10-K/A 1 v300586_10ka.htm FORM 10-K/A


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549 

FORM 10-K/A
Amendment No. 2

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended: December 31, 2010

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to

Commission File No. 001-33771

CHINACAST EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
20-178991
(State or other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)

Suite 08, 20/F, One International Financial Centre, 1 Harbour View Street,
Central, Hong Kong
(Address of Principal Executive Offices) (Zip Code)

(852) 3960-6506
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

$0.0001 Common Stock
NASDAQ Global Select Market
   
Title of each class
Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨  No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨  No  þ

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ   No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
 
Accelerated filer  x
     
Non-accelerated filer  ¨
 
Smaller reporting company   ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No  þ

The aggregate market value of the voting stock on June 30, 2010 held by non-affiliates of the registrant was approximately $232,235,034 based on the reported last sale price of common stock on the NASDAQ Stock Market LLC on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of the registrant’s common stock at $.0001 par value as of March 11, 2011 was 49,778,952

DOCUMENTS INCORPORATED BY REFERENCE

None.
 

 
 
 
 
EXPLANATORY NOTE
 

This amendment on Form 10-K/A (the “Amendment”) is being filed as Amendment No. 2 to our Annual Report on Form 10-K for ChinaCast Education Corporation (“CEC”), as initially filed with the Securities and Exchange Commission (“SEC”) on March 16, 2011 (the “Original Report”), as amended on September 2, 2011. CEC is filing this Amendment for the purpose of 1) amending and supplementing Part I, Item 1, “Business” and Item 1A “Risk Factors,” Part II, Item 6 “Selected Financial Data,” Item 7 “Management’s Discussion and Analysis Of Financial Condition and Results Of Operation,” Item 8 “ITEM 8. Financial Statements and Supplementary Data” and Item 9A “Controls and Procedures,” and Part III, Item 11. “Executive Compensation “ and Part IV, Item 15. “Exhibits, Financial Statement Schedules.” of the Original Report, and 2) restating, for the correction of an error related to the accounting for a prepaid service fee as discussed in Note 27, under the caption “Second Restatement”, our audited consolidated financial statements and disclosures as well as our annual report on the internal control over financial reporting as a result of our reassessment of a material weakness in internal control over financial reporting for the fiscal year ended December 31, 2010. In addition, Note 27 discusses the restatement for the reclassification of cash flows related to the capital contribution by a non-controlling shareholder, disclosed in Amendment No. 1 to our Annual Report filed on September 2, 2011, under the caption “First Restatement”. All other items presented in the Original Report are unchanged. This Amendment does not reflect events occurring after the date of the Original Report or modify or update any of the other disclosures contained therein in any way other than the amendments referred to above. Accordingly, this Amendment should be read in conjunction with the Original Report and CEC’s other filings with the SEC.

In addition, as required by Rule 12b-15 of the Securities Exchange Act of 1934, this Amendment contains new certifications by our Principal Executive Officer and our Principal Financial Officer, filed as exhibits hereto.
 
 
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CHINACAST EDUCATION CORPORATION
Annual Report on Form 10-K for the Year Ended December 31, 2010

TABLE OF CONTENTS
 
PART I
   
ITEM 1. BUSINESS
 
2
ITEM 1A. RISK FACTORS
 
12
     
PART II
 
25
ITEM 6. SELECTED FINANCIAL DATA
  25
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
36
ITEM 9A. CONTROLS AND PROCEDURES
 
37
     
PART III
 
41
ITEM 11. EXECUTIVE COMPENSATION
 
41
     
PART IV
 
52
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
52
EX-10.28
   
EX-10.29
   
EX-10.30
   
EX-10.31
   
EX-10.32
   
EX-10.33
   
EX-10.34
   
     EX-10.35    
EX-10.36
   
EX-10.37
   
EX-23.1
   
EX-31.1
   
EX-31.2
   
EX-32.1
  
 
 
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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates”, “believes”, “expects”, “can”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predict”, “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions. Uncertainties and other factors, including the risks outlined under Risk Factors contained in Item 1A of this Form 10-K/A, may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements.

A variety of factors, some of which are outside our control, may cause our operating results to fluctuate significantly. They include:

 
the availability and cost of products from our suppliers ;

 
general and cyclical economic and business conditions, domestic or foreign;

 
the rate of introduction of new products by our customers;

 
the rate of introduction of enabling technologies by our suppliers;

 
changes in our pricing policies or the pricing policies of our competitors or suppliers;

 
our ability to compete effectively with our current and future competitors;

 
our ability to manage our growth effectively, including possible growth through acquisitions;

 
our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers;

 
our implementation of share-based compensation plans;

 
changes in the favorable tax incentives enjoyed by our PRC operating companies;

 
foreign currency exchange rates fluctuations;

 
adverse changes in the securities markets; and

 
legislative or regulatory changes in China.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Form 10-K/A is filed, and we do not intend to update any of the forward-looking statements after the filing date to conform these statements to actual results, unless required by law.
 
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PART I.

ITEM 1. BUSINESS

General

ChinaCast Education Corporation, its subsidiaries, and its variable interest entity (“VIE”) (collectively, the “Company” or the “Group”), is a leading post-secondary education and e-Learning services provider in China. The Company provides post-secondary degree and diploma programs through its three universities in China: The Foreign Trade and Business College of Chongqing Normal University, the Lijiang College of Guangxi Normal University and the Hubei Industrial University Business College. These universities offer fully accredited, career-oriented bachelor's degree and diploma programs in business, economics, law, IT/computer engineering, hospitality and tourism management, advertising, language studies, art and music. The Company provides its e-Learning services to post-secondary institutions, K-12 schools, government agencies and corporate enterprises via its nationwide satellite/fiber broadband network. These services include interactive distance learning applications, multimedia education content delivery, and vocational training courses. CEC is listed on NASDAQ Global Select Market with the ticker symbol CAST.

Our History and Current Business

We were formed as Great Wall Acquisition Corporation on August 20, 2003 as a blank check company. On December 22, 2007, we completed the acquisition of 51.22% of the outstanding shares of ChinaCast Communication Holdings Limited (“CCH”), a company listed on the Stock Exchange of Singapore (“SGX”) and subsequently changed its name to ChinaCast Education Corporation. During 2007, we acquired 100% of CCH and terminated our SGX listing.

CCH was incorporated under the laws of Bermuda on November 20, 2003 as an exempted company with limited liability, and as the holding company for a public flotation in Singapore of CCH’s business.

CCH’s principal subsidiary, ChinaCast Technology (BVI) Limited (“CCT BVI”), was founded in 1999 to provide funding for its satellite broadband Internet services through ChinaCast Company Ltd. (“CCL”) - Beijing Branch (“CCLBJ”) and ChinaCast Li Xiang Co. Ltd. (“CCLX”) through various contract agreements.

In late 2000, CCH identified demand for its services in the education industry. Given the limited resources of its tertiary institutions (i.e., university/college), and to meet the fast-growing population of its university students, the PRC Ministry of Education ( “MOE” ) granted licenses to approximately 30 (subsequently increased to 68) universities to conduct undergraduate and post-graduate courses by distance learning.

By the end of 2002, CCH had signed with over 15 universities in the PRC to use its satellite interactive distance learning network, serving over 50,000 students nationwide. In July 2003, it raised additional funding to upgrade its satellite technology to the Hughes Network Systems DirecWay satellite broadband network, and thereafter expanded its distance learning business by signing additional K-12, IT and management training customers.

In February 2008, the Company signed a definitive agreement with the owner of the Foreign Trade Business College of Chongqing Normal University (“FTBC”) to acquire 80% of the holding company of FTBC for a consideration of RMB480 million.

On September 18, 2009, the Company entered an agreement with all the shareholders of Chongqing Chaosheng Education and Investment Co., Ltd. (“Chaosheng”) to acquire the 100% equity interest in Chaosheng for a total consideration of RMB135 million. Chaosheng held the remaining 20% equity interest in Hai Lai. Chaosheng has no operating business and it only serves to hold the 20% interest in Hai Lai. After the completion of the acquisition of Chaosheng, the Company holds 100% of the equity interest of Hai Lai.

On October 5, 2009, the Company completed the acquisition of East Achieve Limited (“East Achieve”), the holding company which beneficially owns 100% of Lijiang College of Guangxi Normal University (“Lijiang” or “LJC”). LJC is an independent, for profit, private university affiliated with Guangxi Normal University. LJC offers four-year bachelor’s degree programs in tourism, hospitality, language studies, computer engineering, economics, law, music, art and physical education, all of which are fully accredited by the Ministry of Education. The total consideration was RMB365 million, of which RMB295 million has been paid and the remaining contingent consideration of RMB70 million was to be paid within 30 days of August 31, 2010.  Subsequently RMB20.54 million out of the RMB70 million was paid due to LJC’s performance shortfall in the 2009/2010 academic year.

On August 23, 2010 the Company completed the acquisition of Wintown Enterprises Limited (“Wintown”), the holding company which beneficially owns 100% of Hubei Industrial University Business College (“HIUBC”). The total consideration was RMB450 million, of which RMB360 million has been paid and the remaining contingent consideration of RMB90 million will need to be paid within 30 days of August 31, 2011.
 
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Since our acquisition of Hai Lai in April 2008, we have organized as two business segments, the E-learning and training service group (the “ELG”), encompassing all of the Company’s business before the acquisition, and the Traditional University Group (the “TUG”), offering bachelor and diploma programs to students in China.

The ELG offers products and services to customers under three principal business lines:

 
Post Secondary Education Distance Learning Services — We enable universities and other higher learning institutions to provide nationwide real-time distance learning services. Our “turn-key” packages include all the hardware, software and broadband satellite network services necessary to allow university students located at remote classrooms around the country to interactively participate in live lectures broadcast from a main campus. The Company currently services 15 universities with over 143,000 students in over 300 remote classrooms. For example, Beijing Aeronautical and Aeronautics University (Beihang), consistently ranked among the top ten Universities in China by the Ministry of Education, launched its distance learning network in cooperation with CCH in 2002. By 2010, the number of distance learning students of Beihang reached 25,000, at over 120 remote learning centers in China. In return for the turn-key distance learning services, we receive from the University a percentage of each remote student’s tuition.

 
K-12 Educational Services — We currently broadcast multimedia educational content to 6,500 primary, middle and high schools throughout the PRC in partnership with leading educational content companies, and renowned educational institutions. The educational content packages assist teachers in preparing and teaching course content. Each school pays us a monthly subscription fee for this service and a one-time charge for equipment used to provide the service.

 
Vocational/Career Training Services — In partnership with various government departments and corporate enterprises, we have deployed several hundred training centers throughout China providing job-skills training to recent graduates, employees of state-owned enterprises, and corporate employees.

The TUG offers products and services to customers under one principal business line:

 
Universities — FTBC, LJC and HIUBC are independent private residential universities affiliated with Chongqing Normal University,Guangxi Normal University and Hubei Industrial University respectively. With a total of over 32,000 on campus students, our three universities offer four-year bachelor’s degree and three-year diploma programs in finance, economics, trade, tourism, advertising, IT, music, foreign languages, tourism, hospitality, computer engineering, law and art, all of which are fully accredited by the Ministry of Education.

The China Education Market

According to the PRC Ministry of Education (MOE), the Chinese government plans to increase spending on public education significantly, from the budget allocation of 2.8% of GDP (US$212 billion) in 2005 to 4.0% (US$392 billion) by 2010. Even after this increase, the target level will still be less than in developed countries, which typically spend an average of over 5% of GDP on education services and education spending per capita in China is less than 10% of the level in the United States, implying significant upside.

In terms of number of enrollments, China has the largest market in the world. Compounded annual growth rate for 2004 to 2010 was 13% in China compared to less than 2% in the US. Despite its current size, we expect the number of post-secondary enrollments will continue to grow. The MOE plans to double the current number of seats in post-secondary education to over 40 million by 2020. The percentage of post-secondary students enrolled in universities as a percentage of the age group (18-22 year olds) is only 22% which is significantly less than other developed countries which is above 60%. The percentage of population in China with a four year college degree is even lower, at less than 5%.

We have identified four key drivers that will drive the growth in the Chinese education market. First, PRC government statistics suggest that Chinese consumers recognize education to be crucial to a better life. According to the China State Bureau of Statistics, the average family plans to spend roughly 7% of its disposable income on education. This spending is highly concentrated as most households have only one child. Second, the demographic trend in China will drive the demand for postsecondary education seats over the next 10 years as the percentage population at college age swells. Third, the expected financial reward after gaining an accredited college degree is much more than in the more mature countries such as the US. And fourth, the job market in China is becoming very competitive and a post secondary education is essential to get a good job.
 
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The MOE has been very active in reforming the post-secondary education sector in China. They have granted distance learning licenses to 68 of the country’s top colleges and universities, allowing them to offer degrees programs off-campus. Prior to that, all college education was residential. The MOE has also allowed the development of over 600 privately invested post-secondary colleges some of which are allowed to offer accredited degrees and diplomas. For K-12, the MOE launched the “All Schools Connected” project to equip all of China’s primary, middle and high schools with e-learning systems by 2010. The market for online vocational training and certification exam preparation is also developing rapidly.

The Company strives to tailor its education services to address China’s task of educating its rapidly growing post-secondary, vocational training and K-12 education sectors.

Business Strategy

The Company believes that the combination of its traditional bricks and mortar universities, its proprietary e-learning products and services, ownership of a nationwide broadband content delivery network and its ability to develop new educational content are essential to its long-term growth. In our TUG business, we develop our own teaching content for the instruction of the students. For our ELG business, the faculty members of the partnering universities develop the teaching content and the partnering universities own such content. We also purchase standard educational materials for our K-12 business from suppliers from which we develop the content in multimedia format, and then broadcast the content through our network for the use by K-12 schools. We do not publish/distribute any content on our websites and accordingly we do not need an internet content provider license. For the TUG business, all of our universities are granted an education license by the Ministry of Education, which allows the universities to teach and provide educational content to their students. For the ELG business, we distribute the content over our VSAT network. CCLX was granted by the Ministry of Industry and Information Technology to operate a VSAT network and currently, no other entity in the CEC corporate structure holds a VSAT license other than CCLX.

The Company seeks to achieve brand recognition in targeted high growth, high margin market segments, such as domestic and international post-secondary education and vocational/career training. It strives to maximize customer loyalty and increase margins by offering additional services not offered by traditional service providers. The Company’s growth strategy is to continue to develop new services via internal development and to complement organic growth by mergers and acquisitions to further expand its educational service offerings.

On April 11, 2008, the Company completed the acquisition of 80% of Hai Lai, which holds 100% of the Foreign Trade and Business College of Chongqing Normal University (“FTBC”). FTBC is an independent, for profit, private university affiliated with Chongqing Normal University. FTBC offers four-year bachelor’s degree and three-year diploma programs in finance, economics, trade, tourism, advertising, IT, music and foreign languages, all of which are fully accredited by the Ministry of Education. The Company subsequently acquired the remaining 20% interest of Hai Lai in September 2009.

On October 5, 2009, the Company completed the acquisition of East Achieve Limited (“East Achieve”), the holding company which beneficially owns 100% of Lijiang College of Guangxi Normal University (“Lijiang or LJC”). LJC is an independent, for profit, private university affiliated with Guangxi Normal University. LJC offers four-year bachelor’s degree programs in tourism, hospitality, language studies, computer engineering, economics, law, music, art and physical education, all of which are fully accredited by the Ministry of Education.

On August 23, 2010 the Company completed the acquisition of Wintown Enterprises Limited (“Wintown”), the holding company which beneficially owns 100% of Hubei Industrial University Business College (“HIUBC”). The total consideration was RMB450 million, of which RMB360 million has been paid and the remaining contingent consideration of RMB90 million, fair valued at RMB78 million, will need to be paid wthin 30 days of August 31, 2011.

The Company completed all the procedures required by the State Administration of Industry and Commerce (SAIC) relating to the above acquisitions. In addition, prior to each acquisition, we consulted with the Ministry of Education to confirm that the annual reviews of the education licenses of the universities will not be affected as a result of the ownership change. Subsequent to such acquisitions, the universities have passed all the annual reviews by the Ministry.

Sales and Marketing

To reach its customers, the Company utilizes a direct sales force, distributors, resellers, internet marketing and joint marketing efforts with strategic allies, seeking to market its products and services efficiently with minimal capital while fostering profitable customer relationships.  In addition, our bricks and mortar universities work on an annual basis with the PRC MOE to recruit our new university students.

The Company’s sales and marketing team of professional and supporting personnel, located in Beijing and Shanghai, has responsibility for relationship building, performing customer requirements analysis, preparing product presentations, conducting demonstrations, implementing projects and coordinating after-sales support. To reach new customers, the Company pursues various marketing activities, including direct marketing to potential clients and existing customers and strategic joint marketing activities with key partners and government departments such as the MOE and the Ministry of Labor.
 
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Competitive Strengths

•            Proven track record in successful acquisition of bricks and mortar universities

The Company acquired FTBC in April 2008, LJC in October 2009 and HIUBC in August 2010. The three universities collectively serve over 32,000 on-campus students offering fully accredited bachelor’s degree and diploma programs. The Company was the first US publicly listed post-secondary education service company that owned fully accredited universities in China.

•            E-learning first mover advantage in the PRC

Based on its general knowledge of the industry, the Company believes it is one of the first distance learning providers using satellite broadband services, and we believe that the Company is the market leader in this segment although there are no independent surveys of this segment. Currently, many broadband operators rely mainly on terrestrial networks that do not have extensive coverage, especially in less-developed areas of rural China. The Company believes its programs provide an attractive alternative for schools that wish to engage only a single company to provide all necessary satellite services, hardware, software and content.

•            Highly scalable, recurring revenue business model

The Company’s E-learning business model is capital efficient, profit driven and highly scalable. Its revenue stream from shared student tuition and school subscriptions provides predictability and visibility. The Company pays close attention to market forces and profit trends, adhering to a strict financial plan that precludes unnecessary capacity or technology not required by its customers.

•            CEC has an experienced and proven management team

The Company’s executive officers and directors have on average over fifteen years experience in China. They have established business relationships in the PRC; extensive experience in leading public companies in China, Hong Kong, Singapore and the United States; government regulatory know-how; and access to capital and long-term personal relationships in the industry.

Corporate Structure

The corporate structure of CEC as of December 31, 2010, together with its contractual relationship with CCLX, is as follows.


*
Glander Assets Limited holds the remaining 1.5% of CCT BVI.
 
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Definitions:

CEC
ChinaCast Education Corporation
   
CCH
ChinaCast Communication Holdings Limited
   
CEH
ChinaCast Education Holdings Limited
   
CEI HK
ChinaCast Education International Limited
   
CEI
ChinaCast Education Investment Limited
   
CBET
ChinaCast (Beijing) Education Technology Limited
   
CCN
ChinaCast Communication Network Company Ltd.
   
CCT BVI
ChinaCast Technology (BVI) Limited
   
CCT HK
ChinaCast Technology (HK) Limited
   
CCT Shanghai
ChinaCast Technology (Shanghai) Limited
   
YPSH
Yupei Training Information Technology Co., Ltd.
   
MET
Modern English Trademark Limited
   
Chaosheng
Chongqing Chaosheng Education and Investment Co., Ltd.
   
Hai Lai
Hai Lai Education Technology Limited
   
FTBC
Foreign Trade and Business College of Chongqing Normal University
   
Hai Yuan
Hai Yuan Company Limited
   
CCLX
ChinaCast Li Xiang Co., Ltd.
   
East Achieve
East Achieve Limited
   
Xijiu
Shanghai Xijiu Information Technology Co. Limited
   
Lian He
China Lianhe Biotechnology Co., Ltd.
   
LJC
Lijiang College of Guangxi Normal University
   
Wintown
Wintown Enterprises Limited
   
Rubao
Shanghai Rubao Information Technology Co. Limited
   
Jiyang
Wuhan Jiyang Education Investment Limited
   
HIUBC
Hubei Industrial University Business College
   
QPU
Qingdao Zhongshida Education Development Limited
   
Aohua
Dongying Aohua Education Consulting Limited
 
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CEC’s Holding Company Structure

CEC was incorporated on August 20, 2003 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a company having its primary operations in the PRC. On December 22, 2006, we completed the voluntary conditional offer made in Singapore by DBS Bank, for and on our behalf, to acquire all of the outstanding ordinary shares of CCH, pursuant to which we acquired 51.22% of the outstanding ordinary shares of CCH. On January 18, 2007, at the end of the offer period, total shares acquired was 80.27% (the “Acquisition”). Since CEC was not an operating company and the shareholders of CCH control the combined company after the Acquisition, the Acquisition was accounted for as a recapitalization in which CCH was the accounting acquirer. The cash consideration paid as part of the offer was accounted for as a capital distribution. For purposes of the preparation of the consolidated financial statements, the remaining 19.73% outstanding ordinary shares of CCH not acquired by CEC were reported as minority interest for the financial year 2005 and 2006.

Subsequent to the Acquisition, as of February 12, 2007, CEC acquired additional shares and increased its holdings to 93.73% of the outstanding ordinary shares of CCH. On April 10, 2007, CEC acquired 20,265,000 additional shares by the issuance of 951,853 CEC common shares and increased its holdings to 98.06% of the outstanding ordinary shares of CCH. On July 11, 2007, CEC acquired additional shares and increased its holdings to 100% of the outstanding ordinary shares of CCH. The following is a discussion of CCH’s business.

CEC’s wholly owned subsidiary, CCH, was incorporated in Bermuda on November 20, 2003 as an investment holding company to acquire the entire share capital of CCN in preparation for listing. CCH was subsequently listed in Singapore on May 14, 2004. CCN was established on April 8, 2003 to acquire the capital of CCT BVI to accommodate certain of its former investors. Before the establishment of CCN, CCT BVI was the entity holding the investment in the satellite businesses through its WFOE, CCT Shanghai. CCT Shanghai does not perform any activities or have any operations outside the scope of these arrangements. However, some of its former investors were not satisfied with the existing corporate governance structure of CCT BVI and were unable to obtain unanimous agreement to revise the Memorandum and Articles of Association ("MAA") of CCT BVI. As a way to accommodate these investors, CCN was established with a new corporate governance structure and a new MAA. Through a series of share swaps, CCN eventually acquired a 98.5% controlling interest of CCT BVI, and the new corporate governance structure and MAA of CCN was eventually adopted.  Glander Assets Limited holds the remaining 1.5%.

Prior to its public offering of securities on the Mainboard of the Singapore Exchange, CCH and its subsidiaries, CCT BVI, CCT HK and CCT Shanghai, engaged in a series of share exchanges pursuant to which shareholders of CCT BVI exchanged substantially all of their shares in that entity for CCH ordinary shares. At the same time, CCH engaged in a restructuring of its subsidiaries’ relationship with CCL and CCLX.

In 2010, CEC set up a new fully owned subsidiary CEH as a step towards simplifying the corporate structure of the Group. CEH is one of the intermediate off shore holding company. Through its fully owned subsidiary, CEI, a WFOE, Han Yang has been set up to eventually hold the university investment companies and other future acquisitions.

Contractual Arrangements with CCLX

To operate in the PRC satellite communication market, a company needs a Very Small Aperture Terminals (VSAT) license. Such license is issued by the Ministry of Industry and Information Technology, and needs to be inspected and renewed annually. Foreign ownership is forbidden for companies holding a VSAT license.

The Company provided its satellite related services through the CCLX and CCLBJ in the past through various contractual arrangements. Prior to December 2010, CC LX was owned by Li Wei (10%) and CCL (90%). Then, after our ex-chairman, Mr. Yin Jian Ping resigned and disposed of his stake in the Company, Mr. Yin, wanted his company, CCL, to focus on its own development. Accordingly, CCL terminated its arrangements with us and at our direction transferred its legal ownership in CCLX in December 2010 to the following  employees of the Company who then became the legal owners of record of CCL:  40% to Li Wei, 30% to  Jiang Xiang Yuan and 20% to Zhang Li Wen (the “CCLX Shareholders”). Accordingly, after such transfer by CCL , CCLX was held 50% by Li Wei, 30% by Jiang Xiang Yuan and 20% by Zhang Li Wen.

After CCL transferred the ownership of its 90% stake in CCLX to the CCLX Shareholders and terminated various contractual arrangements with CEC, CEC entered into new contractual arrangements with the CCLX Shareholders and CCLX. Both before and after this transfer, the Company enjoyed all of the economic benefits of CCLX through the relevant contractual arrangements which enabled us to consolidate the results of  CCLX into the Company’s financial statements. As discussed below, the CCLX Shareholders are parties to a series of agreements dated December 31, 2010, which are legally enforceable by the Company. There are no specific additional incentives for the CCLX Shareholders to perform their obligations under these agreements, but all the CCLX Shareholders are also employees of the Company and consequently have a common interest with the Company in ensuring that these contracts are honored.

The following describes contractual arrangements between CEC and its subsidiaries, CCLX and the CCLX Shareholders.
 
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 Benefits and Obligations under the Agreements that transfer economic benefits to CCT Shanghai

Technical Services Agreement between CCLX and CCT Shanghai

Before CCL transferred the beneficial ownership of its 90% stake in CCLX to the CCLX Shareholders and terminated the various contractual arrangements with CCT Shanghai and CCLX, the Company provided its services and products to end customers in the PRC through CCLX under the terms of a technical services agreement, dated August 11, 2003, between CCT Shanghai, CCL, Li Wei and CCLX, as amended on March 29, 2004 (the “Old Technical Services Agreement”). In addition, prior to such transfer, CCT Shanghai also entered into a Novation Deed to enable CCLX to assume the position of CCL and continue its obligations under another technical services agreement, dated November 15, 2000, among CCT Shanghai and CCL and its stockholders. The Novation Deed was entered into on September 11, 2003 among CCT Shanghai, CCLX, Li Wei, CCL and the shareholders of CCL. Under the Novation Deed, CCT Shanghai undertook to provide to CCLX the technical services described in the Old Technical Service Agreement and CCLX undertook to perform the duties, including the payment of technical service fee to CCT Shanghai, as described in the Old Technical Service Agreement between CCL and CCT Shanghai. CCT Shanghai does not perform any activities or have any operations outside the scope of these arrangements.
 
On December 31, 2010, CCLX and CCT Shanghai terminated the 2003 Technical Service Agreement and entered into a new technical service agreement for a term of 10 years (the “New Technical Service Agreement”) with terms similar to the old ones. CCT Shanghai is the exclusive services provider to CCLX with complete technical support, business support, financial support and related consulting services during the term of the agreement. CCLX prepares an annual budget for its business which is submitted to CCT Shanghai for approval. As consideration for its services, CCT Shanghai is entitled to change CCLX monthly service fees equal to the total revenue earned by CCLX less operating expenses reasonably incurred in the course of conducting the business. All the technical service fees of CCLX for the past three years have been paid to CCT Shanghai. CCT Shanghai did not remit the fees to CEC and was not obligated to do so. CCT Shanghai has the right to inspect and/or procure its auditor to inspect any records kept by CCLX. During the term of the agreement, unless CCT Shanghai commits gross negligence, or a fraudulent act against CCLX, CCLX may not terminate the agreement prior to its expiration date. CCT Shanghai can terminate the agreement upon 30 days’ prior written notice to CCLX at any time.

Exclusive Option Agreements

On December 31, 2010, CCT Shanghai entered into exclusive option agreements for a term of 10 years with the CCLX Shareholders, pursuant to which the CCLX Shareholders irrevocably granted CCT Shanghai an exclusive right to purchase100% of their equity interests in CCLX , for a consideration of RMB1 or the lowest price allowed by relevant laws and regulations, when it is permissible for a VSAT business to have 100% foreign investment, or CCT Shanghai’s designated party can acquire 100% of the equity interest of CCLX from the CCLX’s Shareholders at any time and from time and time.

  Agreements that provide to CCT Shanghai effective control over CCLX

Power of Attorney in favor of CCT Shanghai

Under the Power of Attorneys, the CCLX Shareholders irrevocably authorize CCT Shanghai to act on behalf of them with respect to all matters concerning their shareholdings in CCLX. The CCLX Shareholders also authorize CCT Shanghai to execute the transfer contracts stipulated in the Exclusive Option Agreement. The power of attorney remains in place so long as the CCLX Shareholders are shareholders of CCLX.

Pledge Agreements in favor of CCT Shanghai

Before CCL transferred the ownership of its 90% stake in CCLX to the CCLX Shareholders and terminated various old contractual arrangements with CCT Shanghai and CCLX, CCL and Li Wei entered into pledge agreements (the “ Old Pledge Agreements”) with CCT Shanghai and CCLX to pledge all their rights and interests associated with their stakes in CCLX, in favour of CCT Shanghai. On December 31, 2010, the Old Pledge Agreements were terminated. On the same date, the CCLX Shareholders , CCLX and CCT Shanghai entered into new pledge agreements (the “ New Pledge Agreements) with terms similar to the old one.

As collateral security for the prompt and complete payment and performance of the obligations of CCLX under the New Technical Agreements,  the CCLX Shareholders have pledged to CCT Shanghai a first security interest in all of their right, title and interest, whether now owned or hereafter acquired by the CCLX Shareholders, in the equity interest of CCLX. CCT Shanghai has the right to collect dividends generated by the equity interest under the pledge. In the event CCLX fails to pay the service fee in accordance with the New Technical Service Agreement, CCT Shanghai has the right, but not the obligation, to dispose of the equity interest pledged by the CCLX Shareholders in accordance with the provisions in the agreement.
 
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The pledge remains in place until all payments due under the old Technical Service Agreement have been made by CCLX. Upon the full payment of the consulting and service fees under the old Technical Service Agreement and upon termination of CCLX’s obligations under the New Technical Service Agreement, the old Pledge Agreement shall be terminated.

Acquisition of non-controlling interests of CCLX: Prior to the Termination Agreement entered into above among CCT Shanghai, CCLX and CCL, CCL had a non-controlling interest in CCLX in the amount of RMB19 million for the registered capital in CCLX. When the Termination Agreement was entered into, the Company acquired the non-controlling interest balance of RMB19million held by  CCL, the fair value of which was estimated by the Company to be RMB40 million. Instead of paying cash, the Company used RMB40 million of the Non-current advances the Company provided to CCL in prior years to settle the acquisition.

Prior Arrangements with CCL

The Company entered into various contractual agreements with CCL when it was the majority equity holder of CCLX.

CCL Technical service agreements : On November 15, 2000, CCT Shanghai, CCL and the investors of CCL entered into a technical service agreement ("CCL Technical Service Agreement") pursuant to which CCT Shanghai provided CCL with certain technical services and ancillary equipment in connection with CCL's satellite communication business, which was operated by CCLBJ. Prior to January 1, 2010, CCLBJ provided equipment support service to some of the customers of the Company utilizing equipment owned by CCLBJ in exchange for a service fee. After January 1, 2010, all the services provided by CCLBJ  was stopped and CCLX provided all the services required by customers since then. So in effect, CCLBJ ceased operation for 12 months as at December 31, 2010. However, CCL’s equity in CCLX was not transferred to the CCLX Shareholders until December 31, 2010.

Although technically a branch office of CCL and not a legal entity, CCLBJ was operated as a stand-alone group of businesses. CCLBJ maintains its own accounting records and bank accounts in its own name that are clearly separated from those of CCL. CCLBJ represents CCL’s Turbo 163 business, DDN Enhancement business and Cablenet business (the “Satellite Business”). The revenues and expenses of the branch office are not commingled with those of CCL. As compensation for the service, CCT Shanghai received a service fee that equaled the difference between total revenue less expenses of CCL's Beijing branch.

The Company provided CCL with interest free cash advances to finance acquisition of the related satellite equipment. CCL had undertaken that when regulation allows, the ownership of CCLX and all the relevant assets attributable to the satellite business operations in the books of CCL and its Beijing branch (collectively "Satellite Business") would be transferred to the Company, the consideration of which would be settled against the advances to CCL in the books of the Company at the sole discretion of the Company.  Accordingly, the Company considered the noncurrent advances were of the nature of a deemed investment in the Satellite Business.

Equity pledge agreement : To ensure the delivery of the service pursuant to the CCL Technical Service Agreement, pursuant to the pledge agreement, the investors of CCL pledged all their rights and interests, including voting rights in CCL and, if certain events occurred, the entitlement to dividends and appropriations to CCT Shanghai.

Due to the above agreements, and the fact that CCL Beijing branch is not a legal entity separated from CCL, CCL was determined to be a variable interest entity of ChinaCast.   Due to the fact that Company and its related party do not have (1) the power to direct the activities of CCL that most significantly affect CCL's economic performance,  (2)  the obligation to absorb losses of, or the right to receive benefits from CCL, the Company was not considered to be the primary beneficiary of CCL. Therefore CCL had never been included in the accompanying consolidated financial statements.

The CCL Technical Service Agreement and Equity Pledge agreement were terminated in 2010. On December 31, 2010, CCTSH, CCLX and CCL entered into a Service Agreement (the "Service Agreement") under which CCL will assist CCLX to renew the VSAT license for the next ten years. CCL was included as a party to the Service Agreement to minimize the risk that we would not be able to renew our VSAT license. CCL and Mr. Yin were parties responsible for the application for the existing VSAT license, and they have abundant experience with maintaining and renewing the VSAT license along with good relationships with the Ministry of Industry and Information Technology. The VSAT License is critical to the Company's E-learning and training services. Without the license, the Company is not allowed to conduct its business through satellite in China.  Prior to December 31, 2010, the license was renewed each year with the assistance from CCL.  In consideration of CCL's service in assisting the Company to obtain the renewal of the license, the Company shall pay an annual service fee to CCL in the amount of RMB 8.1 million during the service term of the Service Agreement and the RMB60 million remaining balance of the noncurrent advance, after deducting the purchase price of NCI in CCLX, will be used as a prepayment for this service. However, the annual renewal of VSAT license needs to be approved by a government agency and the result is not under the control of either CCL or CCLX, and CCLX undertakes to CCL in the Service Agreement that it will not take back nor recover any amount of the prepayment even though it subsequently does not require the service of CCL during the entire service term.
 
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Contractual Arrangements related to FTBC, LJC and HIUBC

FTBC, LJC and HIUBC are independent, private residential universities affiliated with Chongqing Normal University and Guangxi Normal University and Hubei Industrial University respectively. The Company acquired FTBC in April 2008, LJC in October 2009 and HIUBC in August 2010.  Our wholly foreign owned subsidiary, Yupei,  acquired the holding company (Hai Lai) of FTBC. For LJC and HIUBC the seller re-organized the ownership of the universities to offshore holding companies of wholly foreign owned subsidiaries which became the sole respective shareholder of the holding companies of LJC (Lianhe) and HIUBC (Jiyang) . The WFOE holding FTBC is Yupei Training Information Technology Co., Ltd. The WFOE holding LJC is Shanghai Xijiu Information Technology Co., Ltd. and the WFOE holding HIUBC is Rubao.

This structure offers us effective control over FTBC, LJC and HIUBC. Another commonly accepted structure in connection with foreign investment to education is contractual control structure through a VIE, similar to the structure between CCT Shanghai, CCLX and its shareholders. Compared to the VIE structure, our structure can offer us more protection and legally allow our subsidiaries to distribute dividends to us. See Risk Factors titled “The education sector, in which all of our businesses are conducted, and the telecommunication sector, upon which we are heavily reliant, each are subject to extensive regulation in China, and our ability to conduct business is highly dependent on our compliance with these regulatory frameworks,” and “Because our wholly-owned subsidiaries in China are considered foreign-invested, these subsidiaries may be considered ineligible to acquire the holding companies of FTBC, LJC and HIUBC and to indirectly obtain education licenses and permits in China and if they are deemed ineligible we may not be able to consolidate the financial results of our brick-and-mortar schools.” which addesses the risks involved with diect owneship.
 
Under the affiliation agreements between FTBC, LJC and HIUBC and their respective affiliated university, the affiliated universities are entitled to appoint directors, the aggregate voting rights of which are all under 50%, to the board of FTBC, LJC and HIUBC.Also, in the case of FTBC, the affiliated university is also entitled to supervise the following activities of FTBC:

 
·
Establishment of any major or department;
 
·
Daily education and administrative activities;
 
·
Examination and verification of qualified staffs responsible for administrative work and political work;
 
·
College development direction and various conditions and facilities required for running the college;
 
·
Administration of living service (Hou Qin), i.e., living related services, including dormitory, canteen, water supply, heating system; and
 
·
Student’s education administration, i.e, the administration on the student’s ideological and political education, the student’s psychological education and the student’s scholarship and subsidy.

Legal Advice on Group Structure

At the time of CCH listing on the Singapore Stock Exchange in 2004 it obtained legal advice that its business arrangements with CCL and CCLX, including the pledge agreements described in the previous section as well as CEC’s group structure, are in compliance with applicable PRC laws and regulations. The VIE structure of the group has been simplified since that time.

Research and Development

As most of CEC’s satellite technology is procured from various technology vendors, CEC does not conduct any research and development on the satellite technology used in its business.

Trademarks

CEC has no outstanding trademark applications.

Government Regulations

CEC’s business operations in the PRC and Hong Kong are not subject to any special legislation or regulatory controls other than those generally applicable to companies and businesses operating in the PRC. CEC has obtained all the necessary licenses and permits for its business operations in the PRC and Hong Kong, unless disclosed otherwise in this 10-K..

Pursuant to Rule 6 of the Independent College Establishment and Administrative Measures, the Ministry of Education and its local agencies (collectively, “MOE”) in Chongqing, Guangxi and Hubei are in charge of the following matters of FTBC, Lijiang College and HIUBC:

 
·
Administration of Education Permit, i.e., the issuance, updating and cancellation of the permit;
 
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·
Examination of Recordation of Recruiting Prospectus and Recruiting Advertisement to determine if the recruiting prospectus and advertisements are in compliance with applicable rules;
 
·
Publication of relevant information of college (i.e., basic information including the name of the college, campus, departments and enrolled students;
 
·
Annual inspection of college;
 
·
Reward to college, i.e., reward certificates or bonuses to recognize a college’s research and development contribution to a specific area;
 
·
Investigation and Penalty of college’s illegal activities, i.e., if a college commits any inappropriate actions, MOE can investigate such activities and penalize the college if such activities are indeed in violation of laws and regulations; and
 
·
Other duties provided in other laws and regulations, i.e., the MOE can also exercise such powers and rights or perform such duties to supervise and administer other laws and regulations affecting the supervision and administration of independent colleges.

CEC provides technical services to CCLX and relies on CCLX to provide the satellite network infrastructure for its services. CCLX is licensed under PRC laws to provide value-added satellite broadband services in the PRC.

Pursuant to the “Catalogue for the Guidance of Foreign Investment Industries” effective on December 1, 2007 (Appendix II “Notes for Catalogue of Restricted Industries” 5.7), value-added services: foreign investments are permitted with the proportion of foreign investment not exceeding 50%.

Article 6 of the “Provisions on Administration of Foreign-Invested Telecommunications Enterprises” prescribed that the proportion of foreign investment in a foreign invested telecommunications enterprise providing value-added telecommunications services (including radio paging in basic telecommunications services) shall not exceed 50% in the end. The proportion of the investment made by Chinese and foreign investors to a foreign-invested telecommunications enterprise in different phases shall be determined by the competent information industry department of the State Council in accordance with the relevant provisions. Currently CCLX is a domestic limited liability company that runs the value-added telecommunication business. Subject to the approval of the relevant PRC authorities, foreign capital is allowed to own no more than 50% of the total equity interests of CCLX under current PRC regulations.

For a description of the material risks related to the impact of government regulation, See “Risk Factors.”

Competition

In its business segments, CEC competes with state-owned and private enterprises that provide IT/Telecom services as well as educational services. These include large, well-funded state owned telecom companies such as China Telecom, China Netcom, China Unicom, China Railcom, China Satcom, China Orient, Guangdong Satellite Telecom and China Educational TV, as well as private educational service companies such as ChinaEdu, Beida Online, Ambow, China Education Alliance, and China-Training.com. Not all of these companies compete directly in all e-learning and educational content sectors the Company services and may offer services that are comparable or superior to CEC’s.

Seasonality

Like many education services companies, a significant amount of the Company’s sales occur in the second and fourth quarters, coinciding with enrollment periods of educational institutions. In addition, large enterprise and government customers usually allocate their capital expenditure budgets at the beginning of their fiscal year, which often coincides with the calendar year. The typical sales cycle is six to 12 months, which often results in the customer expenditure for hardware occurring towards the end of the year. Customers often seek to expend the budgeted funds prior to the end of the year and the next budget cycle. As a result, interim results are not indicative of the results to be expected for the full year.

Employees

As of March 1, 2010, CEC had 2,300 employees of which 1,600 are full-time employees. We believe CEC’s relationship with its employees to be good.

Available Information

This Annual Report on Form 10-K for the fiscal year ended December 31, 2010 is available on our website at www.chinacasteducation.com.  The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, excluding exhibits, and the Company’s complete audited financial statements for the fiscal year ended December 31, 2010, will be mailed without charge to any stockholder, upon written request to Secretary of the Company, ChinaCast Education Corporation, Suite 3316, 33/F, One IFC, 1 Harbour View Street, Central, Hong Kong.
 
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ITEM 1A. RISK FACTORS

In addition to the other information in this Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have affected, and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.

Risks Relating to our Business

Techniques Employed by Manipulative Short Sellers in Chinese Small Cap Stocks May Drive Down the Market Price of Our Common Stock

Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale.   As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short.  While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firm and independent research analysts.  These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base.  Issuers with business operations based in China and who have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks, can be particularly vulnerable to such short attacks.

These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts.  In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed shorts will continue to issue such reports.

While we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller.  You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.

We have had a fairly consistent short interest of approximately 2.4 million shares for the past five weeks representing approximately 5% of our public float and we have been singled out in articles and blogs as one with a high short interest. Accordingly, the price and trading volume of our stock is vulnerable to extreme fluctuations. On February 16, 2011, February 24, 2011 and March 7, 2011 a short seller published reports with inaccurate facts and misleading allegations against the Company which continues to be disseminated through chatter on the internet. The trading volume of the Company’s stock was approximately 2 million and 1.7 million on February 16 and March 7, 2011, respectively, significantly higher than to its average daily trading volume prior to the issuance of the first report. In particular, the short seller attack focused on the circumstances surrounding the acquisition by the Company of two universities, i.e., LJC and HIUBC.The short seller questioned the location of the offices of the respective WOFE holding company of each university; the purchase price paid in connection with the acquisitions; the role certain persons who had in interest in the companies which controlled the universities prior to the acquisition; and the restructuring of the university holding structure in connection with the acquisition. The Company responded in detail to the short seller attack in letters to its shareholders and press releases included on Form 8-K filed on February 16, 17 and 22, 2011.
 
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There are predictions that 2011 will bring more short seller attacks against Chinese companies.  Although we will continue to educate investors that the allegations made in the reports issued on the Company were inaccurate and misleading, the price of our stock remains vulnerable to the continuing attacks by this and any other short seller.

We do not have land use rights for parcels of land occupied by HIUBC and may not be able to obtain the building ownership certificates to the buildings on the land, may be subject to fines and accordingly may need to find alternative locations for our schools.

We do not have land use rights for parcels of land occupied by HIUBC. We may not be able to obtain the building ownership certificates to the buildings on the land because procurement of land use right is a condition precedent to obtain building ownership certificates to the buildings on the underlying land. The building ownership certificates confirm legal ownership of the buildings. Until we obtain the land use rights and building ownership certificates, we might not be able to sell the land and buildings or we might be subject to fines and penalties. Such liability might range from RMB 30,000 to RMB 300,000. If this occurs, it may disrupt our local business operation and may adversely affect our financial condition and results of operations.  Alternatively, if we fail to obtain the relevant land use rights and building certificates we may be required to find alternative locations for our schools..   .

The education sector, in which all of our businesses are conducted, and the telecommunication sector, upon which we are heavily reliant, each are subject to extensive regulation in China, and our ability to conduct business is highly dependent on our compliance with these regulatory frameworks.

The Chinese government regulates all aspects of the education sector, including licensing of parties to perform various services, pricing of tuition and other fees, curriculum content, standards for the operations of schools and learning centers associated with online degree programs and foreign participation. The Chinese laws and regulations applicable to the education and telecommunication sectors are in some aspects vague and uncertain, and often lack detailed implementing regulations. These laws and regulations also are subject to change, and new laws and regulations may be adopted, some of which may have retroactive application or have a negative effect on our business. Moreover, there is considerable ongoing scrutiny of the education sector and its participants.

We must comply with China’s extensive regulations on private and foreign participation in the education and telecommunication sectors, and compliance with such restrictions has caused us to adopt complex structural arrangements with our Chinese subsidiaries and Chinese affiliated entities. If the relevant Chinese authorities decide that our structural arrangements do not comply with these restrictions, we would be precluded from conducting some or all of our current business and our financial condition, results of operations and business strategy may be materially and adversely affected.

Because our wholly-owned subsidiaries in China are considered foreign-invested, these subsidiaries may be considered ineligible to acquire the holding companies of FTBC, LJC and HIUBC and to indirectly obtain education licenses and permits in China and if they are deemed ineligible we may  not be able to consolidate the financial results of our brick-and-mortar schools.

There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, particularly as they relate to the education and telecommunications sectors. We cannot assure you that we will not be found to be in violation of any current or future Chinese laws and regulations. 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 of China. Our Delaware holding company and our subsidiaries out of China are not educational institutions and do not provide educational services. We have acquired the holding companies of FTBC, LJC and HIUBC through our wholly owned subsidiaries in China. The WFOE holding FTBC is Yupei. The WFOE holding LJC is Xijiu. The WFOE holding HIUBC is Rubao. PRC law does not expressly prohibit a wholly foreign owned subsidiary from acquiring the holding companies of FTBC and LJC. To date, the applicable regulations on the foreign investment in education are the Regulations on Sino-Foreign Cooperative Schools, and the implementing regulations thereunder, which only provide for the ability of foreign education institutions to set up sino-foreign cooperative schools in China. Neither CCH nor its various offshore entities are qualified foreign education institutions, and accordingly, it is impractical to restructure FTBC and LJC into sino-foreign cooperative schools. Furthermore, in response to our inquiries on a no name basis with the Ministry of Education, the ability of a wholly foreign owned subsidiary to acquire a holding company of a college is not settled. We therefore have disclosed that our wholly foreign owned subsidiaries may be considered ineligible to acquire the holding companies of FTBC and LJC.

Our wholly owned subsidiaries in China, which are considered foreign-invested, may be considered ineligible to acquire the holding companies of FTBC, LJC and HIUBC to indirectly obtain education licenses and permits in China. Moreover, if a Delaware holding company were to become an educational institution in the future, there is no assurance that the PRC Ministry of Education or any other regulator in China would retrospectively approve of an ownership of FTBC, LJC or HIUBC. If we or any of our Chinese subsidiaries or Chinese affiliated entities are found to be or to have been in violation of Chinese laws or regulations requiring foreign ownership or participation in the education sector to be by an established foreign educational institution or limiting foreign ownership or participation in the education or telecommunication sectors, the relevant regulatory authorities have broad discretion in dealing with such violation, including but not limited to:
 
 
·
levying fines and confiscating illegal income;

 
·
restricting or prohibiting our use of the proceeds to finance our business and operations in China;

 
·
requiring us to restructure the ownership structure or operations of our Chinese subsidiaries or Chinese affiliated entities;

 
·
requiring us to discontinue all or a portion of our business; and/or

 
·
revoking our business licenses.

Any of these or similar actions could cause significant disruption to our business operations or render us unable to conduct all or a substantial portion of our business operations, and may materially and adversely affect our business, financial condition and results of operations.  For the year ended December 31, 2010, revenue attributable to Yupei and its subsidiaries accounted for 27.2% of the Group’s revenue.  For the year ended December 31, 2010, revenue attributable to Xijiu and its subsidiaries accounted for 23.7% of the Group’s revenue.  For the year ended December 31, 2010, the revenue attributable to Rubao and its subsidiaries accounted for 8.3% of the Group’s revenue.
 
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If the PRC government finds that the contractual agreements that establish the structure for operating our VSAT business in China do not comply with PRC governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in such operations.

Current PRC laws and regulations place certain restrictions on foreign investments in VSAT business. Specifically, foreign ownership in an value-added telecommunication service provider, which include VSAT business, may not exceed 50%. Therefore, we conduct our VAST business through contractual control arrangement with our VIE entity in the PRC, CCLX, and its shareholders. Our contractual arrangement with CCLX and its shareholders enables us to exercise effective control over this entity and hence treat it as our consolidated affiliated entity and consolidate its results. For a detailed discussion of these contractual arrangements, see “Corporate Structure.”

 

We cannot assure you, however, that we will be able to enforce these contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we do not comply with applicable laws and regulations, it could adopt the following measures to deal with such non-compliance:

·         impose fines or other monetary penalties on CCLX or CCT Shanghai;

·         revoke the business and operating licenses of CCLX and CCT Shanghai;

·         require CCLX and CCT Shanghai to discontinue or restrict their operations;

·         impose conditions or requirements with which we, CCLX or CCT Shanghai may not be able to comply;

·         require us, CCLX and CCT Shanghai to restructure our operating structure and operations; or

The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.

We rely on contractual arrangements with our affiliated consolidated entity in China and its shareholders, for our VSAT business operation, which may not be as effective in providing operational control or enabling us to derive economic benefits as through ownership of controlling equity interest.

We rely on and expect to continue to rely on contractual control arrangement with CCLX and its respective shareholders to operate our VSAT business. These contractual arrangements may not be as effective in providing us with control over CCLX as ownership of controlling equity interests would be in providing us with control over, or enabling us to derive economic benefits from the operations of, CCLX. If we had direct ownership of CCLX, we would be able to exercise our rights as a shareholder to (i) effect changes in its board of directors, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level, and (ii) derive economic benefits from the operations of CCLX by causing it to declare and pay dividends. However, under the current contractual arrangements, as a legal matter, if CCLX or any of its shareholders fails to 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 available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if shareholders of CCLX were to refuse to transfer their equity interests in CCLX to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may have to take a legal action to compel them to fulfill their contractual obligations.

If (i) the applicable PRC authorities invalidate these contractual arrangements for violation of PRC laws, rules and regulations, (ii) CCLX or its shareholders terminate the contractual arrangements or (iii) CCLX or its shareholders fail to perform their obligations under these contractual arrangements, our VSAT business operation in China would be materially and adversely affected.


The tuition charged by CCLX for certain programs, and the post-secondary and diploma programs that we provide curriculum programs to are all subject to price controls administered by the Chinese government, and our revenue is highly dependent on the level of these tuition charges.

Our revenue from e-Learning services comes primarily from service fees that are paid by customers or students and calculated as a percentage of the tuition revenue of CCLX. We provide services to these entities and the tuition charges for these programs are subject to price controls administered by various price control offices under China’s National Development and Reform Commission, or NDRC. Similarly, our revenue from the curriculum programs that we offer to post-secondary and diploma programs is also directly dependent on the tuition revenue of those schools, and those tuition charges are subject to administrative price controls. In light of the substantial increase in tuitions and other education-related fees in China in recent years, China’s price control authorities may impose stricter price control on tuition charges in the future. If the tuition charges upon which our revenue depends, particularly the tuition charges for CCLX, were to be decreased or if they were not to increase in line with increases in our costs because of the actions of China’s administrative price controls, our revenue and profitability would be adversely affected.

We have a relatively short operating history and are subject to the risks of a new enterprise, any one of which could limit growth, content and services, or market development.

Our short operating history makes it difficult to predict how our businesses will develop. In addition, while we have historically provided distance learning services, we have only recently started our post-secondary education business. Accordingly, we face all of the risks and uncertainties encountered by early-stage companies, such as:

 
uncertain growth in the market for, and uncertain market acceptance of, products, services and technologies;

 
the evolving nature of education and e-Learning services and content; and

 
competition, technological change or evolving customer preferences that could harm sales of services, content or solutions.

If we and CCLX are not able to meet the challenges of building businesses and managing growth, the likely result will be slowed growth, lower margins, additional operational costs and lower income.

We may not be able to successfully execute future acquisitions or efficiently manage the businesses we have acquired to date or may acquire in the future.

Our recent acquisitions and any future acquisitions expose us to potential risks, including risks associated with the diversion of resources from our existing businesses and the inability to generate sufficient revenue to offset the costs and expenses of acquisitions. In addition, the revenue and cost synergies that we expect to achieve from our acquisitions may not materialize. Any of these events could have an adverse effect on our business and operating results. We expect to continue to expand, in part, by acquiring complementary businesses. The success of our past acquisitions and any future acquisitions will depend upon several factors, including:

 
our ability to identify and acquire businesses on a cost-effective basis;

 
our ability to integrate acquired personnel, operations, products and technologies into our organization effectively;
 
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We may not be able to successfully execute future acquisitions or efficiently manage the businesses we have acquired to date or may acquire in the future.

Our recent acquisitions and any future acquisitions expose us to potential risks, including risks associated with the diversion of resources from our existing businesses and the inability to generate sufficient revenue to offset the costs and expenses of acquisitions. In addition, the revenue and cost synergies that we expect to achieve from our acquisitions may not materialize. Any of these events could have an adverse effect on our business and operating results. We expect to continue to expand, in part, by acquiring complementary businesses. The success of our past acquisitions and any future acquisitions will depend upon several factors, including:

 
our ability to identify and acquire businesses on a cost-effective basis;

 
our ability to integrate acquired personnel, operations, products and technologies into our organization effectively;
 
our ability to retain and motivate key personnel and to retain the students of the acquired businesses;

 
unanticipated problems or legal liabilities of the acquired businesses; and

 
tax or accounting issues relating to the acquired businesses.

If we are presented with appropriate opportunities, we may acquire additional complementary companies. The integration of acquired companies diverts a great deal of management attention and dedicated staff efforts from other areas of our business. A successful integration process is important to realizing the benefits of an acquisition. If we encounter difficulty integrating our recent and future acquisitions, our business may be adversely affected. The acquisitions may not result in the expected growth or development, which may have an adverse effect on our business. We plan to continue to make strategic acquisitions, and identifying acquisition opportunities could demand substantial management time and resources. Negotiating and financing the potential acquisitions could involve significant cost and uncertainties. If we fail to continue to execute advantageous acquisitions in the future, our overall growth strategy could be impaired, and our operating results could be adversely affected. If we are unable to effectively execute our acquisition strategy or integrate any acquired business, our business, financial condition and results of operations may be materially and adversely affected. In addition, if we use our equity securities as consideration for acquisitions, the value of your common stock may be diluted.

Failure to effectively and efficiently manage the expansion of our school network may materially and adversely affect our ability to capitalize on new business opportunities.

We plan to continue to expand our operations in different geographic locations in China. This expansion has resulted, and will continue to result, in substantial demands on our management, faculty, operational, technological and other resources. Our planned expansion will also place significant demands on us to maintain the consistency of our teaching quality and our culture to ensure that our brand does not suffer as a result of any decreases, whether actual or perceived, in our teaching quality. To manage and support our growth, we must improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified teachers and management personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets. 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 and learning centers 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.

If we are unable to achieve or maintain economies of scale with respect to our various lines of business, our results of operations from these businesses may be materially and adversely affected.

Each of our lines of business involves a degree of upfront investment in the development of programs or the acquisition of contract rights to provide services to programs, and our revenue and profitability depend on the number of students in these programs. CCLX to which we provide support and services, and from which we derive a significant portion of our revenue and profits, requires considerable investments of time and resources to develop. In many cases, CCLX also requires that we make substantial investments in collaborative alliances.  In the event we need to make an investment in our collaborative alliances, we can use the RMB generated by our operations in the PRC to make an equity investment, or we can choose to purchase certain assets of our collaborative alliances to complete an investment, in order to minimize the effect of SAFE restrictions.  The profitability of these programs depends on the ability of the programs to attract students. If the programs or schools are unable to recruit enough students to offset the development and operating costs, our results of operations will be adversely affected.

Because we face significant competition in several of our lines of business, we could lose market share and may need to respond by lowering our prices, which could materially and adversely affect our results of operations.

The private education sector in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and intensify. We face competition in each major program we offer and each geographic market in which we operate. Our student enrollments may decrease due to intense competition. While we are trying to enter into agreements with additional post-secondary and diploma programs with respect to their degree programs, we face competition from other service providers and may not succeed in our efforts.

There are also many new entrants seeking to participate in the education sector in China, including educational institutions from overseas that are attracted by the education market in China. Although restrictive regulation of the education sector in China may have limited our competition in the past, any deregulation of this industry, or easing of restrictions on foreign participants, could increase the competition we face in one or more lines of business.
 
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We may not compete successfully with large, well-funded state-owned and private enterprises in our e-Learning industry, which could result in reduced revenue.

Competition in providing education/training and enterprise data networking service is becoming more intense in the PRC. Large, well-funded state-owned enterprises, such as China Telecom, China Netcom, China Unicom, China Railcom, China Sat, China Orient, Guangdong Satellite Telecom and China Educational TV, as well as private enterprises like chinaedu.net, Beida Online, Ambow, and Tengtu, may offer services that are comparable or superior to ours. As there are no independent market surveys of our business segments, we are unable to ascertain our market share accurately. Failure to compete successfully with these state-owned enterprises will adversely affect our business and operating results.

If we fail to keep pace with rapid technological changes, especially in the satellite and distance learning and education and post-secondary education industries, our competitive position will suffer.

Our market and the enabling technologies (including satellite and distance learning technology) used in our education/training business are characterized by rapid technological change. As our services are primarily based on satellite broadband infrastructure, we rely on CCLX. As such, CEC also relies on CCLX to keep pace with technological changes. Prior to our acquisition of CCH, CCH’s stockholders provided it the funding it required to expand and to provide CCLX with the financial support to acquire required technology. Failure to respond to technological advances could make our business less efficient, or cause our services to be of a lesser quality than our competitors. These advances could also allow competitors to provide higher quality services at lower costs than we can provide. Thus, if we are unable to adopt or incorporate technological advances, our services will become uncompetitive.

Our ability to attract and retain customers and students is heavily dependent on our reputation, which in turn relies on our maintaining a high level of service quality.

We need to continue to provide high quality services to our existing customers and students to maintain and enhance our reputation, and we also need to attract and retain customers and students for our various lines of business. All of our business lines are highly dependent on existing and potential students perceiving our programs as high quality and worth the investment of time and money that they require of students. If any of the programs we operate or support experience service quality problems, our reputation could be harmed and our results of operations and prospects could be materially and adversely affected.

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 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. There are a limited number of teachers in China with the necessary experience to teach our courses and 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 at a faster pace 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, admissions and assessment tests, admissions standards 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, learning centers and programs 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.

We may not succeed in attracting additional customers or students and our growth prospects could suffer.

Although our strategy is to increase the number of customers and students using our services, we may not be able to attract additional customers or students. Developing and entering into a relationship with a customer requires considerable effort on our part, and we may spend considerable time and still may not be successful in developing a new customer. Our ability to expand our services to additional customers and students is dependent on our ability to identify potential partners who can provide course offerings that will be attractive to the target market and to develop a mutually acceptable arrangement with the university for the development of a program. Some of the universities offering online degree programs that do not utilize our services have developed their own technology platforms, and others have entered into service agreements with other service providers. Some of the universities we would like to partner with may not have goals and objectives that are compatible with ours, may be subject to long-term contracts with other service providers, or may have cumbersome decision-making procedures that may delay or prohibit our entering into a service relationship with them. In addition, some of these universities are also being pursued by our competitors. As a result, we cannot predict whether we will be successful in attracting additional universities to which we can provide services. If we are unsuccessful in establishing new service relationships, our strategic growth objectives may not be achieved, thereby adversely impacting our prospects and results of operations.
 
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Our business may be harmed if CCLX upon which we rely fail to perform their obligations.

We provide services over broadband satellite. Pursuant to the technical services agreement between them, CEC provides technical services to CCLX, which is licensed to provide value-added satellite broadband services in the PRC. CEC provides its technical services to customers or students of CCLX, whom it considers to be its own customers or students. CEC also engages CCLX to provide the required satellite broadband service when a customer in China engages CEC directly.

CEC does not own directly or indirectly, CCLX. Although the technical services agreement and the pledge agreements executed by the CCLX Shareholders do not grant CCT Shanghai any express management control over the CCLX, the CCLX Shareholders have executed powers of attorney in favour of CCT Shanghai to exercise all the shareholder rights on behalf of them. In effect, we have actual control over CCLX. For example: our COO has been the general manager of CCLX since their structure was in place, and we also have veto right to approve the CCLX budget. These safeguards may not be enforceable or effective due to lack of conducting share pledge registration with competent governmental authorities or some other reasons. We have no other legal control over CCLX. We will be able to register the pledge agreements because the PRC administration for industry and commerce has recently established the official process for registering share pledge arrangements. Previously, there was no implementing regulation governing the registration of share pledges, so the PRC administration for industry and commerce was reluctant to accept the registration of pledge arrangements. We only need to register the pledge agreement with the Fengxian Administration for Industry and Commerce to validate the pledge.

As such, we are dependent on the due performance by CCLX of their obligations, and if CCLX fails to perform its obligations under or terminate the technical services agreement between them, we will be unable to provide our services.
 
We may not be able to make significant changes to the courses offered by the universities without the support of the affiliated universities.
 
While we have effective control over FTBC, LJC and HIUBC, pursuant to the affiliation agreements between FTBC, LJC and HIUBC and their respective affiliated university, the affiliated universities are entitled to appoint directors with aggregate voting rights of under 50%, to the board of FTBC, LJC and HIUBC. The respective affiliated universities have significant influence related to establishment of any major or department, college development directions and daily education and administrative activities. Accordingly, for example, ChinaCast is unable to make significant changes to the courses offered by the universities without the support of the affiliated universities.
 
Our distance learning business will be materially and adversely affected If CCLX fails to renew its VSAT license.

With its VSAT license, CCLX is licensed under PRC laws to provide value-added satellite broadband services in the PRC. CEC provides technical services to CCLX and relies on CCLX to provide the satellite network infrastructure for the distance learning services. The VSAT license has to be renewed annually. If CCLX fails or is unable to renew the VSAT license, our distance learning service, which relies on the satellite operation, would be materially and adversely affected. If CCLX does not comply with the restrictions and conditions imposed by PRC authorities to maintain the VSAT licenses, the VSAT license could be suspended or revoked or the renewal of the VSAT license could be rejected or delayed.

We have entered into a license renewal service agreement with CCL, under which CCL will assist CCLX to renew its VSAT license for a service tem of 10 years until December 31, 2020. If CCL does not perform or is unable to successfully assist CCLX to renew its VSAT license, our distance learning business would be materially and adversely affected.

We may be unable to enforce the CCT Shanghai pledge agreements with CCLX to obtain 100% of the equity interest of CCLX.

Although we have been advised by counsel that the pledge agreement between CCT Shanghai and CCLX are valid under PRC law, we cannot acquire the pledged equity interest directly if we choose to enforce the pledge agreement, because PRC Security Law prohibits direct transfer of pledged equity interest to a pledgor when the pledgor chooses to enforce the pledge, and requires that the disposal of pledged security interest must be accomplished by auction or public tender procedures so that we would have to prevail at such auction although any losses incurred by CCT Shanghai will get compensated from the proceeds of enforcement of pledged equity interest prior to those unsecured debts. Moreover, even if we prevail in such auction or public tender procedures, we still are not allowed to hold 100% of the equity interest of CCLX because Chinese law currently prohibits foreign investors from owning greater than 50% of the equity interests in companies engaged in the VSAT business in the PRC. Therefore, unless the equity interest restriction is amended or repealed, and subject to the approval of the relevant government authorities, CEC will only be entitled to take possession and ownership of up to a 50% interest in CCLX through CCT Shanghai in accordance with current applicable PRC law and regulations.

Notwithstanding the above, the fundamental purpose of the pledge agreement is to fortify any breach of the contractual agreements by CCLX and its shareholders, and to compensate any losses incurred by CCT Shanghai that are caused by such breach. CCT Shanghai has entered into exclusive option agreements with CCLX and its shareholders, pursuant to which CCT Shanghai can acquire 100% of the equity interest of CCLX from the CCLX’s shareholders when it is permissible for VSAT business to have 100% foreign investment, or CCT Shanghai’s designated party can acquire 100% of the equity interest of CCLX from the CCLX’s shareholders at any time and from time and time.
 
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If we and CCLX do not manage growth successfully, our growth and chances for continued profitability may slow or stop.

We and CCLX have expanded operations rapidly during the last several years, and we plan to continue to expand with additional solutions tailored to meet the different needs of end customers and students in specific market segments. This expansion has created significant demands on administrative, operational and financial personnel and other resources, particularly the need for working capital. Additional expansion in existing or new markets and new lines of business could strain these resources and increase the need for capital, which may result in cash flow shortages. We or CCLX’s personnel, systems, procedures, and controls may not be adequate to support further expansion.

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 common stock.

We have experienced, and expect to continue to experience, seasonal fluctuations in our revenue and results of operations, primarily due to seasonal changes in the number of students who are enrolled in, or served by, our businesses. Historically, our largest revenue student enrollments occur in the fall, and we generally recognize revenue over the twelve-month period following these enrollments. As a result, our revenue in the third quarter and fourth quarter of each year, representing the fall semester, have been higher than the other two quarters, which represent the spring semester. Our expenses and costs, however, do not necessarily correspond with changes in our revenue or the number of students who are enrolled in, or served by, our businesses. We expect quarterly fluctuations in our revenue and results of operations to continue. These fluctuations could result in volatility and adversely affect the price of our common stock. As our revenue grows, these seasonal fluctuations may become more pronounced.

Unexpected network interruptions caused by system failures, natural disasters, or unauthorized tamperings with systems could disrupt our operations.

The continual accessibility of our web sites and the performance and reliability of CCLX’s satellite network infrastructure are critical to our reputation and our ability to attract and retain users, customers, students and merchants. Any system failure or performance inadequacy that causes interruptions in the availability of our services, or increases response time, could reduce our appeal to users, customers and students. Factors that could significantly disrupt our operations include:

 
system failures and outages caused by fire, floods, earthquakes or power loss;

 
telecommunications failures and similar events;

 
software errors;

 
computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems; and

 
security breaches related to the storage and transmission of proprietary information, such as credit card numbers or other personal information.

We and CCLX have limited backup systems and redundancy. Future disruptions or any of the foregoing events could damage our reputation, require us to expend significant capital and other resources and expose us to a risk of loss or litigation and possible liability. Furthermore, as we rely on CCLX to provide the satellite network infrastructure, if CCLX suffers such disruptions or failure, we may have to provide CCLX with substantial financial support. Neither we nor CCLX carries any business interruption insurance to compensate for losses that may occur as a result of any of these events. Accordingly, our revenues and results of operations may be adversely affected if any of the above disruptions should occur.

If we and CCLX lose key management personnel, our business may suffer.

Our continued success is largely dependent on the continued services of our key management personnel, as well as those of CCLX, and on our ability to identify, recruit, hire, train and retain qualified employees for technical, marketing and managerial positions. The loss of the services of certain of our or CCLX’s key personnel, including Messrs. Chan and Li, without adequate replacement, could have an adverse effect on us. Each of these individuals played significant roles in developing and executing our overall business plan, maintaining customer relationships and proprietary technology systems and maintaining relationships with the relevant PRC regulatory authorities. While none is irreplaceable, the loss of the services of any would be disruptive to our business. Competition for qualified personnel in Chinese telecommunications and Internet-related markets is intense. As a result, we may have difficulty attracting and retaining them.
 
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Our stockholders may have securities law claims against us for rescission or damages that are not extinguished by consummation of the acquisition of CCH.

On March 21, 2006, after obtaining the approval of our stockholders, we amended our certificate of incorporation, the effect of which was, among other things, to eliminate the provision of our certificate of incorporation that purported to prohibit amendment of the “business combination” provisions contained therein and to extend the date before which we must complete a business combination, to avoid being required to liquidate, from March 23, 2006 to December 31, 2006. Because extending the period during which we could consummate a business combination was not contemplated by our IPO prospectus, our stockholders may have securities law claims against us for rescission (under which a successful claimant would have the right to receive the total amount paid for his or her shares, plus interest and less any income earned on the shares, in exchange for surrender of the shares) or damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of the security). Such claims might entitle stockholders asserting them to up to US$6.00 per share of common stock, based on the initial offering price of the public units comprised of stock and warrants, less any amount received from sale of the original warrants purchased with them and plus interest from the date of our IPO. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in value of his or her shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares.

We may be subject to securities laws claims regarding past disclosures.

We may be subject to claims for rescission or other securities law claims resulting from our failure to disclose that our charter provision purporting to prohibit certain amendments was possibly inconsistent with Delaware’s General Corporation Law. Article SIXTH of the Certificate of Incorporation of Great Wall set forth certain provisions ((A)-(E)) that applied to Great Wall during the period commencing upon the initial filing of Great Wall’s Certificate of Incorporation and terminating upon the consummation of a Business Combination. Article SIXTH stated that these provisions “may not be amended prior to the consummation of a Business Combination.” Great Wall was subsequently advised by Potter Anderson & Corroon LLP, its Delaware counsel, that, notwithstanding, the language set forth in Article SIXTH that purported to prohibit amendments to Article SIXTH, that under Delaware law, if duly approved by the Board of Directors and the holders of a majority of the outstanding stock of Great Wall, a proposed amendment to Article SIXTH of Great Wall’s Certificate of Incorporation would be effective under Delaware law.” A copy of Potter Anderson & Corroon LLP’s opinion was filed as Annex B to Great Wall’s Definitive 14A filed with the Commission on March 8, 2006. Great Wall filed a Certificate of Correction to its Certificate of Incorporation on March 21, 2006, which removed the language in Article SIXTH that purported to prohibit amendments to that Article. [A copy of Certificate of Correction is included in Annex B to Great Wall’s 424B3 prospectus that was filed with the Commission on December 6, 2006.] Article SIXTH no longer applies to the Company because it consummated its Business Combination on December 22, 2006.

We may also be subject to such claims as a result of inaccuracies in other disclosures, as follows: Section A of Article SIXTH of Great Wall’s Amended and Restated Certificate of Incorporation stated that “In the event that the holders of a majority of the outstanding Voting Stock vote for the approval of the Business Combination, the Corporation shall be authorized to consummate the Business Combination. . . .” However, Great Wall’s IPO prospectus stated that “We will proceed with a business combination only if the public stockholders who own at least a majority of the shares of common stock sold in [the initial public] offering vote in favor [of it]...” Because the language was inconsistent, Great Wall took the position, when seeking stockholder approval of its proposed Business Combination in December 2006, that it would require the affirmative vote of the holders of a majority of its outstanding Voting Stock and the affirmative vote of the public stockholders who owned at least a majority of the shares of common stock sold in its initial public offering, in order to approve the Business Combination. In addition, our Exchange Act reports have been inaccurate in describing CCH as a leading provider of e-Learning content (as opposed to being primarily a content carrier). On November 13, 2006, we filed a Current Report on Form 8-K with the SEC regarding this last item We are unable to predict the likelihood that claims might be made with regard to the foregoing or estimate any amounts for which it might be liable if any such claim was made.

If we fail to maintain an effective system of internal   control over financial reporting, we may be unable to accurately report our financial results or prevent   fraud, and investor confidence and the market price of our shares may be adversely affected.

We and our independent registered public accounting firm, in connection with the audit of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act for the fiscal year ended December 31, 2010, have identified the following material weaknesses in our internal control over financial reporting:

1. Lack of sufficient skilled resources in the finance team to meet the demands of rapidly expanded businesses which resulted in a delayed closing process.
2. Lack of contemporaneous documentation of certain decisions made by the Board of Directors.
3. Accounting for the prepaid service fee - During 2011, the Company reinterpreted its position related to the evaluation of the contractual requirements for a non-current advance referred to as the prepaid service fee. As a result of that process, the company concluded it lacked adequate and effective controls to ensure all contractual requirements as well as relevant accounting guidance were considered in determining the appropriate accounting for the prepaid service fee. This material weakness contributed to the restatement to the previously reported consolidated financial statements for the year ended December 31, 2010, as discussed in Note 27 to the consolidated financial statements under the caption "Second Restatement."
 

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have taken measures and plan to continue to take measures to remedy these deficiencies. However, the implementation of these measures may not fully address the control deficiencies in our internal control over financial reporting. Our failure to address any control deficiency could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our shares, may be materially and adversely affected.

 
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Foreign Exchange Risk

Changes in the conversion rate between the RMB and foreign currencies, such as Hong Kong or United States dollars, may adversely affect our profits.

CEC bills its customers or students in Chinese RMB, but 3.0%, 0% and 5.4% of its revenues in fiscal years 2008, 2009 and 2010, respectively, were collected in Hong Kong dollars. In addition, 14.9%, 13.5% and 4.8% of its purchases/expenses in those fiscal periods, respectively, were in United States dollars; and 3.1%, 2.9% and 4.9% were in Hong Kong dollars during these same periods. The remainder of its revenues and expenses/purchases were in Chinese RMB. As such, we may be subject to fluctuations in the foreign exchange rates between these currencies.

The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

Neither we nor our subsidiaries have a formal hedging policy with respect to foreign exchange exposure. In the future, we may hedge exchange transactions after considering the foreign currency amount, exposure period and transaction costs.

Fluctuations in the value of the Renminbi relative to foreign currencies could affect our operating results.

We prepare our financial statements in Renminbi. The translation of RMB amounts into U.S. dollars is included for the convenience of readers, but payroll and other costs of non-U.S. operations will be payable in foreign currencies, primarily Renminbi. To the extent future revenue is denominated in non-U.S. currencies, we would be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse affect on our business, prospects, financial condition and results of operations. The value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. As our operations will be primarily in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars into Chinese Renminbi for our operations, appreciation of this currency against the U.S. dollar could have a material adverse effect on our business, prospects, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for other business purposes and the U.S. dollar appreciates against this currency, the U.S. dollar equivalent of the Renminbi we convert would be reduced.
 
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
 
The majority of our revenues will be settled in Renminbi, and current and future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any of our business activities outside the PRC or to make dividend or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in the PRC authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including share repurchases, direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi.
 
Chinese foreign exchange controls may limit our ability to utilize CEC’s revenues effectively and receive dividends and other payments from our Chinese subsidiaries.

All our directly owned subsidiaries in China, including ChinaCast Technology (Shanghai) Limited (“CCT Shanghai”), CBET, Ru Bao, SHXJ and YPSH (the “WFOEs”), are subject to Chinese rules and regulations on currency conversion. The Chinese government regulates the conversion of the Chinese RMB into foreign currencies. Currently, foreign investment enterprises, including the WFOEs, are required to apply for authority (renewed annually) to open foreign currency accounts governing conversion for current account transactions, including payment of dividends, but not for capital items such as direct investments, loans, and issuances of securities, some of which may be effected with governmental approval, while others require authorization.

CEC’s subsidiaries in the PRC have never paid dividends. If required in the future, such dividends can be paid out of retained earnings of each WFOE. Currently we anticipate that all our revenue will be used for expansion. The ability of CCT Shanghai to remit funds to us may be limited by the above restrictions. There can be no assurance that the relevant regulations in China will not be amended so as to adversely affect CCT Shanghai’s ability to remit funds to us.

Risks Relating to Doing Business in China

Introduction of new laws or changes to existing laws by the Chinese government may adversely affect our business.

Our business and operations in China and those of our operating subsidiary, and CCLX’s business and operations in China are governed by the Chinese legal system, which is codified in written laws, regulations, circulars, administrative directives and internal guidelines. The Chinese government is in the process of developing its commercial legal system to meet the needs of foreign investors and encourage foreign investment. As the Chinese economy is developing and growing generally at a faster pace than its legal system, uncertainty exists regarding the application of existing laws and regulations to novel events or circumstances. Relevant Chinese laws, regulations and legal requirements may change frequently, and their requirements, interpretation and enforcement involve uncertainties and potential inconsistencies. In addition, Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and regulatory requirements. Uncertainties and inconsistencies in the requirements, interpretation and enforcement of these laws, regulations and legal requirements could materially and adversely affect our business and operations and could expose us to potential liabilities, including potential fines and other penalties, if it is determined that we have failed to comply with the requirements of such laws, regulations and legal requirements.
 
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Moreover, precedents of interpretation, implementation and enforcement of Chinese laws and regulations are limited, and Chinese court decisions are not binding on lower courts. Accordingly, the outcome of dispute resolutions may not be as consistent or predictable as in other more mercantilely advanced jurisdictions. It may be difficult to obtain timely and equitable enforcement of Chinese laws, or to obtain enforcement in China of a judgment by a foreign court or jurisdiction.

Chinese law will govern CEC’s material operating agreements, some of which may be with Chinese governmental agencies. There is no assurance that CEC will be able to enforce those material agreements or that remedies will be available outside China. The Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a substantial degree of uncertainty as to the outcome of litigation. The inability to enforce or obtain a remedy under our future agreements may have a material adverse impact on our operations.

Our business will be adversely affected if Chinese regulatory authorities view CEC’s and CCLX’s corporate activities as not complying with applicable Chinese laws and regulations, including restrictions on foreign investments, change applicable laws and regulations, or impose additional requirements and conditions with which they are unable to comply.

The Chinese government restricts foreign investment in businesses engaged in telecommunications and education services, Internet access, education content and distribution of news and information, but permits foreign investment in businesses providing technical services in these areas. CCLX is licensed to provide value-added satellite broadband services, Internet services and Internet content in China. We have not sought confirmation from Chinese regulatory governmental authorities whether our structure and business arrangement with CCLX comply with applicable Chinese laws and regulations, including regulation of value-added telecommunication business in China.

Our PRC counsel has opined that CEC’s performance under the technical services agreement with CCLX complies with applicable Chinese laws and regulations, and CEC complies with PRC laws and regulations to the extent that its services are technical services. However, the PRC regulatory authorities are entitled to examine and reevaluate our licenses at any time upon their initiatives or following orders of the higher-level authorities and we must comply with the then prevailing standards and regulations which may change from time to time. PRC regulatory authorities may view CEC as not being in compliance with applicable PRC laws and regulations, including but not limited to restrictions on foreign investments in the value-added telecommunication business. If:

 
Chinese authorities deem CEC’s corporate activities as violating applicable Chinese laws and regulations (including restrictions on foreign investments);

 
Chinese regulatory authorities change applicable laws and regulations or impose additional requirements and conditions with which CEC is unable to comply;

 
CEC is found to violate any existing or future Chinese laws or regulations; or
 
 
CEC is found to have undergone a change of control (which may be deemed to include a change in the management of CEC/the departure of certain officers of CEC ).
 
the relevant Chinese authorities would have broad discretion to deal with such a violation by levying fines, suspending or revoking business license(s) failing for renew or delaying the renewal of our licenses, requiring us to restructure CEC’s ownership or operations, and requiring CEC’s and/or CCLX to discontinue some or all of their businesses. Any of these actions will materially adversely affect our business.

We may be classified as a “resident enterprise ” of China under the new Enterprise Income Tax Law of the PRC, or the EIT Law. Such classification would likely result in unfavorable tax consequence to us.

Our subsidiaries and affiliated entities in China are subject to tax in China. Historically, as foreign-invested enterprises, or FIEs, most of those subsidiaries enjoyed various tax holidays and other preferential tax treatments, which reduced their effective income tax rates to 15% or lower. The EIT Law, which took effect on January 1, 2008, has applied a uniform 25% enterprise income tax rate to all “resident enterprises” in China, including FIEs. Moreover, the EIT Law applies to enterprises established outside of China with “de facto management bodies” located in China. Under the implementation regulations to the EIT Law issued by the PRC State Council, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. While we do not believe we are a “resident enterprise,” because ambiguities exist with the interpretation and application of the EIT Law and the implementation regulations, we may be considered a PRC resident enterprise and therefore may be subject to the China enterprise income tax at the rate of 25% on certain of our income.
 
21
 
 
Our success depends on stable political, economic and social environments, which are subject to disruption in the PRC.

Economic conditions in China are subject to uncertainties that may arise from changes in government policies and social conditions. Since 1978, the Chinese government has promulgated various reforms of its economic systems, resulting in economic growth over the last three decades. However, many of the reforms are unprecedented or experimental and expected to be refined and modified from time to time. Other political, economic and social factors may also lead to changes, which may have a material impact on our operations and our financial performance. For instance, less governmental emphasis on education and distance learning services or on retraining out-of-work persons in the Chinese work force would harm our business, prospects, results and financial condition.

Because our executive officers and directors reside outside of the U.S., it may be difficult for you to enforce your rights against them or enforce U.S. court judgments against them in the PRC.

Our executive officers and directors reside outside of the U.S. and substantially all of our assets are located outside of the U.S. It may therefore be difficult for you to enforce your legal rights, to effect service of process upon our officers and directors or to enforce judgments of U.S. courts predicated upon civil liabilities and criminal penalties of our directors and executive officer under U.S. federal securities laws. Moreover, we have been advised that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the U.S. Further, it is unclear if extradition treaties now in effect between the U.S. and the PRC would permit effective enforcement of criminal penalties of the U.S. federal securities laws.

Weakened political relations between the U.S. and China could make us less attractive.

The relationship between the United States and China is subject to sudden fluctuation and periodic tension. Changes in political conditions in China and changes in the state of Sino-U.S. relations are difficult to predict and could adversely affect our operations, and its future business plans and profitability.

Our operations may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to the market-oriented economies of OECD member countries.

The economy of the PRC has historically been a nationalistic, “planned economy,” meaning it functions and produces according to governmental plans and pre-set targets or quotas. In certain aspects, the PRC’s economy has been transitioning to a more market-oriented economy. However, there can be no assurance of the future direction of these economic reforms or the effects these measures may have. The PRC economy also differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, an international group of member countries sharing a commitment to democratic government and market economy. For instance:

 
the number and importance of state-owned enterprises in the PRC is greater than in most OECD countries;

 
the level of capital reinvestment is lower in the PRC than in most OECD countries; and

 
Chinese policies make it more difficult for foreign firms to obtain local currency in China than in OECD jurisdictions.

As a result of these differences, our operations may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to those of OECD member countries.

The economy of China had been experiencing unprecedented growth before 2008, which could be curtailed if the government tries to control inflation by traditional means of monetary policy or its return to planned-economy policies, any of which would have an adverse effect on the combined company.

The rapid growth of the Chinese economy before 2008 had led to higher levels of inflation. Government attempts to control inflation may adversely affect the business climate and growth of private enterprise, and the demand for higher education and e-Learning, in China. In addition, our profitability may be adversely affected if prices for our products and services rise at a rate that is insufficient to compensate for the rise in its costs and expenses.

We are required to deduct Chinese corporate withholding taxes from dividend we may pay to our stockholders.

On March 16, 2007, the National People’s Congress (NPC), approved and promulgated the PRC Enterprise Income Tax Law (the “New EIT Law”). This New EIT Law has taken effect on January 1, 2008. Under the New EIT Law, FIEs and domestic companies are subject to a uniform tax rate of 25%.
 
22
 
 
Under the New EIT Law and the Implementation Rules, both of which became effective on January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and is subject to enterprise income tax at the rate of 25% on its global income. The Implementation Rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our company, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or controlled by or invested in by PRC individuals. We do not believe our foreign subsidiaries should be considered as a resident enterprise.

In addition, because there remains uncertainty regarding the interpretation and implementation of the New EIT Law and the Implementation Rules, it is uncertain whether, if we are regarded as a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders would be subject to any PRC withholding tax. If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our non-PRC corporate shareholders, your investment in our common shares may be materially and adversely affected.

Recent regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.

In October 2005, the State Administration of Foreign Exchange, or SAFE, promulgated Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, that states that if PRC residents use assets or equity interests in their PRC entities as capital contributions to directly establish or indirectly control offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, they must register with local SAFE branches with respect to their overseas investments in offshore companies. They must also file amendments to their registrations if their offshore companies experience material events involving capital variation, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee offshore obligations. Under this regulation, their failure to comply with the registration procedures set forth in such regulation may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on the capital inflow from the offshore entity to the PRC entity.

We have requested our shareholders who are PRC residents to make the necessary applications, filings and amendments as required under Circular 75 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 75 or other related rules. Any future failure by any of our shareholders who is a PRC resident, or controlled by a PRC resident, to comply with relevant requirements under this regulation could subject us to fines or sanctions imposed by the PRC government.

SAFE rules and regulations may limit our ability to transfer the net proceeds from future offerings to CCLX,which may adversely affect the business expansion of CCLX.

On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign- invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to transfer the net proceeds from future offerings.

The most common way to contribute the proceeds of future offerings to our wholly foreign owned subsidiaries is to increase their registered capital. An increase in the registered capital requires the approval of the local ministry of commerce. Once the approval is obtained, such increase must be registered with the local administration for industry and commerce. After the money is injected, the State Administration for Foreign Exchange or its local agency must also approve the conversion of US dollars to Renminbi. For example, overseas funds such as proceeds of an offering could be contributed to our wholly foreign owned subsidiaries in China (including CCT Shanghai, YPSH and Xijiu) as a result of an increase in the registered capital of the subsidiary. In order to transfer the funds to our operating entities in China, in particular  FTBC and LJC, YPSH and Xijiu also need to make a capital contribution to Hai Lai/Chaosheng and Lian He, and Hai Lai/Chaosheng and Lian He would subsequently make capital contribution to FTBC and LJC. However, due to the restrictions under the Circular 142, RMB converted from registered capital of our wholly foreign owned subsidiaries (including CCT Shanghai, YPSH and Xijiu) cannot be used to make an equity investment in Hai Lai/Chaosheng and Lian He to increase the registered capital of Hai Lai/Chaosheng and Lian He, and accordingly Hai Lai/Chaosheng and Lian He are unable to transfer the same to FTBC and LJC. The converted RMB can only be used for activities falling under the respective business scope as detailed in the respective business licenses of each of our wholly foreign owned enterprises. PRC law does not prohibit a wholly foreign owned enterprise from making an equity investment, but Circular 142 just restricts a wholly foreign owned enterprise from using RMB converted from its registered capital to making such equity interest.
 
23
 
 
Our recent acquisitions are offshore transactions outside of the PRC and accordingly, we do not believe that the PRC SAFE rules are applicable. In the event our PRC subsidiaries purchase schools inside PRC, we will use our RMB funds inside the PRC that are not converted from the registered capital of our PRC subsidiaries to minimize the impact of Circular 142 and the foreign exchange risk.

We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with recent PRC regulations relating to employee stock options granted by overseas listed companies to PRC citizens.

On December 25, 2006, the People’s Bank of China issued the Administration Measures on Individual Foreign Exchange Control, and its Implementation Rules were issued by SAFE on January 5, 2007, which both have taken effect on February 1, 2007. Under these regulations, all foreign exchange matters involved in an employee stock holding plan, stock option plan or similar plan in which PRC citizens participate require approval from the SAFE or its authorized branch. On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options or restricted share units, or issued restricted shares by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to complete certain other procedures and transactional foreign exchange matters upon the examination by, and approval of, SAFE. We and our employees who are PRC citizens who have been granted stock options or restricted share units, or issued restricted shares are subject to the Stock Option Rule. If the relevant PRC regulatory authority determines that our PRC employees who hold such options, restricted share units or restricted shares or their PRC employer fail to comply with these regulations, such employees and their PRC employer may be subject to fines and legal sanctions.
 

If FTBC, LJC or HIUBC is unable to pass verification examination with the Ministry of Education before March 31, 2013, we may not be able to consolidate the financial results of these brick-and-mortar colleges.

 

FTBC, LJC and HIUBC are all independent colleges under the PRC regulations, and the government authority in charge of administration of independent college is the Ministry of Education. The Ministry of Education issued the Rules on Establishment and Administration of Independent Colleges on February 22, 2008, which became effective on April 1, 2008, pursuant to which the independent colleges established before April 1, 2008 shall do restructuring works in order to comply with conditions and standards prescribed in the rules for independent colleges, subject to verification and examination by the Ministry of Education, and only independent college passing such verification examination before March 31, 2013 can obtain updated license to continue operation. All of FTBC, LJC and HIUBC were established before April 1, 2008, so have to go through such restructuring works. Following acquisitions of FTBC, LJC and HIUBC, we have been actively coordinating with the affiliated universities of FTBC, LJC and HIUBC to cause FTBC, LJC and HIUBC do such restructuring works in order to comply with conditions and standards set forth in the rules, and we believe that each of FTBC, LJC and HIUBC will comply with such conditions and standards. Currently, each of FTBC, LJC and HIUBC plans to initiate the verification process immediately, and expect to complete examination by the end of 2012.

 

However, we cannot assure you that each of FTBC, LJC and HIUBC can complete such examination in due course. In the event that any of FTBC, LJC and HIUBC is unable to pass such examination before March 31, 2013, any of them will not obtain update license to operate, and we may have to close the respective college that does not pass the examination, which will cause significant disruption to our business operations or render us unable to conduct all or a substantial portion of our business operations, and may materially and adversely affect our business, financial condition and results of operations. For the year ended December 31, 2010, revenue attributable to FTBC accounted for 27.2% of the Group’s revenue. For the year ended December 31, 2010, revenue attributable to LJC accounted for 23.7% of the Group’s revenue. For the year ended December 31, 2010, revenue attributable to HIUBC accounted for 8.3% of the Group’s revenue.

 

24
 

 

 
ITEM 6. SELECTED FINANCIAL DATA
 
The following table sets forth our selected consolidated financial data. You should read this information together with our consolidated financial statements and the related notes to those statements included in this report, and “Item 7. Management’s Discussion and Analysis or Plan of Operation” of this report. The selected consolidated balance sheet data and statements of operations data in the table below have been derived from our audited consolidated financial statements. The information presented in the following tables has been adjusted to reflect the restatements of our financial results which are more fully described in Note 27 of the consolidated financial statements included in this Form 10-K/A. Historical results are not necessarily indicative of results to be expected in the future.
 
 

   
Year Ended December 31,
 
   
2010
(As Restated)
   
2009
   
2008
   
2007
   
2006
 
   
(Amounts in thousands of RMB except share and per share data)
 
Selected Consolidated Statements of Operations Data:
                                       
Revenue
   
514,011
     
346,547
     
282,614
     
183,496
     
174,119
 
Cost of revenues
   
(267,392
   
(147,501
   
(126,852
   
(79,802
   
(89,390
Gross profit
   
246,619
     
199,046
     
155,762
     
103,694
     
84,729
 
Total operating expenses, net
   
(78,665
   
(69,039
   
(68,117
   
(42,511
   
(36,433
Income from continuing operations
   
131,827
     
98,264
     
71,209
     
69,151
     
30,097
 
(Loss) income from discontinued operations
   
1,280
     
1,154
 
   
(21,025
)
   
(7,020
)
   
(2,250
)
Net income
   
133,107
     
97,418
     
50,184
     
62,131
     
27,847
 
Noncontrolling interest
   
(1,454
   
(7,339
   
(7,517
   
(3,472
   
(8,143
Net income attributable to the Company
   
131,653
     
92,079
     
42,667
     
58,659
     
19,704
 
                                         
Net income from continuing operations attributable to the Company per share:
                                       
Basic
   
2.70
     
2.46
     
2.08
     
2.37
     
1.44
 
Diluted
   
2.67
     
2.45
     
2.06
     
2.35
     
1.23
 
Income (loss) from discontinued operations attributable to the Company per share:
                                       
Basic
   
0.03
     
0.03
     
(0.68
)
   
(0.26
)
   
(0.27
Diluted
   
0.03
     
0.03
     
(0.68
)
   
(0.25
)
   
(0.23
)
Net income attributable to the Company per share:
                                       
Basic
   
2.73
     
2.49
     
1.40
     
2.21
     
1.17
 
Diluted
   
2.70
     
2.48
     
1.38
     
2.10
     
1.00
 
                                         
Selected Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
   
244,403
     
327,645
     
220,131
     
138,610
     
278,067
 
Term deposits
   
704,000
     
507,000
     
369,000
     
596,768
     
442,921
 
Total assets
   
2,954,032
     
2,273,149
     
1,499,159
     
950,714
     
940,579
 

We adopted authoritative pronouncement issued by Financial Accounting Standards Board ("FASB") regarding accounting for uncertainty in income taxes on January 1, 2007, prospectively.
 

Selected Unaudited Quarterly Combined Results of Operations

The following table sets forth unaudited quarterly statements of operations data for the four quarters ended December 31, 2010 and 2009. We believe this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements, as restated, appearing elsewhere in this report.

We believe this data includes all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. You should read the quarterly data together with the consolidated financial statements and the notes to those statements appearing elsewhere in this report. The consolidated results of operations for any quarter are not necessarily indicative of the operating results for any future period. We expect that our quarterly revenues may fluctuate significantly.

     
Three Months Ended
 
   
December 31, 2010
   
September
30,
   
June 30,
   
March 31,
   
December
31,
   
September
30,
   
June 30,
   
March 31,
 
    (As Restated)    
2010
   
2010
   
2010
   
2009
   
2009
   
2009
   
2009
 
   
(Amounts in thousands of RMB except share and per share data)
 
Selected quarterly operating results
                                                               
Revenues
   
169,886
     
125,119
     
110,645
     
108,361
     
112,091
     
82,185
     
75,754
     
76,517
 
Cost of revenues
   
(102,847
)    
(64,190
)    
(52,136
)    
(48,219
)    
(58,021
)    
(30,343
)    
(28,932
)    
(30,205
)
Gross profit
   
67,039
     
60,929
     
58,509
     
60,142
     
54,070
     
51,842
     
46,822
     
46,312
 
Total operating expenses, net
   
(33,684
)    
(10,782
)    
(15,471
)    
(18,728
)    
(26,414
)    
(13,363
)    
(11,528
)    
(17,735
)
Income from continuing operations
   
25,161
   
42,100
     
33,010
     
31,556
     
17,043
     
29,780
     
28,596
     
22,845
 
Income (loss) from discontinued operations
   
1,280
 
   
-
     
-
     
-
     
2,595
  
   
(388
)
   
(449
)
   
(604
)
Net income
   
26,441
   
42,100
     
33,010
     
31,556
     
19,638
     
29,392
     
28,147
     
22,241
 
Noncontrolling interest
   
(27
   
(559
   
(434
)    
(434
)    
(394
)    
(2,036
)    
(2,350
)    
(2,559
)
Net income (loss) attributable to the Company
   
26,414
   
41,541
     
32,576
     
31,122
     
19,244
     
27,356
     
25,797
     
19,682
 
Net income from continuing operations attributable to the Company per share:
                                                               
Basic
   
0.50
     
0.83
     
0.69
     
0.68
     
0.42
     
0.77
     
0.73
     
0.57
 
Diluted
   
0.49
     
0.82
     
0.69
     
0.67
     
0.43
     
0.77
     
0.73
     
0.57
 
Income (loss) income from discontinued operations attributable to the Company per share:
                                                               
Basic
   
0.03
  
   
-
     
-
     
-
     
0.06
  
   
(0.01
   
(0.01
   
(0.02
)
Diluted
   
0.03
  
   
-
     
-
     
-
     
0.06
  
   
(0.01
   
(0.01
   
(0.02
)
Net income attributable to the Company per share:
                                                               
Basic
   
0.53
     
0.83
     
0.69
     
0.68
     
0.48
     
0.76
     
0.72
     
0.55
 
Diluted
   
0.52
     
0.82
     
0.69
     
0.67
     
0.48
     
0.75
     
0.72
     
0.55
 

 
25
 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with our Item 8 — Financial Statements and Supplementary Data.
 
Restatements
 

The following discussion and analysis of our financial condition and results of operations incorporates the amounts reflected in our restated consolidated financial statements and disclosures for the fiscal year ended December 31, 2010 as discussed in the Explanatory Note immediately preceding Part 1, Item 1 and Note 27, Restatements of Financial Statements of the Notes to Consolidated Financial Statements in Part II, Item 8.

Information Regarding Forward Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those financial statements set forth commencing on page F-1 of this annual report, as revised for the effect of the restatements discussed in Note 27 Restatements of Financial Statements. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Forward Looking Statements” and “Risk Factors” and elsewhere in this registration statement, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a leading post-secondary education and e-Learning services provider in China. We provide post-secondary degree and diploma programs through our three universities in China: The Foreign Trade and Business College of Chongqing Normal University, the Lijiang College of Guangxi Normal University and the Hubei Industrial University Business College. These universities offer fully accredited, career-oriented bachelor's degree and diploma programs in business, economics, law, IT/computer engineering, hospitality and tourism management, advertising, language studies, art and music. We provide its e-Learning services to post-secondary institutions, K-12 schools, government agencies and corporate enterprises via our nationwide satellite/fiber broadband network. These services include interactive distance learning applications, multimedia education content delivery and vocational training courses.

We are subject to risks common to companies operating in China, including risks inherent in our distribution and commercialization efforts, uncertainty of foreign regulatory approvals and laws, the need for future capital and retention of key employees. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.

Critical Accounting Policies

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. For a summary of our significant accounting policies, see Note 2 of the consolidated financial statements appearing elsewhere in this Annual Report.

Revenue Recognition. ChinaCast’s principal sources of revenues are from provision of satellite bandwidth and network access services in distance learning and to a lesser extent, the provision of English training services sales of satellite communication related equipment and accessories. ChinaCast recognizes revenue when (1) there is persuasive evidence of an agreement with the customer, (2) product is shipped and title has passed, (3) the amount due from the customer is fixed and determinable, and (4) collectibility is reasonably assured. At the time of the transaction, ChinaCast assesses whether the amount due from the customer is fixed and determinable and collection of the resulting receivable is reasonably  assured. ChinaCast assesses whether the amount due from the customer is fixed and determinable based on the terms of the agreement with the customer, including, but not limited to, the payment terms associated with the transaction. ChinaCast assesses collection based on a number of factors, including past transaction history with the customer and credit-worthiness of the customer.

The revenues from provision of distance learning services via satellite bandwidth and network is recognized as the services are provided. Subscription fee received from the multimedia educational content broadcasting service is recognized as revenue over the subscription period during which the services are delivered.

Revenues from bachelor degree and diploma program offerings, representing tuition fees and accommodation and catering service income, are recognized on a straight-line basis over the service period.

The colleges' academic year is generally from September to August of the following year. All the admitted students need to register in September at the beginning of a semester. There are mainly two ways the tuitions are collected. A student either

a)      pays the tuition fee in cash at the beginning of each academic year when registering in September, or

b)      registers in September but uses student loans to pay the tuition fee later. The tuition fee would be collected once the student loan is processed by the bank.

Revenue recognition is the same in both cases. Tuition received from degree and diploma programs is recognized proportionately over the relevant period attended by the students of the applicable program. The portion of tuition payments received from students but not earned is recorded as deferred revenue and is reflected as a current liability as such amounts represent revenue that the Company expects to earn within one year.
 
26
 
 
Tuition refunds are provided to students if they decided to withdraw from school for the remaining service period, up to 90% of the tuition fee received. Tuition refunds have not been significant since the cancellation rate has been low.

Revenues from satellite communication related equipment and accessories are recognized once the equipment and accessories are delivered and accepted by the customers.

Useful lives and impairment of Property and equipment, and acquired intangible assets. Property and equipment and acquired intangible assets are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue. In particular, customer relationship (FTBC) acquired is amortized using the accelerated amortization method up to 41 months based on the estimated progression of the students through the respective courses, giving consideration to the revenue and cash flow associated. Customer relationship (LJC) acquired is amortized using the accelerated amortization method up to 47 months based on the estimated progression of the students through the respective courses, giving consideration to the revenue and cash flow associated. Affiliation agreement acquired is amortized on a straight-line basis up to 59 months. Customer relationship (HIUBC) acquired is amortized using the accelerated amortization method over 48 months based on the estimated progression of the students through the respective courses, giving consideration to the revenue and cash flow associated. Affiliation agreement acquired is amortized on a straight-line basis over 36 months.  Property and equipment and acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Prepaid lease payments for land use rights. All land in the PRC is owned by the PRC government.  The government in the PRC, according to the relevant PRC law, may grant the right to use the land for a specified period of time.  Payments for acquiring land use rights represent prepayments of rentals over the periods the rights are granted and are stated at cost less accumulated amortization and any recognized impairment loss.  Amortization is provided over the term of the land use right agreement on a straight-line basis. Prepaid lease payments which are to be amortized in the next twelve months or less are classified as current assets.
 
Share-based compensation. The Company accounts for employee stock options under authoritative pronouncement issued by the FASB regarding share-based payment from the inception of the Company's stock compensation plans.  Compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period which is generally the vesting period, with a corresponding addition to paid-in capital.

Purchase Price allocation in business combination. For business acquisition recorded using the purchase method of accounting, acquired assets and liabilities are recorded at their fair market value at the date of acquisition. The Company performs purchase price allocation based on such fair values. The valuation analyses utilize and consider generally accepted valuation methodologies such as income, market and cost approach.

Inventory valuation. Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management’s review of inventories on hand compared to estimated future usage and sales.

Impairment of cost method investments. The Company periodically reviews the carrying value of the cost method investments for continued appropriateness. When there is an impairment indicator. This review is based upon the Company’s projections of anticipated future cash flows. While the Company believes that the estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the valuations.
 
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Income taxes. The Company has provided a full valuation reserve related to its substantial deferred tax assets. In the future, if sufficient evidence of the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce its valuation allowances, resulting in income tax benefits in the Company’s consolidated statement of operations. Management evaluates whether it is more likely than not that the deferred tax assets would be realized and assesses the need for valuation allowance.

Effective on January 1, 2007, the Company adopted the authoritative pronouncement regarding uncertainty in income taxes . Under the guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-that-not to be sustained upon audit by the relevant taxing authority based solely on technical merits of the associated tax position. If the Company ultimately determines that the payment of these liabilities will be unnecessary, the Company will reverse the liability and recognize a tax benefit during that period. Conversely, the Company records additional tax charges in a period in which it determines that a recorded tax liability is less than the expected ultimate assessment. The Company also elected the accounting policy that the interest and penalties recognized are classified as part of its income taxes. The unrecognized tax benefits, tax liabilities and accrued interest and penalties represent management’s estimates under the provisions of the guidance. The three acquired universities have not paid any income tax so far. The Company provided provision of unrecognized tax benefits for the three acquired universities since significant judgments are required in determining whether such universities are qualified for the income tax exemption. The ultimate amount of tax liability may be uncertain as a result. As of December 31, 2010, the total unrecognized tax benefits was approximately RMB110 million.

Impairment of Goodwill. The carrying value of goodwill as of December 31, 2010 by operating segments was as follows:
 
   
2010
   
2009
 
   
(RMB'000)
   
(RMB'000)
 
E-learning and training serve Group (“ELG”)
    1,618       1,614  
Traditional University Group (“TUG”).
    772,465       502,157  
      774,083       503,771  

Authoritative pronouncement issued by FASB regarding goodwill and others intangible assets, requires that the goodwill impairment assessment be performed at the reporting unit level. The guidance requires a two-step goodwill impairment test. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

We performed our annual goodwill impairment test at December 31, 2010. Our reporting units are consistent with our two operating segments.

The goodwill allocated to our ELG segment arose in 2004 when we further purchased a portion of non-controlling interests of one subsidiary, CCT BVI, from three non-controlling shareholders. We note that prior to 2008 this was the only reporting unit and segment of the Company, and the market capitalization of the Company as of December 31, 2007 (RMB1,362.8 million) greatly exceeded the carrying amount of the ELG reporting unit, RMB804.6 million. Accordingly, we determined that the first step of the goodwill impairment test was passed, and that the goodwill of the ELG reporting unit was not impaired as of December 31, 2007. The assets and liabilities that make up the ELG reporting unit  did not change significantly from 2007 to 2010. The ELG reporting unit is a relatively well established business. Revenue of this reporting unit has been growing steadily since 2004. Revenue grew 5% from 2007 to 2010, and we expect that the revenue of this reporting unit will continue to grow in the future. No significant negative events occurred and the likelihood that the fair value would be less than the carrying amount of the ELG reporting unit as of December 31, 2010 was remote. Therefore we determined that the fair value of the ELG reporting unit would be no less than the carrying amount of this reporting unit.

The Company had one acquisition in 2008 which resulted in the addition of the TUG segment. The Company had another acquisition in 2009 and 2010, repectively, to further expand the TUG segment. For our TUG segment, we estimated the fair value of the reporting unit using the income approach. The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings of forecasts developed by us. The assumptions used in deriving the fair valuations are consistent with our business plan at the time of each valuation. These  assumptions include: no material changes in the existing political, legal and economic conditions in China, no major changes in applicable tax rates and no material deviation in market conditions from our forecasts. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rate to apply to the estimated cash flows.
 
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In particular, the discounted cash flows for the TUG reporting unit were based on discrete five-year financial forecasts developed by management for planning purposes. Cash flows beyond the five-year discrete forecast were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for the reporting unit and considered long-term earnings growth rates for publicly traded peer companies.

The key assumptions used in determining the fair value of the TUG reporting unit are:

Key Assumptions
 
Description
     
Revenue growth rate
 
The forecasted average annual growth rate of revenue is 3 – 19% from 2011 to 2015. This reflects the following assumptions:
   
Student capacity of the campus is expected to grow upon completion of the planned construction projects;
     
   
Demand for accredited degree program is expected to grow significantly in the PRC; and
     
   
A long term growth rate into perpetuity has been determined to be 3% with reference to the birth rate, market penetration and other related factors.
     
COGS growth rate
 
Cost of goods sold ("COGS") are forecasted to grow by 0 to 10% from 2011 to 2015.
     
Discount rate
 
The discount rate applied to the cash flows is based on the weighted average cost of capital (“WACC”) of the Company. WACC is the weighted average of the estimated rate of return required by equity and debt holders for an investment of this type. We used 16.0 to 19%.

Publicly available information regarding our market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated using the discounted cash flow methodology. During the years ended December 31, 2008, 2009 and 2010, we determined that there had been no impairment of goodwill.

Results of Operations

For the purpose of the discussion and analysis of the results of CEC, the consolidated group is referred to as “the Group”. CEC is sometimes referred to as the “Company”. The satellite operating entity, ChinaCast Company Limited, is referred to as “CCL” and its registered branch in Beijing is referred to as “CCLBJ”. The US dollar figures presented below were based on the historical exchange rate of 1USD = 6.6RMB at December 31, 2010 for 2010; 1USD = 6.8RMB at December 31, 2009 for 2009; and 1USD = 6.8RMB at December 31, 2008 for 2008.

Since our acquisition of Hai Lai, we have been organized as two business divisions, the E-learning and training service Group (the “ELG”), encompassing all the Company’s businesses before the acquisition, and the Traditional University Group (the “TUG”), offering bachelor and diploma programs to students in China.

Year ended December 31, 2010 compared to year ended December 31, 2009

The revenue of the Company for 2010 amounted to RMB514.0 million (US$77.9 million) representing an increase of 48.3% compared to RMB346.5 million (US$51.0 million) in 2009. The increase was mainly due to the growth of the TUG. The results of LJC was consolidated for the whole year in 2010 whereas its result was consolidated for the period from October 5, 2009 to December 31, 2009 in 2009 after the acquisition of East Achieve. HIUBC also contributed to the growth after the acquisition of Wintown on August 23, 2010.

 Revenue of the ELG amounted to RMB208.1 million (US$31.5 million) for 2010 as compared to revenue of RMB196.3 million (US$28.9 million) for 2009. Service income, mainly of a recurring nature amounted to RMB189.9 million (US$28.8 million) for 2010 compared to RMB187.7 million (US$27.6 million) in 2009. Equipment sales, mainly project based, amounted to RMB18.2 million (US$2.8 million) against RMB8.6 million (US$1.3 million) last year. The following table provides a summary of the ELG’s revenue by business lines:
 
   
2010
   
2009
   
2008
 
(millions)
 
RMB
   
US$
   
RMB
   
US$
   
RMB
   
US$
 
Post secondary education distance learning
    113.9       17.3       109.2       16.1       96.9       14.3  
K-12 and content delivery
    63.0       9.5       64.1       9.4       65.6       9.6  
Vocational training, enterprise/government training and networking services
    31.2       4.7       23.0       3.4       36.9       5.4  
                                                 
Total ELG revenue
    208.1       31.5       196.3       28.9       199.4       29.3  

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Net revenue from post secondary education distance learning services increased from RMB109.2 million (US$16.1 million) in 2009 to RMB113.9 million (US$17.3 million) in 2010. The increase of 4.3% was mainly due to the increase in student enrollment and the increase in tuition fee. The total number of post-secondary students enrolled in courses using the Company’s distance learning platforms increased to 143,000 from 138,000 at the end of 2009.


The revenue from the K-12 and content delivery business decreased slightly by approximately 1.7% from RMB64.1 million (US$9.4 million) to RMB63.0 million (US$9.5 million). The number of subscribing schools for K-12 distance learning services has stabilized at 6,500.

Net revenue from vocational and career training services and enterprise government training and networking services increased from RMB23.0 million (US$3.4 million) to RMB31.2 million (US$4.7 million). The decrease was mainly due to the increase in equipment sales, the nature of which is not recurring.

TUG was established in the second quarter of 2008 after the acquisition of Hai Lai and was expanded to include LJC acquired in 2009 and the newly acquired HIUBC in 2010. TUG’s revenue amounted to RMB150.3 million (US$22.1 million) in 2009 as compared to a revenue of RMB305.9 million (US$46.4 million) in 2010. The following table provides a summary of the TUG’s revenue by universities:
 
   
2010
   
2009
   
2008
 
(millions)
 
RMB
   
US$
   
RMB
   
US$
   
RMB
   
US$
 
FTBC Group
                                   
Tuition
    123.4       18.7       110.3       16.2       70.9       10.4  
Other
    17.2       2.6       12.0       1.8       12.3       1.8  
Sub-total
    140.6       21.3       122.3       18.0       83.2       12.2  
LJC Group
                                               
Tuition
    110.6       16.8       25.1       3.7       -       -  
Other
    12.3       1.9       2.9       0.4       -       -  
Sub-total
    122.9       18.7       28.0       4.1       -       -  
HIUBC Group
                                               
Tuition
    38.2       5.8       -       -       -       -  
Other
    4.2       0.6       -       -       -       -  
Sub-total
    42.4       6.4       -       -       -       -  
Total TUG revenue
    305.9       46.4       150.3       22.1       83.2       12.2  

FTBC had approximately 12,000 students and 12,600 students in 2009 and 2010, respectively, and generated RMB110.3 million (US$16.2 million) and RMB123.4 million (US$18.7 million) of tuition revenue in 2009 and 2010, respectively. The increase was due to an increase in tuition fees and the student enrollment. Other revenue of FTBC, which comprises mainly accommodation and catering revenue, amounted to RMB12.0 million (US$1.8 million) and RMB17.2 million (US$2.6 million) for 2009 and 2010, respectively. LJC had approximately 8,400 students and 9,200 students for 2009 and 2010, respectively. LJC generated RMB25.1 million (US$3.7 million) of tuition revenue in 2009 after the completion of its acquisition on October 5, 2009 and generated RMB110.6 million (US$16.8 million) of tuition revenue in 2010. Other revenue of LJC, which comprises mainly accommodation and catering revenue, amounted to RMB2.9 million (US$0.4 million) and RMB12.3 million (US$1.9 million) in 2009 and 2010, respectively. HIUBC had approximately 10,800 students for 2010 and generated RMB38.2 million (US$5.8 million) of tuition revenue in 2010 after the completion of its acquisition on August 23, 2010. Other revenue of HIUBC, which comprises mainly accommodation and catering revenue amounted to RMB4.2 million (US$0.6 million)

Cost of sales of the Company increased by 81.3% from RMB147.5 million (US$21.7 million) in 2009 to RMB267.4 million (US$40.5 million) in 2010. The increase was mainly due to the expansion of the TUG.

ELG’s cost of materials increased from RMB8.5 million (US$1.2 million) for 2009 to RMB18.0 million (US$2.7 million) for 2010. The changes were mainly due to increase in equipment sales. The cost of service for the ELG decreased modestly from RMB34.9 million (US$5.1 million) for 2009 to RMB26.5 million (US$4.0 million) for 2010. The decrease was mainly due to the termination of the payment of satellite platform usage fee to CCLBJ effective from January 1, 2010.

TUG’s cost increased from RMB104.1 million (US$15.3 million) for 2009 to RMB222.9 million (US$33.8 million) for 2010. The main reason for the increase was that the result of LJC was consolidated for the whole year in 2010 whereas its result was consolidated for the period from October 5, 2009 to December 31, 2009 in 2009. The acquisition of HIUBC in August 2009 also contributed to the increase in TUG’s cost. HIUBC’s cost for the period from August 23, 2010 to December 31, 2010 amounted to RMB38.5 million (US$5.8 million). Amortization of intangible assets amounted to RMB39.5 million (US$6.0 million) for 2010 as compared to RMB20.2 million (US$2.9 million) for 2009.


ELG’s gross profit margin increased by 0.7 percentage points, from 77.9% in 2009 to 78.6% in 2010. The main reason for the increase was the termination of the payment of satellite platform usage fee to CCLBJ in 2010, which was partly offset by the increase in equipment sales, which has a low margin. TUG’s gross profit margin decreased slightly by 3.6 percentage points, from 30.7% in 2009 to 27.1% in 2010. The decrease was mainly due to the lower margin of the newly acquired LJC and HIUBC, which had a higher revenue split to the parent university as compared to FTBC.
 
In 2009, the Company received a service fee of RMB5.1 million (US$1.0 million), as compared to RMB6.5 million (US$1.0 million) in 2008. The service arose from various agreements with CCL that entitled the Company to the economic benefits of its Beijing Branch — CCLBJ. The management service fee was terminated effective from January 1, 2010.
  
Selling and marketing expenses decreased by 35.6% to RMB3.0 million (US$0.5 million) in 2010 from RMB4.6 million (US$0.7 million) in 2009. The decrease was due to the drop in share option expense from RMB1.6 million (US$0.2 million) for 2009 to RMB0.4 million (US$0.06 million) for 2010.
 
 General and administrative expenses increased by 19.6% to RMB84.4 million (US$12.8 million) in 2010 from RMB69.6 million (US$10.2 million) in 2009. The reduction of share option expense from RMB14.6 million (US$2.1 million) for 2009 to RMB7.4 million (US$1.1 million) for 2010 was offset by the increase in general and administrative expenses of the LJC and HIUBC after their acquisition.
 
The Company has foreign exchange losses of RMB1.0 million (US$0.1 million) in 2010 compared to RMB0.09 million (US$0.01 million) in 2009. The change was a result of the change in the RMB/US exchange rate.
 
The last tranche of the consideration for acquiring East Achieve amounting to RMB20.5 million (US$3.1 million) was settled in the third quarter of 2010. The amount was less than the contingent consideration recorded by the Company resulting in a gain of RMB9.5 million (US$1.4 million) for 2010.
 
In 2010, the Company disposed of its 17.85% stake in TCX, resulting in a gain of RMB2.1 million (US$0.3 million).
 
Interest income increased from RMB8.3 million (US$1.2 million) in 2009 to RMB14.1 million (US$2.1 million) in 2010. The increase was due to a higher interest rate and a higher average term deposit holdings during the year.
 
Interest expense increased from RMB8.0 million (US$1.2 million) in 2009 to RMB13.7 million (US$2.1 million) in 2010. The interest expense was generated from bank borrowings of FIBC, LJC and HIUBC. The result of LJC was consolidated for the whole year in 2010 whereas its result was consolidated for the period from October 5, 2009 to December 31, 2009 in 2009. The acquisition of HIUBC in 2010 also contributed to the increase in interest expense.
 
Overall, profit before income tax and loss in equity investments increased from RMB131.1 million (US$19.3 million) in 2009 to RMB170.5 million (US$25.8 million) in 2010, a increase of 31.3%. The increase was mainly due to the increase in business in the TUG segment.
 
The Company recorded a loss in equity investments amounted to RMB0.1 million (US$0.02 million) in 2010 compared to RMB1.7 million (US$0.2 million) in 2009.
 
Income taxes increased by 28.8% from RMB29.9 million (US$4.4 million) in 2009 to RMB38.6 million (US$5.8 million) in 2010. The higher income tax was due to the increase in business and the expansion in TUG,
 
Gain from discontinued operations amounted to RMB1.2 million (US$0.2 million) in 2009 as compared to RMB1.3 million (US$0.2 million) in 2010, and the gain of 2009 arosed from the termination of the Company’s stake in CLS while the gain of 2010 arosed from the disposal of Jiangsu English Training Technology Limited.
 
Noncontrolling interest amounted to RMB1.5 million (US$0.2 million) in 2009 as compared to RMB7.3 million (US$1.1 million) in 2009. On September 18, 2009, the Company acquired the 20% minority stake in Hai Lai, which resulted in a reduction of the noncontrolling interest.
 
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Net Income attributable to the Company amounted to RMB131.7 million (US$10.9 million) in 2010 compared to RMB92.1 million (US$13.5 million) in 2009.
  
Year ended December 31, 2009 compared to year ended December 31, 2008
 
The revenue of the Company for 2009 amounted to RMB346.5 million (US$51.0 million) representing an increase of 22.6% compared to RMB282.6 million (US$41.6 million) in 2008. The increase was mainly due to the growth of the TUG. The results of FTBC was consolidated for the whole year in 2009 whereas its result was consolidated for the period from April 11, 2008 to December 31, 2008 in 2008 after the acquisition of Hai Lai. LJC also contributed to the growth after the acquisition of East Achieve on October 5, 2009.
 
Revenue of the ELG amounted to RMB196.3 million (US$28.9 million) for 2009 as compared to revenue of RMB199.4 million (US$29.3 million) for 2008. Service income, mainly of a recurring nature amounted to RMB187.7 million (US$27.6 million) for 2009 compared to RMB170.5 million (US$25.1 million) in 2008. Equipment sales, mainly project based, amounted to RMB8.6 million (US$1.3 million) against RMB28.9 million (US$4.3 million) last year. 

Net revenue from post secondary education distance learning services increased from RMB96.9 million (US$14.3 million) in 2008 to RMB109.2 million (US$16.1 million) in 2009. The increase of 12.7% was due to the increase in student enrolment and the increase in tuition fee. The total number of post-secondary students enrolled in courses using the Company’s distance learning platforms increased to 138,000 from 131,000 at the end of 2008.
 
The revenue from the K-12 and content delivery business decreased slightly by approximately 2.3% from RMB65.6 million (US$9.6 million) to RMB64.1 million (US$9.4 million). The number of subscribing schools for K-12 distance learning services has stabilized at 6,500.
 
Net revenue from vocational and career training services and enterprise government training and networking services decreased from RMB36.9 million (US$5.4 million) to RMB23.0 million (US$3.4 million). The decrease was mainly due to the drop in equipment sales, the nature of which is not recurring.
 
TUG was established in the second quarter of 2008 after the acquisition of Hai Lai and was expanded to include the newly acquired LJC in 2009. TUG’s revenue amounted to RMB83.2 million (US$12.2 million) in 2008 as compared to a revenue of RMB150.3 million (US$22.1 million) in 2009. 
  
FTBC had approximately 11,000 students and 12,000 students in 2008 and 2009, respectively, and generated RMB70.9 million (US$10.4 million) and RMB110.3 million (US$16.2 million) of tuition revenue in 2008 and 2009, respectively. The results of FTBC was consolidated for the whole year in 2009 whereas its result was consolidated for the period from April 11, 2008 to December 31, 2008 in 2008 after the acquisition of Hai Lai.  Other revenue of FTBC, which comprises mainly accommodation and catering revenue amounted to RMB12.3 million (US$1.8 million) and RMB12.0 million (US$1.8 million) for 2008 and 2009, respectively. LJC had approximately 8,400 students and generated RMB25.1 million (US$3.7 million) of tuition revenue in 2009 after the completion of its acquisition on October 5, 2009. Other revenue of LJC, which comprises mainly accommodation and catering revenue amounted to RMB2.9 million (US$0.4 million) in 2009.
 
Cost of sales of the Company increased by 16.2% from RMB126.9 million (US$18.7 million) in 2008 to RMB147.5 million (US$21.7 million) in 2009. The increase was mainly due to the expansion of the TUG.
 
ELG’s cost of materials decreased from RMB29.1 million (US$4.3 million) for 2008 to RMB8.5 million (US$1.2 million) for 2009. The changes were mainly due to drop in equipment sales. The cost of service for the ELG decreased modestly from RMB40.2 million (US$5.9 million) for 2008 to RMB34.9 million (US$5.1 million) for 2009. The decrease was mainly due to the reduction in transponder fee from RMB7.5m (US$1.1 milion ) for 2008 to RMB3.5 million (US$0.5 million) for 2009 after renegotiating with the service providers as a result of the reduced bandwidth.
 
TUG’s cost increased from RMB57.5 million (US$8.5 million) for 2008 to RMB104.1 million (US$15.3 million) for 2009. The main reason for the increase was that the results of FTBC was consolidated for the whole year in 2009 whereas its result was consolidated for the period from April 11, 2008 to December 31, 2008 in 2008. The acquisition of LJC in the fourth quarter of 2009 also contributed to the increase in TUG’s cost. LJC’s cost in the fourth quarter of 2009 amounted to RMB26.9 million (US$4.0 million). Amortization of intangible assets amounted to RMB20.0 million (US$2.9 million) for 2009 as compared to RMB14.0 million (US$2.1 million) for 2008.
 
ELG’s gross profit margin increased by 12.7 percentage points, from 65.2% in 2008 to 77.9% in 2009. The main reason for the increase was the reduction in equipment sales, which has a low marginTUG’s gross profit margin decreased slightly by 0.1 percentage points, from 30.8% in 2008 to 30.7% in 2009.
 
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In 2009, the Company received a service fee of RMB5.1 million (US$1.0 million), as compared to RMB6.5 million (US$1.0 million) in 2008. The service arose from various agreements with CCL that entitled the Company to the economic benefits of its Beijing Branch — CCLBJ. CCLBJ is in the process of transferring all its outstanding businesses, mainly in post secondary education distance learning, to the Company, which led to the reduction in management service fee.
 
Selling and marketing expenses decreased by 19.4% to RMB4.6 million (US$0.7 million) in 2009 from RMB5.7 million (US$0.8 million) in 2008. The reduction was due to the lower sales and marketing activities associated with the enterprise training business line and the Tongji project.
 
General and administrative expenses increased slightly by 2.9% to RMB69.6 million (US$10.2 million) in 2009 from RMB67.7 million (US$10.0 million) in 2008. The increase due to the acquisition and expansion in TUG was offset by the reduction in professional expenses and office rental of the ELG in 2009. Professional expenses of the ELG for 2009 and 2008 was RMB13.4 million (US$2.0 million) and RMB17.0 million (US$2.5 million) respectively. Office rental of the ELG for 2009 and 2008 was RMB2.4 million (US$0.4 million) and RMB4.3 million (US$0.6 million) respectively. Payroll of the ELG also decreased to RMB14.8 million (US$2.2 million) for 2009 from RMB16.5 million (US$2.4 million) for 2008.
 
The Company has foreign exchange losses of RMB0.09 million (US$0.01 million) in 2009 compared to RMB1.2 million (US$0.2 million) in 2008. The decrease was a result of the stable trend of the exchange rate of the RMB against US dollars in 2009 while the exchange rate was volatile in 2008.
 
As a result of the deterioration of the operating profitability of TCX, an investment impairment loss of RMB8.5 million (US$1.3 million) was recorded in 2008 in relation to TCX. A further investment impairment loss of RMB0.4 million (US$0.06 million) was recorded in 2009 in relation to TCX that reduced the balance of cost method investment in TCX to zero.
 
Interest income decreased from RMB19.5 million (US$2.9 million) in 2008 to RMB8.3 million (US$1.2 million) in 2009. The decrease was due to a lower interest rate and a lower average term deposit holdings during the year as a result of the settlement of the acquisition consideration in 2008 and 2009.
 
Interest expense increased from RMB2.6 million (US$0.4 million) in 2008 to RMB8.0 million (US$1.2 million) in 2009. The interest expense was generated from bank borrowings of FIBC and LJC. The result of FTBC was consolidated for the whole year in 2009 whereas its result was consolidated for the period from April 11, 2008 to December 31, 2008 in 2008. The acquisition of LJC in 2009 also contributed to the increase in interest expense.
 
Overall, profit before income tax increased from RMB96.0 million (US$14.1 million) in 2008 to RMB131.1 million (US$19.3 million) in 2009, an increase of 36.5%. The increase was mainly due to the drop in investment impairment loss; the reduction in professional expenses and rental expense as well as the expansion of the TUG.
 
The Company’s share of net investment losses from various equity method investments amounted to RMB1.7 million (US$0.2 million) in 2009 compared to RMB0.4 million (US$0.06 million) in 2008. 
  
Income taxes increased by 22.8% from RMB24.4 million (US$3.6 million) in 2008 to RMB29.9 million (US$4.4 million) in 2009. The higher income tax was due to the increase in business and the expansion in TUG.
 
Gain from discontinued operations amounted to RMB1.2 million (US$0.02 million) in 2009 as compared to loss amounted to RMB21.0 million (US$3.1 million) in 2008. The gain of 2009 arose from disposal the Company's stake in CLS amounting to RMB1.2 million (US$0.2 million); and the loss from discontinued operations in 2008 was mainly due to an impairment loss on brand name usage right amounting to RMB14.5 million (US$2.1 million).
 
Net income attributable to non-controlling shareholders amounted to RMB7.3 million (US$1.1 million) in 2009 as compared to RMB7.5 million (US$1.1 million) in 2008.
 
Net Income attributable to the Company amounted to RMB92.1 million (US$13.5 million) in 2009 compared to RMB42.7 million (US$6.3 million) in 2008.
 
 Liquidity and Capital Resources
 
Cash and bank balances together with term deposits increased from RMB834.6 million (US$122.8 million) at December 31, 2009, to RMB948.4 million (US$143.7 million) at December 31, 2010. The increase of approximately 13.6% was because of the proceeds from the issuance of shares of the Company in 2010.
 
32
 
 
Net cash generated from operating activities was RMB352.6 million (US$53.4 million) in 2010 as compared to RMB135.1 million (US$19.9 million) in 2009. Mainly, it is due to the net cash generated from operating activities for 2009 was depressed because after the acquisition of LJC on October 5, 2009, there was a payment of RMB27.3 million (US$4.0 million) to Guangxi Normal University as fee payment under the affiliation agreement for revenue received before October 5, 2009. The revenue received before October 5, 2009 was not consolidated into the operating cash flow of the Company, but the fee payment under the affiliation agreement payment after October 5, 2009 was included in the operating cash outflow. As such, the operating cash flow would be reduced accordingly.
 
Net cash used in investment activities in 2010 was RMB637.6 million (US$96.6 million), mainly reflecting settlement of acquisition consideration in relation to HIUBC of RMB340.1 million (US$51.5 million). The Company also paid RMB100.4 million (US$15.2 million) for acquiring property and equipment mainly for TUG. There was also a transfer to fixed deposit of RMB197.0 million (US$29.8 million). Net cash used in investment activities in 2009 was RMB385.5 million (US$56.7 million), mainly reflecting settlement of acquisition consideration in relation to LJC of RMB221.9 million (US$32.6 million).
 
Net cash provided by financing activities in 2010 was RMB199.0 million (US$30.1 million), mainly reflecting the proceeds from issue of shares and net repayment of bank borrowing amounting to RMB32.4 million (US$4.9 million). Net cash provided by financing activities in 2009 was RMB327.6 million (US$48.2 million), mainly reflecting the proceeds from issue of shares in a secondary offerings and RMB70 million (US$10.3 million) bank borrowing raised.
  
On December 1, 2009, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC (the “Underwriter”), pursuant to which the Company agreed to issue and sell 5,930,000 shares of the Company’s common stock, par value $0.0001 per share, to the Underwriter at an offering price per share of $6.85. In addition, the Company also granted the Underwriter an option to purchase up to an additional 889,500 shares to cover overallotments, if any, at the same price of US$6.85 per share. The sale of the 5,930,000 shares of common stock was consummated on December 7, 2009 and the sale of up to an additional 889,500 shares to cover overallotments was consummated on December 16, 2009. Net proceeds to the Company from the offering, after deducting underwriting discounts and commissions and estimated offering expenses, were approximately US$43.6 million.
 
On January 5, 2010, the Company issued 692,520 restricted shares of our common stock to Thriving Blue Limited, a British Virgin Islands company that is 100% owned by Ron Chan Tze Ngon, the Company’s Chief Executive Officer (“Thriving Blue”) pursuant to a Subscription Agreement dated December 21, 2009 between the Company and Thriving Blue for a purchase price of US$7.22 per share or an aggregate purchase price of US$4,999,994.40. The shares are beneficially held on behalf of Ron Chan Tze Ngon, Michael Santos, and Antonio Sena.
 
On April 29, 2010, the Company entered into a Stock Purchase Agreement with Wu Shi Xin, the sole stockholder of Wintown Enterprises Limited, a British Virgin Islands company (“Wintown”), pursuant to which Mr. Wu purchased 3,735,734 shares of our common stock for a purchase price of US$7.85 per share, or an aggregate purchase price of US$29.3 million. Wintown is the holding company of HIUBC.
 
The Company believes that its cash and cash equivalents balances, together with its access to financing sources, will continue to be sufficient to meet the working capital needs associated with its current operations on an ongoing basis, although that cannot be assured. Also, it is possible that the Company’s cash flow requirements could increase as a result of a number of factors, including unfavorable timing of cash flow events, the decision to increase investment in marketing and development activities or the use of cash for acquisitions to accelerate its growth.
 
  Total assets at the end of 2010 amounted to RMB2,954.2 million (US$447.6 million). In 2009, total assets was RMB2,273.9 million (US$334.4 million), an increase of 29.9%. Total current assets increased by 16.9% to RMB1,075.5 million (US$163.0 million).
 
Accounts receivable increased from RMB53.8 million (US$7.9 million) as at December 31, 2009 to RMB59.4 million (US$9.0 million) at the end of 2010. Most of the business partners are long term customers and settle their accounts promptly. All accounts receivable are reviewed regularly and provisions have been made for any balances that are disputed or doubtful.
 
Inventory, mainly made up of satellite transmission and receiving equipment, amounted to RMB1.0 million (US$0.2 million) and RMB1.4 million (US$0.2 million) as at December 31, 2010 and December 31, 2009 respectively.
 
Prepaid expenses and other current assets increased from RMB19.2 million (US$2.9 million) as at December 31, 2009 to RMB56.3 million (US$8.5 million). The increase was mainly due to the increase in deposits and prepayments for construction projects paid by LJC.
 
The Company had bank borrowings amounting to RMB260.0 million (US$39.4 million) at December 31, 2010, to finance the construction projects and campus capacity expansion in TUG.
 
33
 
  
 
   
Payment Due by Period
 
                                     
   
 
   
Within
   
 
   
 
   
2014 and
   
 
 
     Total    
1 Year
    2012     2013    
beyond
   
Other
 
   
(RMB
   
(RMB
   
(RMB
   
(RMB
   
(RMB
   
(RMB
 
      ‘000)       ‘000)       ‘000)       ‘000)       ‘000)       ‘000)  
Long-term debt obligation
                                               
Principal
    260,000       170,000       55,000       30,000       5,000       -  
Interest
    22,672       14,628       5,603       2,345       96       -  
Operating lease commitments
    3,680       1,617       2,063                          
FIN48 obligation
    109,933                                       109,933  
Lease obligation for information usage and satellite platform usage
    12,136       12,136                                  
Total contractual obligations
    408,421       198,381       62,666       32,345       5,096       109,933  
Equivalent US$ ‘000.
    61,882       30,058       9,495       4,901       772       16,657  
 
Contractual Obligations and Commercial Commitments. The Company has various contractual obligations that will affect its liquidity. The following table sets forth the contractual obligations of the Company as of December 31, 2010:

The following table presents the contractual obligations in USD solely for the convenience of readers.  The exchange rate of RMB 6.6 was applied as of December 31, 2010.

   
Total
   
Within 1 
year
   
2012
   
2013
   
2014 and 
beyond
   
Other
 
   
(USD'000)
   
(USD'000)
   
(USD'000)
   
(USD'000)
   
(USD'000)
   
(USD'000)
 
Long-term debt obligation
                                   
Principal
    39,394       25,758       8,333       4,545       758        
Interest
    3,435       2,216       849       355       15        
Operating lease commitments
    558       245       313                        
FIN48 obligation
    16,657                                       16,657  
Lease obligation for information usage and satellite platform usage
    1,839       1,839                                  
Total contractual obligations
    61,882       30,058       9,495       4,901       772       16,657  
 
Note: The potential obligation up to RMB 90 million related to the Company's contingent consideration payment pursuant to the Wintown Enterprise acquisition is fair valued at RMB78.7 million as of December 31, 2010 and is recorded as other current liabilities. Such contingent consideration liability is not included in the above table.
 
Operating Leases. The Company leases certain office premises under non-cancelable leases. Rent expense under operating leases for the years ended December 31, 2008, 2009, and 2010 were RMB6.7 million, RMB3.0 million and RMB2.7 million (US$0.4 million), respectively. The Company has entered into certain operating lease arrangements relating to the information usage and satellite platform usage services. Rental expense related to these operating lease arrangement for the years ended December 2008, 2009 and 2010 were RMB17.5 million, RMB17.4 million and RMB12.1 million (US$1.8 million), respectively. The Company had no fixed commitment on information usage and satellite platform usage fee. The satellite platform usage fee was payable to the CCLBJ calculated at 10% of revenue generated by a subsidiary of the Company for 2008 and 2009.
 
As of December 31, 2010, future minimum capital commitments under the non-cancelable construction premises was RMB nil million due in 2010.
 
The Company has not entered any financial guarantees or other commitments to guarantee the payment obligations of any third parties.
 
Accounting Pronouncements

Recent Accounting Pronouncement

In June 2009, the FASB issued an authoritative pronouncement to amend the accounting rules for variable interest entities.  The amendments effectively replace the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affect the entity's economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity.  Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity's economic performance.  The new guidance also requires additional disclosures about a reporting entity's involvement with variable interest entities and about any significant changes in risk exposure as a result of that involvement.
 
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The new guidance is effective at the start of a reporting entity's first fiscal year beginning after November 15, 2009, and all interim and annual periods thereafter.

The Company has had one consolidated variable interest entity under the authoritative literature prior to the amendment discussed above because it was the primary beneficiary of the entity.  Because the Company, through its wholly owned subsidiary, has (1) the power to direct the activities of the variable interest entity that most significantly affect the entity's economic performance and (2) the right to receive benefits from the variable interest entity. This new guidance has been adopted by the company on January 1, 2010.  The Company continues to consolidate the variable interest entity upon the adoption of the new guidance which therefore has no impact on the Company's financial condition or results of operations, except for the additional disclosures on the face of and in the notes to the consolidated financial statements.

In April 2010, the FASB issued an authoritative pronouncement on effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity's functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition, and therefore should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement is for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted.
 
  In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the guidance is effective for impairment tests performed during entities' fiscal years (and interim periods within those years) that begin after December 15, 2010. Early adoption will not be permitted. For nonpublic entities, the guidance is effective for impairment tests performed during entities' fiscal years (and interim periods within those years) that begin after December 15, 2011. Early application for nonpublic entities is permitted; nonpublic entities that elect early application will use the same effective date as that for public entities.

In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro forma information for business combinations. The objective of this guidance is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable t the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments will be effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption is permitted.   For most calendar-year-end companies, companies should evaluate and disclose the impact, if any, this guidance will have on its consolidated financial statements starting from January 1, 2011.
 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The following financial statements, financial statement schedule and the footnotes thereto are included in the section beginning on page F-1.
 
 
1.
Report of Independent Registered Public Accounting Firm.
 
 
2. 
Consolidated Balance Sheets as of December 31, 2009 and 2010 (As Restated).
 
 
3.
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2008, 2009 and 2010 (As Restated).
 
 
4.
Consolidated Statements of Changes in Equity for the years ended December 31, 2008, 2009 and 2010 (As Restated).
 
 
5.
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2009 and 2010 (As Restated).
 
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6.
Notes to Consolidated Financial Statements (As Restated).

 
7.
Schedule I (As Restated).

Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements, as restated, Notes to Consolidated Financial Statements, as restated, and Financial Statement Schedule, as restated, which are listed in the Index to Financial Statements and which appear beginning on page F-2 of this report are incorporated into this Item 8. Quarterly Results of Operations information, as restated, is included elsewhere in this report and is incorporated into this Item 8.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
(a)
Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of our disclosure controls and procedures as of December 31, 2010, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this Annual Report on Form 10-K, the Company’s disclosure controls and procedures were not effective as of December 31, 2010 to give a reasonable assurance that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure due to the identification of the following material weaknesses in our internal controls discussed in “Management’s Annual Report on Internal Control Over Financial Reporting” : 
 
1. Lack of sufficient skilled resources in the finance team to meet the demands of rapidly expanded businesses which resulted in a delayed closing process.
2. Lack of contemporaneous documentation of certain decisions made by the Board of Directors.
3. Accounting for the prepaid service fee - During 2011, the Company reinterpreted its position related to the evaluation of the contractual requirements for a non-current advance referred to as the prepaid service fee. As a result of that process, the company concluded it lacked adequate and effective controls to ensure all contractual requirements as well as relevant accounting guidance were considered in determining the appropriate accounting for the prepaid service fee. This material weakness contributed to the restatement to the previously reported consolidated financial statements for the year ended December 31, 2010, as discussed in Note 27 to the consolidated financial statements under the caption "Second Restatement."
 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. 
 
(b)       Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
  
1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
 
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
 
37
 
 
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted a comprehensive review, evaluation and assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation which excluded Wintown and its subsidiaries as discussed in the paragraphs below, our principal executive officer and principal financial officer have concluded that as of December 31, 2010, our internal control over financial reporting was not effective due to the identification of the following material weaknesses:
 
1. Lack of sufficient skilled resources in the finance team to meet the demands of rapidly expanded businesses which resulted in a delayed closing process.
2. Lack of contemporaneous documentation of certain decisions made by the Board of Directors.
3. Accounting for the prepaid service fee - During 2011, the Company reinterpreted its position related to the evaluation of the contractual requirements for a non-current advance referred to as the prepaid service fee. As a result of that process, the company concluded it lacked adequate and effective controls to ensure all contractual requirements as well as relevant accounting guidance were considered in determining the appropriate accounting for the prepaid service fee. This material weakness contributed to the restatement to the previously reported consolidated financial statements for the year ended December 31, 2010, as discussed in Note 27 to the consolidated financial statements under the caption "Second Restatement."

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. 
 
Wintown and its subsidiaries were excluded from the year’s self assessment by the management. The acquisition of Wintown was completed on August 23, 2010. As an investment holding company, Wintown beneficially owns HIUBC’s Management. In view of the limited timeframe between September and December 2010, management decided to exclude Wintown and its subsidiaries from this year’s management self assessment as it was felt that the time available was inadequate to complete an effective assessment of the internal control of Wintown and its subsidiaries during the period as well as insufficient to effectively implement and roll out any meaningful changes. Management was also of the view that any potential risk from Wintown and its subsidiaries is manageable and should not be a key concern for the current year.
 
Subtotals pertaining to Wintown and its subsidiaries, whose internal controls have not been assessed and their significance (in percentage) to the Consolidated Financial Statements of CEC (as restated), are set out below.
 
   
Million
RMB
   
%
 
Net assets (including goodwill and intangible assets acquired)
    434.7       24 %
Total assets (including goodwill and intangible assets acquired)
    696.7       24 %
Revenues
    42.4       8 %
 
I n addition, net loss of Wintown and its subsidiaries was approximately RMB4.0 million for the period from the date of acquisition to the end of 2010 and it represented 3% of net income of the Company (as restated).
 
Since the filing of the 10-K for the year ended December 31, 2010, the Company has taken the following steps related to its internal control over financial reporting:

a. We have employed an additional senior qualified accountant who is well experienced in preparing financial statements for listed companies and in internal control reviews.
b. We have strengthened our financial teams at the operation level by adding resources as well as provided staff trainings so that the teams are fully aware and supportive of the Company’s commitment to the quality of its financial reporting.
c. We have engaged external contractors who are experienced in US GAAP conversion to assist the financial teams at the universities starting from the first quarter of 2011 to ensure the timely availability of accurate US GAAP conversion information for review by the auditor.
d. We have set training objectives for senior and corporate financial staff members so that (i) they are fully updated on new developments in US GAAP reporting requirements, (ii) they receive additional training from structured professional programs including programs in the US and (iii) to encourage and sponsor staff members to pursue US accounting qualifications including the CPA.

Our independent registered public accounting firm, Deloitte Touche Tohmatsu CPA Ltd., who also audited our consolidated financial statements, independently assessed the effectiveness of our internal control over financial reporting as of December 31, 2010, as stated in their report (as restated), which is included in this Annual Report on Form 10-K/A.
 
38
 
 
  
(c)       Report of Independent Registered Public Accounting Firm

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TO THE BOARD OF

DIRECTORS AND SHAREHOLDERS OF CHINACAST EDUCATION CORPORATION

 

We have audited the internal control over financial reporting of ChinaCast Education Corporation, its subsidiaries and its variable interest entities (collectively, the "Company") as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  As described in Management's Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Wintown Enterprises Limited and its subsidiaries (collectively, "Wintown"), which were acquired on August 23, 2010.

 

Subtotals pertaining to Wintown and its subsidiaries, whose internal controls have not been assessed and their significance (in percentage) to the Consolidated Financial Statements of CEC (as restated), are set out below.

 

    Million
RMB
    %  
Net assets (including goodwill and intangible assets acquired)     434.7       24 %
Total assets (including goodwill and intangible assets acquired)     696.7       24 %
Revenues     42.4       8 %

 

In addition, net loss of Wintown and its subsidiaries was approximately RMB4.0 million for the period from the date of acquisition to the end of 2010 and it represented 3% of net income of the Company (as restated).

 

Accordingly, our audit did not include the internal control over financial reporting at Wintown.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting (as revised), based on our audit.

 

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

  

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

  
39
 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment:

 

1. Lack of sufficient skilled resources in the finance team to meet the demands of rapidly expanded businesses which resulted in a delayed closing process.
2. Lack of contemporaneous documentation of certain decisions made by the Board of Directors.
3. Accounting for the prepaid service fee - During 2011, the Company reinterpreted its position related to the evaluation of the contractual requirements for a non-current advance referred to as the prepaid service fee. As a result of that process, the company concluded it lacked adequate and effective controls to ensure all contractual requirements as well as relevant accounting guidance were considered in determining the appropriate accounting for the prepaid service fee. This material weakness contributed to the restatement to the previously reported consolidated financial statements for the year ended December 31, 2010, as discussed in Note 27 to the consolidated financial statements under the caption "Second Restatement."

 

The material weaknesses were considered in determining  the nature, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2010, of the Company and this report does not affect our report on such financial statements and financial statement schedule.

 

In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2010 of the Company and our report dated March 16, 2011 (September 2, 2011 as to the effects of the restatement discussed in Note 27 under the caption "First Restatement" and February 7, 2012 as to the effects of the restatement discussed in Note 27 under the caption "Second Restatement") expressed an unqualified opinion on those financial statements and financial statement schedule and included explanatory paragraphs relating to i) the restatements discussed in Note 27 and ii) the convenience translation of Renminbi amounts into United States dollar amounts in the financial statements.

 

/s/ Deloitte Touche Tohmatsu CPA Ltd.

Beijing, People's Republic of China

 

March 16, 2011 (February 7, 2012 as to the effects of the material weakness related to the accounting for the prepaid service fee as discussed in Management’s Report on Internal Control over Financial Reporting (as revised))

 
40
 
  
PART III.
 
ITEM 11. EXECUTIVE COMPENSATION
 
Compensation Discussion and Analysis
 
Overview
 
This compensation discussion describes the material elements of compensation awarded to, earned by, or paid to each of our executive officers listed in the Summary Compensation Table below (the “named executive officers”) during the last completed fiscal year. This compensation discussion focuses on the information contained in the following tables and related footnotes and narrative for primarily the last completed fiscal year, but we also describe compensation actions taken before or after the last completed fiscal year to the extent it enhances the understanding of our executive compensation disclosure.
 
The compensation committee currently oversees the design and administration of our executive compensation program.  Our compensation plans do not encourage excessive and unnecessary risk taking. The plans encourage long term staff retention which is critical for the Company to maintain its strategy of growing through acquisition and new business lines in the PRC. The Company does not believe that there are any risks arising from its compensation plans and policies that are likely to have a material effect on the Company.
   
Objectives and Philosophy
 
Our primary goal with respect to our compensation programs has been to attract and retain the most talented and dedicated employees in key positions in order to compete effectively in the market place, successfully execute our growth strategies, and create lasting shareholder value. The Compensation Committee evaluates both individual and Company performance when determining the compensation of our executives. Our executives’ overall compensation is tied to the Company financial and operational performance, as measured by revenues and net income, as well as to accomplishing strategic goals such as merger and acquisitions and fund raising. The Compensation Committee believes that a significant portion of our executive’s total compensation should be at-risk compensation that is linked to stock-based incentives to align their interests with those of shareholders.
 
Additionally, the Compensation Committee has determined that an executive officer who is a Chinese national and is based in China will be entitled to a locally competitive package and an executive officer who is an expatriate or who is based outside the PRC will be paid a salary commensurate with those paid to the executives in their home countries. The Compensation Committee evaluates the appropriateness of the compensation programs annually and may make adjustments after taking account the subjective evaluation described previously.
 
We apply our compensation policies consistently for determining compensation of our chief executive officer as we do with the other executives. The Compensation Committee assesses the performance of our chief executive officer annually and determines the base salary and incentive compensation of our chief executive officer.
 
Our Chief Executive Officer is primarily responsible for the assessment of our other executive officers’ performance. Ultimately, it is the Compensation Committee’s evaluation of the chief executive officer’s assessment along with competitive market data that determines each executive’s total compensation.
 
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Elements of Our Executive Compensation Programs
 
During each year, the compensation committee lays down the principles to properly align the Chinacast management’s incentives with the long term success of the company and shareholders value. The Compensation Committee believes that an effective compensation structure should be composed of multiple instruments, including base salary, year end cash bonus, and stock option/restricted stock program. The Compensation Committee firmly believes that each instrument is suited to address different aspects of the compensation issues and need to work together to make the compensation structure more complete and versatile for different recipients.
 
The following is a description of the elements of our compensation generally.
 
Base Salary . All full time executives are paid a base salary. Base salaries for our named executives are set based on their professional qualifications and experiences, education background and scope of their responsibilities, taking into account competitive market compensation levels paid by other similar sized companies for similar positions and reasonableness and fairness when compared to other similar positions of responsibility within the Company. Base salaries are reviewed annually by the Compensation Committee, and may be adjusted annually as needed.
 
Annual Bonuses . The Company does not pay guaranteed annual bonuses to our executives or to employees at any level because we emphasize pay-for-performance. The Compensation Committee determines cash bonuses towards the end of each fiscal year to award our executive officers including our Chief Executive Officer and Chief Financial Officer based upon a subjective assessment of the Company’s overall performance and the contributions of the executive officers during the relevant period.
  
Equity Incentive Compensation . A key element of our pay-for-performance philosophy is our reliance on performance-based equity awards through the Company’s equity based compensation plan. This program aligns executives’ and shareholders’ interests by providing executives an ownership stake in the Company.  Our Compensation Committee has the authority to award equity incentive compensation, i.e. stock options or incentive stock, to our executive officers in such amounts and on such terms as the Compensation Committee determines in its sole discretion. The Compensation Committee will review the existing 2007 Omnibus Securities and Incentive Plan or approve additional plans from time to time, and determine the overall stock units that can be awarded during the period. The Compensation Committee will approve the award plan including performance target benchmarks proposed by the management for the executives each year.

The Compensation Committee grants equity incentive compensation at times when there are not material non-public information to avoid timing issues and the appearance that such awards are made based on any such information. The exercise price is the closing market price on the date of the grant. The Compensation Committee’s policy is to keep the total stock option and restricted stock awarded each year under 1% of the total shares outstanding. All awards under the plan will be subjected to vesting period approved .
 
Other Compensation . We provide our executives with certain other benefits, including reimbursement of business and entertainment expenses, health insurance, vacation and sick leave plan. The Compensation Committee in its discretion may revise, amend or add to the officer’s executive benefits as it deems necessary. We believe that these benefits are typically provided to senior executives of similar companies in China and in the U.S.
 
2009 Executive Incentive Plan

 
On October 28, 2009, we adopted our 2009 Executive Incentive Plan (the "EIP"). The EIP is intended to form the basis for compensation of our executives (6 persons). Although the EIP relates to certain key performance targets for the Company for the 2009 year, the compensation related thereto is paid in 2010 as an additional incentive to such employees to remain with the Company.
 
Pursuant to the EIP, the compensation package for each of our executives shall consist of (i) base salary, (ii) cash bonus and (iii) stock based compensation consisting of restricted shares of the Company’s common stock.  Cash bonuses and shares of restricted stock shall be based on the Company’s achievement of the following key performance targets:

 1 . Revenues of US$49-51 million for 2009 (“Revenue Target”)
 2.  Adjusted net profit of US$14-16 million for 2009 (“Net Profit Target”)
 3.  Return on assets of 4.8%-5.2% for 2009 (“Return of Assets Target”)

Cash bonuses shall be set by our CEO and based on 40-50% of the base salary of each executive as well as the percentage achievement of each of each of the key performance targets.  The percentage of total cash bonus for which an executive is eligible shall be allocated as follows: (i) 40% based on achievement of the Revenue Target, (ii) 40% based on achievement of the Net Profit Target and (iii) 20% based on achievement of the Return of Assets Target.  In the case of each of these targets, achievement of the low end of the target range shall entitle the executive to receive 100% of the portion of total cash bonus attributable to such target.  If, however, 110% of such target is achieved, the executive shall be entitled to receive 110% of the total bonus attributable to such target.  Conversely, if only 80% of such target is achieved, the executive shall be entitled to receive 80% of the total bonus attributable to such target.
 
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A total of around 350,000 shares of common stock shall be available for award as stock based compensation in the form of restricted stock.  The percentage of the total number of shares of restricted stock for which an executive is eligible to receive shall be allocated as follows: (i) 25% based on achievement of the Revenue Target, (ii) 25% based on achievement of the Net Profit Target and (iii) 50% based on achievement of the Return of Assets Target.  In the case of each of these targets, achievement of the low end of the target range shall entitle the executive to receive 100% of the portion of total stock based compensation attributable to such target.  If, however, 110% of such target is achieved, the executive shall be entitled to receive 110% of the total stock based compensation attributable to such target.  Conversely, if only 80% of such target is achieved, the executive shall be entitled to receive 80% of the total stock based compensation attributable to such target.  All restricted stock awards made pursuant to the EIP shall vest in even amounts quarterly over the twelve consecutive fiscal quarters commencing April 30, 2010.

2010 Executive Incentive Plan
 
On August 6, 2010, we adopted our 2010 Executive Incentive Plan (the "EIP"). The EIP is intended to form the basis for compensation of our executives (6 persons) and certain senior staff. Although the executives and senior staff are not aware of the precise performance targets that have been set, they know that the EIP is based on performance goals for the Company for the 2010 year. The EIP awards incentivize staff retention as the cash bonus and restricted stock are not paid until 2011.  If a staff member resigns or is terminated, the unpaid portions of the bonus and the unvested portion of the restricted shares are forfeited. The EIP serves less to incentivize performance during fiscal 2010 and more to incentivize staff retention thereafter.
   
Pursuant to the EIP, the compensation package for each of our executives shall consist of (i) base salary, (ii) cash bonus and (iii) stock based compensation consisting of restricted shares of the Company’s common stock.  Cash bonuses and shares of restricted stock shall be based on the Company’s achievement of the following key performance targets:
  
 1 . Revenues of US$78-80 million for 2010 (“Revenue Target”)
 2.  Adjusted net profit of US$45-47 million for 2010 (“Net Profit Target”)
 3.  Return on adjusted tangible assets of 19-20% for 2010 (“Return of Assets Target”)

Adjusted tangible assets is defined as total assets less idle cash, acquired intangibles assets, goodwill, non current advances to related party and long term investment.
 
Cash bonuses shall be set by our CEO and based on 40-50% of the base salary of each executive as well as the percentage achievement of each of each of the key performance targets.  The percentage of total cash bonus for which an executive is eligible shall be allocated as follows: (i) 40% based on achievement of the Revenue Target, (ii) 40% based on achievement of the Net Profit Target and (iii) 20% based on achievement of the Return of Assets Target.  In the case of each of these targets, achievement of the low end of the target range shall entitle the executive to receive 100% of the portion of total cash bonus attributable to such target.  If, however, 110% of such target is achieved, the executive shall be entitled to receive 110% of the total bonus attributable to such target.  Conversely, if only 80% of such target is achieved, the executive shall be entitled to receive 80% of the total bonus attributable to such target.
 
A total of around 500,000 shares of common stock shall be available for award as stock based compensation in the form of restricted stock.  The percentage of the total number of shares of restricted stock for which an executive is eligible to receive shall be allocated as follows: (i) 25% based on achievement of the Revenue Target, (ii) 25% based on achievement of the Net Profit Target and (iii) 50% based on achievement of the Return of Assets Target.  In the case of each of these targets, achievement of the low end of the target range shall entitle the executive to receive 100% of the portion of total stock based compensation attributable to such target.  If, however, 110% of such target is achieved, the executive shall be entitled to receive 110% of the total stock based compensation attributable to such target.  Conversely, if only 80% of such target is achieved, the executive shall be entitled to receive 80% of the total stock based compensation attributable to such target.  All restricted stock awards made pursuant to the EIP shall vest in even amounts quarterly over the twelve consecutive fiscal quarters commencing April 30, 2011.
 
Compensation Committee Report on Executive Compensation
 
Our compensation committee has certain duties and powers as described in its charter. The compensation committee is currently composed of the three non-employee directors named at the end of this report, each of whom is independent as defined by the NASDAQ Global Select Market listing standards.
 
The compensation committee has reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis section of this Annual Report on Form 10-K. Based upon this review and discussion, the compensation committee recommended to our Board of Directors that the Compensation Discussion and Analysis section be included in our Annual Report on Form 10-K to be filed with the SEC.
 
The members of the Compensation Committee are:
 
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Daniel Tseung

Justin Tang

Ned Sherwood

Compensation Committee Interlocks and Insider Participation

Members of our Compensation Committee of the Board of Directors during 2010 were Daniel Tseung, Justin Tang and  Ned Sherwood. No member of our Compensation Committee was, or has been, an officer or employee of the Company or any of our subsidiaries.

No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers or directors of the Company or another entity.

Executive Compensation

Summary Compensation Table (US$)

                               
Non-Equity
             
                   
Stock
   
Option
   
Incentive Plan
   
All Other
       
Name and Principal
     
Salary
   
Bonus
   
Awards
   
Awards
   
Compensation
   
Compensation
   
Total
 
Position
 
Year
 
($)
   
($)
   
($)
   
($)(1)
   
($)
   
($)
   
($)
 
Ron Chan Tze Ngon,
 
2010
    230,769       121,500       120,411                         472,680 (8)
Executive Chairman and
 
2009
    204,345                                     204,345  
Chief Executive Officer (2)
 
2008
    139,221                                     139,221  
Li Wei,
 
2010
    88,798       46,752       86,012       267,000                   488,562 (9)
Chief Operating Office (3)
 
2009
    80,030                   267,000                   349,030  
   
2008
    82,899                   267,000                   349,899  
Antonio Sena,
 
2010
    184,615       97,200       103,184       176,220                   561,219 (10)
Chief Financial Officer (4)
 
2009
    131,586                   178,890                   310,476  
   
2008
    134,475                   178,890                   313,365  
Michael Santos,
 
2010
    185,000       97,403       103,184       176,220                   561,807 (11)
Director and Chief
 
2009
    185,768                   178,890                   364,658  
Marketing Officer (5)
 
2008
    189,847                   178,890                   368,737  
Jim Ma,
 
2010
    138,462       72,900       86,012       176,220                   473,594 (12)
VP of Finance (6)
 
2009
    102,173                   178,890                   281,063  
   
2008
    104,416                   178,890                   283,306  
Jiang Xiang Yuan,
 
2010
    88,798       46,752       103,184       267,000                   505,734 (13)
VP (7)
 
2009
    27,778                   267,000                   294,778  
   
2008
    28,174                   267,000                   295,174  
 

 
(1)
Valuation based on the dollar amount of option grants was based on the grant date fair value of awards computed in accordance with FASB ASC Topic 718. All Option Awards were received in 2008.

(2)
During 2010, Mr. Ron Chan received a total of 19,837 shares of restricted stock and a bonus of $121,411 under EIP2009. The closing price of the shares at the grant date on June 22, 2010 was $6.07.

(3)
On January 11, 2008, Mr Li Wei received a grant of options to purchase 300,000 shares of the Company’s common stock at an exercise price of $6.30 per share. 100,000 of the options vested on March 31, 2008, 100,000 of such options vested on March 31, 2009 and 100,000 of such options vested on March 31, 2010. During 2010, Mr. Li received a total of 14,170 shares of restricted stock and a bonus of $46,752 under EIP2009. The closing price of the shares at the grant date on June 22, 2010 was $6.07.

(4)
On January 11, 2008, Mr. Antonio Sena received a grant of options to purchase 200,000 shares of the Company’s common stock at an exercise price of $6.30 per share. 67,000 of the options vested on March 31, 2008, 67,000 of such options vested on March 31, 2009 and 66,000 of such options vested on March 31, 2010. During the year, Mr. Sena received a grant of 16,999 shares of restricted stock under EIP2009. The closing price of the shares at the grant date on June 22, 2010 was $6.07.
 
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(5)
On January 11, 2008, Mr. Michael Santos received a grant of options to purchase 200,000 shares of the Company’s common stock at an exercise price of $6.30 per share. 67,000 of the options vested on March 31, 2008, 67,000 of such options vested on March 31, 2009 and 66,000 of such options vested on March 31, 2010. During the year, Mr. Santos received a grant of 16,999 shares of restricted stock under EIP2009. The closing price of the shares at the grant date on June 22, 2010 was $6.07.

(6)
On January 11, 2008, Mr. Jim Ma received a grant of options to purchase 200,000 shares of the Company’s common stock at an exercise price of $6.30 per share. 67,000 of the options vested on March 31, 2008, 67,000 of such options vested on March 31, 2009 and 66,000 of such options vested on March 31, 2010. During the year, Mr. Ma received a grant of 14,170 shares of restricted stock under EIP2009. The closing price of the shares at the grant date on June 22, 2010 was $6.07.
 
(7)
On January 11, 2008, Mr. Jiang received a grant of options to purchase 300,000 shares of the Company’s common stock at an exercise price of $6.30 per share. 100,000 of the options vested on March 31, 2008, 100,000 of such options vested on March 31, 2009 and 100,000 of such options vested on March 31, 2010. During the year, Mr. Jiang received a grant of 16,999 shares of restricted stock under EIP2009. The closing price of the shares at the grant date on June 22, 2010 was $6.07.

Outstanding Equity Awards at Fiscal Year-End

The following table summarizes the number of securities underlying outstanding plan awards for each named executive officer as of December 31, 2010.

   
Option Awards
   
Stock Awards
 
   
Number of
Securities
Underlying
Unexercised
Options (#)
   
Number of
Securities
Underlying
Unexercised
Options (#)
   
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
   
Option
Exercise
Price ($)
   
Option
Expiration
Date
   
Number
of
Shares
or
Units of
Stock
That
Have
Not
Vested
(#)
   
Market
Value
of
Shares
or
Units of
Stock
That
Have
Not
Vested
($)(4)
   
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units
or Other
Rights That
Have Not
Vested (#)
   
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($)
 
Name
 
Exercisable
   
Unexercisable