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Article by DailyStocks_admin    (02-08-08 04:06 AM)

The Daily Magic Formula Stock for 02/08/2008 is ChinaCast Education Corp. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

BASIS OF PREPARATION

The accompanying unaudited condensed consolidated financial statements of ChinaCast Education Corporation (“CEC”), formerly Great Wall Acquisition Corporation (“Great Wall”)) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“US GAAP”) for complete financial statements and should be read in conjunction with the audited financial statements included in CEC’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006.

In the opinion of the management of CEC, the accompanying unaudited condensed consolidated financial statements are prepared on the same basis as the audited financial statements, and these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the results of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results expected for any subsequent interim period or for CEC’s fiscal year ending December 31, 2007.

The accompanying unaudited condensed consolidated financial statements include the accounts of CEC, its subsidiaries, and variable interest entities (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Amounts in United States dollars (“US$”) are presented solely for the convenience of readers and an exchange rate of RMB7.5 to US$1 was applied as of September 30, 2007. Such transaction should not be construed to be the amounts that would have been reported under US GAAP.

The Share Exchange Transaction

On December 22, 2006, Great Wall consummated the voluntary conditional offer (the “Offer”) made in Singapore to acquire all of the outstanding ordinary shares of ChinaCast Communication Holdings Limited (“ChinaCast”). Pursuant to the terms of the Offer, ChinaCast shareholders had the option to receive either shares of CEC or a cash payment for each ChinaCast share tendered. On January 18, 2007, the closing date of the Offer, total shares acquired were 80.27%. Since Great Wall was not an operating company and the shareholders of ChinaCast control the combined company after the above transaction consummated on December 22, 2006 (the “Share Exchange Transaction”) the Share Exchange Transaction was accounted for as a recapitalization in which ChinaCast 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 outstanding ordinary shares of ChinaCast not acquired by Great Wall were reported as minority interest for all the periods presented.

During the nine months ended September 30, 2007, CEC acquired additional shares by issuing shares of CEC and cash amounted to RMB5,793 to certain original ChinaCast shareholders and increased its holdings to 100% of the outstanding ordinary shares of ChinaCast. The 19.73% of the additional shares acquired were accounted for on the same basis as the Share Exchange Transaction.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”. SFAS No. 159 provides companies with an irrevocable option to report selected financial assets and liabilities at fair value. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted. The Company is currently evaluating whether the adoption of SFAS No. 159 will have a material effect on its consolidated financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating whether the adoption of SFAS No. 157 will have a material effect on its consolidated financial position or results of operations.
DISCONTINUED OPERATIONS

As of January 1, 2006, the Company had a 50% stake in Beijing Tongfang Digital Education Technology Limited (“Tongfang”) and Tongfang had a 51% stake in Beijing Tongfang Chuangxin Technology Limited (“Tongfang Chuangxin”). On February 9, 2007 (“Closing Date”), the Company completed the transaction under a sale and purchase agreement with Tongfang Co. Limited to dispose all of its shareholding in Tongfang in return for a 17.85% interest in Tongfang Chuangxin. As part of the consideration for the sale, the Company offset the RMB6,300 payable to Tongfang Co. Limited against the sale proceeds. No significant gain or loss was reported as a result of the sale. Tongfang ceased to be a subsidiary of the Company and the Company has accounted for its investment in Tongfang Chuangxin amounting to RMB8,936 under the cost method of accounting thereafter.

The following is a summary of the net assets sold as of the Closing Date and December 31, 2006:

On August 30, 2007, ChinaCast acquired 100% of the outstanding registered capital of Modern English Trademark Limited (“MET”), in exchange for cash of US$3 million, which is payable within 90 days from August 30, 2007 according to the sale and purchase agreement. The consideration has not been paid as of September 30, 2007 and was recorded under accrued expenses and other current liabilities. MET has no asset or liability except for a 10-year exclusive brand name usage right. The acquisition was recorded as an intangible asset, which is being amortized on a straight-line basis over 10 years.

For the three months and nine months ended September 30, 2007, the Company recorded amortization expense in respect of the brand name usage right amounting to RMB187. The Company will record amortization expenses of RMB751, RMB2,253, RMB2,253, RMB2,253, RMB2,253 in 2007, 2008, 2009, 2010 and 2011, respectively.

In 2005, the Company acquired certain agreements with universities and a training school operating right through the acquisition of Tongfang. The Company also recorded amortization expenses in respect of agreements with universities and a training school operating right amounting to RMBnil and RMB1,341 for the three months ended September 30, 2007 and 2006, respectively and RMB447 and RMB4,008 for the nine months ended September 30, 2007 and 2006, respectivley. In February 2007, Tongfang ceased to be a subsidiary of the Company and the Company has accounted for its investment in Tongfang Chuangxin under the cost method of accounting thereafter, the related agreements and operating right were no longer recorded as the Company’s intangible assets. The transaction was reported as discontinued operations (see Note 3).

STOCK INCENTIVE PLAN

2007 Omnibus Securities and Incentive Plan (“2007 Plan”)

Under the 2007 Plan adopted in May 2007, the Company may grant any awards to eligible participates, including employees, directors or consultants, to purchase up to 2,500,000 ordinary shares.

On July 11, 2007, the Company granted, under the 2007 Plan, 12,500 ordinary shares to its employees at no consideration. The per share fair value of ordinary shares as of the grant date was US$5.65. Total share-based compensation costs recognized in income were RMB530 and RMBnil for the three-month and nine-month periods ended September 30, 2007 and 2006 respectively.

As of September 30, 2007, no other awards have been granted under the 2007 Plan.

INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”) on January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was RMB23,337. As a result of the implementation of FIN 48, the Company recognized a RMB3,134 increase in the liability for unrecognized tax benefits which was accounted for as an increase to the January 1, 2007, balance of accumulated deficit. In addition, consistent with the provisions of FIN 48, the Company reclassified RMB20,203 unrecognized tax benefits from current to non-current because payment of cash is not anticipated within one year of the balance sheet date. Included in the balance of unrecognized tax benefits at January 1, 2007, are RMB23,337 of tax benefits that, if recognized, would affect the effective tax rate. As of January 1, 2007, the total amount of accrued interests were RMB5,628. The Company classifies interest as component of its income tax provision. The Company’s various tax years starting from 2001 to 2006 are remaining open in various taxing jurisdictions.

On March 16, 2007, the National People’s Congress passed a new enterprise income tax law, which will take effect beginning January 1, 2008. The new law applies a uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic enterprises. The new law provides a five-year transition period from its effective date form those enterprises which were established before the promulgation date of the new tax law and which were entitled to a preferential tax treatment such as a reduced tax rate or a tax holiday. According to the new tax law, one of the Company’s major operating subsidiaries, ChinaCast Technology (Shanghai) Limited (“CCT Shanghai”), may no longer be able to enjoy the preferential tax rates presently offered to it because of its location in specially designed region. As the law was newly issued and no implementing rules have been promulgated to date, it is uncertain whether CCT Shanghai may continue to enjoy the reduced tax rate going forward. Nevertheless, this uncertainty does not have a material impact on the Company’s deferred tax position as of September 30, 2007 because the temporary differences between the tax basis of assets and liabilities of CCT Shanghai will be fully reversed as of December 31, 2007.


CEO BACKGROUND

Ron Chan Tze Ngon is our Chairman and Chief Executive Officer, responsible for ChinaCast Communication Holdings Limited (“CCH”)’s strategic direction and shaping its various business models. Mr. Chan was appointed Chief Executive Officer of CCH in 1999 at ChinaCast’s inception. Mr. Chan worked as a sales executive in Sun Hung Kai (China) Limited from 1983 to 1985, and from 1985 to 1986 was sales manager for Unisys China Limited. From 1987 to 1988, he was strategic account manager for Unisys Asia Limited, and thereafter joined Unisys Hong Kong Limited as a sales director until 1990. Mr. Chan then joined CL Computer China/Hong Kong Limited as its general manager prior to founding, in 1993, Technology Ventures Holdings, an information technology company currently listed on the Hong Kong Stock Exchange. Mr. Chan holds a Master of Science, Mathematics degree and a Master of Computer Science degree, both from Concordia University, Montreal, Canada.

Yin Jianping is our Vice-Chairman and is responsible for our overall management, operations and strategic direction. Mr. Yin has been the Chairman of CCH since 2000. Mr. Yin graduated from the Southwest Finance and Economy University of China with a bachelor’s degree in finance. From 1984 to 1993, Mr. Yin worked in various PRC government departments, including heading the Economic Planning Department of the Tibet Municipal Government and serving as Economic Planning Officer of Naqu Region, Tibet Province. Mr. Yin left government service, and from 1993 to 1997 ran his own businesses in Sichuan Province, PRC. Prior to joining CHINACAST in 2000, he was the president of Lasha Beer Company Limited, in charge of its daily operations from 1997 to 2000.

Justin Tang is a director of our company and is a co-founder of Blue Ridge China, a private equity fund formed in 2006 that invests in companies in China. Prior to that, Mr. Tang was the co-founder of eLong, Inc., a leading online travel service company in China. From 2001 to 2006, Mr. Tang served as Chairman and CEO of eLong and in similar key executive positions at its predecessor company from 1999 to 2001. Prior to founding eLong, Mr. Tang held various positions in the financial services industry in the United States from 1993 to 1999. Mr. Tang studied at Nanjing University in China and received his BS degree from Concordia College in the United States.

Daniel Tseung is a director of our company and is currently the Managing Director at Sun Hung Kai Properties Direct Investments Ltd., the private equity division of one of Asia’s largest conglomerates, as well as Director of Investments for SUNeVision Holdings Limited, an Asian Internet infrastructure and services provider. He was previously a Director in the Technology & Communications Group of GE Equity, the private equity arm of GE Capital. He also currently serves on the Board of Directors of RCN Corporation (NASDAQ: RCNI) and Owens Corning (NYSE: OC). Mr. Tseung holds a Bachelor’s degree from Princeton University and a Master’s Degree from Harvard University.

Richard Xue is a director of our company and since July 2005 has been the Chief Financial Officer at Target Media, one of the largest out-of-home advertising network in China. Prior to joining Target Media he was Vice President of Strategy and Business Development at eLong, the 2nd largest online travel company in China. Prior to joining eLong in December 2003, Mr. Xue worked for eight years in investment banking in the United States and China. Mr. Xue studied at Tsinghua University in China and received a BS degree in Physics from University of Illinois and an MBA degree from University of Chicago in the United States.

SHARE OWNERSHIP

(1) Beneficial ownership is determined in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of November 16, 2007 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the following table or pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name. The percentage of beneficial ownership is based on 27,066,790 shares of Common Stock outstanding as of November 16, 2007. The foregoing information was derived from a Schedule 13G and Schedule 13D filings and information provided to the company by the respective shareholders.

(2) Mr. Yin’s beneficial interest is held through Super Dynamic Consultancy Limited

(3) Mr. Tang’s business address is c/o eLong, Inc., Union Plaza, Suite 604, 20 Chaoyang Men Wai Ave., Beijing 100020, China. Includes 300,000 shares of common stock issuable upon exercise of warrants that are currently exercisable.

(4) Mr. Xue’s business address is #906-917, Central Plaza, 381 Huai Hai Middle Road, Shanghai, China 200020

(5) The business address of Sapling, LLC is 505 Fifth Avenue, 23rd Floor, New York, New York 10017. The business address of Fir Tree Recovery Master Fund, L.P. is c/o Admiral Administration Ltd., Admiral Financial Center, 5th Floor, 90 Fort Street, Box 32021 SMB, Grand Cayman, Cayman Islands. Fir Tree Value Master Fund, LP, a Cayman Island exempted limited partnership, is the sole member of Sapling, LLC, a Delaware limited liability company, and Fir Tree, Inc., a New York corporation, is the investment manager of Sapling LLC and Fir Tree Recovery Master Fund, L.P., a Cayman Islands exempted limited partnership. Fir Tree, Inc. may be deemed to beneficially own the shares held by Sapling, LLC and Fir Tree Recovery Master Fund, L.P. Sapling, LLC and Fir Tree Recovery Master Fund, L.P. are the beneficial owners of 784,259 and 216,071 shares of common stock, respectively. The foregoing information was derived from a Schedule 13G filed with the SEC on January 28, 2005 and amended September 22, 2006 and a Schedule 13D filed January 8, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
We were formed on August 20, 2003 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a company having its primary operations in the PRC.
On December 22, 2006, we consummated the acquisition of ChinaCast Communication Holdings Limited (“CCH”). As of December 22, 2006, shareholders of CCH that had previously executed Letters of Undertaking with us with respect to the sale of their shares of CCH and that collectively held 239,648,953 shares of CCH or 51.22% of CCH’s outstanding shares have accepted the voluntary conditional offer (the “Offer”) made in Singapore by DBS Bank, for and on our behalf, to acquire all of the outstanding ordinary shares of CCH. On January 18, 2007, at the end of the Offer period, acceptance of the Offer totaled 80.27% which is the basis we accounted for the acquisition. As a result of this acceptance of the Offer by CCH shareholders, CCH has become our subsidiary and such acquisition qualified as a “business combination” under our amended and restated certificate of incorporation. During the nine months ended September 30, 2007, CEC acquired additional shares by issuing shares of CEC to certain original ChinaCast shareholders and increased its holdings to 100% of the outstanding ordinary shares of ChinaCast. The 19.73% of the additional shares acquired were accounted for on the same basis as the Share Exchange Transaction.
We are subject to risks common to companies operating in China, including risks inherent in our distribution and commercialization efforts, uncertainty of foreign regulatory approvals and laws, the need for future capital and retention of key employees. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.
Critical Accounting Policies
For summary of the critical accounting policies and the significant judgements and estimates made on the part of the management, see item 6 of Form 10KSB for the year ended December 31, 2006 filed by the Company on April 17, 2007. The following are accounting policies that were either new or were adopted during the nine months ended September 30, 2007.
The tax contingency was previously assessed under FASB Statement No. 5. Effective on January 1, 2007, the Company adopted FIN 48. Under FIN 48, 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. 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 FIN 48.

The Company established an English training service business line in the third quarter of 2007. The Company provides two types of tuition services to students. Students can attend English classes with unlimited access within a certain period of time generally from 2 to 12 months. The other type of classes limits the number of times students can access within a certain period of time generally from 3 to 12 months. Tuition fees are non-refundable for both types of tuition services. Revenues from the unlimited access classes are recognized on a straight-line basis over the service period. Revenues from the limited access classes are recognized on completion of the tuition period in the absence of available record supporting the number of times students attended classes during the tuition period.
Results of Operations
For the purpose of the discussion and analysis of the results of ChinaCast Education Corporation (“CEC”) and the listed group in Singapore (“CCH”) in this section, 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 = 7.5 at September 30 2007 for the 3 months and 9 months ended September 30 2007; 1USD = 7.81 at December 31 2006 for 2006; and 1USD = 8.00 at September 30 2006 for the 3 months and 9 months ended September 30 2006.
Three Months and Nine Months Ended September 30 2007 compared to the three Months and Nine Months Ended September 30 2006. The revenue of the Group for the three months and nine months ended September 30 2007 amounted to RMB46.0 million (US$6.1 million) and RMB128.2 million (US$17.1 million) respectively representing an increase of 24.9% and 7.8% over the revenue of the corresponding period in 2006. Service income, mainly of a recurring nature amounted to RMB38.0 million (US$5.1 million) for the 3 months ended September 30 2007 compared to RMB32.7 million (US$4.1 million) in the same period in 2006. Service income, mainly of a recurring nature, amounted to RMB106.0 million (US$14.1) for the nine months ended September 30 2007 compared to RMB91.5 million (US$11.4 million) in the same period in 2006. Equipment sales, mainly project based, amounted to RMB8.0 million (US$1.1 million) for the three months ended September 30 2007 against RMB4.2 million (US$0.5 million) during the same period last year. Equipment sales, mainly project based, amounted to RMB22.1 million (US$3.0 million) for the nine months ended September 30 2007 against RMB 27.4 million (US$3.4 million) during the same period last year.

Net revenue from post secondary education distance learning services increased from RMB40.1 million (US$5.0 million) in the nine months ended September 30, 2006 to RMB47.8 million (US$6.4 million) in nine months ended September 30, 2007. Net revenue from post secondary education distance learning services increased from RMB13.3 million (US$1.7million) in the three months ended September 30, 2006 to RMB17.6 million (US$2.4 million) in three months ended September 30, 2007. The total number of post-secondary students enrolled in courses using the Group’s distance learning platforms including contracts with CCLBJ but excluding Tongfang Education’s students, increased to 121,000 at September 30, 2007 from 110,000 at the end of September 30, 2006. The increase was due to the continuous growth of students enrolled in distance learning degree courses with the universities.
The revenue from the K-12 and content delivery business decreased by approximately 27.4% from RMB21.5 million (US$2.7 million) for the three months ended September 30 2006 to RMB15.6 million (US$2.0 million) for the three months ended September 30 2007.The revenue from the K-12 and content delivery business decreased by approximately 14.6% from RMB57.5 million (US$7.2 million) for the nine months ended September 30 2006 to RMB49.1 million (US$6.5 million) for the nine months ended September 30 2007 mainly due to the drop in equipment sales and one-off project revenue in this business line. 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, and English training services increased from RMB2.1 million (US$0.2 million) during the three months ended September 30, 2006 to RMB12.8 million (US$1.7 million) during the three months ended September 30, 2007. The increase was mainly due to increase in equipment sales and the establishment of the English training service which contributed a revenue of RMB2.9 million (US$0.4 million) in the third quarter of 2007. Net revenue from vocational and career training services and enterprise government training and networking, and English training services increased from RMB21.3million (US$2.7million) during the nine months ended September 30,2006 to RMB31.3million (US$4.2million) during the nine months ended September 30, 2007. Equipment sales are projected-based and revenue generated from it varies from quarter-to-quarter and year-to-year depending on the timing of projects.
Cost of sales of the Group increased by 52.8% from RMB13.2 million (US$1.6 million) during the third quarter of 2006 to RMB20.1 million (US$2.7 million) during the third quarter of 2007. The increase was due to increase in equipment sales and the establishment of English training service. Cost of materials increased from RMB4.5 million (US$0.6 million) during the third quarter of 2006 to RMB8.0 million (US$1.1 million) during the third quarter of 2007. The newly established English training service has incurred a cost of service of RMB3.3 million (US$0.4 million) in the third quarter of 2007. Cost of sales of the Group decreased by 3.0% from 57.4 million (US$7.2 million) during the nine months ended September 30 2006 to RMB 55.6 million (US$7.4 million) during the nine months ended September 30 2007.
Gross profit margin decreased by 8.1 percentage points, from 64.3% in the third quarter of 2006 to 56.2% in the third quarter of 2007. The reduction was due to the establishment of the English training service in the third quarter of 2007. Gross profit margin increased by 4.8 percentage points, from 51.8% in the first nine months of 2006 to 56.6% in the first nine months of 2007.This increase was a result of the reduction in equipment sales, which has a low margin.
For the three months ended September 30, 2007, the Group received a management service fee of RMB5.1 million (US$0.7 million), as compared to RMB1.3 million (US$0.2 million) during the three months ended September 30, 2006. For the nine months ended September 30 2007, the Group received a management service fee of RMB 17.0 million (US$2.3million), as compared to RMB8.1million (US$1.0million) during the nine months ended September 30,2006. The management service fee arose from various agreements with CCL that entitled the Group 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 Group. The growth in management service fee for the three months and nine months ended September 30 2007 was due to the organic growth of the projects remained in CCLBJ and the transfer of costs and expenses, in particular the transponder fee, to the Group.
Selling and marketing expenses increased from RMB0.7 million (US$0.08 million) in the third quarter of 2006 to RMB1.7 million (US$0.2 million) in the third quarter of 2007. Selling and marketing expenses increased from 1.7 million (US$0.2 million) in the nine months ended September 30, 2006 to RMB4.5 million (US$0.6 million) in the nine months ended September 30, 2007. The increase was due to the establishment of the English training business line in 2007. The English training business line is a consumer business and involves more direct sales and marketing activities when compared with the other business lines of the Group.
General and administrative expenses increased by 28.7% to RMB12.4 million (US$1.7 million) in the three months ended September 30, 2007 from RMB9.7 million (US$1.2 million) during the three months ended September 30, 2006. The increase was due to the increase in professional fee for being a listed company in the US after the Share Exchange Transaction. General and administrative expenses increased by 25.8% to RMB33.4 million (US$4.5 million) in the nine months ended September 30, 2007 from RMB26.6 million (US$3.3 million) during the nine months ended September 30,2006. In addition to the additional expenses associated with the establishment of the English training business line in 2007, there was also an increase in professional fees in the first nine months of 2007 when compared with the same period of 2006.
The Group has foreign exchange losses of RMB1.1 million (US$0.1 million) for the third quarter of 2007 compared to a loss of RMB0.8 million (US$0.1 million) during the third quarter of 2006. The Group has foreign exchange losses of RMB4.3million (US$0.6 million) for the first nine months of 2007 compared to a loss of RMB1.1 million (US$0.1 million) during the first nine months of 2006.The increase was a result of the continuous appreciation of the RMB against US dollars which the Group has considerable holdings and unable to convert to RMB due to the exchange control regulations in China.
Interest income increased significantly from RMB3.6 million (US$0.5 million) in the third quarter of 2006 to RMB 6.1 million (US$0.8 million) in the third quarter of 2007. Interest income increased from RMB6.2 million (US$0.8 million) in the first nine months of 2006 to RMB13.0 million (US$1.7 million) in the first nine months of 2007.The increase was mainly due to the increase in the Group’s cash and term deposits and the increase in interest rate in China.
Overall, profit before income tax increased from RMB17.5 million (US$2.2 million) in the three months ended September 30, 2006 to RMB21.9 million (US$2.9 million) in the three months ended September 30, 2007, an increase of 25.1%. Profit before income tax increased from RMB46.5 million (US$5.8 million) in the nine months ended September 30, 2006 to 60.2 million (US$8.0 million) in the nine months ended September 30,2007, a increase of 29.4%. The increase was mainly due to the increase in service revenue and the higher margin of the Group’s service revenue.
The Group’s share of loss in equity investments amounted to RMB0.2 million (US$0.03 million ) in the third quarter of 2007 compared to RMB0.3 million (US$0.04 million) in the third quarter of 2006.The Group’s share of earnings in equity investments amounted to RMB0.7 million (US$0.09million) in the first nine months of 2007 compared to RMB0.7 million(US$0.09 million) in the first nine months of 2006.
Income taxes increased by 29.5% from RMB3.5 million (US$0.4 million) in the third quarter of 2006 to RMB4.5 million (US$0.6 million) in the third quarter of 2007 as a result of higher profits. Income taxes increased by 43.4%from RMB8.8 million (US$1.1 million) in the first nine months of 2006 to RMB 12.6 million (US$1.7 million) in the first nine months of 2007 as a result of higher profits.
Minority interest amounted to RMB0.3 million (US$0.04 million) for the three months ended September 30,2007 as compared to RMB2.6 million (US$0.3 million) for the three months ended September 30,2006. Minority interest amounted to RMB2.7 million (US$0.4 million) for the nine months ended September 30,2007 as compared to RMB6.8 million (US$0.9 million) for the nine months ended September 30,2006. The minority interest in 2006 arose mainly as a result from the CCH shareholders who did not exchange for CEC. In July 2007, the Group has acquired 100% of CCH, which led to the reduction in minority interest.
Income from continuing operations amounted to RMB16.8 million (US$2.2million) in the three months ended September 30, 2007 compared to RMB11.1 million (US$1.4 million) in the three months ended September 30, 2006. Income from continuing operations amounted to RMB44.2 million (US$5.9 million) in the nine months ended September 30, 2007 compared to RMB30.2 million (US$3.8 million) in the nine months ended September 30, 2006.
In Feb 2007, the Group streamlined its beneficial holding in Tongfang Chuangxin by disposing its entire stake in Tongfang Education in exchange for a direct 17.85% stake in Tongfang Chuangxin and RMB6.3 million. As a result, the Group cannot consolidate the results of Tongfang Education and Tongfang Chuangxin. The consolidated result of Tongfang Education was shown as loss on discontinued operations for the three months and nine months ended September 30, 2006 and 2007 respectively. Net loss on discontinued operations amounted to RMB0.9 million (US$0.1 million) and RMBnil (US$nil) for the three months ended September 30, 2006 and 2007 respectively.Net loss on discontinued operations amounted to RMB3.3 million (US$0.4 million) and RMB0.3million (US$0.05 million) for the nine months ended September 30,2006 and 2007 respectively.
Net income increased significantly by 65.8% to RMB16.8 million (US$3.4 million) in the three months ended September 30,2007 from RMB10.2million (US$1.3 million) in the three months ended September 30,2006. Net income increased significantly by 62.9% to RMB43.9million (US$5.9 million) in the nine months ended September 30, 2007 from RMB26.9million (US$3.4 million) in the nine months ended September 30,2006. The increase are mainly due to the increase in service revenue, the improved margin as well as the drop in loss attributable to the discontinued operations.

On March 16, 2007, the National People’s Congress of China enacted a new tax law, under which foreign-invested enterprises and domestic companies will be subject to enterprise income tax at a uniform rate of 25% . The new tax law will become effective on January 1, 2008. There will be a transition period, during which enterprises may continue to enjoy existing preferential tax treatment or in which their tax rates may be gradually adjusted to 25%. Following the effectiveness of the new tax law, some of our PRC subsidiaries and affiliated entities, may no longer be able to enjoy the preferential tax rates presently offered to them. As the law was newly issued and no implementing rules have been promulgated to date, we are still evaluating its impact on us.

Cash and bank balances together with term deposits increased from RMB721.0 million (US$92.3 million) as at December 31, 2006, to RMB735.3 (US$98.0) million as at September 30, 2007. The increase of approximately 2.0% was because of the profit earned.
There was a net cash generated from operating activities of RMB17.1 million (US$2.3 million) in the nine months ended September 30, 2007 as compared to a net cash generated from operating activities of RMB62.4 million (US$7.8 million) in the nine months ended September 30, 2006. This was mainly due to the profit earned and after payments of professional fees after the consummation of the acquisition exercise of CCH. Revenue is recognized ratably throughout the periods services are provided but payments may be received ahead of or behind the revenue being recognized. Payments received before recognition of revenue are recorded as deferred revenue while payments not received at the time goods and services have been provided are recorded as accounts receivable. For revenue related to project sales, the timing of payments depended upon the terms of the contracts.
Net cash generating from investment activities in the first nine months of 2007 was RMB18.7 million (US$2.5 million), mainly reflecting transfer from term deposit of RMB15.4 million (US$2.1 million). The Group received a deposit of RMB12 million (US$1.6 million) in relation to the disposal of Dongshi ChinaCast and paid RMB5.8 million (US$0.8 million) for acquiring the remaining stake in CCH in the third quarter of 2007. For the nine months ended September 30, 2006, transfer to term deposit amounted to RMB156.5 million (US$19.6 million) and a deposit of RMB10 million (US$1.3 million) was paid as a deposit for business acquisition.
The Group 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 Group’s cash flow requirements could increase as a result of a number of factors, including unfavorable timing of cash flow events, the decision to increase investment in marketing and development activities or the use of cash for acquisitions to accelerate its growth.
Total assets at September 30, 2007 amounted to RMB951.5 million (US$126.9 million). At December 31, 2006, total assets were RMB940.6million (US$120.4 million), a increase of 1.2%. Total current assets increased by 0.8% to 779.9 million (US$104.0 million).
Account receivable decreased from RMB41.7 million (US$5.3 million) as at December 31, 2006 to RMB33.0 million (US$4.4 million) at September 30, 2007. Most of the business partners are long term customers and settle their accounts promptly. All account receivables 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, increased slightly to RMB3.2 million (US$0.4 million) at September 30, 2007.
Prepaid expenses and other current assets increased from RMB5.2 million (US$0.7 million) as at December 31, 2006 to RMB6.5 million (US$0.9 million). The increase was mainly due to the increase in prepayment for project development.
During the first quarter of 2007, the Group has disposed of Tongfang Education in exchange for a 17.85% direct stake in Tongfang Chuangxin. As a result, the intangible assets and goodwill amounting to RMB1.6 million (US$0.2 million) were eliminated. The direct stake in Tongfang Chuangxin was recorded as a long term investment, which increased from RMB5.1 million (US$0.7 million) as at December 31, 2006 to RMB8.9 million (US$1.2 million) as at September 30, 2007.
The Group also funded the operation of a related party, CCL, which held the satellite license before transferring it to the Group. The related party is still in the process of transferring its satellite related businesses to the Group. Amounts advanced to the related party were RMB122.1 million (US$16.3 million) as at September 30, 2007. As at December 31, 2006, the amount advanced was RMB129.9 million (US$16.6 million), the decrease is mainly due to repayment made.
On December 7, 2006, we entered into a Credit Facility Agreement (the “Facility Agreement”), with certain lenders and DBS Bank Ltd, as Administrative Agent (“Agent”). The Facility Agreement established a secured credit facility under which we could have borrowed up to S$62,000,000 in two tranches. We entered into the Facility Agreement in connection with our acquisition of the outstanding shares of CCH. We were permitted to use the proceeds of loans under the Facility Agreement only for the acquisition of outstanding shares of CCH and to pay fees, interest and other expenses related to such acquisition. Any loans under the Facility Agreement bore interest pursuant to a formula as set forth in the Facility Agreement. Tranche A Loans under the Facility Agreement were permitted to be made at the time on of the fulfillment of the conditions to funding set forth in the Facility Agreement (the “Effective Date”) and ending on December 27, 2006. Tranche A Loans were not, in the aggregate, permitted to exceed the amount formerly held in our trust account with Continental Stock Transfer & Trust Company after paying any amounts for the conversion of our shares to cash owing to shareholders who exercised their conversion rights in connection with the acquisition of CCH. Tranche A Loans were to mature on the date which was seven days after the date on which such Tranche A Loans are made. Tranche B Loans under the Facility Agreement were permitted to be made at any time from and after the Effective Date until February 8, 2007. Tranche B Loans mature on June 4, 2007.
A loan under the Facility Agreement may be repaid without penalty at any time prior to the maturity date for each loan, however, we must prepay any loan under the Facility Agreement under a number of circumstances, in particular (a) upon the issuance or sale by us of any of its capital stock, warrants, options or any other security interest representing an equity interest, (b) upon the disposition of any shares of CCH, (c) upon the deposit into our account at the Agent of any amounts currently held in trust by us pursuant to our initial public offering (IPO). In addition to customary representations and warranties and events of default, additional events of default occur if (a) at anytime after December 31, 2006 we cease to own at least 50.0% of CCH and (b) the shares of CCH cease to be listed on the Singapore Exchange Securities Trading Limited (SGX). Payment of outstanding advances may be accelerated, at the option of the Agent, should we default in our obligations under the Facility Agreement.
Obligations under the Facility Agreement are secured by all of our assets pursuant to a Security Agreement entered into on December 7, 2006 between us and the Agent. The obligations under the Facility Agreement are further secured by a Deed of Share Charge and Deed of Charge over Accounts both dated December 7, 2006 between us and the Agent. We did not make any Tranche A Loans or Tranche B Loans.
The Group had no other borrowings at September 30, 2007 other than a financial lease of an insignificant amount.
Off-Balance Sheet Arrangements
Except for the Facility Agreement described above, the Group does not have financial guarantees or other commitments to guarantee the payment obligations of any third parties.

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