standards related to the consolidation
of variable interest entities ("VIEs"). The standard amends current
consolidation guidance and requires additional disclosures about an enterprise's
involvement in VIEs. The standard shall be effective as of the beginning of each
reporting entity's first annual reporting period that begins after November 15,
2009, for interim periods within the first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. The Company does not expect the adoption to have a material impact
on the Company's results of operations or financial position.
F-37
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In May 2009, FASB issued FAS No. 165, Subsequent Events. The standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. An entity should apply the requirements of FAS No.
165 to interim or annual financial periods ending after June 15, 2009. Adoption
of this standard does not have a material impact on the Company's results of
operations or financial position.
In April 2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009,
and is to be applied prospectively. The adoption did not have a material effect
on the Company's results of operations and financial condition.
In April 2009, the FASB updated the accounting standards for the recognition and
presentation of other-than-temporary impairments. The standard amends existing
guidance on other-than-temporary impairments for debt securities and requires
that the credit portion of other-than-temporary impairments be recorded in
earnings and the noncredit portion of losses be recorded in other comprehensive
income. The standard requires separate presentation of both the credit and
noncredit portions of other-than-temporary impairments on the financial
statements and additional disclosures. This standard is effective for interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. At the date of adoption, the
portion of previously recognized other-than-temporary impairments that represent
the noncredit related loss component shall be recognized as a cumulative effect
of adoption with an adjustment to the opening balance of retained earnings with
a corresponding adjustment to accumulated other comprehensive income (loss). The
adaption of this standard did not have a material effect on the preparation of
the Company's consolidated financial statements.
In August 2009, the FASB updated the accounting standards to provide additional
guidance on estimating the fair value of a liability in a hypothetical
transaction where the liability is transferred to a market participant. The
standard is effective for the first reporting period, including interim periods,
beginning after issuance. The Company does not expect the adoption to have a
material effect on the Company's consolidated results of operations and
financial condition.
F-38
NOTE 3. ADVANCE TO VENDORS
The Company periodically makes advances to certain vendors for purchases of
materials for construction of classrooms and related facilities, and records
those advances as advance to vendors. Advances to vendors as of August 31, 2009
and 2008 amounted to $2,375,365 and $20,466, respectively.
NOTE 4. INVENTORY
Inventory consists of the following:
As of August 31,
---------------------------------
2009 2008
---------- ----------
Course materials $ 45,575 $ 165,898
Consumer products 364,122 370,236
Office supplies 202,362 101,103
Textbooks 716,440 640,894
---------- ----------
Total $1,328,499 $1,278,131
========== ==========
NOTE 5. RELATED PARTY TRANSACTIONS
As of August 31, 2009 and 2008, the Company had receivables from (payable to)
the related parties as follows:
As of August 31,
---------------------------------
2009 2008
---------- ----------
Shenzhen Linghai International
Cargo Agent Co., Ltd. $2,447,482 $2,053,212
Zhong Ya Bin -- (14,619)
---------- ----------
Total $2,447,482 $2,038,593
========== ==========
Shenzhen Linghai International Cargo Agent Co., Ltd. ("Shenzhen Linghai") is
owned by Ms. Zhong Juanjuan, sister of Ms. Yabin Zhong. The loan is unsecured
and bears no interest, and has no fixed repayment date.
Ms. Yabin Zhong is the spouse of Mr. Guangwen He, CEO of the Company, and is
also 10% shareholder of the Company. The balance with Ms. Yabin Zhong is
unsecured and bears no interest and has no fixed repayment date.
F-39
NOTE 6. PROPERTY, PLANT AND EQUIPMENTS
As of August 31, 2009 and 2008, the detail of property, plant and equipments was
as follows:
As of August 31,
---------------------------------
2009 2008
---------- ----------
Teaching facilities $10,288,401 $10,223,073
Educational equipment and books 4,035,012 3,707,485
Office equipment 803,068 584,331
Automobiles 269,211 232,540
Dormitory 1,485,942 1,368,588
----------- -----------
Sub-total 16,881,634 16,116,017
Less: accumulated depreciation (5,233,210) (3,620,449)
Add: Construction in progress 3,343,884 727,739
----------- -----------
Property, plant and equipment, net $14,992,308 $13,223,308
=========== ===========
Depreciation expense for the years ended August 31, 2009 and 2008 was $1,606,620
and $1,335,983, respectively.
NOTE 7. LAND USE RIGHTS, NET
The details of land use rights are as follows:
As of August 31,
---------------------------------
2009 2008
---------- ----------
Land use rights $ 561,926 $ 561,111
Less: accumulated amortization (84,587) (73,047)
----------- ----------
Land use rights, net $ 477,339 $ 488,064
=========== ==========
Amortization expenses for the land use rights totaled $11,427and $10,919 for the
years ended August 31, 2009, and 2008, respectively.
F-40
NOTE 8. SHORT-TERM LOANS
The bank borrowings are comprised of the following:
The short-term borrowing outstanding at August 31, 2008 was borrowed from
Changsha Foundation for Education, bore interest at 5% per annum, and was in the
amount of $292,376 (RMB 2,000,000). This loan was unsecured and had a term of
one year and was repayable on March 31, 2009. The loan was later renewed for
another year and will be repayable on March 17th, 2010.
As of August 31, 2009, the Company borrowed another $439,626 (RMB 3,000,000)
from Changsha Foundation for Education, repayable on July 31, 2010, which was
unsecured and bore interest at 5% per annum. The total short term loan as of
August 31, 2009 was $732,002.
NOTE 9. LONG TERM LOANS
The long term loans include the following:
As of August 31,
---------------------------------
2009 2008
---------- ----------
Long term bank loans $1,032,123 $1,030,627
Less: Long-term, current portion 629,522 694,394
---------- ----------
Long-term, non-current portion 402,601 336,233
========== ==========
The long term borrowings outstanding as at August 31, 2008 consisted of four
bank loans of RMB 2, 000,000, RMB 1, 350,000, RMB1, 400,000 and RMB 1, 800,000
which were repayable on May 30, 2009, November 22, 2008, November 21, 2008 and
December 28, 2009 respectively. All those loans were renewed for another year to
May 30, 2010, November 13, 2011, November 23, 2011, and December 28, 2009
respectively. The four bank loans bore the interest at 10.08%, 10.08%, 10.08%
and 12.096%, and were collateralized by the buildings with cost of $743,249 and
land use rights with cost of $899,595. Another loan of RMB 500,000 was borrowed
from Changsha Foundation for Education which was repayable on July 18, 2010.
This loan was unsecured and bore no interest.
As of August 31, 2009 and 2008, the Company incurred $128,240 and $ 104,954
interests for the above loans.
F-41
NOTE 10. OTHER PAYABLES AND ACCRUED LIABILITIES
As of August 31, 2009 and 2008, other payables and accrued liabilities are as
follow:
As of August 31,
---------------------------------
2009 2008
---------- ----------
Staff welfare payable $ 836,434 $ 522,200
Others 66,291 132,635
---------- ----------
Total $ 902,725 $ 654,835
========== ==========
NOTE 11. TAXES
(A) CORPORATION INCOME TAX ("CIT") AND BUSINESS TAX
The Company is governed by the Income Tax Law of the People's Republic of China
concerning the private-run enterprises, which are generally subject to tax at a
new statutory rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments. The applicable business tax rate
for educational service is currently 5%.
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
rates, tax exemptions and other measures. According to Law of the People's
Republic of China on Promotion of Privately-run Schools, implemented from
September 1, 2003, and the Notice of Tax Policy for Education Activities
(Caishui [2004] No.39), issued and became effective on February 5, 2004, some
specific enterprises, organizations and schools could enjoy the same tax
incentives as the schools run by the government, and could be exempt from
business tax and income tax accordingly. As the operation of the Company meets
the requirements of the regulations aforementioned, the Company is therefore
exempt from business tax and income tax.
No income tax and business tax were provided for the reporting period in
accordance with the regulations of the relevant taxing authorities.
(B) TAX PAYABLE
As of August 31, 2009 and 2008, the Company had tax payable as follows:
As of August 31,
---------------------------------
2009 2008
---------- ----------
Individual income tax withholding $ 20,580 $ 30
--------- ---------
Total $ 20,580 $ 30
========= =========
NOTE 12. SHAREHOLDERS' EQUITY
The registered capital of the Company and its VIEs is a total of $5,416,618
(including RMB31,500,000 and $300,000, approximately RMB 33,548,139 in total),
of which RMB 1,500,000 (approximately $183,269) was contributed by August 31,
2008, and another RMB 6,000,000 (approximately $1,417,963) was paid as of August
31, 2009. $300,000 registered capital for the Company is required to be
contributed by March 31, 2010 and $3,515,386 (RMB24,000,000) for the Company is
required to be contributed by November 17, 2010.
The industry practice in PRC does not require the issuance of stock certificates
to the shareholders, nor a third party transfer agent to maintain the records.
For the purpose of financial reporting, the Company elected to designate one (1)
F-42
common share for each RMB contributed. Accordingly, there were totally 7,500,000
and 1,500,000 shares issued and outstanding for the years ended August 31, 2009
and 2008, respectively.
NOTE 13. STATUTORY RESERVE
According to Law of the People's Republic of China on Promotion of Privately-run
Schools, implemented from September 1, 2003, the Company and the related
subsidiaries are required to set aside at least 25% of their after-tax net
profits each year, if any, to fund the statutory reserves for the future
development of educational activities. The statutory reserves are not
distributable in the form of cash dividends to the shareholders.
For the years ended August 31, 2009 and 2008, the Company has made
appropriations in the amount of US$2,659,329 and US$1,945,397 to this statutory
reserve, respectively. The balances of the statutory reserve were US$6,935,314
and US$4,275,985 as of August 31, 2009 and 2008, respectively.
NOTE 14. DIVIDENDS DECLARED AND PAID
On August 31, 2008, the Company's Board of Directors made a resolution to
declare cash dividends of US$1,915,065 (RMB 13,100,000) to its shareholders. The
amount was subsequently paid in full.
On July 24, 2009, additional dividends in the amount of $1,808,046 (RMB
12,350,000) were declared by the Company's Board of Directors and subsequently
paid in full.
NOTE 15. COMMITMENTS
OPERATING LEASE
The commitments are primarily the rental for the Company's office space and
warehouse. As of August 31, 2009, the commitments related to the above rental
are as follows:
Periods Ended August 31, RMB US$
------------------------ ---------- ----------
2010 963,155 140,929
2011 967,682 141,591
2012 944,686 138,226
2013 1,008,109 147,506
2014 1,075,844 157,417
Thereafter 898,895 131,526
---------- ----------
Total $5,858,371 $ 857,195
========== ==========
CAPITAL COMMITMENT
As of August 31, 2009, the Company had commitments with local government to
expend in the total amount of $14,991,068 (RMB102,397,690) for the expansion of
the schools in Hunan Province and Sichuan Province in the PRC.
F-43