UNITED STATES
333-39629
Florida | 59-2549529 | ||
(State or other jurisdiction of | (IRS Employer | ||
incorporation or organization) | Identification No.) | ||
(Address of principal executive offices) Taipei, Taiwan ROC(Address of principal executive offices)Securities registered pursuant to Section 12(b) of the Act:Title of each className of each exchange on which registeredCommon StockN/A
Securities registered under Section 12(g) of the Act:
Title of class
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)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 last ninetypast 90 days.
Documents incorporated by reference: None.
i
KID CASTLE EDUCATIONAL CORPORATION
UNAUDITED CONDENSEDCONSOLIDATEDITEM 1 - FINANCIAL STATEMENTS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004ANDFOR THE THREE MONTHS ENDEDMARCH 31, 2005 AND 2004
KID CASTLE EDUCATIONAL CORPORATIONINDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-2-
Kid Castle Educational Corporation
March 31, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and bank balances | $ | 173,169 | $ | 213,564 | ||||
Bank fixed deposits – pledged (Note 12) | 354,416 | 294,331 | ||||||
Notes and accounts receivable, net (Notes 5 and 10) | 2,903,221 | 2,401,904 | ||||||
Inventories, net (Note 6) | 2,983,890 | 2,979,738 | ||||||
Other receivables (Notes 7 and 10) | 420,351 | 337,848 | ||||||
Prepayments and other current assets (Note 10) | 440,200 | 478,752 | ||||||
Pledged notes receivable (Note 12) | 1,220,482 | 1,218,356 | ||||||
Deferred income tax assets | 256,105 | 218,574 | ||||||
Total current assets | 8,751,834 | 8,143,067 | ||||||
Deferred income tax assets | 167,093 | 170,477 | ||||||
Prepaid interest in associates | — | 24,165 | ||||||
Interest in associates (Note 8) | 137,213 | 99,467 | ||||||
Property and equipment, net | 2,173,300 | 2,188,092 | ||||||
Intangible assets, net of amortization (Note 11) | 856,147 | 894,419 | ||||||
Long-term notes receivable | 224,185 | 240,971 | ||||||
Pledged notes receivable (Note 12) | 573,832 | 407,149 | ||||||
Other assets | 570,168 | 613,617 | ||||||
Total assets | $ | 13,453,772 | $ | 12,781,424 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Borrowings – short-term and maturing within one year (Note 12) | $ | 2,443,026 | $ | 2,632,982 | ||||
Notes and accounts payable (Note 10) | 1,574,181 | 1,506,543 | ||||||
Accrued expenses | 855,018 | 703,407 | ||||||
Other payables | 368,333 | 283,080 | ||||||
Deposits received | 668,432 | 498,266 | ||||||
Receipts in advance (Note 13) | 2,831,244 | 2,996,558 | ||||||
Income tax payable (Note 9) | 213,196 | 97,142 | ||||||
Obligation under capital leases due within one year | 27,572 | 8,659 | ||||||
Total current liabilities | 8,981,002 | 8,726,637 | ||||||
Borrowings maturing after one year (Note 12) | 1,877,956 | 1,651,825 | ||||||
Receipts in advance (Note 13) | 1,421,803 | 1,124,809 | ||||||
Obligation under capital leases | 27,280 | — | ||||||
Deposits received | 594,136 | 689,530 | ||||||
Accrued pension liabilities (Note 14) | 190,820 | 160,907 | ||||||
Total liabilities | 13,092,997 | 12,353,708 | ||||||
ASSETS | September 30, 2005 | December 31, 2004 | |||||
(Unaudited) | (Audited) | ||||||
Current assets | |||||||
Cash and bank balances include pledged bank fixed deposits of $67,064 and $294,331 | $ | 273,925 | $ | 507,895 | |||
Notes and accounts receivable include pledged notes receivables of $1,133,305 and $1,218,356, net of provision for doubtful accounts and sales returns of $1,021,047 and $196,188 | 4,513,386 | 3,620,260 | |||||
Inventories, net | 2,681,349 | 2,979,738 | |||||
Other receivables | 178,069 | 337,848 | |||||
Prepayments and other current assets | 738,222 | 478,752 | |||||
Deferred income tax assets | 197,453 | 218,574 | |||||
Total current assets | 8,582,404 | 8,143,067 | |||||
Deferred income tax assets | 180,285 | 170,477 | |||||
Prepaid long-term investments | — | 24,165 | |||||
Long-term investments | 102,475 | 99,467 | |||||
Property and equipment, net | 2,114,023 | 2,188,092 | |||||
Intangible assets, net of amortization | 766,645 | 894,419 | |||||
Long-term notes receivable includes pledged notes receivable of $484,523 and $407,149 | 694,163 | 648,120 | |||||
Other assets | 676,893 | 613,617 | |||||
Total assets | $ | 13,116,888 | $ | 12,781,424 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Bank borrowings - short-term and maturing within one year | $ | 2,313,652 | $ | 2,632,982 | |||
Notes and accounts payable | 2,080,556 | 1,506,543 | |||||
Accrued expenses | 1,110,392 | 703,407 | |||||
Other payables | 319,095 | 283,080 | |||||
Deposits received | 837,496 | 498,266 | |||||
Receipts in advance | 2,753,266 | 2,996,558 | |||||
Income tax payable | 208,181 | 97,142 | |||||
Obligation under capital leases due within one year | 36,748 | 8,659 | |||||
Total current liabilities | 9,659,386 | 8,726,637 | |||||
Bank borrowings maturing after one year | 1,768,217 | 1,651,825 | |||||
Receipts in advance | 1,189,140 | 1,124,809 | |||||
Obligation under capital leases | 22,149 | — | |||||
Deposits received | 413,487 | 689,530 | |||||
Accrued pension liabilities | 245,995 | 160,907 | |||||
Total liabilities | 13,298,374 | 12,353,708 | |||||
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Kid Castle Educational Corporation
Condensed Consolidated Balance Sheets - Continued
(Expressed in US Dollars)
March 31, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Commitments and contingencies (Note 16) | ||||||||
Minority interest | 33,950 | 33,791 | ||||||
Shareholders’ equity | ||||||||
Common stock, no par share: | ||||||||
25,000,000 shares authorized; 18,999,703 shares issued and outstanding at March 31, 2005 and December 31, 2004 | 7,669,308 | 7,669,308 | ||||||
Additional paid-in capital | 194,021 | 194,021 | ||||||
Legal reserve | 65,320 | 65,320 | ||||||
Accumulated deficit | (7,362,504 | ) | (7,312,074 | ) | ||||
Accumulated other comprehensive loss | (239,320 | ) | (222,650 | ) | ||||
Total shareholders’ equity | 26,825 | 393,925 | ||||||
Total liabilities and shareholders’ equity | $ | 13,453,772 | $ | 12,781,424 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
-4-
Condensed Consolidated Statements of Operations
Balance Sheets - Continued
Three months ended March 31, | ||||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Operating Revenue | ||||||||
Sales of goods | $ | 2,375,155 | $ | 2,029,853 | ||||
Franchising income | 597,925 | 528,132 | ||||||
Other operating revenue | 149,912 | 52,353 | ||||||
Total net operating revenue | 3,122,992 | 2,610,338 | ||||||
Operating costs | ||||||||
Cost of goods sold | (927,731 | ) | (674,505 | ) | ||||
Cost of franchising | (113,613 | ) | (132,101 | ) | ||||
Other operating costs | (74,196 | ) | (57,195 | ) | ||||
Total operating costs | (1,115,540 | ) | (863,801 | ) | ||||
Gross profit | 2,007,452 | 1,746,537 | ||||||
Advertising costs | (33,363 | ) | (126,642 | ) | ||||
Other operating expenses | (1,785,500 | ) | (2,016,424 | ) | ||||
Income (loss) from operations | 188,589 | (396,529 | ) | |||||
Interest expenses, net | (59,253 | ) | (21,765 | ) | ||||
Share of loss of investments | 12,483 | 46,967 | ||||||
Other non-operating (loss) income, net | (48,939 | ) | 43,673 | |||||
Income (loss) before income taxes and minority interest income | 92,880 | (327,654 | ) | |||||
Provision for taxes | (143,453 | ) | — | |||||
Loss before minority interest income | (50,573 | ) | (327,654 | ) | ||||
Minority interest income | 143 | — | ||||||
Net loss | $ | (50,430 | ) | $ | (327,654 | ) | ||
Loss per share – basic and diluted | $ | (0.003 | ) | $ | (0.017 | ) | ||
Weighted-average shares used to compute (loss) earnings per share – basic and diluted | 18,999,703 | 18,999,703 | ||||||
September 30, 2005 | December 31, 2004 | ||||||
(Unaudited) | (Audited) | ||||||
Minority interest | 17,774 | 33,791 | |||||
Shareholders’ equity | |||||||
Capital Stock | |||||||
Common stock, no par share: | |||||||
25,000,000 shares authorized; 18,999,703 shares issued and outstanding at September 30, 2005 and December 31, 2004 | 7,669,308 | 7,669,308 | |||||
Legal reserve | 65,320 | 65,320 | |||||
Retained deficit | (8,001,668 | ) | (7,312,074 | ) | |||
Accumulated other comprehensive loss | (126,241 | ) | (222,650 | ) | |||
Total shareholders’ equity | (199,260 | ) | 393,925 | ||||
Total liabilities and shareholders’ equity | $ | 13,116,888 | $ | 12,781,424 | |||
-5-
Operations
Common Stock | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||||||
Number of | paid-in | Legal | Accumulated | comprehensive | ||||||||||||||||||||||||
shares | Amount | capital | reserve | deficit | loss | Total | ||||||||||||||||||||||
Balance, December 31, 2003 | 18,999,703 | 7,669,308 | 194,021 | 65,320 | (6,057,482 | ) | (163,170 | ) | 1,707,997 | |||||||||||||||||||
Net loss for 2004 | — | — | — | — | (1,254,592 | ) | — | (1,254,592 | ) | |||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | — | (59,480 | ) | (59,480 | ) | |||||||||||||||||||
Comprehensive loss | (1,314,072 | ) | ||||||||||||||||||||||||||
Balance, December 31, 2004 | 18,999,703 | $ | 7,669,308 | $ | 194,021 | $ | 65,320 | $ | (7,312,074 | ) | $ | (222,650 | ) | $ | 393,925 | |||||||||||||
Net loss for the three months ended March 31, 2005 (Unaudited) | — | — | — | — | (50,430 | ) | — | (50,430 | ) | |||||||||||||||||||
Cumulative translation adjustment (Unaudited) | — | — | — | — | — | (16,670 | ) | (16,670 | ) | |||||||||||||||||||
Comprehensive loss (Unaudited) | (67,100 | ) | ||||||||||||||||||||||||||
Balance, March 31, 2005 (Unaudited) | 18,999,703 | $ | 7,669,308 | $ | 194,021 | $ | 65,320 | $ | (7,362,504 | ) | $ | (239,320 | ) | $ | 326,825 | |||||||||||||
Nine months ended September 30, | |||||||
2005 | 2004 | ||||||
Operating Revenue | |||||||
Sales of goods | $ | 6,372,162 | $ | 5,661,046 | |||
Franchising income | 1,914,925 | 1,814,984 | |||||
Other operating revenue | 448,807 | 389,846 | |||||
Total net operating revenue | 8,735,894 | 7,865,876 | |||||
Operating costs | |||||||
Cost of goods sold | (2,701,227 | ) | (2,426,012 | ) | |||
Cost of franchising | (547,535 | ) | (373,980 | ) | |||
Other operating costs | (307,076 | ) | (307,660 | ) | |||
Total operating costs | (3,555,838 | ) | (3,107,652 | ) | |||
Gross profit | 5,180,056 | 4,758,224 | |||||
Other operating expenses | (5,609,858 | ) | (5,409,916 | ) | |||
Loss from operations | (429,802 | ) | (651,692 | ) | |||
Interest income | 11,000 | 22,582 | |||||
Interest expenses | (182,346 | ) | (123,474 | ) | |||
Share of profit (loss) of investments | (21,633 | ) | 10,609 | ||||
Other non-operating income, net | 192,401 | 70,982 | |||||
Loss before income taxes and minority interest | (430,380 | ) | (670,993 | ) | |||
Provision for taxes | (275,361 | ) | (111,567 | ) | |||
Loss before minority interest | (705,741 | ) | (782,560 | ) | |||
Minority interest in (income) loss | 16,147 | (2,611 | ) | ||||
Net loss | $ | (689,594 | ) | $ | (785,171 | ) | |
Loss per share - basic and diluted | $ | (0.04 | ) | $ | (0.04 | ) | |
Weighted-average shares used to compute loss per share - basic and diluted | 18,999,703 | 18,999,703 |
-6-
Three months ended March 31, | ||||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (50,430 | ) | $ | (327,654 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | ||||||||
Depreciation of property and equipment | 66,681 | 52,266 | ||||||
Amortization of intangible assets | 42,835 | 40,509 | ||||||
Allowance for sales returns | 95,267 | 71,890 | ||||||
Allowance for doubtful debts | 284,537 | 156,221 | ||||||
Provision for (reversal of) allowance for loss on inventory obsolescence and slow-moving items | 6,452 | (69,180 | ) | |||||
Gain on disposal of property and equipment | (9,010 | ) | — | |||||
Minority interest income | (143 | ) | — | |||||
Share of gain of investments | (12,483 | ) | (46,967 | ) | ||||
(Increase)/decrease in: | ||||||||
Notes and accounts receivable | (775,674 | ) | 192,461 | |||||
Inventories | 4,514 | 204,320 | ||||||
Other receivables | (129,129 | ) | 72,016 | |||||
Prepayments and other current assets | 41,002 | (6,073 | ) | |||||
Deferred income tax assets | (32,194 | ) | 3,314 | |||||
Other assets | 46,591 | (31,084 | ) | |||||
Increase/(decrease) in: | ||||||||
Notes and accounts payable | 60,036 | 107,712 | ||||||
Accrued expenses | 148,876 | (46,463 | ) | |||||
Other payables | 124,933 | (76,311 | ) | |||||
Receipts in advance | (147,307 | ) | (261,384 | ) | ||||
Income taxes payable | 115,635 | (3,314 | ) | |||||
Deposits received | 67,207 | 29,413 | ||||||
Accrued pension liabilities | 29,115 | (16,266 | ) | |||||
Net cash provided by (used in) operating activities | (22,689 | ) | 45,426 | |||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (104,562 | ) | — | |||||
Proceeds from disposal of property and equipment | 72,795 | — | ||||||
Bank fixed deposits – pledged | (58,629 | ) | (135,818 | ) | ||||
Pledged notes receivable | 29,990 | 30,129 | ||||||
Net cash used in investing activities | (60,406 | ) | (105,689 | ) | ||||
-7-
Kid Castle Educational Corporation
Condensed Consolidated Statements of Cash Flows – Continued
(Expressed in US Dollars) 2005 2004 Operating Revenue Sales of goods Franchising income Other operating revenue Total net operating revenue Operating costs Cost of goods sold Cost of franchising Other operating costs Total operating costs Gross profit Other operating expenses Income (loss) from operations Interest income 2,622 3,412 Interest expenses (57,985 ) Share of loss of investments Other non-operating income (loss), net Income (loss) before income taxes and minority interest Provision for taxes Income (loss) before minority interest Minority interest in (income) loss Net income (loss) Earnings (loss) per share - basic and diluted $ (0.02 ) $ 0.01 Weighted-average shares used to compute earnings (loss) per share - basic and diluted
Three months ended March 31, | ||||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Cash flows from financing activities | ||||||||
Proceeds from bank borrowings | $ | 795,968 | $ | 2,829,827 | ||||
Repayment of bank borrowings | (781,513 | ) | (2,169,859 | ) | ||||
Proceeds from capital leases | 57,089 | — | ||||||
Repayment of capital leases | (10,910 | ) | (5,662 | ) | ||||
Repayment of loan from officers/stockholders | — | (586,529 | ) | |||||
Net cash provided by financing activities | 60,634 | 67,777 | ||||||
Net increase (decrease) in cash and cash equivalents | (22,461 | ) | 7,514 | |||||
Effect of exchange rate changes on cash and cash equivalents | (17,934 | ) | (30,792 | ) | ||||
Cash and cash equivalents at beginning of period | 213,564 | 1,273,723 | ||||||
Cash and cash equivalents at end of period | $ | 173,169 | $ | 1,250,445 | ||||
Supplemental disclosure of significant non-cash transactions | ||||||||
Increase (decrease) of notes receivable and pledged notes receivable corresponding to the increase (decrease) in the following accounts: | ||||||||
Deposits received | $ | 1,586 | $ | (18,896 | ) | |||
Other payables | $ | 6,473 | $ | (10,112 | ) | |||
Receipts in advance | $ | 258,156 | $ | (123,465 | ) | |||
-8-
Nine months ended September 30, | Three months ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Net income (loss) | $ | (689,594 | ) | $ | (785,171 | ) | $ | (431,137 | ) | $ | 145,121 | ||
Other comprehensive income (loss): | |||||||||||||
Foreign currency translation gain (loss) | 96,409 | (5,879 | ) | 21,901 | 273 | ||||||||
Total comprehensive income (loss) | $ | (593,185 | ) | $ | (791,050 | ) | $ | (409,236 | ) | $ | 145,394 | ||
Nine months ended September 30, | |||||||
2005 | 2004 | ||||||
Cash flows from operating activities | |||||||
Net loss | $ | (689,594 | ) | $ | (785,171 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 333,388 | 258,261 | |||||
Allowance for doubtful debts and sales returns | 1,231,289 | 172,537 | |||||
Provision for allowance for loss on inventory obsolescence and slow-moving items | 58,325 | 113,573 | |||||
Gain on disposal of property and equipment | (30,333 | ) | (10,609 | ) | |||
Decrease in deferred income tax assets | 11,313 | 67,378 | |||||
Minority interest in income | (16,017 | ) | 2,611 | ||||
Share of loss of investments | 21,157 | — | |||||
Changes in assets and liabilities: | |||||||
Increase in notes and accounts receivable | (2,124,415 | ) | (561,081 | ) | |||
Decrease in inventories | 240,064 | (403,744 | ) | ||||
Increase in other receivables | 159,779 | (99,282 | ) | ||||
Increase in prepayments and other current assets | (259,470 | ) | (250,194 | ) | |||
Increase in other assets | (63,276 | ) | (122,453 | ) | |||
Increase in notes and accounts payable | 574,013 | 572,556 | |||||
Increase in accrued expenses | 406,985 | (104,349 | ) | ||||
Increase in other payables | 36,015 | (88,561 | ) | ||||
Decrease in receipts in advance | (178,961 | ) | 349,247 | ||||
Increase in income taxes payable | 111,039 | 42,967 | |||||
Increase in deposits received | 63,187 | 129,455 | |||||
Increase in accrued pension liabilities | 85,088 | 10,406 | |||||
Net cash used in operating activities | (30,424 | ) | (706,453 | ) | |||
Cash flows from investing activities | |||||||
Purchases of property and equipment | (111,270 | ) | (197,389 | ) | |||
Proceeds from disposal of property and equipment | 78,661 | 79,135 | |||||
Acquisition of long-term investments | — | (103,563 | ) | ||||
Acquisition of long-term notes receivable | (46,043 | ) | — | ||||
Advances to shareholder | (2,267,424 | ) | — | ||||
Repayments of advances to shareholder | 2,267,424 | — | |||||
Net cash used in investing activities | (78,652 | ) | (221,817 | ) |
Nine months ended September 30, | |||||||
2005 | 2004 | ||||||
Cash flows from financing activities | |||||||
Proceeds from bank borrowings | 791,450 | 2,500,962 | |||||
Repayment of bank borrowings | (994,388 | ) | (1,652,431 | ) | |||
Repayment of capital leases | (18,365 | ) | (22,086 | ) | |||
Repayment of loan from officers/shareholders | — | (581,228 | ) | ||||
Net cash consumed by financing activities | (221,303 | ) | 245,217 | ||||
Net decrease in cash and cash equivalents | (330,379 | ) | (683,053 | ) | |||
Effect of changes in exchange rate on cash and cash equivalents | 96,409 | 3,561 | |||||
Cash and cash equivalents at beginning of period | 507,895 | 1,478,612 | |||||
Cash and cash equivalents at end of period | $ | 273,925 | $ | 799,120 |
PRESENTATION
On March 9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment Property Limited incorporated in the British Virgin Islands, which held the entire common stock of Higoal Developments Limited (“Higoal”) incorporated in the Cayman Islands on March 8, 2001. On September 10, 2001, Higoal established a wholly owned subsidiary, Kid Castle Educational Software Development Company Limited (“KCES”) in the People’s Republic of China (the “PRC”). The existing operations of Higoal are principally located in Taiwan and are being expanded in the PRC. In June 2002, after KCIT undertook a series of group restructurings, KCIT became the direct owner of the outstanding shares of Higoal. Premier Holding Investment Property Limited was then liquidated in June 2003.
On September 18, 2002, Higoal issued 11,880,000 shares of common stock to the stockholders of KCIT in exchange for 100% of the outstanding common stock of KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary of Higoal. On October 1, 2002, Kid Castle Educational Corporation (the “Company”), formerly King Ball International Technology Limited Corporation entered into an exchange agreement with Higoal whereby the Company issued to the stockholders of Higoal 11,880,000 shares of common stock of the Company in exchange for 100% of the issued and fully paid up capital of Higoal.
As a result of the share exchange, the former stockholders of Higoal hold a majority of the Company’s outstanding capital stock. Generally accepted accounting principles require in certain circumstances that a company whose stockholders retain the majority voting interest in the combined business to be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” whereby Higoal is deemed to have purchased the Company. However, the Company remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes.
In July 2003, KCES entered into an agreement with 21st Century Publishing House to incorporate Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”). It was agreed that KCES and 21st Century Publishing House each owned 50% ownership and that each party contributed RMB$1 million for the incorporation. On July 2, 2004, KCES acquired additional 40% of ownership in Culture Media from 21st Century Publishing House. KCES now owns 90% of Culture Media.
-9-
The Company, Higoal and its subsidiaries collectively are referred to as the “Group”. The operations of the Group are principally located in Taiwan and the PRC.
NOTE 2 - BASIS OF PRESENTATION
The accompanying financial data as of March 31,30, 2005, and for the nine month and three monthsmonth periods ended March 31,September 30, 2005 and 2004 have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of AmericaAmerica. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. The results of operations for the quarter and nine month period ended September 30, 2005 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2005.
The preparation of financial statements in conformity with accounting principles generally accepted in
Nine months ended September 30, | Three months ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Commissions | $ | 137,783 | $ | 421,994 | $ | 49,407 | $ | 103,747 | |||||
Advertising | 54,442 | 400,591 | 28,050 | (5,521 | ) | ||||||||
Amortization and depreciation | 333,388 | 308,114 | 116,721 | 88,713 | |||||||||
Allowance for doubtful accounts | 1,167,068 | (3,454 | ) | 820,825 | 0 | ||||||||
Insurance | 184,793 | 175,854 | 56,667 | 46,785 | |||||||||
Professional Fees | 300,440 | 287,339 | 113,653 | 138,951 | |||||||||
Rent | 385,744 | 278,111 | 115,045 | 85,994 | |||||||||
Salary | 2,131,239 | 2,424,194 | 648,425 | 672,445 | |||||||||
Other expenses | 914,961 | 1,117,173 | 353,666 | 394,206 | |||||||||
Other operating expenses | $ | 5,609,858 | $ | 5,409,916 | $ | 2,302,459 | $ | 1,525,320 |
The Group has incurred operating losses since inception and hence, as of March 31,nine months period ended September 30, 2005, the balance of accumulated deficit was $7,362,504. The Group plans to fund its working capital needs by obtaining new credit lines from financial institutions and raising capital through the sale of equity securities. If the Group is unable to meet its current operating plan, it will be required to obtain additional funding. Management believes such funding will be available, but there can be no assurances that such funding will be available, or if it is available, on terms acceptable to the Group. Management believes that if funding is not available, other actions can and will be taken to reduce costs. These actions may entail the Group to reduce headcount, sales and marketing, other expansion activities, which may affect the future growth of the Group’s operations.
NOTE 3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales of books, magazines, audio and video tapes, compact disc and other merchandises are recognized as revenue on the transfer of risks and rewards of ownership, which generally coincides withCompany’s CFO at the time, when the goods are delivered to customersMr. Yu-En Chiu, effected numerous withdrawals and title has passed. Provision is made for expected future sales returns and allowances when revenue is recognized.
Franchise fees are the annual licensing fees for franchisees to use the Group’s brand name and consulting services. Franchising income is recognized on a straight-line basis over the termsrepayment of the relevant franchise agreements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based on the evaluation of collectibility and aging analysis of notes and accounts receivables.
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INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition, and is calculated using the weighted average method. Market value is determined by reference to the sales proceeds of items sold in the ordinary course of business after the balance sheet date or to management estimates based on prevailing market conditions.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed using the straight-line method to allocate the cost of depreciable assets over the estimated useful lives of the assets as follows:
Maintenance, repairs and minor renewals are charged directly to the statement of operations as incurred. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the financial statements and any resulting gain or loss is included in the statement of operations.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicateCompany funds that the carryingCompany has determined to treat for accounting purposes as short term interest free loans. The total amount of the assets might not be recoverable. The Group does not perform a periodic assessmentwithdrawals totaled NT$71,900,000 ($2,267,424). As of assets for impairmentSeptember 30, 2005, Mr. Chiu had repaid all such withdrawals to the Company. Additional withdrawals were made by Mr. Chiu during the fourth quarter of 2005 totaling NT$23,100,000 ($728,477). Mr. Chiu’s withdrawals and the Company’s action with respect thereto are more fully described in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assetsCompany’s Form 8-K dated June 16, 2006. There were no advances to be held and used, the Group measures fair value based on quoted market prices or based on discounted estimates of future cash flows.
INCOME TAXES
The Company and its subsidiaries accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established when it is considered more likely than not that the deferred tax assets will not be realized.
INTANGIBLE ASSETS
Franchises and copyrights are stated at cost and amortized on the straight-line method over their estimated useful lives of 10 years.
COMPREHENSIVE INCOME (LOSS)
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Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Comprehensive income (loss) is disclosed in the condensed consolidated statement of stockholders’ equity.
NET EARNINGS (LOSS) PER COMMON SHARE
The Group computes net earnings (loss) per share in accordance with SFAS No. 128, “Earnings per Share.” Under the provisions of SFAS No. 128, basic net earnings (loss) per share is computed by dividing the net earnings (loss) available to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net earnings (loss) per share gives effect to common stock equivalents. For the three months ended March 31, 2005 and 2004, the Group did not have any potential common shares.
RECLASSIFICATION
The presentation of certain prior information has been reclassified to conform to current presentation.
NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS
In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed statement. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investment accounted for under the cost method. The Group is currently evaluating the effect of this proposed statement on its financial position and results of operations.
In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151,Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginningMr. Chiu after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our financial statements.
NOTE 5 – NOTES AND ACCOUNTS RECEIVABLE
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March 31, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Notes and accounts receivable | ||||||||
– Third parties | $ | 3,198,682 | $ | 2,420,647 | ||||
– Related parties (NOTE 10) | 281,286 | 177,445 | ||||||
Total | 3,479,968 | 2,598,092 | ||||||
Allowance for doubtful accounts and sales returns | (576,747 | ) | (196,188 | ) | ||||
Notes and accounts receivable, net | $ | 2,903,221 | $ | 2,401,904 | ||||
NOTE 6 – INVENTORIES
March 31, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Work in process | $ | 106,262 | $ | 99,610 | ||||
Finished goods and other merchandises | 3,663,746 | 3,655,864 | ||||||
3,770,008 | 3,755,474 | |||||||
Less: Allowance for obsolete inventories and decline of market value | (786,118 | ) | (775,736 | ) | ||||
$ | 2,983,890 | $ | 2,979,738 | |||||
NOTE 7 – OTHER RECEIVABLES
March 31, | December 31, | |||||||
2005 | 2003 | |||||||
(Unaudited) | ||||||||
Other receivables – third parties: | ||||||||
Tax paid on behalf of landlord | $ | 973 | $ | 1,575 | ||||
Advances to staff | 84,856 | 74,396 | ||||||
Grants from Market Information Center | — | 29,959 | ||||||
Receivables from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai Wonderland”) (Note (i)) | 169,538 | 87,082 | ||||||
Other receivables | 150,161 | 114,900 | ||||||
Sub-total | 405,528 | 307,912 | ||||||
Other receivables – related parties (NOTE 10) | 14,822 | 29,936 | ||||||
$ | 420,350 | $ | 337,848 | |||||
Note:
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NOTE 8 – INTEREST IN ASSOCIATES
March 31, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
21st Century Kid Castle Language and Education Center (“Education Center”) (Note (i)) | ||||||||
Investment cost | $ | 91,430 | $ | 90,620 | ||||
Share of loss | 18 | (32,752 | ) | |||||
$ | 91,448 | $ | 57,868 | |||||
Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (ii)) | ||||||||
Investment cost | $ | 85,335 | $ | 60,413 | ||||
Share of loss | (56,890 | ) | (40,886 | ) | ||||
$ | 28,445 | $ | 19,527 | |||||
Lanbeisi Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note (iii)) | ||||||||
Investment cost | $ | 43,886 | $ | 43,498 | ||||
Share of loss | (26,566 | ) | (21,426 | ) | ||||
$ | 17,320 | $ | 22,072 | |||||
Total | $ | 137,213 | $ | 99,467 | ||||
Note:
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NOTE 9 – INCOME TAXES
The income taxes of the Group are substantially attributable to the operations in Taiwan and the PRC whose statutory tax rates are 25% and 15%, respectively. The principal differences between taxes on income computed at the applicable statutory income tax rates and recorded income tax expense are as follows:
Three months ended March 31, | ||||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Income taxes credit calculated on applicable statutory tax rates | $ | (99,849 | ) | $ | (432,789 | ) | ||
Higher/(lower) effective income tax rates of other countries | 16,296 | 33,955 | ||||||
Valuation allowance | 384,329 | 146,148 | ||||||
Non-taxable income | (57,694 | ) | (18,720 | ) | ||||
Non-deductible expenses | (129,302 | ) | 226,322 | |||||
Tax on undistributed earnings | 29,673 | 45,085 | ||||||
Income taxes expenses as recorded in statement of operations | $ | 143,453 | $ | — | ||||
At March 31, 2005, KCESD had net operating loss of approximately US$1,587,730, available to be carried forward to offset future taxable income which will expire in the period from 2006 to 2010. KCESD’s net operating loss carry-forwards to offset future taxable income is insignificant.
NOTE 10 – RELATED PARTY TRANSACTIONS
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Three months ended March 31, | ||||||||||
2005 | 2004 | |||||||||
(Unaudited) | ||||||||||
(i) | Sales to: | |||||||||
- PKC Language | $ | 3,030 | $ | 3,979 | ||||||
- TCP PKC | 3,030 | 3,979 | ||||||||
- TCP Chevady | 7,614 | 5,191 | ||||||||
- TCP Chung-hua | 7,614 | 4,086 | ||||||||
- TCP Wonderland | 5,349 | 5,191 | ||||||||
- TCP Kid Castle | 4,996 | 4,949 | ||||||||
- English School | 6,034 | — | ||||||||
- Tianjin Consulting | 4,589 | — | ||||||||
- Lanbeisi | 26,793 | — | ||||||||
$ | 69,049 | $ | 27,375 | |||||||
(ii) | Rental income from: | |||||||||
- CCE | $ | 476 | $ | 450 | ||||||
$ | 476 | $ | 450 | |||||||
(iii) | Franchising income from: | |||||||||
- PKC Language | $ | 136 | $ | 129 | ||||||
- TCP PKC | 136 | 129 | ||||||||
- TCP Kid Castle | 1,854 | 2,014 | ||||||||
- TCP Chung-Hua | — | 214 | ||||||||
- TCP Chevady | 927 | 1,007 | ||||||||
- TCP Wonderland | 927 | 1,007 | ||||||||
$ | 3,980 | $ | 4,500 | |||||||
(iv) | Purchase from: | |||||||||
- Publishing House | $ | 319,640 | $ | — | ||||||
$ | 319,640 | $ | — | |||||||
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March 31, | December 31, | |||||||
Name of related parties | 2005 | 2004 | ||||||
(Unaudited) | ||||||||
- KCE | $ | 3,803 | $ | — | ||||
- PKC Language | 20,345 | 16,772 | ||||||
- TCP PKC | 20,345 | 16,772 | ||||||
- TCP Chung-hua | 39,353 | 27,506 | ||||||
- TCP Chevady | 40,505 | 24,431 | ||||||
- TCP Wonderland | 40,505 | 24,431 | ||||||
- TCP Kid Castle | 47,564 | 31,586 | ||||||
- Education Center | 57 | 726 | ||||||
- Tianjin Consulting | 15,439 | 15,746 | ||||||
- Lanbeisi | 53,370 | 19,475 | ||||||
$ | 281,286 | $ | 177,445 | |||||
March 31, | December 31, | |||||||
Name of related parties | 2005 | 2004 | ||||||
(Unaudited) | ||||||||
Amount due from Publishing House (Note 1) | $ | 5,408 | $ | 13,781 | ||||
Amount due from Education Center (Note 2) | 271 | 268 | ||||||
Amount due from Tianjin Consulting (Note 3) | — | 6,825 | ||||||
Amount due from Lanbeisi (Note 4) | 9,143 | 9,062 | ||||||
$ | 14,822 | $ | 29,936 | |||||
Note:
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March 31, | December 31, | |||||||
Name of related parties | 2005 | 2004 | ||||||
(Unaudited) | ||||||||
Prepayments to Publishing House | 168,026 | 265,223 | ||||||
$ | 168,026 | $ | 265,223 | |||||
Prepayments to Publishing House are mainly for inventory ordered by Culture Media. According to the purchase agreements signed with Publishing House, Culture Media has to prepay a certain percentage of inventories purchased upon the effectiveness of the contracts. The remaining payments are to be made three months after the initial payment.
March 31, | December 31, | |||||||
Name of related parties | 2005 | 2004 | ||||||
(Unaudited) | ||||||||
- Publishing House | $ | 391,397 | $ | 265,077 | ||||
$ | 391,397 | $ | 265,077 | |||||
NOTE 11 – INTANGIBLE ASSETS
March 31, | December 31, | |||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Gross carrying amount | ||||||||
Franchise | $ | 1,078,380 | $ | 1,072,939 | ||||
Copyrights | 633,914 | 630,716 | ||||||
1,712,294 | 1,703,655 | |||||||
Less: Accumulated amortization | ||||||||
Franchise | (539,190 | ) | (509,646 | ) | ||||
Copyrights | (316,957 | ) | (299,590 | ) | ||||
(856,147 | ) | (809,236 | ) | |||||
Net | $ | 856,147 | $ | 894,419 | ||||
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Amortization charged to operations was $42,835 and $40,509 for the three months ended March 31, 2005 and 2004, respectively.
The estimated aggregate amortization expenses for each of the five succeeding fiscal years are as follows:
2006 | $ | 171,340 | ||
2007 | 171,340 | |||
2008 | 171,340 | |||
2009 | 171,340 | |||
2010 | 171,340 | |||
$ | 856,700 | |||
NOTE 12 – BORROWINGS
March 31, | December 31, | |||||||||||
Notes | 2005 | 2004 | ||||||||||
(Unaudited) | ||||||||||||
Bank term loans | (i) | $ | 950,660 | $ | 945,932 | |||||||
Short-term unsecured bank loans | (ii) | 253,566 | 725,323 | |||||||||
Mid-term loan | (iii) | 958,809 | 1,130,827 | |||||||||
Mid-term secured bank loan | (iv) | 2,157,947 | 1,482,725 | |||||||||
4,320,982 | 4,284,807 | |||||||||||
Less: Balances maturing within one year included in current liabilities | ||||||||||||
Bank term loans | 728,627 | 721,896 | ||||||||||
Short-term unsecured bank loans | 253,566 | 725,323 | ||||||||||
Mid-term loan | 743,547 | 726,720 | ||||||||||
Mid-term secured bank loan | 717,286 | 459,043 | ||||||||||
2,443,026 | 2,632,982 | |||||||||||
Bank borrowings maturing after one year | $ | 1,877,956 | $ | 1,651,825 | ||||||||
Note:
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NOTE 13 – RECEIPTS IN ADVANCE
The balance comprises:
March 31, | December 31, | |||||||||||
Notes | 2005 | 2004 | ||||||||||
(Unaudited) | ||||||||||||
Current liabilities: | ||||||||||||
Sales deposits received | (i) | $ | 555,759 | $ | 565,053 | |||||||
Franchising feesreceived | (ii) | 1,756,352 | 1,906,286 | |||||||||
Subscription fees received | (iii) | 493,198 | 435,635 | |||||||||
Others | 25,935 | 89,584 | ||||||||||
2,831,244 | 2,996,558 | |||||||||||
Long-term liabilities: | ||||||||||||
Franchising feesreceived | (ii) | 1,421,803 | 1,124,809 | |||||||||
$ | 4,253,047 | $ | 4,121,367 | |||||||||
Note:
NOTE 14 – RETIREMENT PLANS
The Group has a defined benefit retirement plan (the “Plan”) covering all regular employees of KCIT, its ROC subsidiary in Taiwan. Under the funding policy of the Plan, commencing from September 2003, KCIT contributes monthly an amount equal to 2% of the employees’ total salaries and wages, to an independent retirement trust fund deposited with the Central Trust of China in accordance with the ROC Labor Standards Law in Taiwan. The retirement fund is not included in the Group’s
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financial statements. Net periodic pension cost is based on annual actuarial valuations which use the projected unit credit cost method of calculation and is charged to the consolidated statement of operations on a systematic basis over the average remaining service lives of current employees. Under the plan, the employees are entitled to receive retirement benefits upon retirement in the manner stipulated by the ROC Labor Standard Law in Taiwan. The benefits under the plan are based on various factors such as years of service and the final base salary preceding retirement.
The net periodic pension cost is as follows:
Three months ended March 31, | ||||||||
2005 | 2004 | |||||||
(Unaudited) | ||||||||
Service cost | $ | 25,500 | $ | 15,424 | ||||
Interest cost | 4,884 | 1,732 | ||||||
Expected return on assets | (1,697 | ) | (367 | ) | ||||
Amortization of unrecognized loss | 428 | 322 | ||||||
Net periodic pension cost | $ | 29,115 | $ | 17,111 | ||||
The Group previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $46,679 to the Plan in 2005. As of March 31, 2005 and 2004 contributions made by the Group amounted to $11,497 and $23,319, respectively.
The Group is principally engaged in the business of child educational teaching materials and related services focusing on English language in Taiwan and the PRC. Accordingly, the Group has two reportable geographic segments: Taiwan and the PRC. The Group evaluates the performance of each geographic segment based on its net income or loss. The Group also accounts for inter-segment sales as if the sales were made to third parties. Information concerning the operations in these geographical segments is as follows:
Taiwan | The PRC | Total | Corporate | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||||||||
Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | Three months ended | |||||||||||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | |||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||
External revenue | $ | 2,313,293 | $ | 2,241,656 | $ | 805,513 | $ | 394,238 | $ | 3,118,806 | $ | 2,635,894 | $ | 4,186 | $ | — | $ | — | $ | — | $ | 3,122,992 | $ | 2,635,894 | ||||||||||||||||||||||||
Inter-segment revenue | 522 | 1,362 | — | — | 522 | 1,362 | — | — | (522 | ) | (1,362 | ) | — | — | ||||||||||||||||||||||||||||||||||
$ | 2,313,815 | $ | 2,243,018 | $ | 805,513 | $ | 394,238 | $ | 3,119,328 | $ | 2,637,256 | $ | 4,186 | $ | — | $ | (522 | ) | $ | (1,362 | ) | $ | 3,122,992 | $ | 2,635,894 | |||||||||||||||||||||||
Profit (loss) from Operations | $ | 452,556 | $ | (10,560 | ) | $ | (206,377 | ) | $ | (293,247 | ) | $ | 246,178 | $ | (303,807 | ) | $ | (57,590 | ) | $ | (69,395 | ) | $ | — | $ | 31,187 | $ | 188,589 | $ | (342,015 | ) | |||||||||||||||||
Capital expenditures | $ | 11,475 | $ | — | $ | 3,208 | $ | — | $ | 14,683 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 14,683 | $ | — | ||||||||||||||||||||||||
March 31, | December 31, | March 31, | December 31, | March 31, | December 31, | March 31, | December 31, | March 31, | December 31, | March 31, | December 31, | |||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||||||||||||||
Total assets | $ | 10,869,782 | $ | 10,313,287 | $ | 2,909,664 | $ | 2,827,431 | $ | 13,779,446 | $ | 13,140,718 | $ | 30,341 | $ | 30,225 | $ | (356,015 | ) | $ | (389,519 | ) | $ | 13,453,772 | $ | 12,781,424 | ||||||||||||||||||||||
NOTE 16 – COMMITMENT AND CONTINGENCIES
A. Lease Commitment
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As of March 31, 2005, the Company’s future minimum lease payments under non-cancellable operating lease expiring in excess of one year are as follows:
Years ending December 31, | ||||
2005 | $ | 169,415 | ||
2006 | 247,935 | |||
2007 | 221,753 | |||
2008 | 207,540 | |||
2009 | 135,129 | |||
$ | 981,772 | |||
B. Going concern
The accompanying financial statements have been prepared assuming the GroupCompany will continue as a going concern. As the GroupCompany is aggressively expanding its business in the PRCPeople’s Republic of China (PRC) and the Group’sCompany’s PRC operation is still in an emerging stage and has not turned profitable, the GroupCompany has suffered recurring losses from operations, and has a networking capital deficiency.deficiency, and an equity deficit. The above conditions raise substantial doubt about the Group’s ability of the Company to continue as a going concern, if the investment in the PRC will not gradually see returns. As discussed in Note 12, the majority of the Group’s existing loans were guaranteed by two directors of the Group who have expressed their continuous support to the Group until other sources of funds have been obtained. Moreover, the Group successfully obtained new bank facilities in the first quarter of 2005. Management believes that, with continuous growth in the sales in the PRC, the existing directors’ support and the new bank facilities, the Group will have sufficient funds for operations.concern. The financial statements do nonot include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This report contains certain forward-looking statements and information relating to us that are based on the beliefs and assumptions made by our management as well as information currently available to the management. When used in this document, the words “anticipate,” “believe,” “estimate,” and “expect” and similar expressions, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are discussed under the caption “Factors That May Affect Our Future Results And Financial Condition” contained herein and other factors disclosed in our filings with the Securities and Exchange Commission including, but not limited to our Annual Report on Form 10-K for the year ended December 31, 2004. We do not intend to update these forward-looking statements.
GENERAL
We are engaged in the business of children’s education, focusing on the publication and sale of kindergarten language school and primary school teaching materials and magazines. We also provide management and consulting services to our franchised kindergarten and language schools. Our teaching materials include books, audio tapes, video tapes and compact discs. A major portion of our educational materials focuses on English language education. We also sell educational tools and equipment that are complementary to our business. Our major business originally started in Taiwan. In 2001, we started to expand our business in the People’s Republic of China (PRC). We officially launched our operations in Shanghai in April 2002. As in Taiwan, we offer advanced teaching materials and tools, and monthly and bi-weekly magazines to provide children ranging from 2 to 12 years of age a chance to learn exceptional English language and computer skills, and to provide a pre-school education program.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, equity investments, income taxes, financing operations, pensions, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition.We recognize sales of teaching materials and educational tools and equipment as revenue when titleOPERATIONS
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If market conditions were to decline, we may take actions to increase sales discounts, possibly resulting in an incremental reduction of revenue at the time when revenues are recognized.
Allowance for Doubtful Accounts.We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Allowance for Obsolete Inventories and Lower of Cost or Market.We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about inventory aging, future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Investment Impairments.We hold equity interests in companies having operations in areas within our strategic focus. We record an investment impairment charge when we believe an investment has experienced a decline in value that is not temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
Fixed Assets and Depreciation.Our fixed assets are stated at cost. Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs that do not extend the life of the applicable asset are charged to expense as incurred. Buildings are depreciated over a 50-year term. Fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from two-and-a-half years to ten years.
Impairment of Long-Lived Assets.We review our fixed assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimate of fair value is generally based on quoted market prices or on the best available information, including prices for similar assets and the results of using other valuation techniques.
As of March 31, 2005, the balance of our amortizable intangible assets was $856,147, including franchise-related intangible assets of $539,190 and copyrights of $316,957. The amortizable intangible assets are amortized on a straight-line basis over estimated useful lives of 10 years. In determining the useful lives and recoverability of the intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets, which may not represent the true fair value. If these estimates or their related assumptions change in the future, there may be significant impact on our results of operations in the period of the change incurred.
Income Taxes.We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
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in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability. Actual results may differ significantly from management’s estimate.
RESULTS OF OPERATIONS
Comparison of The Three Months Ended March 31,September 30, 2005 and 2004
$43,473, all from the amounts of the comparable prior period in 2004.
Franchising income.The increaseSeptember 30, 2005 was attributable to a decrease in franchising income from $528,132 forcertain schools that exceeded the three months ended March 31, 2004 to $597,925 for the three months ended March 31, 2005, or 13%, was mainly due to the increaseincreases in the number of our franchised schools in Shanghai. Franchisingfranchising income for Shanghai increased by $110,039 from $96,488 for the three months ended March 31, 2004 to $206,527 for the three months ended March 31, 2005.
other schools.
Total Operating Expenses.Total operating expenses decreased by $324,203, or 15%, to $1,818,863 for the three months ended March 31, 2005 from $2,143,066 for the three months ended March 31, 2004. Advertising costs decreased by $93,279, or 74%, to $33,363 for the three months ended March 31, 2005 from $126,642 for the three months ended March 31, 2004. This decrease was mainly due to the allocation of our adverting budget for 2005. We do most of our advertising during the summer vacation period rather than winter vacation period, and therefore incur most of our advertising expenses in the second and third quarters.
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period.
Comparison of Fiscal Years 2004 and 2003
Net cash (used in) provided by operating activities was ($22,689) and $45,426 during the three months ended March 31, 2005 and 2004, respectively.
an increase in accounts receivable.
equipment.
Off-Balance Sheet Arrangements
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Contractual Obligations
The Company, Higoal and its subsidiaries are collectively referred to as the “Group.” The following table represents the Group’s contractual obligations:
Payments Due by Period | ||||||||||||||||||||||||||||
Total | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | ||||||||||||||||||||||
(Thousand dollars) | ||||||||||||||||||||||||||||
Contractual obligations | ||||||||||||||||||||||||||||
Bank borrowing | 4,321 | 2,474 | 780 | 366 | 89 | 89 | 523 | |||||||||||||||||||||
Pension benefit | 29 | — | — | — | — | — | 29 | |||||||||||||||||||||
Operating leases | 1,508 | 169 | 248 | 222 | 208 | 135 | 526 | |||||||||||||||||||||
Total | 5,858 | 2,643 | 1,028 | 588 | 297 | 224 | 1,078 | |||||||||||||||||||||
Bank Borrowing
One of our financing sources is from bank borrowings. As of March 31, 2005 and 2004, the balances of bank borrowings, including current and non-current portions, were $4,320,982 and $3,217,258, respectively.
Equity Investments in Joint Ventures
On May 28, 2004, the Group signed a joint venture agreement with Zhangjhou Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC to establish a company, Henan Kid Castle Education Development Co., Ltd. with registered capital of RMB$300,000. Pursuant to this joint venture agreement, the Group and Zhangjhou Yu Hua Educational Investment Co., Ltd. own 65% and 35% interests in Henan Kid Castle Education Development Co., Ltd., respectively. No capital contribution has yet been made for the joint venture as of March 31, 2005.
On June 29, 2004, the Group signed a joint venture agreement with Li Kai and Zhang Wuen Shou in the PRC to establish a company, Shanxi Kid Castle Education Development Co., Ltd. with registered capital of RMB$500,000. Pursuant to this joint venture agreement, the Group, Li Kai and Zhang Wuen Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of March 31, 2005.
Pension Benefit
We have a non-contributory and funded defined benefit retirement plan (the “Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, as described in Note 14 to our Condensed Consolidated Financial Statements. The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are $0 and $28,845, respectively. We also make defined contributions to a retirement benefits plan for our employees in the PRC in accordance with local regulations. The contributions made by us for the three months ended March 31, 2005 and 2004 amounted to $11,497, and $23,319, respectively.
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Operating Leases
We have entered into several non-cancelable lease arrangements for administrative office space, warehouse space and sales offices for various lengths of time.
Going Concern
NEW ACCOUNTING PRONOUNCEMENTS
In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed statement until further guidance is issued for its application. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investment accounted for under the cost method. The Group is currently evaluating the effect of this proposed statement on its financial position and results of operations.
In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151,Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our financial statements.
Non-GAAP Financial Measures
None.
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Risks Relating to Our Business
We have a history of operating losses and we anticipate losses and negative cash flow to continue for the foreseeable future, and unless we are able to generate profits and positive cash flow on a consistent basis we may not be able to continue operations.
Our ability to attain a positive cash flow and become profitable depends on our ability to generate and maintain greater revenue while incurring reasonable expenses. This, in turn, depends, among other things, on the development of our business of child educational teaching materials and related services focusing on English language in Taiwan and the PRC. We may be unable to achieve and maintain profitability if we fail to do any of the following:
We have incurred operating losses since inception. As a result, as of March 31, 2005, we had an accumulated deficit of $7,342,858. We incurred net losses of $1,906,996, $1,940,591, and $1,254,592 for the years ended December 31, 2002, 2003 and 2004, respectively, and had cash flow from operations of $33,886, ($2,689,688) and $(1,544,902) for the years ended December 31, 2002, 2003 and 2004, respectively. If we are unable to achieve and maintain a positive cash flow and profitability, we may be unable to continue our operations. Even if we do achieve a positive cash flow and profitability, we cannot be certain that we will be able to sustain or increase them on a quarterly or annual basis in the future.
Our inability to achieve or maintain profitability or positive cash flow could result in disappointing financial results, impede implementation of our growth strategy or cause the market price of our common stock to decrease. Specifically, if we cannot effectively maintain, improve and develop our products and services, we may not be able to recover our fixed costs or otherwise turn profitable. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes, evolving education industry standards or customer needs and trends on a timely basis. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products, services or service enhancements. These new products, services and service enhancements may not achieve market acceptance or our competitors may develop alternative technologies and methods that gain broader market acceptance than our products and services. Accordingly, we cannot assure you that we will be able to generate the cash flow and profits necessary to sustain our business expectations, which makes our ability to successfully implement our business plan uncertain.
We cannot predict whether demand for our products and services will continue to develop, particularly at the volume or prices that we need to become profitable.
Although the market for English language instruction and education is growing rapidly, we cannot be certain that this growth will continue at its present rate, or at all. We believe our success ultimately will
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depend upon, among other things, our ability to:
Because our operating results are tied, in part, to the success of our franchisees, the failure of our franchisees could adversely affect our operating results.
Our revenues include licensing fees received from franchisees of Kid Castle. Accordingly, our future revenues will be impacted by the gross revenues of Kid Castle franchisees and the number of schools operating by these franchisees. Although our revenues from Kid Castle franchise operations will vary directly with the gross revenues of our franchisees, we are not directly dependent on the franchisees’ profitability. We believe, however, that the profitability of existing franchisees is key to our ability to attract new franchisees and open new franchised schools. Therefore, factors that adversely affect the revenues and profitability of our franchisees may have an adverse effect on our operating results.
There can be no assurance that our franchisees will operate schools successfully. While no individual franchisee represents more than 1% of our franchise revenues, a significant failure of our franchisees to operate successfully could adversely affect our operating results. The resolution of certain franchisee financial difficulties may cause us to incur additional costs, due to uncollectible accounts receivable related to franchise and license fees, the purchase of teaching and learning materials and/or potential claims by franchisees and could have a material adverse effect on our results of operations.
An increase in market competition could have a negative impact on our business.
Our markets are new, rapidly evolving and highly competitive, and we expect this competition to persist and intensify in the future. This increase in competition could lead to price reductions, decreased sales-volume, under-utilization of employees, reduced operating margins and loss of market share. There can be no assurance that we will be able to successfully compete for customers in our targeted markets.
Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter current or potential competition from a number of sources, including:
Because we face competition from established competitors, we may be unable to maintain the market share.
Our primary competitors, including Giraffe Language School in Taiwan, Ladder Digital Education Corp. in Taiwan and the PRC, and Joy Enterprises Organization in Taiwan and the PRC, have significant financial, technical and marketing resources, and/or name recognition. Some of these competitors have a longer operating history and greater overall resources than we do. These companies also have established customer support and professional services organizations. As a result, our competitors may be able to adapt more quickly to changes in customer needs, offer products and services at lower prices than we do, and devote greater resources than we do to the development and sale of teaching/learning products and services, which could result in reducing our market share.
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Because we intend to expand internationally, we will be subject to risks of conducting business in foreign countries.
As we expand our operations outside of Taiwan, we will be subject to the risks of conducting business in foreign countries, including:
We cannot be certain that the risks associated with our anticipated foreign operations will not negatively affect our operating results or prospects, particularly as these operations expand in scope, scale and significance.
Because we may not be able to protect our proprietary rights on a global basis, we may incur substantial costs to defend or protect our business and intellectual property.
We strategically pursue the registration of our intellectual property rights. However, effective patent, trademark, service mark, copyright and trade secret protection may not always be available and the steps we have taken may be inadequate to protect our intellectual property. In addition, there can be no assurance that competitors will not independently develop similar intellectual property. If others are able to copy and use our products and delivery systems, we may not be able to maintain our competitive position. If we fail to protect our intellectual property, we may be exposed to expensive litigation or risk jeopardizing our competitive position. We may have to litigate to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and the diversion of our management and technical resources, which could harm our business.
In addition, laws in the PRC have traditionally been less protective of intellectual property rights
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and enforcement relating to the protection of intellectual property in the PRC has been sporadic at best. Deterioration in compliance with existing legal protections or reductions in the legal protection for intellectual property rights in the PRC could adversely affect our revenue as we continue to expand into the PRC market.
Because we may not be able to avoid claims that we infringed the proprietary rights of others, we may incur substantial costs to defend or protect our business and intellectual property.
Although we have taken steps to avoid infringement claims from others, these measures may not be adequate to prevent others from claiming that we violated their copyrights, other trademarks or other proprietary rights. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. A party making a claim could secure a judgment that requires us to pay substantial damages or we may lose the rights to use our products or to modify them.
We rely substantially on bank loans and our inability to obtain sufficient funding may adversely affect our liquidity and financial condition.
We rely substantially on bank loans to satisfy our funding requirements. As of December 31, 2002, 2003 and 2004, our bank loans and loans from financial institutions were $4,284,807, $2,484,471 and $1,982,019 respectively. Although, in our experience, our bank loans and loans from financial institutions have been, in the past, a stable source of funding, no assurances can be given that this will continue to be the case. If we are unable to secure sufficient borrowings, our liquidity position would be adversely affected, and we may be required to seek more expensive sources of funding to finance our operations.
Implementing our strategies may require substantial capital expenditures. To the extent these expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Our ability to obtain sufficient financing and the cost of such financing will depend on numerous factors, some of which are beyond our control, including:
If we are unable to obtain sufficient funding for our operations or development plans on commercially acceptable terms, or at all, our liquidity and financial condition may be adversely affected.
Because we conduct operations in New Taiwan Dollars and Renminbi (RMB), we are subject to risk from exchange rate fluctuations.
Our transactions with suppliers and customers are effected in New Taiwan dollars, the functional currency of our Taiwanese subsidiary, Kid Castle Internet Technologies Limited (KCIT), and, as a result of our expansion in the PRC, increasingly in RMB, the functional currency of our PRC subsidiary, Kid Castle Educational Software Development Company Limited (KCES). Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the
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New Taiwan dollar and the RMB will affect our reported shareholders’ equity from one period to the next. Such impacts could be meaningful and are independent of the underlying performance of our business. The market price of our securities could be significantly affected by unfavorable changes in exchange rates. We do not actively manage our exposure to such unfavorable changes in exchange rates.
Because our officers and directors are not U.S. persons, and our operating subsidiaries are Taiwan and People’s Republic of China companies, you may be unable to enforce judgments under the Securities Act.
Our operating subsidiaries are a Taiwanese company and a PRC company and our officers and directors are residents of various jurisdictions outside the United States. All or a substantial portion of the assets of our business and of such persons are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to enforce court judgments in the United States obtained against such persons in the United States courts and predicated upon the civil liability provisions of the Securities Act.
Our internal controls and management systems are not currently consistent with international practices in certain respects and we are in the process of improving these controls to enable us to certify the effectiveness of our internal controls under the Sarbanes-Oxley Act of 2002. Our failure to timely and successfully upgrade these controls and systems could subject us to regulatory actions and harm the price of our stock.
Our internal control and management systems were designed to meet the standards generally adopted by private Taiwan companies and the internal control and management systems of our PRC subsidiaries were designed to the standards generally adopted by companies in China. These standards are different from the standards and best practices adopted by companies in the United States. We have identified areas in which our current control and management systems do not meet international standards and practices. In addition, during their audit, our external auditors brought to our attention a number of areas in which our current internal controls and management systems do not reduce undetected material errors or fraud to a relatively low level of risk, which could adversely affect our ability to accurately and timely record, process, summarize and report financial data. Pursuant to the Sarbanes-Oxley Act of 2002 and the various rules and regulations adopted pursuant thereto or in conjunction therewith, we are required, for fiscal year 2005, to perform an evaluation of our internal controls over financial reporting and file an assessment of its effectiveness with the U.S. Securities and Exchange Commission. Unless we successfully upgrade our controls and systems, we will not be able to satisfactorily comply with our obligation under the Sarbanes-Oxley Act of 2002 and our external auditors will be unable to provide a satisfactory certification. We have prepared an internal plan of action for compliance, which includes a schedule of activities to address our need to meet these standards and best practices. If we fail to successfully complete the improvements we have scheduled on a timely basis, or if the activities fail to raise our internal controls and management systems to the levels required by international standards or legal requirements, or if we fail to implement new or improved controls, then we may fail to meet our reporting obligations and our auditors may be unable to certify the management’s assertion of the effectiveness of our internal controls as required under the Sarbanes-Oxley Act of 2002. This could subject us to regulatory scrutiny and result in a loss of public confidence in our management, which could, among other things, adversely affect our stock price.
If we lose key management or other personnel, we may experience delays in our product development and other negative effects on our business.
Our success is dependent upon the personal efforts and abilities of our executive officers, Kuo-An Wang, our Chief Executive Officer, and Yu-En Chui, our Chief Financial Officer. If these key officers
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cease employment with us before we find qualified replacements, it would have a significant negative impact on our operations. We do not have employment agreements with any of our executive officers.
Moreover, our growth and success depend on our ability to attract, hire and retain additional highly qualified management, educators, technical, marketing and sales personnel. These individuals are in high demand and we may not be able to attract the staff we need. The hiring process is intensely competitive, time consuming and may divert the attention of our management from our operations. Competitors and others have in the past, and may in the future, attempt to recruit our employees. If we lose the services of any of our senior management or key education personnel, or if we fail to continue to attract qualified personnel, our business could suffer.
“Penny Stock” regulations may impose certain restrictions on marketability of our common stock.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock may fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouses).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell our common stock in the secondary market.
An outbreak of Severe Acute Respiratory Syndrome (SARS) may adversely affect our results of operations.
In March 2003, Guangdong Province of the PRC, Hong Kong, Singapore, Taiwan and several other Asian countries encountered an outbreak of SARS, a highly contagious form of atypical pneumonia. In the future, if any of our employees or students is suspected to have contracted SARS, under certain circumstances such employees, students and affected areas of our premises may have to be quarantined. As a result, we may have to temporarily suspend all or part of our operations. Furthermore, a future outbreak of SARS may negatively impact our ability to attract foreign teachers, who may be less inclined to come to Taiwan, and to attract and retain students, whose parents may choose to have them taught at home by individual tutors or forego supplemental English learning altogether. Although the World Health Organization removed all of the above regions from its list of areas affected by SARS by the summer of 2003, and there have been only a relatively small number of confirmed cases of SARS since that time, we cannot rule out the possibility of a future outbreak or predict the effect any such future outbreak could have on our company.
Risks Relating to The People’s Republic of China
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Our operations in the PRC are subject to political, regulatory and economic uncertainties.
Our operations and assets in the PRC are subject to significant political, regulatory and economic uncertainties. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, restrictions on the manner of operating educational institutions or disseminating educational materials, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under its current leadership, the PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the PRC government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
In addition, in July 2003, our subsidiary, KCES, entered into agreements with a local Chinese party, 21st Century Publishing House, in Jiangxi Province to establish two joint ventures, Jiangxi 21st Century Kid Castle Culture Media Co., Ltd. (Culture Media) and 21st Century Kid Castle Language and Education Center (Education Center). Culture Media and Education Center are established to engage primarily in the publication and distribution of English language education materials, enter into franchise and consulting relationships with kindergarten and language schools, and provide services to cooperative schools in China. We intend to use them as one of our primary vehicles for our expansion into the PRC market. Although we received, on January 19, 2004 and October 31, 2003, licenses from the applicable government authorities to conduct the business of Culture Media and Education Center in the PRC, the regulations with respect to operation of businesses by foreign-owned entities are still in flux. There is no assurance that the licenses will not be challenged by the PRC authorities.
The lack of remedies and impartiality under the PRC’s legal system could negatively impact us.
Unlike the United States, the PRC has a civil law system based on written statutes in which judicial decisions have little precedential value. The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to
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the three months ended March 31, 2005, we have projected that, if interest rates were to increase by 1%, the result would be an annual increase in our interest expense of $43,030. This analysis does not take into consideration the effect of changes in the level of overall economic activity on interest rate fluctuations.
(a) | Current assets, current liabilities and long term monetary assets and liabilities, at the rate of exchange in effect as at the balance sheet date; |
(b) | Non-monetary long term assets and liabilities, at the exchange rates prevailing at the time of the acquisition of the assets or assumption of liabilities; and, |
(c) | Revenues and expenses, at the average rate of exchange for the year. |
ITEM 4. CONTROLS AND PROCEDURES
We are in the process of identifying, developing and implementing measures to improve the effectiveness of our disclosure controls and procedures, and, in particular, internal controls, including plans to enhance our resources, systems and training with respect to our financial reporting and disclosure responsibilities, and to review our actions with the audit committee and independent auditors. Since April 2004, we have been in the process of implementing a system with respect to internal control over financial reporting. In May 2004, we began installing a new ERP system through an application service provider, and we expect the installation to be completed in the fourth quarter of 2005. Our CEO and our CFO believe that such measures will help improve our disclosure controls and procedures. Based on this information, as of March 31, 2005, our CEO and our CFO believe that, subject to the limitations noted above, our disclosure controls and procedures are effective in ensuring that material information required to be included in Kid Castle’s SEC reports is made known to them on a timely basis.
In May 2005, our accounting manager, who assisted our CFO with our internal control over financial reporting, resigned. We are in the process of searching for a candidate to hire as an accounting manager to handle our internal control over financial reporting. Although this personnel change caused a temporary interruption of our internal control over financial reporting, we believe that the ongoing implementation of our new system with respect to internal control over financial reporting and the installation of our ERP system have minimized any adverse effect that may have been caused by such resignation.
PART II
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ITEM 2. CHANGES IN SECURITIES
Pursuant to a stock purchase agreement dated August 18, 2003, Globe Wisdom Investments Limited (“GWIL”), a Samoan international business company, subscribed for 175,500 shares of our common stock at an aggregate purchase price of $122,850 in a private offering. As of March 31, 2005, we had not yet issued any shares to GWIL pursuant to the August 18, 2003 stock purchase agreement.SECURITES
AND REPORTS ON FORM 8-K A.10.1 ExhibitsAcknowledgement of indebtedness for loan extension dated August 5, 2005, by and among Kidcastle Internet Technologies Limited and Fuhwa Commercial Bank.31.1 Certification of Kuo-An Wang,Min-Tan Yang, Chief Executive Officer of the registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 Certification of Yu-En Chiu,Suang-Yi Pai, Chief Financial Officer of the registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1 Certification of Kuo-An Wang,Min-Tan Yang, Chief Executive Officer of the registrant, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 Certification of Yu-En Chiu,Suang-Yi Pai, Chief Financial Officer of the registrant, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.B.Reports on Form 8-K Not applicable.-38-
Dated: May 20, 2005
KID CASTLE EDUCATIONAL CORPORATION | |||||
Dated: June 28, 2006 | By: | /s/ | Min-Tan Yang | ||
Name: | Min-Tan Yang | ||||
Title: | Chief Executive Officer | ||||
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