United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-QSB
x
QUARTERLY
REPORT UNDER
SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 2006
o
TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For
the
transition period from ______________ to ________________
Commission
File Number: 333-101167
China
Education Alliance, Inc.
(Exact
name of small business issuer as
specified
in its charter)
|
North
Carolina
|
|
56-2012361
|
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
|
|
80
Heng
Shan Rd. Kun Lun Shopping Mall
Harbin,
P.R. China 150090
(Address
of principal executive offices)
001-86-451-8233-5794
(Issuer's
telephone number)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. x
Yes o
No
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check
whether the registrant filed all documents and reports required to be filed
by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes o
No o
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer's classes of common equity
as
of the latest practicable date: 57,915,000 shares as of August 16,
2006
Transitional
Small Business Disclosure Format (check one): Yes o
No
x
CHINA
EDUCATION ALLIANCE, INC.
INDEX
PART
I.
FINANCIAL INFORMATION
|
Item
1. Financial Information:
|
| |
|
Condensed
Consolidated Balance Sheet as of June 30, 2006
|
| |
|
Condensed
Consolidated Statements of Operations for the three months and six
months
ended June 30, 2006 and 2005
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June
30,
2006 and 2005
|
| |
|
Notes
to the Condensed Consolidated Financial Statements
|
| |
|
Item
2. Management’s Discussion and Analysis or Plan of
Operations
|
| |
|
Item
3. Controls and Procedures
|
| |
|
PART
II. OTHER INFORMATION
|
| |
|
Item
1. Legal Proceedings
|
| |
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
| |
|
Item
3. Defaults upon Senior Securities
|
| |
|
Item
4. Submission of Matters to a Vote of Security Holders
|
| |
|
Item
5. Other Information
|
| |
|
Item
6. Exhibits
|
| |
|
Signatures
|
PART
I. FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
|
Current
Assets
|
|
|
|
|
|
Cash
and Cash Equivalents (Note 5)
|
|
$
|
2,774,961
|
|
|
Inventories
(Note 6)
|
|
|
1,166
|
|
|
Prepaid
Expense
|
|
|
115,549
|
|
|
Other
Receivable
|
|
|
-
|
|
|
Total
Current Assets
|
|
|
2,891,676
|
|
|
Property
and Equipment
|
|
|
|
|
|
Fixed
Assets, Net of Accum. Depreciation (Note 7)
|
|
|
3,832,515
|
|
|
Total
Property and Equipment
|
|
|
3,832,515
|
|
|
Total
Assets
|
|
$
|
6,724,191
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses (Note 8)
|
|
$
|
7,989
|
|
|
Advances
on Accounts (Note 9)
|
|
|
290,016
|
|
|
Loan
from Shareholder (Note 15)
|
|
|
229,423
|
|
|
Wages
Payable
|
|
|
4,567
|
|
|
Welfare
Payable
|
|
|
6,575
|
|
|
Taxes
Payable (Note 10)
|
|
|
65,594
|
|
|
Total
Current Liabilities
|
|
|
604,164
|
|
|
Total
Liabilities
|
|
|
604,164
|
|
| |
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
Preferred
Stock ($0.001 par value, 5,000,000 shares authorized, none issued
and
outstanding)
|
|
|
-
|
|
|
Common
Stock ($0.001 par value, 150,000,000 shares authorized, 57,915,000
issued
and outstanding)
|
|
|
57,915
|
|
|
Additional
Paid-in Capital
|
|
|
2,407,969
|
|
|
Currency
Conversion Adjustment (Note 3)
|
|
|
77,767
|
|
|
Retained
Earnings
|
|
|
3,576,376
|
|
|
Total
Shareholders' Equity
|
|
|
6,120,027
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
6,724,191
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHINA
EDUCATION ALLIANCE AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
for
the three months and six months ended June 30, 2006
(Expressed
in US dollars)
(Unaudited)
| |
|
For
the Three Months Ended June
30,
|
|
For
the Six Months Ended June
30,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
REVENUES
(Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and Tuition
|
|
$
|
2,166,854
|
|
$
|
285,411
|
|
$
|
3,514,257
|
|
$
|
364,028
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Cost of Good Sold
|
|
|
663,612
|
|
|
30,656
|
|
|
1,157,363
|
|
|
56,294
|
|
|
Gross
Profit
|
|
|
1,503,242
|
|
|
254,755
|
|
|
2,356,894
|
|
|
307,734
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
, General and Administrative Expenses
|
|
|
204,309
|
|
|
33,815
|
|
|
378,905
|
|
|
78,261
|
|
|
Total
Operating Expenses
|
|
|
204,309
|
|
|
33,815
|
|
|
378,905
|
|
|
78,261
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES (INCOME)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
Costs (Income)
|
|
|
(4,026 |
) |
|
2,219
|
|
|
(4,922 |
) |
|
6,159
|
|
|
Total
Other Expenses (Income)
|
|
|
(4,026 |
) |
|
2,219
|
|
|
(4,922 |
) |
|
6,159
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income before Income Taxes
|
|
|
1,302,959
|
|
|
218,721
|
|
|
1,982,911
|
|
|
223,314
|
|
|
Less:Provision
for Income Taxes (Note 11)
|
|
|
-
|
|
|
74,101
|
|
|
- |
|
|
77,714
|
|
|
Net
Income
|
|
$
|
1,302,959
|
|
$
|
144,620
|
|
$
|
1,982,911
|
|
$
|
145,600
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share attributed to China Education Alliance common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$
|
0.0225
|
|
$
|
0.0025
|
|
$
|
0.0342
|
|
$
|
0.0025
|
|
|
Diluted
income per share
|
|
$
|
0.0225
|
|
$
|
0.0025
|
|
$
|
0.0342
|
|
$
|
0.0025
|
|
|
Basic
weighted average shares outstanding
|
|
|
57,915,000
|
|
|
57,915,000
|
|
|
57,915,000
|
|
|
57,915,000
|
|
The
accompanying notes are an integral part of these condensed consolidate financial
statements.
CHINA
EDUCATION ALLIANCE AND SUBSIDIARIES
Consolidated
Statements of Cash Flow
For
the Six Months Ended June 30, 2006
(Unaudited)
| |
|
For
the six months ended
|
|
| |
|
6/30/06
|
|
6/30/05
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,302,959
|
|
$
|
144,620
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
78,477
|
|
|
48,778
|
|
|
Changes
in assets and liabilities -
|
|
|
|
|
|
|
|
|
Decrease
in inventories
|
|
|
1,624
|
|
|
5,042
|
|
|
Increase
in prepaid expense
|
|
|
(1,865
|
)
|
|
-
|
|
|
Decrease
in other receivable
|
|
|
8,315
|
|
|
362
|
|
|
Decrease
in accounts payable and accrued expenses
|
|
|
(14,071
|
)
|
|
(22,409
|
)
|
|
Decrease
in advance on account
|
|
|
(243,262
|
)
|
|
-
|
|
|
Decrease
in wages payable
|
|
|
(1,095
|
)
|
|
-
|
|
|
Decrease
in welfare payable
|
|
|
(1,221
|
)
|
|
-
|
|
|
Increase
in taxes payable
|
|
|
39,797
|
|
|
72,215
|
|
|
Net
cash provided by operating activities
|
|
|
1,169,658
|
|
|
248,608
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases/(transfer)
of fixed assets
|
|
|
(1,955
|
)
|
|
-
|
|
|
Net
cash used by investing activities
|
|
|
(1,955
|
)
|
|
-
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Increase
in loan from shareholders
|
|
|
52,065
|
|
|
7,827
|
|
|
Proceeds
from stockholder
|
|
|
|
|
|
10,000
|
|
|
Net
cash provided by financing activities
|
|
|
52,065
|
|
|
17,827
|
|
|
Currency
conversion adjustments
|
|
|
8,534
|
|
|
-
|
|
|
Net
increase in cash
|
|
|
1,228,302
|
|
|
266,435
|
|
|
Cash
at beginning of year
|
|
|
1,546,659
|
|
|
156,863
|
|
|
Cash
at end of year
|
|
$
|
2,774,961
|
|
$
|
423,298
|
|
The
accompanying notes are an integral part of these condensed consolidate financial
statements.
China
Education Alliance and Subsidiaries
Notes
to the Consolidated Financial Statements
June
30, 2006
(Unaudited)
| 1. |
Description
of Business
|
Nature
of organization
China
Education Alliance, Inc. (CEDA), formerly known as ABC Realty Co., was
originally organized under the laws of the State of North Carolina on December
2, 1996. The main function for the ABC Realty was to engage in residential
real
estate transactions as a broker or agent. On September 15, 2004, ABC Realty
was
reorganized pursuant to the Plan of Exchange to acquire Harbin Zhong He Li
Da
Education Technology, Inc. (“ZHLD”), a Corporation formed on August 9, 2004 in
the city of Harbin of Heilongjiang Province, the People’s Republic of China,
with an authorized capital of $60,386 (RMB500,000).
On
September 15, 2004, ABC Realty Co. executed a Plan of Exchange with ZHLD, and
Duane C. Bennett, Chairman of ABC Realty Co., pursuant to which ZHLD exchanged
all of its registered capital of $60,386 for 55,000,000 shares, or approximately
95% of the common stock. On November 17, 2004, ABC Realty Co. changed its name
to China Education Alliance, Inc. On December 13, 2004, China Education
Alliance, Inc. consummated the Plan of Exchange with ZHLD. As a result of the
Plan of Exchange, the transaction was treated for accounting purposes as a
capital transaction and a recapitalization by the accounting acquirer, ZHLD
and
as reorganization by the accounting acquired, China Education Alliance,
Inc.
China
Education Alliance, Inc. is only a holding company, it has no revenues. The
Company carries its business mainly through its wholly owned subsidiaries,
ZHLD
and the Zhonghe Education Training Center in the business of online education
and training center in China.
ZHLD
is a
technology company engaged in the online education industry in China. Its
mission is to impel the distance learning development in China, to improve
the
efficiency and effectiveness of elementary education, higher education,
vocational education, skill education, continuing education, and professional
training programs, and to integrate with the international education system.
As
a multiplicative, comprehensive, and authoritative education frontrunner, the
Company has firmly occupied its hegemonic position in the online education
industry through its abundant teachers, rich teaching knowledge, and plentiful
teaching achievements.
Heilongjiang
Zhonghe Education Training Center (“ZHTC”) was registered in the People’s
Republic of China on July 8, 2005 with a registered capital of $60,386, is
the
wholly owned subsidiary of ZHLD. ZHLD owns 99% of interest in the ZHTC with
a
de
minimis
number
of 1% shares owned by present executive officer, Xi Qun Yu of ZHLD and ZHTC,
as
required by People’s Republic China’s Business Enterprise law.
| 1. |
Description
of Business (Continued)
|
The
Company’s online education business has established leading positions in several
high growth segments, including supplemental education and the test preparation
for grades kindergarten through high school.
The
Company’s products include on-line test preparation materials, teachers’
materials, study guides and audio recordings of popular classes. It is a full
range professional education resource service provider. The business scope
includes distance learning technology, education resource development, education
project planning and promoting, teaching platform, and the class development
and
schedule, education information, and technical service. The products cover
all
education ranges, including pre-school education, elementary and middle school
education, vocational education, continuing education, enterprise training
program, intelligence authentication, agricultural labor education, education
for the disabled, first time employment education, re-employment education,
study abroad, education for the aged people.
| 2. |
Basis
of Preparation of Financial
Statements
|
China
Education Alliance is only a holding company; it has no revenues but only minor
maintenance expenses. The functional currency for its subsidiaries is
denominated in “Renminbi” (“RMB”) or “Yuan”. ZHLD and Zhonghe Education Training
Center maintain its books and accounting records in Renminbi (“RMB”). It is the
currency of the primary economic environment in which the entities operates,
and
in accordance with law and accounting requirements of People’s Republic of China
law and accounting practices.
The
accompanying unaudited condensed consolidated financial statements
have
been
prepared by the Company pursuant to the rules and regulations of
the
Securities
and Exchange Commission (SEC) and in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”).
Principles
of Consolidation
- The
consolidated financial statements include the accounts of the Company and its
subsidiary, China Education Alliance, ZHLD, and Zhonghe Education Training
Center. All inter-company transactions and balances were
eliminated.
| 3. |
Summary
of Significant Accounting
Policies
|
Use
of estimates
- The
preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affected the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at
the dates of the financial statements and the reported amounts of net sales
and
expenses during the reported periods.
Significant
estimates included values and lives assigned to acquired intangible assets,
reserves for customer returns and allowances, uncollectible accounts receivable,
slow moving, obsolete and/or damaged inventory and stock option valuation.
Actual results may differ from these estimates.
Cash
and cash equivalents - The Company
considers all highly liquid debt instruments purchased with maturity period
of
three months or less to be cash equivalents. The carrying amounts reported
in
the accompanying consolidated balance sheet for cash and cash equivalents
approximate their fair value.
Inventories
-
inventories were accounted for using the first-in, first-out method and included
freight-in, materials, packing materials, labor and overhead costs and were
stated at the lower of cost or market, cost being determined by a moving
weighted average. Provision is made for slow moving, obsolete and/or damaged
inventory based on a periodic analysis of individual inventory items, including
an evaluation of historical usage and/or movement, age, expiration date and
general condition.
Property
and equipment
-
Property and equipment are stated at the historical cost, less accumulated
depreciation. Depreciation on property, plant and equipment is provided using
the straight-line method over the estimated useful lives of the assets after
taking into account estimated residual value of 5% of cost or valuation for
both
financial and income tax reporting purposes as follows:
|
Buildings
|
|
|
20
years
|
|
|
Communication
Equipments
|
|
|
10
years
|
|
|
Motor
vehicles
|
|
|
5
years
|
|
|
Furniture,
Fixtures, and Equipments
|
|
|
5
years
|
|
Expenditures
for renewals and betterments were capitalized while repairs and maintenance
costs are normally charged to the statement of operations in the year in which
they are 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, the expenditure is capitalized as
an
additional cost of the asset.
Upon
sale
or disposal of an asset, the historical cost and related accumulated
depreciation or amortization of such asset were removed from their respective
accounts and any gain or loss was recorded in the Consolidated Statements of
Operations.
Property
and equipment are evaluated for impairment in value annually or whenever an
event or change in circumstances indicates that the carrying values may not
be
recoverable. If such an event or change in circumstances occurs and potential
impairment is indicated because the carrying values exceed the estimated future
undiscounted cash flows of the asset, the Company would measure the impairment
loss as the amount by which the carrying value of the asset exceeds its fair
vale.
Foreign
currency translation -
These
financial statements have been prepared in U.S. dollars. China Education
Alliance is only a holding company; it has no revenues with minor expenses,
except those related to its ownership interest in ZHLD and Zhonghe Education
Training Center. The functional currency for the ZHLD and Zhonghe Education
Training is denominated in “Renminbi” (“RMB”) or “Yuan”. ZHLD and Zhonghe
Education Training maintain its books and accounting records in Renminbi
("RMB"). It is the currency of the primary economic environment in which the
entities operates.
FASB
Statement of Financial Accounting Standards No. 52, “Foreign Currency
Translation” requires differentials to be calculated and allocated using the
current rate method if the foreign entity’s functional and local currencies are
the same. Non-monetary assets and liabilities are translated at historical
exchange rates. Monetary assets and liabilities are translated at the exchange
rates in effect at the end of the year. The income statement accounts are
translated at average exchange rates.
The
conversion gains and losses are not recognized in the income statement under
the
functional currency approach. They are accumulated in a separate account in
stockholders’ equity (i.e., the cumulative foreign exchange translation
adjustments account). This treatment is based on the FASB’s view that
translation gains or losses are not directly related to the foreign entities’
operating cash flows. As a result, the Company recognized in equity the effect
of currency translation in the amount of $77,767.
The
official exchange rates as of June 30, 2006 for one US dollar, were 8.0065
RMB.
Income
recognition
-
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition, which states that revenue should be recognized when the
following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) the service has been rendered; (3) the selling price is
fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied
upon
customers download prepaid debit card. Revenue is reduced by provisions for
estimated returns and allowances, which are based on historical averages that
have not varied significantly for the periods presented, as well as specific
known claims, if any.
Prepaid
debit cards allow our subscribers to make a predetermined monetary amount of
download materials posted on our website. The Company new system is able to
track usage of the debit card once the end user uses the debit cards for its
service. At the time that the prepaid debit card is purchased, the receipt
of
cash is recorded as a subscriber prepayment. Revenues are recognized in the
month when services are actually rendered. Unused value relating to debit cards
is recognized as revenues when the prepaid debit card has expired.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable
Prepayments
Account-Prepaid
expenses are primarily comprised of advance payments made for services to
teachers for online materials and video.
Other
Receivable -
Other
Receivable is prepaid account included advances to employees, that included
cash
prepaid to employees for their travel, entertainment
and transportation expenditures.
Deferred
Revenue/Subscriber Prepayments - Deferred
revenue related to subscription services represents the portion of unearned
subscription revenue, which is amortized on a monthly, straight-line basis,
as
earned. Deferred revenue related to education service website advertising
service, or technology services represents that portion of amounts billed by
the
Company, or cash collected by the Company, for which services have not yet
been
provided or earned in accordance with the Company's revenue recognition
policy.
Impairment
of Long-Lived Assets - The
Company periodically evaluates the recoverability of the carrying amount of
its
long-lived assets
in
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of
Long-Lived Assets”. Whenever events or changes in circumstances indicate that
the carrying
amounts of those assets may not be recoverable, the Company compares
the undiscounted
net cash flows estimated to be generated by those assets to the carrying amount
of those assets.
When
these undiscounted cash flows are less than the carrying amounts of the assets,
the Company will record impairment losses to write the asset down to fair value,
measured by the discounted estimated net future cash flows expected to be
generated from the assets. During the periods ended June 30, 2006, no such
impairments have occurred.
Advertising
-
The
Company expensed advertising costs the first time the respective advertising
took place. These costs were included in selling, general and administrative
expenses. The total advertising expenses incurred for period ended June 30,
2006
was $24,878.
Income
Taxes - Provision
is made in the financial statements for taxation of profits in accordance
with PRC
legislation currently in force. The Company accounts for income taxes under
the liability
method in accordance with SFAS No. 109, “Accounting for Income Taxes”.
Under the
liability method, deferred income taxes reflect the future tax consequences
of
temporary differences
between the tax and financial statement basis of assets and liabilities and
are measured
using enacted tax rates applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in the tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance
is provided when it is more likely than not that some or all of the deferred
tax
assets will not be realized in the future. These evaluations are based on the
expectations of future taxable income and reversals of the various taxable
temporary differences.
Provision
for The People’s Republic of China enterprise income tax is calculated at the
prevailing rate based on the estimated assessable profits less available tax
relief for losses brought forward. As of June 30, 2006, The Company is still
enjoyed the income tax exemption for 2 years and half for 3 years suitable
as
foreign invested company.
Enterprise
income tax
Under
the
Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the State, income tax is payable by enterprises
at
a rate of 33% of their taxable income. Preferential tax treatment may, however,
be granted pursuant to any law or regulations from time to time promulgated
by
the State Council.
Enterprise
income tax (“EIT”) is provided on the basis of the statutory profit for
financial reporting purposes, adjusted for income and expense items, which
are
not assessable or deductible for income tax purposes.
Value
added tax
The
Provisional Regulations of The People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations
of
the PRC Concerning Value Added Tax, value added tax is imposed on goods sold
in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.
Value
added tax payable in The People’s Republic of China is charged on an aggregated
basis at a rate of 13% or 17% (depending on the type of goods involved) on
the
full price collected for the goods sold or, in the case of taxable services
provided, at a rate of 17% on the charges for the taxable services provided,
but
excluding, in respect of both goods and services, any amount paid in respect
of
value added tax included in the price or charges, and less any deductible value
added tax already paid by the taxpayer on purchases of goods and services in
the
same financial year.
Contingent
liabilities and contingent assets -
A
contingent liability is a possible obligation hat arises from past events and
whose existence will only be confirmed by the occurrence or non-occurrence
of
one or more uncertain future events not wholly within the control of the
Company. It can also be a present obligation arising from past events that
is
not recognized because it is not probable that outflow of economic resources
will be required or the amount of obligation cannot be measured
reliably.
A
contingent liability is not recognized but is disclosed in the notes to the
financial statements. When a change in the probability of an outflow occurs
so
that outflow is probable, they will then be recognized as a
provision.
A
contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one
or
more uncertain events not wholly within the control of the Company.
Contingent
assets are not recognized but are disclosed in the notes to the financial
statements when an inflow of economic benefits is probable. When inflow is
virtually certain, an asset is recognized.
Related
companies -
A
related company is a company in which the director has beneficial interests
in
and in which the Company has significant influence.
Retirement
benefit costs
-
According to The People’s Republic of China regulations on pension, the Company
contributes to a defined contribution retirement scheme organized by municipal
government in the province in which the Company was registered and all qualified
employees are eligible to participate in the scheme.
Contributions
to the scheme are calculated at 23.5% of the employees’ salaries above a fixed
threshold amount and the employees contribute 2% to 8% while the Company
contributes the balance contribution of 21.5% to 15.5%. The Company has no
other
material obligation for the payment of retirement benefits beyond the annual
contributions under this scheme.
Fair
value of financial instruments - The
carrying amounts of certain financial instruments, including cash, accounts
receivable, commercial notes receivable, other receivables, accounts payable,
commercial notes payable, accrued expenses, and other payables approximate
their
fair values as of June 30, 2006 because of the relatively short-term maturity
of
these instruments.
Recent
accounting pronouncements
-
In
June
2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
replacement of APB Opinion NO. 20 and FASB Statements NO 3. SFAS NO. 154 applies
to all voluntary changes in accounting principle, and changes the requirements
for accounting for and reporting of a change in accounting principle. SFAS
No.
154 requires retrospective application to prior periods' financial statements
of
a voluntary change in accounting principle unless it is impracticable.
Accounting Principles Boards ("APB") Opinion No. 20 previously required that
most voluntary changes in accounting principle be recognized by including in
net
income of the period of the change the cumulative effect of changing to the
new
accounting principle. SFAS No. 154 requires that a change in method of
depreciation, amortization, or depletion for long-lived, nonfinancial assets
be
accounted for as a change in accounting estimate that is affected by a change
in
accounting principle. APB Opinion No. 20 previously required that such a change
be reported as a change in accounting principle. The Company adopted SFAS No.
154 on January 1, 2006. The adoption of the provisions of SFAS No. 154 had
no
material effect on the Company's consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets-amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception
to
fair value for exchanges of similar productive assets and replaces it with a
general exception for exchange transactions that do not have commercial
substance, defined as transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. This statement
is
effective for exchanges of non-monetary assets occurring after June 15, 2005.
Management believes adoption of this new statement will not have any significant
effect on the Company’s financial condition or results of
operations.
| 4. |
Concentrations
of Business and Credit
Risk
|
Substantially
all of the Company’s bank accounts are in banks located in the PRC and are not
covered by any type of protection similar to that provided by the FDIC on funds
held in U.S banks.
The
Company is operating in China, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between U.S. dollars and the Chinese currency RMB.
Financial
instruments that potentially subject the Company to concentration of credit
risk
consist principally of cash and trade receivables, the balances of which are
stated on the balance sheet. The Company places its cash in high credit quality
financial institutions. Concentration of credit risk with respect to trade
receivables are limited due to the Company's' large number of diverse customers
in different locations in China. The Company does not require collateral or
other security to support financial instruments subject to credit risk. 90
percent the age of the Company’s accounts receivable are less than 60
days.
| 5. |
Cash
and Cash Equivalents
|
As
of
June 30, 2006, Cash and cash equivalents consist of the following:
|
|
|
06/30/06
|
|
| Cash
and Cash Equivalents |
|
|
|
|
|
Cash
on Hand
|
|
$
|
10,168
|
|
|
Bank
Deposits
|
|
|
2,764,793
|
|
|
Total
Cash and Cash Equivalents
|
|
$
|
2,774,961
|
|
The
Company values its inventories at the lower of cost or market method.
Inventories are accounted for using the first-in, first-out method. Inventories
in the balance sheet include finished products.
As
of
June 30, 2006, Inventories consist of the following:
|
|
|
06/30/06
|
|
| Inventory |
|
|
|
|
|
Debit
Cards & materials
|
|
$
|
1,166
|
|
|
Total
Inventory
|
|
$
|
1,166
|
|
| 7. |
Property
and Equipment
|
As
of
June 30, 2006, Property and Equipment consist of the following:
|
|
|
06/30/06
|
|
| Property
and Equipment |
|
|
|
|
|
Buildings
|
|
$
|
2,766,787
|
|
|
Transportation
Vehicles
|
|
|
113,390
|
|
|
Office
Equipments
|
|
|
328,273
|
|
|
Machinery
|
|
|
1,030,638
|
|
|
Total
Property and Equipment
|
|
|
4,239,088
|
|
|
Less:
Accumulated Depreciation
|
|
|
(406,573
|
)
|
|
Property
and Equipment, Net
|
|
$
|
3,832,515
|
|
For
the
year ended June 30, 2006, depreciation expenses totals $78,477.
| 8. |
Accounts
Payable and Accrued
Expense
|
As
of
June 30, 2006, Total Accounts Payable and Accrued Expense consist of the
following:
|
|
|
06/30/06
|
|
| Total
Accounts Payable and Accrued Expense |
|
|
|
|
|
Accounts
Payable and Accrued Expense
|
|
$
|
7,989
|
|
|
Wages
Payable
|
|
|
5,662
|
|
|
Welfare
Payable
|
|
|
7,796
|
|
|
Total
Accounts Payable and Accrued Exp
|
|
$
|
21,447
|
|
Advances
on accounts include subscriber prepayments and education fee prepayments.
Subscriber prepayments represents customer prepayments for the purchase of
debit
cards used to pay for the online downloading of education materials, including
testing booklets, supplemental materials, and teaching video clips. The Company
values the sales based on the actual occurrence of customer download. Therefore,
the spare time between the purchase of debit cards and actual download is
recorded under advances on accounts as deferred or unearned revenues to the
Company. Once the download takes place, the amount is then transferred from
advances on accounts to sales. Education fee prepayments represent customer
prepayments for the service provided by the Company of teaching and educating
the customers for their specific need at their desired education level. There
are various levels existed for the customers to choose the best one that fits
their individual needs. During the period, a great portion of advances were
consumed and recognized as income, due to occurrences of several state-wide
entrance exams for junior middle schools, high schools, and universities. During
the period, more advances were paid by customers for the summer classes at
the
time of registration. As of June 30, 2006, the Company has $290,016 on
subscriber prepayment and prepayments instruction fees.
As
of
June 30, 2006, taxes payable consist of the following:
|
|
|
06/30/06
|
|
| Taxes
Payable |
|
|
|
|
|
Value
Added Tax
|
|
$
|
46,689
|
|
|
Operation
Tax
|
|
|
5,978
|
|
|
Stamp
Tax
|
|
|
175
|
|
|
Individual
Income Tax
|
|
|
11,852
|
|
|
Flood
and Security Prevention Fund
|
|
|
884
|
|
|
Living
Garbage Fees
|
|
|
16
|
|
|
Total
Taxes Payable
|
|
$
|
65,594
|
|
The
Company commences business in the PRC which is governed by the Income Tax Law
of
the PRC concerning Enterprises and various local income tax laws (the “Income
Tax Laws"). Under the Income Tax Laws, enterprises generally are subject to
an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise is located in specially
designated regions or cities for which more favorable effective rates
apply.
On
September 15, 2004, China Education Alliance executed a Plan of Exchange with
Zhong He Li Da Education Technology, Inc. (“ZHLD”), a corporation organized and
existing under the laws of People’s Republic of China. ZHLD applied to be as a
foreign invested company right after the merger, which business license has
been
approved as a foreign invested company on April 8, 2005. According to Chinese
taxation policy, there is income tax exemption for 2 years and half for 3 years
suitable to foreign invested company, advanced Technology Company or software
Development Company. ZHLD is a Company under the category of all three.
Therefore the Company enjoys this income tax exemption policy from April 8,
2005
the date approval as a foreign invested company. The formal documents about
income tax exemption in advance issued on December 26, 2005. The Company was
still enjoyed the income tax exempt status as of June 30, 2006.
As
stipulated by the relevant laws and regulations applicable to China's foreign
investment enterprises, the Company is required to make appropriations from
net
income as determined under accounting principles generally accepted in the
PRC
("PRC GAAP") to non-distributable reserves which include a general reserve,
an
enterprises expansion reserve and employee welfare and bonus reserves. In
accordance with the provisions of the Company’s Memorandum and Articles of
Association, the Company is required to appropriate 10% of the net distributable
profit after enterprises income tax to capital reserve.
The
general reserve is used to offset future extraordinary losses as defined under
PRC GAAP. The Company may, upon a resolution passed by the owners, convert
the
general reserve into capital. The employee welfare and bonus reserve is used
for
the collective welfare of the employees of the Company. The enterprise expansion
reserve is used for the expansion of the Company and can be converted to capital
subject to approval by the relevant authorities. The Company recorded reserves
of capital of $130,296 on June 30, 2006. No such adjustments are required under
accounting principles generally accepted in the United States of America in
2006.
| 13. |
Employee
Retirement Benefits and Post Retirement Benefits
|
According
to the Heilongjiang Provincial regulations on State pension scheme, both
employees and employers have to contribute pension. The pension contributions
are ranging from 8% that was contributed by individuals (employees) and the
Company is required to make contributions to the state retirement plan based
on
20% of the employees’ monthly basic salaries. Employees in the PRC are entitled
to retirement benefits calculated with reference to their basic salaries on
retirement and their length of service in accordance with a government managed
benefits plan. The PRC government is responsible for the benefit liability
to
these retired employees.
| 14. |
Commitments
and Contingencies
|
In
the
event that the Company succeeds in its business strategy, in all likelihood,
competition will develop. The degree of competition
cannot
presently be ascertained. However, there can be no assurances that the Company
will have the resources to compete effectively, especially to the extent that
the market experiences rapid growth.
No
government approvals are required to conduct the Company’s principal operations,
and the Company is not aware of any probable governmental regulation of our
business sectors in the near future. Although
management believes that the Company is in material compliance with the
statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company’s compliance with the
applicable statutes, laws, rules and regulations will not be challenged by
governing authorities or private parties, or that such challenges will not
lead
to a material adverse effect on the Company’s financial position, results of
operations or cash flows.
The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management,
the
individual regulatory and legal matters in which it might involve in the future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations or cash flows.
| 15. |
Loans
from Shareholder
|
In
connection with ABC Realty Merger (see Note 1), the shareholder, Xiqun Yu loaned
the Company for $100,000 at a 9% interest rate originally signed in December
2004. Annual amount of interest is payable together with principal. The
shareholder pays all necessary oversea consulting and advising fees, lawyer
fees, and accounting fees from period to period out of his own personal bank
accounts in the United States due to the strict laws and regulations imposed
by
the Chinese government on out-going foreign currency wire transfers. The amount
outstanding as of June 30, 2006 is $229,423. The loan matures in end of 2006.
The loan from shareholder has the option to convert in two years to company
common stock at the market price on the date the Company incurred the
loan.
ITEM
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The
following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto included elsewhere
herein.
The
statements contained in this report include forward-looking statements about
information of possible or assumed results of operations, business strategies,
financing plans, competitive position and potential growth opportunities.
Forward-looking statements include all statements that are not historical facts
and are generally accompanied by words such as “may,” “will,” “intend,”
“anticipate,” “believe,” “estimate,” “expect,” “should” or similar expressions
or the negative of such words or expressions. These statements also relate
to
the Company’s contingent payment obligations relating to acquisitions, future
capital requirements, potential acquisitions and the Company’s future
development plans and are based on current expectations. Forward-looking
statements involve various risks, uncertainties and assumptions. The Company’s
actual results may differ materially from those expressed in these
forward-looking statements.
Our
discussion and analysis of our financial condition and results of operations
are
based upon our unaudited 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 the reported amounts of assets, liabilities,
revenues and expenses. On an on-going basis, we evaluate these estimates,
including those related to useful lives of real estate assets, cost
reimbursement income, bad debts, impairment, net lease intangibles,
contingencies and litigation. We base our estimates on historical experience
and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. There can be no assurance that actual results will not differ
from those estimates.
The
discussion that follows is based on our consolidated results of operations
for
the three months period ended June 30, 2006 and 2005.
OVERVIEW
China
Education Alliance, Inc. (“CEDA”), formerly known as ABC Realty, Inc., is
registered in the state of North Carolina, USA. The company’s primary business
activity is online education and on-site training services. It offers large
scale of high-quality educational resources, and focuses on network education
as
well as on-site training. It is mainly operated through its wholly owned
subsidiaries, Harbin Zhonghelida Education Technology Company Limited with
registered website domain www.edu-chn.com for its online education and
Heilongjiang Zhonghe Education Center for its on-site training
services.
China
Education Alliance, Inc. dedicates to develop IT education industry and offer
network solution for the education course of China. As an excellent education
resources provider and operator, CEDA has a leading interactive business
platform. It made full use of the network resources, and broke through the
time
and space limits of the traditional teaching methods and the face-to-face
constraints on high-quality resources. Through the physical integrations and
successful case spreading, it serves to change the uneven education resources
distribution and create a better sharing of education resources across China.
Meanwhile, it is promoting the Chinese education by opening schools and training
agencies. It has shaped www.edu-chn.com to become a leading functional portal
website, through the enforcement of the “on-site” training business. It has
become a network and physical training agency.
As
a
provider and operator of high-quality education resources, China Education
Alliances, Inc., based on its know-how of the educational market in China and
its own strengths, currently takes the exam-oriented education in junior middle
and high school as its core business. The company combined its superior network
operating experience with rich education resources integrating experience,
and
takes the company’s website as a platform to carry out services like “Famed
Instructors Test Paper Store” through its service charging system by way of
rechargeable learning cards. The learners can study via online classrooms or
materials downloading for offline education. The company also provides on-site
teaching services under the “Big Classroom of the Famed Instructors” program
through its state-of-the-art training center.
www.edu-chn.com
is a major functional education resources portal website in China. It provides
plenty of client resources and strong brand promotion for business developing.
Under the website, there are four modules, eight alliances, nine platforms
and
eight columns of interactive entertainment columns. It provides informative
education products through the updated communication tools under
www.edu-chn.com. It provides multi-media resources such as college school,
middle school and elementary school test papers, courseware, and video data
since 1980s, owning intellectual property rights for more than 300,000 sets
of
courseware and test papers. www.edu-chn.com is a major enterprise-class
comprehensive education network platform which based on the network video
technology and the large data sources of elementary education resources. It
provides online education and material download for customers by integrating
“the big classroom of the famed instructors”. By the end of 2005, more than 3
million visitors had viewed the website.
Heilongjiang
Zhonghe Education Center engages in the on-site training services and
face-to-face tutorship under “The Big Classroom of the Famed Instructors”
program and its VOD courseware resources. The usable area for the training
center is about 3400 square meters, with 17 modern classrooms that has capacity
of 1,200 students. The courses covered each phases of compulsory education,
and
take the junior middle and high school as the key part.
While
the
company is focusing on the exam-oriented education in junior middle and high
school as its core business, it is also developing new services to fulfill
the
blanks of online vocational training services. www.360ve.com is a “high-quality
vocational teaching resource supermarket” to be launched in the coming future.
Based on the body of joint enrollment of vocational education, the portal
website will join China Vocational Education Society to conduct online vocation
training and the relevant certificate offering services. It aims to forge an
“online supermarket” for vocation trainees, as well as vocational training
agencies. While www.360ve.com
is a
“selling mall” of network platform which combines its own educational resources
with other authenticable educational resources, it almost concludes content
in
every sector so as to meet the different needs of different vocation learners.
CEDA will integrate the vocational education resources in www.edu-chn.com,
and
join the China Vocation Education Society to set up www.360ve.com. In the
future, it will become a powerful search engine for the vocational education
enrollment and a guider for the learners. The core business is to offer
network-based marketing and promoting solutions for training agencies, and
to
hold display and all-round promotions for training agencies. Meanwhile, with
the
assistance of China Vocational Education Society, www.360ve.com will establish
cooperating agencies with provincial education bureau as well as Branch Society
of China Vocational Education to attract investment and carry out strategic
cooperation with the outstanding training agencies in local area, especially
in
the aspects of joint enrollment, resources exchanging and on-site training
agencies establishment. www.360ve.com is expected to become a dominant media
and
battlefield for China’s vocation education. It would present the trend and
states of the vocational education to the public so as to create a dynamic
and
interactive vocation training system. Once it is fully integrated, the
vocation certificating center is expected to be an essential part of CEDA
business. Through the authorizing of China Vocation Education Society, the
vocational certificating center will contact and coordinate education ministry,
labor ministry and other authorized government agencies to draw up benchmark
for
different education training sectors and organize performance
evaluation.
The
Company has formed several strategic alliances with the Chinese vocational
education society, the government educated information center, the
authentication training center, and other multitudinous government department
and education department to enhance the influence of the Company, as well as
its
products and services provided.
The
Company has carried out various level cooperation with over one thousand
professors in their respective expertise fields, more than two thousand
membership schools, school principals exceeding three thousand, and school
teachers in excess of fifty thousand, as well as over one hundred news media
and
twenty scholarly research organizations.
In
order
for the company to continue developing products, expanding services, and growing
in the long-term, CEDA plans to finance $6 million through equity financing
in
the international capital market. About $4 million will be used to duplicate
exam-oriented model from regional to national. The balance will be used as
initial input for vocational market development and its “Millions of College
Students Employment Crossroad” program. The fund will also used to better assist
the utilizing of
unlimited space of network to promote resource sharing network solutions
featured with on-line instructors teaching and resource downloading to put
down
the barriers among different markets. With www.edu-chn.com is building
instructors’ resource base, an overall business operations can be completed as
the on-site training offered. The Regional Development will start with the
establishment of the regional instructors’ resource base to build local
tutorship centers by rental or cooperation. Once complete, it will start to
install local www.edu-chn.com station that is consisted of 15 to 20 servers
to
spread the educational resources and promoting the company. With the completion
of Exam-oriented-education market layout to be set nationwide. CEDA will take
every chance to integrate existing vocation education resource and come up
with
the solution of vocation education resource sharing.
RESULTS
OF OPERATIONS
Results
from Operations - Comparison of Three-month Period Ended June 30, 2006 and
2005
| |
|
June
30, 2006
|
|
June
30, 2005
|
|
|
Sales
|
|
$
|
2,166,854
|
|
$
|
285,411
|
|
|
Less:
Cost of Goods Sold
|
|
|
663,612
|
|
|
30,656
|
|
|
Gross
Profit
|
|
$
|
1,503,242
|
|
$
|
254,755
|
|
Revenues
increased by 659% in the second quarter to $2,166,854 in 2006 from $285,411
in
2005, resulting in net income of $1,302,959 for the second quarter of 2006
compared to net income of $292,822 for 2005. The company was in its initial
state of operation on December 2004, prior to June 30, 2005, the company devoted
to build up its business model, the business started expanding since then.
In
addition, this year the company started its marketing for the state-wide
entrance exams for junior middle schools, high schools, and universities, those
exams are held between May and July each year. More educational courses were
viewed and more materials were downloaded during such spam of time by the
students. The income from the stimulation test download was around $345,400.
The
training center was not in operation prior to June 30, 2005. Gross revenue
from
training center was around $424,700 in the second quarter, 2006, the gross
profit was around $223,200 and the gross margin was 52% in the three months
ended period ended June 30, 2006. The income was also attributable to the
increase of advertising income earned. The company has contract with a reputable
advertising company to handle its internet commercial accounts. The sales from
advertising were around $342,200.
Cost
of sales
increased by 2065% to $663,612 in the second quarter of 2006 as compared to
$30,656 of 2005. This was primarily due to the increase of sales, which results
the cost of teachers, booklets and simulation test material to increase.
Gross
profit margin
increased by 490% for the second quarter of 2006. Gross profit margins vary
from
product to product depending on a number of factors including: (a) cost of
materials; (b) overall market demand and individual customer demand; (c) cost
of
intellectual property rights; and (d) competitor pricing policies.
Selling
and operating expenses
represented expenditures in connection with the distribution and selling of
properties as well as expenses incurred for the operating of the business.
| |
|
June
30, 2006
|
|
June
30, 2005
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative
|
|
$
|
204,309
|
|
$
|
33,815
|
|
|
Total
Operating Expenses
|
|
|
204,309
|
|
|
33,815
|
|
| |
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
4,026
|
|
|
(2,219
|
)
|
|
Total
Other Income (Expenses)
|
|
$
|
4,026
|
|
$
|
(2,219
|
)
|
Selling,
general and administrative expenses increased by $170,494 or 504% from $33,815
in the second quarter of 2005 to $204,309 in the second quarter of 2006. The
unfavorable variance was mainly attributed to the increases in business
promotion, advertising events, and salaries to sales staffs.
Depreciation
increased by $29,699 or 60% to $78,477 for the second quarter of 2006 compared
to $48,778 for 2005. This was mainly attributable to the increase in one
building and the additional office equipments.
LIQUIDITY
AND CAPITAL RESOURCES
The
company’s assets primarily consist of its operating subsidiaries, marketable
properties for sales, cash and cash equivalents.
The
Company has $2,774,961 in cash and cash equivalent at June 30, 2006 compares
to
$285,411 at June 30, 2005. The Company’s current ratio at June 30, 2006 was
4.79. Its primary sources of funds include cash balances, cash flow from
operations, the potentially, the proceeds of prepayments made by customers,
in
addition, shareholder loaned to company to pay certain USA office maintenance
fees. The management endeavors to ensure that the funds are always available
to
take advantage of new investment opportunity and they are sufficient to meet
future liquidity and capital needs. Management considers current working capital
and borrowing capabilities adequate to cover the Company's planned operating
and
capital requirements. For future operating, management plans to finance $6
million through equity financing in the international capital
market.
Cash
and cash equivalents
increased by $2,351,663 or 556% to $2,774,961 as of June 30, 2006 compared
to
$423,298 as of June 30, 2005 were mainly due to the increase of
sales.
There
was
no restrictive bank deposit pledged as of June 30, 2006 and 2005. Therefore,
the
Company did not have to maintain any minimum balance in the relevant deposit
account as security.
Inventories
decreased by $3,568 or 75% to $1,166 as of June 30, 2006 from $4,734 as of
June
30, 2005. The decrease in inventories is primarily due to the significant
increase in sales. The cost of making debt cards is very small.
Prepaid
expense recorded
$115,549 as of June 30, 2006 (2005: $nil). Prepaid expenses are primarily
comprised of advance payments made for services to teachers for online materials
and video. The company was still in the initial stage of launching numeral
programs. Prior to June 30, 2005, therefore, no prepaid expense occurred during
the period prior to June 30, 2005.
Properties
and equipment
stated
at cost less accumulated depreciation and amortization consist of:
| |
|
June
30, 2006
|
|
June
30, 2005
|
|
|
Property
and Equipments
|
|
|
4,239,088 |
|
|
2,407,600
|
|
|
Less:
Accumulated Depreciation
|
|
|
(406,573
|
)
|
|
(130,077
|
)
|
|
Property
and Equipment, Net
|
|
$
|
3,832,515
|
|
$
|
2,277,523
|
|
Net
book
value of fixed assets increased by $1,554,992 or 68% to $3,832,515 as of June
30, 2006 compared to $2,277,523 as of June 30, 2005 was mainly attributable
to
the purchase of new building and office equipments and furniture in the amount
of about $1.8 million, less accumulated depreciation.
Depreciation
expense for the three months ended June 30, 2006 was $78,477.
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
| Current
Liabilities |
|
|
|
|
|
|
|
|
Accounts
payables and accrued expenses
|
|
$
|
7,989
|
|
$
|
11,515
|
|
|
Advances
on accounts
|
|
|
290,016
|
|
|
-
|
|
|
Loan
from shareholder
|
|
|
229,423
|
|
|
97,365
|
|
|
Wages
payable
|
|
|
4,567
|
|
|
-
|
|
|
Welfare
payable
|
|
|
6,575
|
|
|
-
|
|
|
Taxes
payable
|
|
|
65,594
|
|
|
77,714
|
|
|
Total
Current Liabilities
|
|
$
|
604,164
|
|
$
|
186,594
|
|
Current
liabilities
increased by $417,570 or 224% to $604,164 as of June 30, 2006 compared to
$186,594 as of June 30, 2005 were attributable to the increase in advances
on
accounts and other business expense payable. The shareholder pays all necessary
oversea consulting and advising fees, lawyer fees, and accounting fees from
period to period out of his own personal bank accounts in the United States
due
to the strict laws and regulations imposed by the Chinese government on
out-going foreign currency wire transfers. The amount outstanding as of June
30,
2006 is $229,423 compared to $97,365 as June 30, 2005.
Accounts
payable and accrued expenses
decreased by $3,526 or 31% to $7,989 as of June 30, 2006 compared to $11,515
as
of June 30, 2005 was attributable to the decrease in accrued
expense.
Advances
on accounts
recorded
$290,016 as of June 30, 2006 (2005: $nil) was attributable to the usage of
the
prepaid debit card system. Advances on accounts are deferred revenues prepaid
by
customers for the future download of materials thru company
website.
Loan
from shareholder
increased by $132,058 or 135% to $229,423 as of June 30, 2006 compared to
$97,365 as of June 30, 2005 was attributable to the shareholder payments on
behalf of the company to oversea financial advisors, consultants and accounting
fees for services provided.
Capital
reserve
represented that amount appropriated from net income after tax (Enterprise
Income Tax) for the year. As stipulated by the relevant laws and regulations
applicable to China's foreign invested enterprises, the company is required
to
make appropriations from net income as determined under accounting principles
generally accepted in the PRC ("PRC GAAP") to the statutory surplus reserves
which include a general reserve, an enterprises expansion reserve, and employee
welfare and bonus reserves. Pursuant to the relevant PRC regulations and the
provisions of the Company’s Memorandum and Articles of Association, the Company
is required to appropriate 10% of the net distributable profit after enterprise
income tax to capital reserve, profit attributable to the shareholders shall
be
appropriated in the following sequence; the general reserve is used to offset
future extraordinary losses as defined under PRC GAAP. The company may, upon
a
resolution passed by the owners, convert the general reserve into capital.
The
employee welfare and bonus reserve is used for the collective welfare of the
employees of the company. The enterprise expansion reserve is used for the
expansion of the company and can be converted to capital subject to approval
by
the relevant authorities. The Company record reserves of $130,296 for the three
months ended June 30, 2006. No such adjustments are required under accounting
principles generally accepted in the United States of America in
2006.
INDUSTRY
AND MARKET OUTLOOK
The
education resources distribution is uneven in different areas across China;
most
of the excellent teachers are in the developed areas and key middle schools.
Among the 15998 high schools in China, 847 of them are key schools, which
account for 5.29û.
Most of
the excellent teachers’ resources are in the key high schools, the ratio of
college entrance of key high school is higher than 90%, but the national average
ratio of college entrance is about 55%.
Most
of
high-quality resources of China elementary education often centralize in a
few
of key schools, and its amount and the scale are quite limited. Because the
college entrance rate of key high schools is higher than that of the ordinary
high schools, so, each student expects to enter the key high school where they
can obtain the most excellent teaching resources. The students who have poor
performance but want to enter into the key high school must pay additional
“school selecting fees”. According to the Chinese Nanfang Daily, in China the
school selecting fees was more than RMB 27 billion in 2005, which is over $3
billion. There are even about 20% students entering into high school through
sponsorship and school selecting fee in China. Thus it can be noted that the
China elementary and secondary education is in urgent need for high-quality
education resources.
On
the
whole, the China online education market is still at the preliminary stage.
In
2004, China online education market turnover reached RMB 14.4 billion, about
$1.8 billion. As China becomes more information-oriented, while people become
increasingly aware of the network’ function, the size of the online education
market will increase dramatically. iResearch, a well-known market consulting
firm, forecasts the China online market turnover in 2005, 2006, and 2007 will
reach RMB 18.1 billion, RMB 23.3 billion, and RMB 29.6 billion
respectively.
According
to the China Network Information Center’s statistics as of December 31, 2005,
the total number of internet users in China was 111 million, ranked second
over
the world, a increase of 17 million compared with the same period a year earlier
or 18.1% higher. The students account for 35.7%, about 39.627 million (objects
of exam-oriented education); company staff accounted for 29.70%, about 32.967
million (objects of profession education); the jobless accounted for 6.9%,
about
7.657 million (objects of vocational education); the China online education
market is of great potential.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
of
June 30, 2006, the Company had no material derivative instruments. The Company
may enter into derivative financial instrument transactions in order to mitigate
its interest rate risk on a related financial instrument in the future.
The
Company’s balance sheet includes amount of assets and liabilities whose fair
values are subject to market risk. Market risk is the risk of loss arising
from
adverse changes in market prices or interest rates. Generally, the Company’s
borrowing is short to medium term in nature and therefore approximate fair
value. The Company currently has interest rate risk as it related to its fixed
maturity mortgage participation interest. The Company seeks to limit the impact
of interest rate changes on earnings and cash flows and to lower its overall
borrowing costs by closely monitoring its interest rate debt.
The
Company’s equity risk as it related to its marketable equity securities, and
foreign currency risk as it relates to investments denominated in foreign
currencies. The Company and its subsidiaries are mainly located in China, there
were no significant changes in exchange rates, and however, unforeseen
developments may cause a significant change in exchange rates. The Company
is
subject to commodity price risks arising from price of construction
materials.
The
Company’s expansion risk is in connection with the rapid development of Internet
and growth of its users. Online learning will become one of the dominant and
efficient ways of learning for students. This is the main risk for business
development, considering the habits of customers and the popularization of
broadband business. The management team worked out a solution by direct
communicating with students in forefront, lightening up the idea that training
is far beyond face-to-face teaching, various of ways should be occupied, such
as
downloading learning, online learning and other ways to attract students to
use,
familiar with and rely on the internet and services, including but not limited
to individual service and interactive entertainment service of
www.edu-chn.com.
The
company’s competition risk lies with its education resources. As the provider of
education resource, the high-quality education resource is the core competitive
power for education enterprises. Currently, Chinese high-quality elementary
education resource is not balanced on a provincial-basis and locally focused
featuring key schools. The schools that have the local education resource can
open the local learning website, and have strong competitive power. CEDA will
duplicate the regional model in national market, with the strong internet
operational capability; it will build the national leading educational service
system and top brand of education service; integrate the advanced resource
of
local education organizations by united means and provide partial educational
resource for the public schools. Under the principle of providing operating
platform, CEDA plans to build the regional educational organizations, and reach
a win-win situation with public schools, and to realize the CEDA’s ambition of
sharing high-grade resources.
ITEM
3.
CONTROLS AND PROCEDURES
The
Company's Chief Executive Officer/President and its Chief Financial
Officer/principal accounting officer (collectively, the "Certifying Officers")
are responsible for establishing and maintaining disclosure controls and
procedures for the Company. Such officers have concluded (based upon their
evaluation of these controls and procedures as of a date within 90 days of
the
filing of this report) that the Company's disclosure controls and procedures
are
effective to ensure that information required to be disclosed by the Company
in
this report is accumulated and communicated to the Company's management,
including its principal executive officers as appropriate, to allow timely
decisions regarding required disclosure. The Certifying Officers also have
indicated that there were no significant changes in the Company's internal
controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and that there were no corrective
actions necessary with regard to any significant deficiencies and material
weaknesses.
PART
II -
OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
None.
ITEM
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEMS
5.
OTHER INFORMATION
N/A
ITEM
6.
EXHIBITS
(a) Exhibits.
| 31.1 |
|
Certification of
Xi Qun Yu |
| |
|
|
| 31.2 |
|
Certification of Wang Chunqing |
| |
|
|
| 32 |
|
Certification of Xi Qun Yu and Wang
Chunqing |
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| |
|
|
| |
China
Education Alliance, Inc. |
|
|
|
| Date: August 17, 2006 |
By: |
|
| |
Xi
Qun Yu
Chief
Executive Officer and President
|
| |
|
|
| |
|
|
| |
By: |
|
| |
Wang
Chunqing
Chief
Financial Officer
|