UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q/A10-Q
xþQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2004
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-61286
KID CASTLE EDUCATIONAL CORPORATION
Florida (State or other jurisdiction of incorporation or organization) | 59-2549529 (IRS Employer Identification No.) |
8th Floor, No. 98 Min Chuan Road, Hsien Tien
Taipei, Taiwan ROC
(Address of principal executive offices)
Registrant’s telephone number, including area code: 011-886-22218 5996
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock | N/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) 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 ninety days.
Yesxþ Noo
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yeso Noxþ
As of July 31, 2004,May 10, 2005, there were 18,999,703 shares of the Registrant’s common stock outstanding.
Documents incorporated by reference: None.
FORM 10-Q/A10-Q
KID CASTLE EDUCATIONAL CORPORATION
TABLE OF CONTENTS
Page | ||||||||
PART I | FINANCIAL INFORMATION | 2 | ||||||
Item 1. | Unaudited Condensed Consolidated Financial | |||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of | 24 | ||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 36 | ||||||
Item 4. | Controls and | |||||||
OTHER INFORMATION | 37 | |||||||
Item 1. | Legal Proceedings. | 37 | ||||||
Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. | 38 | ||||||
Item | Defaults upon Senior Securities. | 38 | ||||||
Item | Submission of Matters to a Vote of Security Holders. | 38 | ||||||
Item | Other Information. | 38 | ||||||
Item | Exhibits and Reports on Form 8-K. | 38 | ||||||
39 |
i
KID CASTLE EDUCATIONAL CORPORATION
UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
AND
FOR THE THREE MONTHS ENDED
MARCH 31, 2005 AND 2004
KID CASTLE EDUCATIONAL CORPORATION
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pages | ||||||||
2 – 3 | ||||||||
4 | ||||||||
5 | ||||||||
6 – 8 | ||||||||
9 – 26 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32.1 | ||||||||
EXHIBIT 32.2 |
i
KID CASTLE EDUCATIONAL CORPORATIONINDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003ANDFOR THE THREE MONTHS AND SIX MONTHS ENDEDJUNE 30, 2004 AND 2003
-1--2-
Kid Castle Educational Corporation
Condensed Consolidated Balance Sheets
(Expressed in US Dollars)
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and bank balances | $ | 542,188 | $ | 1,273,723 | $ | 173,169 | $ | 213,564 | ||||||||
Bank fixed deposits – pledged (Note 12) | 317,660 | 204,889 | 354,416 | 294,331 | ||||||||||||
Notes and accounts receivable, net (Notes 5 and 10) | 1,868,207 | 2,334,385 | 2,903,221 | 2,401,904 | ||||||||||||
Inventories, net (Note 6) | 2,162,633 | 1,991,951 | 2,983,890 | 2,979,738 | ||||||||||||
Other receivables (Notes 7 and 10) | 557,505 | 524,974 | 420,351 | 337,848 | ||||||||||||
Prepayments and other current assets (Note 8) | 114,188 | 122,292 | ||||||||||||||
Prepayments and other current assets (Note 10) | 440,200 | 478,752 | ||||||||||||||
Pledged notes receivable (Note 12) | 955,675 | 1,062,406 | 1,220,482 | 1,218,356 | ||||||||||||
Deferred income tax assets | 604,617 | 615,286 | 256,105 | 218,574 | ||||||||||||
Total current assets | 7,122,673 | 8,129,906 | 8,751,834 | 8,143,067 | ||||||||||||
Deferred income tax assets | 135,577 | 120,335 | 167,093 | 170,477 | ||||||||||||
Prepaid long-term investments | — | 60,323 | ||||||||||||||
Long-term investments (Note 9) | 309,313 | 114,200 | ||||||||||||||
Prepaid interest in associates | — | 24,165 | ||||||||||||||
Interest in associates (Note 8) | 137,213 | 99,467 | ||||||||||||||
Property and equipment, net | 1,955,349 | 1,993,849 | 2,173,300 | 2,188,092 | ||||||||||||
Intangible assets, net of amortization (Note 11) | 920,390 | 989,865 | 856,147 | 894,419 | ||||||||||||
Long-term notes receivable | 576,815 | 505,091 | 224,185 | 240,971 | ||||||||||||
Pledged notes receivable (Note 12) | 320,328 | 444,302 | 573,832 | 407,149 | ||||||||||||
Other assets | 271,724 | 184,345 | 570,168 | 613,617 | ||||||||||||
Total assets | $ | 11,612,169 | $ | 12,542,216 | $ | 13,453,772 | $ | 12,781,424 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Bank borrowings – short-term and maturing within one year (Note 12) | $ | 1,695,956 | $ | 1,317,690 | ||||||||||||
Notes and accounts payable | 1,301,253 | 1,072,584 | ||||||||||||||
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 | 777,300 | 805,556 | 855,018 | 703,407 | ||||||||||||
Amounts due to officers (Note 10) | — | 572,160 | ||||||||||||||
Other payables | 331,407 | 266,276 | 368,333 | 283,080 | ||||||||||||
Deposits received | 514,915 | 421,734 | 668,432 | 498,266 | ||||||||||||
Receipts in advance (Note 13) | 2,568,872 | 2,924,636 | 2,831,244 | 2,996,558 | ||||||||||||
Income tax payable | 41,263 | 44,067 | ||||||||||||||
Income tax payable (Note 9) | 213,196 | 97,142 | ||||||||||||||
Obligation under capital leases due within one year | 24,611 | 32,468 | 27,572 | 8,659 | ||||||||||||
Total current liabilities | 7,255,577 | 7,457,171 | 8,981,002 | 8,726,637 | ||||||||||||
Bank borrowings maturing after one year (Note 12) | 1,328,992 | 1,166,781 | ||||||||||||||
Borrowings maturing after one year (Note 12) | 1,877,956 | 1,651,825 | ||||||||||||||
Receipts in advance (Note 13) | 1,471,034 | 1,467,025 | 1,421,803 | 1,124,809 | ||||||||||||
Obligation under capital leases | — | 5,534 | 27,280 | — | ||||||||||||
Deposits received | 640,715 | 603,635 | 594,136 | 689,530 | ||||||||||||
Accrued pension liabilities | 144,298 | 134,073 | ||||||||||||||
Accrued pension liabilities (Note 14) | 190,820 | 160,907 | ||||||||||||||
Total liabilities | 10,840,616 | 10,834,219 | 13,092,997 | 12,353,708 | ||||||||||||
-2--3-
Kid Castle Educational Corporation
Condensed Consolidated Balance Sheets - Continued
(Expressed in US Dollars)
June 30, | December 31, | |||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Commitments and contingencies (Note 16) | ||||||||
Stockholders’ equity | ||||||||
Common stock, no par share: | ||||||||
25,000,000 shares authorized; 18,999,703 shares issued and outstanding at June 30, 2004 and December 31, 2003 | 7,669,308 | 7,669,308 | ||||||
Additional paid-in capital | 194,021 | 194,021 | ||||||
Legal reserve | 65,320 | 65,320 | ||||||
Accumulated deficit | (6,987,774 | ) | (6,057,482 | ) | ||||
Accumulated other comprehensive loss | (169,322 | ) | (163,170 | ) | ||||
Total stockholders’ equity | 771,553 | 1,707,997 | ||||||
Total liabilities and stockholders’ equity | $ | 11,612,169 | $ | 12,542,216 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
-3-
Kid Castle Educational Corporation
Condensed Consolidated Statements of Operations
(Expressed in US Dollars)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Operating Revenue | ||||||||||||||||
Sales of goods | $ | 1,186,926 | $ | 712,735 | $ | 3,216,779 | $ | 2,987,448 | ||||||||
Franchising income | 664,608 | 415,298 | 1,192,740 | 846,949 | ||||||||||||
Other operating revenue | 151,561 | 79,791 | 203,914 | 135,519 | ||||||||||||
Total net operating revenue | 2,003,095 | 1,207,824 | 4,613,433 | 3,969,916 | ||||||||||||
Operating costs | ||||||||||||||||
Cost of goods sold | (650,418 | ) | (346,036 | ) | (1,324,923 | ) | (1,070,083 | ) | ||||||||
Cost of franchising | (113,403 | ) | (165,606 | ) | (245,504 | ) | (269,394 | ) | ||||||||
Other operating costs | (78,544 | ) | (47,248 | ) | (135,739 | ) | (104,835 | ) | ||||||||
Total operating costs | (842,365 | ) | (558,890 | ) | (1,706,166 | ) | (1,444,312 | ) | ||||||||
Gross profit | 1,160,730 | 648,934 | 2,907,267 | 2,525,604 | ||||||||||||
Advertising costs | (327,850 | ) | (154,772 | ) | (454,492 | ) | (198,747 | ) | ||||||||
Other operating expenses | (1,413,680 | ) | (1,474,346 | ) | (3,430,104 | ) | (3,122,693 | ) | ||||||||
Income (loss) from operations | (580,800 | ) | (980,184 | ) | (977,329 | ) | (795,836 | ) | ||||||||
Interest expenses, net | (43,171 | ) | (80,451 | ) | (64,936 | ) | (154,472 | ) | ||||||||
Share of profit (loss) of an investment | (15,542 | ) | — | 31,425 | (12,681 | ) | ||||||||||
Loss on write-off of an investment | — | (132,116 | ) | — | (132,116 | ) | ||||||||||
Other non-operating income (loss), net | 38,097 | 18,108 | 81,770 | 74,208 | ||||||||||||
Loss before income taxes | (601,416 | ) | (1,174,643 | ) | (929,070 | ) | (1,020,897 | ) | ||||||||
Provision for taxes | (1,222 | ) | (34,184 | ) | (1,222 | ) | (182,681 | ) | ||||||||
Net loss | $ | (602,638 | ) | $ | (1,208,827 | ) | $ | (930,292 | ) | $ | (1,203,578 | ) | ||||
Loss per share – basic and diluted | $ | (0.032 | ) | $ | (0.080 | ) | $ | (0.049 | ) | $ | (0.080 | ) | ||||
Weighted-average shares used to compute loss per share – basic and diluted | 18,999,703 | 15,074,329 | 18,999,703 | 15,074,329 | ||||||||||||
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-
Kid Castle Educational Corporation
Condensed Consolidated Statements of Stockholders’ EquityOperations
(Expressed in US Dollars)
Common Stock | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||||||
Number of | paid-in | Legal | Accumulated | comprehensive | ||||||||||||||||||||||||
shares | Amount | capital | reserve | deficit | loss | Total | ||||||||||||||||||||||
Balance, December 31, 2002 | 15,074,329 | $ | 4,654,880 | $ | 194,021 | $ | 65,320 | $ | (4,116,891 | ) | $ | (160,764 | ) | $ | 636,566 | |||||||||||||
Net loss for 2003 | — | — | — | — | (1,940,591 | ) | — | (1,940,591 | ) | |||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | — | (2,406 | ) | (2,406 | ) | |||||||||||||||||||
Comprehensive loss | (1,942,997 | ) | ||||||||||||||||||||||||||
Issuance of common stock for cash | 3,592,040 | 2,514,428 | — | — | — | — | 2,514,428 | |||||||||||||||||||||
Repayment of a liability by issuance of common stock | 333,334 | 500,000 | — | — | — | — | 500,000 | |||||||||||||||||||||
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 the six months ended June 30, 2004 (Unaudited) | — | — | — | — | (930,292 | ) | — | (930,292 | ) | |||||||||||||||||||
Cumulative translation adjustment (Unaudited) | — | — | — | — | — | (6,152 | ) | (6,152 | ) | |||||||||||||||||||
Comprehensive loss (Unaudited) | (936,444 | ) | ||||||||||||||||||||||||||
Balance, June 30, 2004 (Unaudited) | 18,999,703 | $ | 7,669,308 | $ | 194,021 | $ | 65,320 | $ | (6,987,774 | ) | $ | (169,322 | ) | $ | 771,553 | |||||||||||||
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 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
-5-
Kid Castle Educational Corporation
Condensed Consolidated Statements of Cash FlowsStockholders’ Equity
(Expressed in US Dollars)
Six months ended June 30, | ||||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities | ||||||||
Net (loss) income | $ | (930,292 | ) | $ | (1,203,578 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation of property and equipment | 107,729 | 81,549 | ||||||
Amortization of intangible assets | 80,824 | 77,753 | ||||||
(Reversal of) provision for allowance for sales returns | (13,126 | ) | 44,617 | |||||
Allowance for doubtful debts | 130,866 | 28,785 | ||||||
Provision for (reversal of) loss on inventory obsolescence and slow-moving items | 34,970 | (168,989 | ) | |||||
Share of (profit) loss of investments | (31,425 | ) | 12,681 | |||||
Loss on write-off of an investment | — | 132,116 | ||||||
(Increase)/decrease in: | ||||||||
Notes and accounts receivable | 402,524 | (606,246 | ) | |||||
Inventories | (185,880 | ) | (339,939 | ) | ||||
Other receivables | (202,283 | ) | (32,527 | ) | ||||
Prepayments and other current assets | 9,484 | (123,391 | ) | |||||
Deferred income tax assets | 3,306 | 182,030 | ||||||
Other assets | (86,257 | ) | (39,644 | ) | ||||
Increase/(decrease) in: | ||||||||
Notes and accounts payable | 219,374 | (235,045 | ) | |||||
Accrued expenses | (36,063 | ) | 30,899 | |||||
Other payables | 205,497 | 454,737 | ||||||
Receipts in advance | (202,230 | ) | 31,030 | |||||
Income taxes payable | (3,306 | ) | — | |||||
Deposits received | 99,576 | 167,098 | ||||||
Accrued pension liabilities | 8,882 | 29,102 | ||||||
Net cash used in operating activities | (387,830 | ) | (1,476,962 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (47,371 | ) | (87,809 | ) | ||||
Amount due from stockholder/director | — | 122,300 | ||||||
Acquisition of long-term investments | (103,346 | ) | — | |||||
Bank fixed deposits – pledged | (111,678 | ) | (65,381 | ) | ||||
Pledged notes receivable | 11,407 | 37,873 | ||||||
Net cash (used in) provided by investing activities | (250,988 | ) | 6,983 | |||||
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 | |||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
-6-
Kid Castle Educational Corporation
Condensed Consolidated Statements of Cash Flows – Continued
(Expressed in US Dollars)
Six months ended June 30, | ||||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Cash flows from financing activities | ||||||||
Proceeds from bank borrowings | $ | 2,865,929 | $ | 618,415 | ||||
Repayment of bank borrowings | (2,346,878 | ) | (201,489 | ) | ||||
Repayment of capital leases | (13,933 | ) | (6,585 | ) | ||||
Proceeds from loan from officers/stockholders | — | 31,427 | ||||||
Repayment of loan from officers/stockholders | (585,006 | ) | — | |||||
Stock subscriptions received in advance | — | 2,181,578 | ||||||
Net cash provided by financing activities | (79,888 | ) | 2,623,346 | |||||
Net (decrease) increase in cash and cash equivalents | (718,706 | ) | 1,153,367 | |||||
Effect of exchange rate changes on cash and cash equivalents | (12,829 | ) | 3,033 | |||||
Cash and cash equivalents at beginning of period | 1,273,723 | 125,806 | ||||||
Cash and cash equivalents at end of period | $ | 542,188 | $ | 1,282,206 | ||||
Supplemental disclosure of cash flow information Interest paid | $ | 32,885 | $ | 247,149 | ||||
Income taxes paid | $ | 1,222 | $ | 1,729 | ||||
Supplemental disclosure of significant non-cash transactions | ||||||||
Capital lease of transportation equipment | $ | — | $ | 57,571 | ||||
Increase (decrease) of notes receivable and pledged notes receivable corresponding to the increase (decrease) in the following accounts: | ||||||||
Other receivables – related parties | $ | — | $ | (259,308 | ) | |||
Accrued expenses | $ | — | $ | 5,181 | ||||
Deposits received | $ | 20,924 | $ | — | ||||
Other payables | $ | 32,900 | $ | — | ||||
Receipts in advance | $ | (200,303 | ) | $ | 533,472 | |||
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)
Six months ended June 30, | ||||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Write-off of an associate investment against deferred income | ||||||||
Balance of an associate investment | $ | — | $ | 298,113 | ||||
Balance of deferred income | — | (165,997 | ) | |||||
Loss on write-off of an associate investment | $ | — | $ | 132,116 | ||||
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 | ) | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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Kid Castle Educational Corporation
Notes to Condensed Consolidated Financial Statements
(Expressed in US Dollars)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Kid Castle Internet Technologies Limited (“KCIT”) was incorporated on December 17, 1999 under the provisions of the Company Law of the Republic of China (“ROC”) as a limited liability company. KCIT is engaged in the business of children’s education focusing on the English language. The business comprises publication, sales and distribution of related books, magazines, audio and videotapes and compact disc, franchising and sales of merchandises complementary to the business. KCIT commenced operations in April 2000 when it acquired the above business from a related company, Kid Castle Enterprises Limited (“KCE”), which was owned by two directors and stockholders of KCIT.
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 (the “Company”) 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.
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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 June 30, 2004March 31, 2005 and for the six months and three months ended June 30,March 31, 2005 and 2004 and 2003 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
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normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Group believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Group’s audited annual financial statements for the year ended December 31, 2003.2004.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
The Group has incurred operating losses since inception and hence, as of June 30, 2004,March 31, 2005, the balance of accumulated deficit was $6,987,774.$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 with the time when the goods are delivered to customers 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 terms 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.
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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:
Estimated useful life | ||
(in years) | ||
Land | Indefinite | |
Buildings | 50 | |
Furniture and fixtures | 3-10 | |
Transportation equipment | 2.5-5 | |
Miscellaneous equipment | 5-10 |
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 indicate that the carrying amount of the assets might not be recoverable. The Group does not perform a periodic assessment of assets for impairment 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 assets 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”.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
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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 sixthree months ended June 30,March 31, 2005 and 2004, and 2003, the Group did not have any potential common stock shares.
RECLASSIFICATION
The presentation of certain prior information has been reclassified to conform withto current presentation.
NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003,September 2004, the Financial Accounting Standards BoardEITF 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” (“FASB”EITF 03-01”) issued Interpretation No.46, “Consolidationas included in paragraphs 10-20 of Variable Interest Entities, an Interpretationthe proposed statement. The proposed statement will clarify the meaning of ARBother-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 51” (“FIN 46”). FIN 46 clarifies when a company should consolidate115, “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 statements the assets, liabilitiesposition and activitiesresults of a variable interest entity. FIN 46 provides general guidance as to the definition of a variable interest entity and requires a variable interest entity to be consolidated if a company absorbs the majority of the variable interest entity’s expected losses, or is entitled to receive a majority of the variable interest entity’s residual returns, or both.operations.
In December 2003, the FASB issued a revised interpretation of FIN 46 (“FIN 46-R”), which supersedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities created prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. We have performed a review of all entities created prior to and subsequent to January 31, 2003, and determined the adoption of FIN 46 and FIN 46-R did not have a material impact on the Group’s financial reporting and disclosures.
On April 30, 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”(“SFAS No. 149”) SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Group does not expect SFAS No. 149 to have a material impact on the Group’s consolidated financial statements upon adoption.
In May 2003,November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”)(SFAS) No. 150, “Accounting151,Inventory Costs, which clarifies the accounting for Certain Financial Instruments with Characteristicsabnormal amounts of both Liabilitiesidle facility expense, freight, handling costs, and Equity” (“wasted material. SFAS No. 150”). SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is151 will be effective for all financial instruments created or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim periodinventory costs incurred during fiscal years beginning after June 15, 2003. The Group does2005. We do not expectbelieve the adoption of SFAS No. 150 to151 will have a material impact on the Group’s consolidatedour financial statements upon adoption.statements.
In December 2003,2004, the StaffFASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, which eliminates the Securitiesexception for nonmonetary exchanges of similar productive assets and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”)replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 104, “Revenue Recognition,” which supersedes SAB 101, “Revenue153 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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Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements and revises the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” that have been codified in Topic 13. SAB 104 was effective immediately and did not have a material impact on the Group’s financial reporting and disclosures.
In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ended after December 15, 2003. The Group has adopted this Statement since the year ended December 31, 2003.
NOTE 5 – NOTES AND ACCOUNTS RECEIVABLE
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Notes and accounts receivable | ||||||||||||||||
– Third parties | $ | 2,080,179 | $ | 2,140,073 | $ | 3,198,682 | $ | 2,420,647 | ||||||||
– Related parties | 84,504 | 631,153 | ||||||||||||||
– Related parties (NOTE 10) | 281,286 | 177,445 | ||||||||||||||
Total | 2,164,683 | 2,771,226 | 3,479,968 | 2,598,092 | ||||||||||||
Allowance for doubtful accounts and sales returns | (296,476 | ) | (436,841 | ) | (576,747 | ) | (196,188 | ) | ||||||||
Notes and accounts receivable, net | $ | 1,868,207 | $ | 2,334,385 | $ | 2,903,221 | $ | 2,401,904 | ||||||||
NOTE 6 – INVENTORIES
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Work in process | $ | 60,173 | $ | 53,756 | $ | 106,262 | $ | 99,610 | ||||||||
Finished goods and other merchandises | 2,795,835 | 2,589,990 | 3,663,746 | 3,655,864 | ||||||||||||
2,856,008 | 2,643,746 | |||||||||||||||
Less: Allowance for obsolete inventories and lower of cost or market | (693,375 | ) | (651,795 | ) | ||||||||||||
3,770,008 | 3,755,474 | |||||||||||||||
Less: Allowance for obsolete inventories and decline of market value | (786,118 | ) | (775,736 | ) | ||||||||||||
$ | 2,162,633 | $ | 1,991,951 | |||||||||||||
$ | 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:
(i) | Shanghai Wonderland is a distributor of the Group. The Group loaned Shanghai Wonderland RMB$500,000 (approximately $60,000), RMB$250,000 (approximately $30,477), and RMB$500,000 each for operations in July 2004, January 2005, and March 2005, respectively, which are all unsecured and bear no interest. These loans are due in one year. |
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NOTE 7 – OTHER RECEIVABLES
June 30, | December 31, | |||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Other receivables – third parties: | ||||||||
Tax paid on behalf of landlord | $ | 1,340 | $ | 1,442 | ||||
Advances to staff | 80,658 | 43,242 | ||||||
Penalties receivables | — | 14,658 | ||||||
Receivables from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai Wonderland”) (Note (i)) | 70,824 | 105,847 | ||||||
Other receivables | 87,887 | 43,622 | ||||||
Sub-total | 240,709 | 208,811 | ||||||
Other receivables – related parties (Note (ii)) | 316,796 | 316,163 | ||||||
$ | 557,505 | $ | 524,974 | |||||
Note:
NOTE 8 – PREPAYMENTS AND OTHER CURRENT ASSETSINTEREST IN ASSOCIATES
June 30, | December 31, | |||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Prepayments | $ | 59,000 | $ | 51,990 | ||||
Temporary payments | 213 | 4,989 | ||||||
VAT tax recoverable | 4,926 | — | ||||||
Tax recoverable | 33,573 | 29,208 |
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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 | ||||
June 30, | December 31, | |||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Prepaid interest | 3,221 | 19,856 | ||||||
Others | 13,255 | 16,249 | ||||||
$ | 114,188 | $ | 122,292 | |||||
NOTE 9 – LONG-TERM INVESTMENTS
June 30, | December 31, | |||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”) (Note (i)) | ||||||||
Investment cost | $ | 120,446 | $ | 120,646 | ||||
Share of profit (loss) | 21,707 | (11,326 | ) | |||||
$ | 142,153 | $ | 109,320 | |||||
21st Century Kid Castle Language and Education Center (“Education Center”) (Note (ii)) | ||||||||
Investment cost | $ | 90,334 | $ | 30,161 | ||||
Share of loss | (26,757 | ) | (25,281 | ) | ||||
$ | 63,577 | $ | 4,880 | |||||
Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (Note (iii)) | ||||||||
Investment cost | $ | 60,223 | — | |||||
Lanbeisi Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note (iv)) | ||||||||
Investment cost | $ | 43,360 | — | |||||
Total | $ | 309,313 | $ | 114,200 | ||||
Note:
(i) | ||||
In October 2003, the Group obtained the government’s approval to co-found Education Center with 21st Century Publishing House in the PRC. In 2004, Education Center registered the total capital as RMB$1,500,000, and |
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the investee. It has been determined that the Group has significant influence and should therefore account for its investee on the equity method. | ||
For the | ||
On April 1, 2004, the Group signed a joint venture agreement with Tianjin Foreign Enterprises & Experts Service Corp., in Tianjin City, PRC. Pursuant to this joint venture agreement, the Group and Tianjin Foreign Enterprises & Experts Service Corp. each owns a 50% interest in Tianjin Kid Castle Educational Investment Consulting Co., Ltd. It has been determined that the Group has significant influence and should therefore account for its investee on the equity method. | ||
For the three months ended March 31, 2005, the Group recognized an investment loss of $15,649, accounted for under the equity method, in Tianjin Consulting. | ||
(iii) | On April 28, 2004, the Group signed a joint venture agreement with Lanbeisi Education & Culture Industrial Co., Ltd in Sichuan Province, PRC and Sichuan Province Education Institutional Service Center in Sichuan Province, PRC. Pursuant to this joint venture agreement, |
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the Group, Lanbeisi Education & Culture Industrial Co., Ltd and Sichuan Province Education Institutional Service Center own, respectively, 45%, 45% and 10% interests in Sichuan Lanbeisi Kid Castle Education Development Co., Ltd. It has been determined that the Group has significant influence and should therefore account for its investee using the equity method. | ||
For the |
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
A. | Names of related parties and relationship with the Group are as follows: |
Names of related parties | Relationship with the Company | |
Mr. Kuo-An Wang | He is a director, stockholder and chairman of the Company | |
Mr. Yu-En Chiu | He is a director, stockholder and vice chairman of the Company | |
Chevady Culture Enterprise Limited (“CCE”) | Its chairman is Mr. Kuo-An Wang | |
Private Kid Castle Short Term Language Cram School (“PKC Language”) | Its chairman is Mr. Yu-En Chiu | |
Taipei Country Private Kid Castle Short Term Language Cram School (“TCP PKC”) | Its chairman is Mr. Yu-En Chiu | |
Taipei Country Private Chevady | Its chairman is Mr. Yu-En Chiu |
-16--15-
Names of related parties | Relationship with the Company | |
Preschool (“TCP Chevady”) | ||
Taipei Country Private Chung-hua Preschool (“TCP Chung-hua”) | Its chairman is Mr. Yu-En Chiu | |
Taipei Country Private Wonderland Preschool (“TCP Wonderland”) | Its chairman is Mr. Yu-En Chiu | |
Taipei City Private Kid Castle Preschool (“TCP Kid Castle) | Its chairman is Mr. Yu-En Chiu | |
21st Century Publishing House (“Publishing House”) | A joint | |
Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”) | An investment accounted for under the equity | |
21st Century Kid Castle Language and Education Center (“Education Center”) | An investment accounted for under the equity method. | |
Tianjin | An investment accounted for under the equity method | |
Sichuan Lanbeisi Kid Castle Education | An investment accounted for under the equity method |
B. | Significant transactions and balances with related parties are as follows: |
Six months ended June 30, | Three months ended March 31, | |||||||||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||
(i) | Sales to: | 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 | ||||||||||||||||||
- PKC Language | $ | 6,944 | $ | 6,442 | - TCP Kid Castle | 4,996 | 4,949 | |||||||||||||
- TCP PKC | 6,944 | 6,442 | - English School | 6,034 | — | |||||||||||||||
- TCP Chevady | 6,631 | 8,088 | - Tianjin Consulting | 4,589 | — | |||||||||||||||
- TCP Chung-hua | 11,669 | 13,304 | - Lanbeisi | 26,793 | — | |||||||||||||||
- TCP Wonderland | 6,631 | 8,203 | ||||||||||||||||||
- TCP Kid Castle | 6,554 | 11,386 | ||||||||||||||||||
$ | 69,049 | $ | 27,375 | |||||||||||||||||
$ | 45,373 | $ | 53,865 | |||||||||||||||||
(ii) | Rental income from: | Rental income from: | ||||||||||||||||||
- KCE | $ | — | $ | 864 | - CCE | $ | 476 | $ | 450 | |||||||||||
- CCE | 898 | 864 | ||||||||||||||||||
$ | 898 | $ | 1,728 | $ | 476 | $ | 450 | |||||||||||||
(iii) | Franchising income from: | Franchising income from: | ||||||||||||||||||
- PKC Language | $ | 425 | $ | 1,119 | - PKC Language | $ | 136 | $ | 129 | |||||||||||
- TCP PKC | 465 | — | - TCP PKC | 136 | 129 | |||||||||||||||
- TCP Kid Castle | 4,887 | 4,222 | - TCP Kid Castle | 1,854 | 2,014 | |||||||||||||||
- TCP Chung-Hua | 1,468 | 768 | - TCP Chung-Hua | — | 214 | |||||||||||||||
- TCP Chevady | 2,444 | 2,111 | - TCP Chevady | 927 | 1,007 | |||||||||||||||
- TCP Wonderland | 2,444 | 2,111 | - TCP Wonderland | 927 | 1,007 | |||||||||||||||
$ | 12,133 | $ | 10,331 | |||||||||||||||||
$ | 3,980 | $ | 4,500 | |||||||||||||||||
(iv) | Purchase from: | |||||||||||||||||||
- Publishing House | $ | 319,640 | $ | — | ||||||||||||||||
$ | 319,640 | $ | — | |||||||||||||||||
-17--16-
(v) | The two directors and stockholders, Mr. Kuo-An Wang and Mr. Yu-Eng Chiu, have given personal guarantees to certain bank loans and borrowings. Please see the details as described in Note 12 – | |||
(vi) | Accounts and notes receivable – related parties: |
June 30, | December 31, | March 31, | December 31, | |||||||||||||
Name of related parties | 2004 | 2003 | 2005 | 2004 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
- KCE | $ | 3,556 | $ | 571,755 | $ | 3,803 | $ | — | ||||||||
- PKC Language | 8,439 | 3,358 | 20,345 | 16,772 | ||||||||||||
- TCP PKC | 8,200 | 3,358 | 20,345 | 16,772 | ||||||||||||
- TCP Chung-hua | 16,571 | 2,863 | 39,353 | 27,506 | ||||||||||||
- TCP Chevady | 12,181 | 2,537 | 40,505 | 24,431 | ||||||||||||
- TCP Wonderland | 12,181 | 2,537 | 40,505 | 24,431 | ||||||||||||
- TCP Kid Castle | 10,896 | — | 47,564 | 31,586 | ||||||||||||
- Publishing House | 12,480 | — | ||||||||||||||
- Culture Media | — | 42,646 | ||||||||||||||
- Education Center | — | 2,099 | 57 | 726 | ||||||||||||
- Tianjin Consulting | 15,439 | 15,746 | ||||||||||||||
- Lanbeisi | 53,370 | 19,475 | ||||||||||||||
$ | 84,504 | $ | 631,153 | |||||||||||||
$ | 281,286 | $ | 177,445 | |||||||||||||
(vii) | Other receivables – related parties: |
June 30, | December 31, | March 31, | December 31, | |||||||||||||
Name of related parties | 2004 | 2003 | 2005 | 2004 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Amount due from Publishing House (Note 1) | $ | 128,840 | $ | 135,513 | $ | 5,408 | $ | 13,781 | ||||||||
Amount due from Culture Media (Note 2) | 176,460 | 178,331 | ||||||||||||||
Amount due from Education Center (Note 3) | 2,463 | 2,319 | ||||||||||||||
Amount due from Education Center (Note 2) | 271 | 268 | ||||||||||||||
Amount due from Tianjin Consulting (Note 3) | — | 6,825 | ||||||||||||||
Amount due from Lanbeisi (Note 4) | 9,033 | — | 9,143 | 9,062 | ||||||||||||
$ | 316,796 | $ | 316,163 | |||||||||||||
$ | 14,822 | $ | 29,936 | |||||||||||||
Note:
Note:
1. |
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2. | Education Center was founded in October 2003. The amount due from the associate is mainly inventory purchases paid by the Group on behalf of Education Center. The amount due from this related party has no fixed repayment term and bears no |
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Tianjin Consulting was incorporated in April 2004. The Group paid certain pre-operating costs on behalf of Tianjin Consulting. The amount due from this related party has no fixed repayment term and bears no interest. | ||||
4. | Lanbeisi was incorporated in April 2004. The Group paid pre-operating costs of RMB$75,000 (approximately $9,000) on behalf of Lanbeisi. The amount due from this related party has no fixed repayment term and bears no |
June 30, | December 31, | |||||||
2004 | 2003 | |||||||
(Unaudited) | ||||||||
Mr. Kuo-An Wang and Mr. Yu-En Chiu (Note 1) | $ | — | $ | 572,160 | ||||
$ | — | $ | 572,160 | |||||
March 31, | December 31, | |||||||
Name of related parties | 2005 | 2004 | ||||||
(Unaudited) | ||||||||
Prepayments to Publishing House | 168,026 | 265,223 | ||||||
$ | 168,026 | $ | 265,223 | |||||
Note: 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.
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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
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Gross carrying amount | ||||||||||||||||
Franchise | $ | 1,008,086 | $ | 997,446 | $ | 1,078,380 | $ | 1,072,939 | ||||||||
Copyrights | 592,592 | 586,338 | 633,914 | 630,716 | ||||||||||||
1,600,678 | 1,583,784 | |||||||||||||||
1,712,294 | 1,703,655 | |||||||||||||||
Less: Accumulated amortization | ||||||||||||||||
Franchise | (428,436 | ) | (374,042 | ) | (539,190 | ) | (509,646 | ) | ||||||||
Copyrights | (251,852 | ) | (219,877 | ) | (316,957 | ) | (299,590 | ) | ||||||||
(680,288 | ) | (593,919 | ) | |||||||||||||
(856,147 | ) | (809,236 | ) | |||||||||||||
Net | $ | 920,390 | $ | 989,865 | $ | 856,147 | $ | 894,419 | ||||||||
2005 | $ | 161,648 | ||
2006 | 161,648 | |||
2007 | 161,648 | |||
2008 | 161,648 | |||
2009 | 161,648 | |||
$ | 808,240 | |||
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 – BANK BORROWINGS
June 30, | December 31, | March 31, | December 31, | |||||||||||||||||||||
Notes | 2004 | 2003 | Notes | 2005 | 2004 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Bank term loans | (i | ) | $ | 633,323 | $ | 986,280 | (i) | $ | 950,660 | $ | 945,932 | |||||||||||||
Short-term unsecured bank loans | (ii) | 681,481 | 234,535 | (ii) | 253,566 | 725,323 | ||||||||||||||||||
Mid-term loan | (iii) | 761,996 | 325,515 | (iii) | 958,809 | 1,130,827 | ||||||||||||||||||
Mid-term secured bank loan | (iv) | 948,148 | 938,141 | (iv) | 2,157,947 | 1,482,725 | ||||||||||||||||||
3,024,948 | 2,484,471 | |||||||||||||||||||||||
4,320,982 | 4,284,807 | |||||||||||||||||||||||
Less: Balances maturing within one year included in current liabilities | ||||||||||||||||||||||||
Bank term loans | 484,054 | 757,640 | 728,627 | 721,896 | ||||||||||||||||||||
Short-term unsecured bank loans | 681,481 | 234,535 | 253,566 | 725,323 | ||||||||||||||||||||
Mid-term loan | 475,085 | 325,515 | 743,547 | 726,720 | ||||||||||||||||||||
Mid-term secured bank loan | 55,336 | — | 717,286 | 459,043 | ||||||||||||||||||||
1,695,956 | 1,317,690 | |||||||||||||||||||||||
2,443,026 | 2,632,982 | |||||||||||||||||||||||
Bank borrowings maturing after one year | $ | 1,328,992 | $ | 1,166,781 | $ | 1,877,956 | $ | 1,651,825 | ||||||||||||||||
-20-
Note:
(i) |
(ii) | In August 2003, KCIT obtained an unsecured short-term loan |
-19-
and is | ||
In March 2004, KCIT obtained an unsecured short-term loan | ||
In April 2004, KCIT obtained another unsecured short-term loan | ||
For the |
(iii) | In March 2003, KCIT obtained a loan of | |
In | ||
For the |
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(iv) | In August 2003, KCIT obtained a bank loan | |
In March 2004, KCIT obtained a new bank loan of $792,393, which bears interest at 5.60% per annum and is repayable in 24 equal monthly installments. The last installment will be due on March 31, 2006. As of March 31, 2005, the loan was pledged by the KCIT’s bank deposit of $241,141, and guaranteed by two directors of the Group. As of March 31, 2005, the Group had repaid $385,035, and $407,358 remains outstanding under the loan. |
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In January 2005, KCIT obtained a bank loan of $475,436, which bears interest at 6.00% per annum and is repayable in 36 equal monthly installments. The last installment will be due on February 3, 2008. As of March 31, 2005, the Group had repaid $12,086, and $463,350 remains outstanding under the loan. | ||
In March 2005, another bank loan of $316,957 was obtained. The loan bears interest at the Taiwan basic borrowing rate plus 1.65% per annum and is repayable in 36 equal monthly installments. The applicable interest rate as of March 31, 2005 is approximately | ||
For the |
NOTE 13 – RECEIPTS IN ADVANCE
The balance comprises:
June 30, | December 31, | March 31, | December 31, | |||||||||||||||||||||
Notes | 2004 | 2003 | Notes | 2005 | 2004 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Sales deposits received | (i | ) | $ | 367,780 | $ | 356,575 | (i) | $ | 555,759 | $ | 565,053 | |||||||||||||
Franchising income received | (ii) | 1,574,199 | 1,703,426 | |||||||||||||||||||||
Franchising feesreceived | (ii) | 1,756,352 | 1,906,286 | |||||||||||||||||||||
Subscription fees received | (iii) | 599,957 | 842,509 | (iii) | 493,198 | 435,635 | ||||||||||||||||||
Others | 26,936 | 22,126 | 25,935 | 89,584 | ||||||||||||||||||||
2,568,872 | 2,924,636 | 2,831,244 | 2,996,558 | |||||||||||||||||||||
Long-term liabilities: | ||||||||||||||||||||||||
Franchising income received | (ii) | 1,438,850 | 1,432,343 | |||||||||||||||||||||
Others | 32,184 | 34,682 | ||||||||||||||||||||||
Franchising feesreceived | (ii) | 1,421,803 | 1,124,809 | |||||||||||||||||||||
1,471,034 | 1,467,025 | |||||||||||||||||||||||
$ | 4,253,047 | $ | 4,121,367 | |||||||||||||||||||||
$ | 4,039,906 | $ | 4,391,661 | |||||||||||||||||||||
Note:
Note:
(i) | The balance represents receipts in advance from customers for goods to be sold to them. |
(ii) | The balance mainly represents franchising |
(iii) | The balance represents subscription fees received in advance for subscription of magazines published by the Group. |
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
-21-
financial statements. Net periodic pension cost is based on annual actuarial valuations which use the projected
-22-
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:
Six months ended June 30, | Three months ended March 31, | |||||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Service cost | $ | 30,775 | $ | 26,396 | $ | 25,500 | $ | 15,424 | ||||||||
Interest cost | 3,456 | 2,231 | 4,884 | 1,732 | ||||||||||||
Expected return on assets | (733 | ) | — | (1,697 | ) | (367 | ) | |||||||||
Amortization of unrecognized loss | 643 | 475 | 428 | 322 | ||||||||||||
Net periodic pension cost | $ | 34,141 | $ | 29,102 | $ | 29,115 | $ | 17,111 | ||||||||
The Group previously disclosed in its financial statements for the year ended December 31, 2003,2004, that it expected to contribute $54,355$46,679 to the Plan in 2004.2005. As of June 30,March 31, 2005 and 2004 $25,260 of contributions had been made. Themade by the Group presently anticipates contributing an additional $34,047amounted to fund the Plan in 2004 for a total of $54,355.$11,497 and $23,319, respectively.
NOTE 15 – GEOGRAPHICAL SEGMENTS
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 segmentsegments is as follows:
Taiwan | The PRC | Total | ||||||||||||||||||||||
Six months ended | Six months ended | Six months ended | Six months ended | Six months ended | Six months ended | |||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
External revenue | $ | 3,817,279 | $ | 3,583,706 | $ | 796,154 | $ | 386,210 | $ | 4,613,433 | $ | 3,969,916 | ||||||||||||
Inter-segment revenue | 1,949 | 26,893 | — | — | 1,949 | 26,893 | ||||||||||||||||||
$ | 3,819,228 | $ | 3,610,599 | $ | 796,154 | $ | 386,210 | $ | 4,615,382 | $ | 3,996,809 | |||||||||||||
Profit (loss) from Operations | $ | (324,680 | ) | $ | 64,675 | $ | (552,785 | ) | $ | (398,834 | ) | $ | (877,465 | ) | $ | (334,159 | ) | |||||||
Capital expenditures | $ | 32,957 | $ | 133,164 | $ | 14,414 | $ | 12,216 | $ | 47,371 | $ | 145,380 | ||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
Corporate | Eliminations | Consolidated | Taiwan | The PRC | Total | Corporate | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Six months ended | Six months ended | Six months ended | Six months ended | Six months ended | Six 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 | Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | June 30, | June 30, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
External revenue | $ | — | $ | — | $ | — | $ | — | $ | 4,613,433 | $ | 3,969,916 | $ | 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 | — | — | (1,949 | ) | (26,893 | ) | — | — | 522 | 1,362 | — | — | 522 | 1,362 | — | — | (522 | ) | (1,362 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
$ | — | $ | — | $ | (1,949 | ) | $ | (26,893 | ) | $ | 4,613,433 | $ | 3,969,916 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 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 | $ | (145,311 | ) | $ | (386,194 | ) | $ | 45,447 | $ | (75,483 | ) | $ | (977,329 | ) | $ | (795,836 | ) | $ | 452,556 | $ | (10,560 | ) | $ | (206,377 | ) | $ | (293,247 | ) | $ | 246,178 | $ | (303,807 | ) | $ | (57,590 | ) | $ | (69,395 | ) | $ | — | $ | 31,187 | $ | 188,589 | $ | (342,015 | ) | ||||||||||||||||||||||||
Capital expenditures | $ | — | $ | — | $ | — | $ | — | $ | 47,371 | $ | 145,380 | $ | 11,475 | $ | — | $ | 3,208 | $ | — | $ | 14,683 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 14,683 | $ | — | ||||||||||||||||||||||||||||||||||||
June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Total assets | $ | 10,618,773 | $ | 10,614,292 | $ | 1,182,101 | $ | 2,053,029 | $ | 11,800,874 | $ | 12,667,321 | ||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Total assets | $ | 639,081 | $ | 7,487 | $ | (827,786 | ) | $ | (132,592 | ) | $ | 11,612,169 | $ | 12,542,216 | ||||||||||
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
(i) On May 28, 2004,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 Group signedwill continue as 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,going concern. As the Group is aggressively expanding its business in the PRC and Zhangjhou Yu Hua Educational Investment Co., Ltd. each owns 65%the Group’s PRC operation is still in an emerging stage and 35% interests in Henan Kid Castle Education Development Co., Ltd. No capital contribution has yet been made for the joint venture as of June 30, 2004.
(ii) On June 29, 2004,not turned profitable, the Group signedhas suffered recurring losses from operations and has a joint venture agreement with Li Kai and Zhang Wuen Shounet capital deficiency. The above conditions raise substantial doubt about the Group’s ability to continue as a going concern, if the investment in the PRC to establish a company, Shanxi Kid Castle Education Development Co., Ltd. with registered capitalwill not gradually see returns. As discussed in Note 12, the majority of RMB$500,000. Pursuant to this joint venture agreement,the Group’s existing loans were guaranteed by two directors of the Group Li Kaiwho 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 Zhang Wuen Shou own, respectively, 51%, 30%the new bank facilities, the Group will have sufficient funds for operations. The financial statements do no include any adjustments to reflect the possible future effects on the recoverability and 19% interests in Shanxi Kid Castle Education Development Co., Ltd. No capital contribution has yet been made forclassification of assets or the joint venture asamounts and classification of June 30, 2004.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”,“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. ShouldIf one or more of these risks or uncertainties materialize, or shouldif 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-KSB10-K for the year ended December 31, 2003.2004. 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. Currently, ourOur major business isoriginally started in Taiwan. In 2001, we started to expand our business in the People’s Republic of China (“PRC”)(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 two2 to twelve12 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, and commitmentcommitments 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 title of the product and risk of ownership are transferred to the customer, which occurs at the time of delivery, or when the goods arrive at the customer designated location, depending on the associated shipping terms. Additionally, we deliver products sold by our distributors directly to the distributors’ customers and as such the delivered goods are recognized as revenue in a similar toway as sales to our direct customers. We estimate sales returns and discounts based on historical experience and record them as reductions to revenues.
-24-
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.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 inventoriesObsolete Inventories and lowerLower of costCost or market.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.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 assetsAssets and depreciation.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.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 June 30, 2004,March 31, 2005, the balance of our amortizable intangible assets was $920,390,$856,147, including franchise-related intangible assets of $579,650$539,190 and copyrights of $340,740.$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.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
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management’s estimates of realizability. Actual results may differ significantly from management’s estimate.
Currency Risk
Our transactions with suppliers and customers are primarily effected in New Taiwan dollars, which is the functional currency of our Taiwanese subsidiary, Kid Castle Internet Technologies Limited. As a result of our expansion in the PRC, our transactions denominated in Renminbi, which is the functional currency of our PRC subsidiary, Kid Castle Educational Software Development Company Limited, are increasing. Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the New Taiwan dollar and the Renminbi will affect our reported financial results. Such impacts could be meaningful and are independent of the underlying performance of the business. The market price of our securities could be significantly harmed based on unfavorable changes in exchange rates. We do not actively manage our exposure to currency exchange rate fluctuations.
RESULTS OF OPERATIONS
Comparison of The six months ended June 30,Three Months Ended March 31, 2005 and 2004
Total Net Operating Revenue.Total net operating revenue consists of sales of goods, franchising income and 2003
other operating revenue. Total net operating revenues increased by $643,517,$512,654, or 16%20%, to $4,613,433$3,122,992 for the sixthree months ended June 30, 2004March 31, 2005 from $3,969,916$2,610,338 for the sixthree months ended June 30, 2003,March 31, 2004, including the increase in sales of goods of $229,331$345,302 and the franchising income of $345,791$69,793 and other operating revenues of $68,395. $97,559
Sales of goods.The increase in sales of goods, from $2,987,448$2,029,853 for the sixthree months ended June 30, 2003March 31, 2004 to $3,216,779$2,375,155 for the sixthree months ended June 30, 2004,March 31, 2005, or 8%17%, was mainly due to the increase in net sales of goods generated from our Shanghai operations of $265,027,$301,144, or 117%101%, to $490,764$598,895 for the sixthree months ended June 30, 2004March 31, 2005 from $225,737$297,751 for the sixthree months ended June 30, 2003. March 31, 2004.
Franchising income.The increase in franchising income, from $846,949$528,132 for the sixthree months ended June 30, 2003March 31, 2004 to $1,192,740$597,925 for the sixthree months ended June 30, 2004,March 31, 2005, or 41%13%, was mainly due to the increase in numbersthe number of our franchised schools andin Shanghai. Franchising income for Shanghai increased by $110,039 from $96,488 for the increase inthree months ended March 31, 2004 to $206,527 for the annual franchising fees. three months ended March 31, 2005.
Other operating revenue.Our other operating revenues represent revenues from other activities and services such as training of teachers, arranging for personal English language tutors, organizing field trips and educational fairs, and fees for designing the school layout forof our franchised schools. Other operating revenuesrevenue increased by $68,395,$97,559, or 50%186%, to $203,914$149,912 for the sixthree months ended June 30, 2004March 31, 2005 from $135,519$52,353 for the sixthree months ended June 30, 2003.March 31, 2004. The increase was mainly due to the fees paid byrevenue generated from our franchised schools for our services rendered in connection with the construction and decorationdesign layout of thoseour franchised schools and the income resulting from the sales of education related equipmentseducation-related equipment to our franchised schools.
Gross Profit.Gross profit increased by $381,663,$260,915, or 15%, to $2,907,267$2,007,452 for the sixthree months ended June 30, 2004March 31, 2005 from $2,525,604$1,746,537 for the sixthree months ended June 30, 2003.March 31, 2004. The increase in gross profit was attributable to the fact that the rate of increase in our franchising costs and other operating costs from June 30, 2003March 31, 2004 to June 30, 2004March 31, 2005 was lower than the rate of increase in our franchising income and other operating income for the same period. In addition, our advertising campaign during this period particularly helpedthe gross margin decreased from 67% for the three months ended March 31, 2004 to boost franchising income in both Taiwan61% for the three months ended March 31, 2005, primarily because of the consolidation of Culture Media that has a lower gross margin than KCIT and Shanghai, PRC.KCESD. Culture Media’s gross margin for the three months ended March 31, 2005 was approximately 50%.
Total Operating Expenses.Total operating expenses increaseddecreased by $563,156,$324,203, or 17%15%, to $3,884,596$1,818,863 for the sixthree months ended June 30, 2004March 31, 2005 from $3,321,440$2,143,066 for the sixthree months ended June 30, 2003.March 31, 2004. Advertising costs increaseddecreased by $255,745,$93,279, or 129%74%, to $454,492$33,363 for the sixthree months ended June 30, 2004March 31, 2005 from $198,747$126,642 for the sixthree months ended June 30, 2003. The increaseMarch 31, 2004. This decrease was mainly due to the additionalallocation 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 incurred with respect toin the filming of commercials for our new promotional campaign for our productssecond and franchised schools. Other operating expenses increased by $307,411, or 10%, to $3,430,104 for the six months ended June 30, 2004 from $3,122,693 for the six months ended June 30, 2003, principally due to increases in commission fees from monthly magazines and in expenses as a result of the expansion in Shanghai, PRC. Commission fees increased by $206,484, or 182%, to $320,175 for the six months ended June 30, 2004third quarters.
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from $113,691 for the six months ended June 30, 2003, which was mainly due to the increase in volume of commission fees incurred from the new promotional campaign of our monthly magazines sold to pre-schools. In addition, our personnel expenses and other relevant expenses increased as a result of the continued expansion of our business and workforce in Shanghai.
Net interestOther Operating Expenses.Other operating expenses decreased by $89,536,$230,924, or 58%11%, to $64,936 for the six months ended June 30, 2004 from $154,472 for the six months ended June 30, 2003, primarily due to a loan from a stockholder in April 2002 (please refer to Note 10 to the condensed consolidated financial statements for more information) that had a monthly interest rate of 2.1%. The loan was fully repaid subsequent to December 31, 2003.
Share of profit (loss) of investments increased by $44,106, or 348%, to $31,425 for the six months ended June 30, 2004 from ($12,681) for the six months ended June 30, 2003, primarily due to our new investment in Culture Media on July 8, 2003 that incurred an investment gain of $32,939 (please refer to Note 9 to our condensed consolidated financial statements for more information) for the six months ended June 30, 2004.
Loss on write-off of an investment in the six months ended June 30, 2003, was due to a special resolution adopted by our board of directors on June 5, 2003. We resolved to amend the agreement we entered into on May 16, 2001 with Global International to change our cooperation relationship from equity ownership to strategic alliance. As a result, during the six months ended June 30, 2003, we recognized a loss of $132,116 in the operating results.
Other non-operating income increase by $7,562, or 10%, to $81,770 for the six months ended June 30, 2004 from $74,208 for the six months ended June 30, 2003, primarily because of the fluctuation in exchange rate.
The income tax expenses of $1,222 for the six months ended June 30, 2004 represents the additional income tax paid for 2002. Income tax provision for the six months ended June 30, 2003 was $182,681. This income tax provision mainly represents an increase in the valuation allowance against deferred tax assets generated from our Shanghai operations so as to reduce the deferred tax assets to the extent that the tax benefit is more than likely to be realized.
The three months ended June 30, 2004 and 2003
Total net operating revenues increased by $795,271, or 66%, to $2,003,095$1,785,500 for the three months ended June 30, 2004March 31, 2005 from $1,207,824$2,016,424 for the three months ended June 30, 2003, including the increaseMarch 31, 2004, principally due to decreases in sales of goods of $474,191, franchising income of $249,310 and other operating revenues of $71,770. The increasesalary expenses resulting from a reduction in sales of goods, from $712,735employee headcount in our Taiwan operations.
Interest Expenses, Net.Net interest expenses increased by $37,488, or 172%, to $59,253 for the three months ended June 30, 2003 to $1,186,926March 31, 2005 from $21,765 for the three months ended June 30,March 31, 2004, or 67%, was mainlyprimarily due to the net salesincrease of goods generated from our Shanghai operations increased by $101,346, or 96%, to $193,013 orthe borrowings during the three months ended June 30,March 31, 2005 comparing to the three months ended March 31, 2004 from $91,667(please refer to Note 12 to our Condensed Consolidated Financial Statements for more information).
Provision for Taxes.Provision for taxes for the three months ended June 30, 2003. In addition, because we sold the educational materialsMarch 31, 2005 and 2004 were $143,453 and $0, respectively. These provisions for the first semester of 2004income taxes relate to our franchise schools in Taiwan in June, which was earlier than 2003, the sales revenue in the first six months of 2004 increased by approximately $206,335, compared with the same period in 2003. The increase in franchising income from $415,298 for the three months ended June 30, 2003 to $664,608 for the three months ended June 30, 2004, was mainly due to the increase in numbers of our franchised schools and the increase in the annual franchising fees. Our other operating revenues represent revenues from other activities and services such as training of teachers, arranging for personal English language tutors, organizing field trips and educational fairs, and designing the school layout for franchised schools. Other operating revenues increased to $151,561 for the three
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months ended June 30, 2004 from $79,791 for the three months ended June 30, 2003, mainly due to the fees paid by our franchised schools for our services in connection with the construction and decoration of those franchised schools and the incometaxes resulting from the sales of education related equipments to our franchised schools.
Gross profit increase by $511,796, or 79%, to $1,160,730 for the three months ended June 30, 2004 from $648,934 for the three months ended June 30, 2003. The increase was mainly attributable to an increase in the annual franchising fees as well as an improved utilization of our consulting and management resources provided to our franchised schools.
Total operating expenses increased by $112,412, or 7%, to $1,741,530 for the three months ended June 30, 2004 from $1,629,118 for the three months ended June 30, 2003. Advertising costs increased by $173,078, or 112%, to $327,850 for the three months ended June 30, 2004 from $154,772 for the three months ended June 30, 2003. The increase was mainly because we spent additional cost in filming our new commercials on the promotion of our products and franchised schools. Other operating expenses decreased by $60,666, or 4%, to $1,413,680 for the three months ended June 30, 2004 from $1,474,346 for the three months ended June 30, 2003, primarily because we saved some personnel expenses by closing down our direct-marketing department in April, 2004.
Net interest expenses decreased by $37,280, or 46%, to $43,171 for the three months ended June 30, 2004 from $80,451 for the three months ended June 30, 2003, primarily due to a loan from a stockholder in April 2002 (please refer to Note 10 to the condensed consolidated financial statements) that had a monthly interest rate of 2.1%. The loan was fully repaid in January, 2004.
Share of loss of investments was $15,542 for the three months ended June 30, 2004, primarily due to our new investments in Culture Media on July 8, 2003, and Education Center in October 2003, which incurred investment losses of $14,068 and $1,474 (please refer to Note 9 to our condensed consolidated financial statements for more information) for the three months ended June 30, 2004, respectively.
Loss on write-off of an investment in the three months ended June 30, 2003, was due to a special resolution adopted by our board of directors on June 5, 2003. We resolved to amend the agreement we entered into on May 16, 2001 with Global International to change our cooperation relationship from equity ownership to strategic alliance. As result, during the three months ended June 30, 2003, we recognized a loss of $132,116 in the operation results.
Other non-operating income increase by $19,989, or 110%, to $38,097 for the three months ended June 30, 2004 from $18,108 for the three months ended June 30, 2003, primarily because of the fluctuation in exchange rates of the primary currencies in which we conduct our operations the New Taiwan (NT) Dollars and Renminbi (RMB), against the US Dollar.
Income tax expenses of $1,222 for the three months ended June 30, 2004 represents the additional income tax paid for 2002. Income tax provision for the three months ended June 30, 2003 was $34,184. This income tax provision mainly represents an increase in the valuation allowance against deferred tax assets generated from our Shanghai operations so as to reduce the deferred tax assets to the extent that the tax benefit is more than likely to be realized.Taiwan.
LIQUIDITY AND CAPITAL RESOURCES
Comparison of Fiscal Years 2004 and 2003
As of June 30, 2004,March 31, 2005, our principal sources of liquidity included cash and bank balances of $542,188,$173,169 which decreased from $1,273,723$213,564 at December 31, 2003.2004. The decrease was mainly due to the
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expenditures to fund the daily operations and the new investments in our Shanghai operations (please refer to note 9 to our condensed consolidated financial statement for more information).operations.
Net cash used in(used in) provided by operating activities was $387,830($22,689) and $1,476,962$45,426 during the sixthree months ended June 30,March 31, 2005 and 2004, and 2003, respectively. Net cash used in operating activities during the sixthree months ended June 30, 2004March 31, 2005 was primarily attributed to net loss, thatloss.
Net cash used in investing activities were $60,406 and $105,689 during the three months ended March 31, 2005 and 2004, respectively. The $45,283 difference was partially offset by an increaseprimarily attributable to cash used in notespurchase of property and accounts payable, anequipment of $104,562 during the three months ended March 31, 2005 and the increase of deposit received, and anpledged bank fixed deposits by 58,629 during the three months ended March 31, 2005, compared to increase in other payables.of $135,818 during the three months ended March 31, 2004.
Net cash (used in) provided by investingfinancing activities was $(250,988) and $6,983 during the sixthree months ended June 30, 2004 and 2003, respectively.March 31, 2005 was $60,634 as compared to $67,777 during the three months ended March 31, 2004. The $257,971$7,143 difference was primarily attributable to the collectionsdecrease of amount due from stockholder/director of $122,300 during the six months ended June 30, 2003 and the payment of long-term investments of $103,346 in Shanghai.
Net cash (used in) provided by financing activities during the six months ended June 30, 2004 was $(79,888) as compared to $2,623,346 during the six months ended June 30, 2003. The $2,703,234 difference was primarily attributable to the net proceeds from bank borrowings of $2,181,578 we received from the issuance of 3,116,540 shares of common stock during the six months ended June 30, 2003,645,512, and the repayment of loans from officers/stockholdersshareholders of $585,006$586,529 during the sixthree months ended June 30,March 31, 2004.
As of June 30, 2004, the Company has a total line of credit of $2,518,519 from certain banks and the unused credit facility was $255,566.
Off-Balance Sheet ArrangementArrangements
The Securities and Exchange Commission (“SEC”) has described various characteristics to identify contractual arrangements that would fall within the SEC’s definition As of March 31, 2005, we did not engage in any off-balance sheet arrangements.arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC under the Securities Exchange Act of 1934.
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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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Payments Due By Period (Thousand dollars) | Total | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | (Thousand dollars) | |||||||||||||||||||||||||||||||||||||||||||||||||
Contractual obligations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank borrowing | $ | 2,187 | 909 | 1,097 | 181 | — | — | — | 4,321 | 2,474 | 780 | 366 | 89 | 89 | 523 | |||||||||||||||||||||||||||||||||||||||||
Pension Benefit | 41 | — | — | — | — | — | 41 | |||||||||||||||||||||||||||||||||||||||||||||||||
Pension benefit | 29 | — | — | — | — | — | 29 | |||||||||||||||||||||||||||||||||||||||||||||||||
Operating leases | 393 | 118 | 100 | 82 | 54 | 39 | — | 1,508 | 169 | 248 | 222 | 208 | 135 | 526 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,621 | 1,027 | 1,197 | 263 | 54 | 39 | 41 | 5,858 | 2,643 | 1,028 | 588 | 297 | 224 | 1,078 | |||||||||||||||||||||||||||||||||||||||||
Bank borrowingBorrowing
One of our financing sources is from bank borrowings. As of June 30,March 31, 2005 and 2004, and December 31, 2003, the balances of bank borrowings, including current and non-current portions, were $3,024,948$4,320,982 and $2,484,471,$3,217,258, respectively.
Equity investmentsInvestments in joint venturesJoint Ventures
On May 28, 2004, KCESthe Group signed a joint venture agreement with Zhangjhou Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC.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
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Zhangjhou Yu Hua Educational Investment Co., Ltd. each ownsown 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, KCESthe Group signed a joint venture agreement with Li Kai and Zhang Wuen Shou in PRC.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.
As of June 30, 2004, no operations had commenced No capital contribution has yet for Henan Kid Castle Education Development Co., Ltd., and Shanxi Kid Castle Education Development Co., Ltd. In addition, no capital injection hadbeen made for Henan Kid Castle Education Development Co., Ltd. and Shanxi Kid Castle Education Development Co., Ltd.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 theour 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 $40,913,$28,845, respectively. We also make defined contributions to a retirement benefits plan for itsour employees in the PRC in accordance with local regulations. The contributions made by us for the sixthree months ended June 30,March 31, 2005 and 2004 and 2003 amounted to $70,454$11,497, and $45,290,$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
The accompanying financial statements have been prepared assuming the Group will continue as a going concern. As the Group is aggressively expanding its business in various periods.the PRC and the Group’s PRC operation is still in an emerging stage and has not turned profitable, the Group has suffered recurring losses from operations and has a net capital deficiency. The above conditions raise substantial doubt about the Group’s ability to continue as a going concern, if the investment in the PRC does not gradually see returns. As discussed in Note 12 to our Condensed Consolidated Financial Statements, 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 (please refer to Note 12 to our Condensed Consolidated Financial Statements for more information). 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. The financial statements do not 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.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003,September 2004, the FASB issued InterpretationEITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 4603-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FIN 46”EITF 03-01”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary as included in paragraphs 10-20 of the entity ifproposed 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 investorssecurities, in particular investments within the entity do not havescope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investment accounted for under the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Managementcost method. The Group is currently evaluating the effect of adopting FIN 46this proposed statement on its financial position and results of operations and financial position.operations.
On April 30, 2003, In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”)(SFAS) No. 149, “Amendment151,Inventory Costs, which clarifies the accounting for abnormal amounts of Statement 133 on Derivative Instrumentsidle facility expense, freight, handling costs, and Hedging Activities” (“wasted material. SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is151 will be effective for contracts entered into or modifiedinventory costs incurred during fiscal years beginning after June 30, 2003 and for hedging relationships designated after June 30, 2003.15, 2005. We do not believe that the adoption of SFAS No. 149151 will have noa material impact on our consolidated 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:
• | maintain and improve our current products and services and develop or license new products on a timely basis; | |||
• | compete effectively with existing and potential competitors; | |||
• | further develop our business activities; | |||
• | manage expanding operations; and | |||
attract and retain qualified personnel. |
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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In May 2003,depend upon, among other things, our ability to:
• | increase awareness of our brand and the availability of our products and services; | |||
• | continue to attract and develop relationships with educational institutions and regulatory authorities in our targeted geographic markets; and | |||
• | continue to attract and retain customers. |
Because our operating results are tied, in part, to the FASB issued Statementsuccess of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instrumentsour 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 Characteristicsthe gross revenues of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations ofour franchisees, we are not directly dependent on the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.franchisees’ profitability. We believe, however, that the adoptionprofitability of SFAS No. 150existing 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 noa material adverse effect on our results of operations.
An increase in market competition could have a negative impact on our consolidatedbusiness.
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:
• | branches and franchises of international language instruction companies; | |||
• | public institutions and private schools; and | |||
• | private tutors. |
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, statements.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:
• | our inability to adapt our products and services to local cultural traits and customs; | |||
• | our inability to locate qualified local employees, partners and suppliers; | |||
• | difficulties managing foreign operations; | |||
• | the potential burdens of complying with a variety of foreign laws; | |||
• | trade standards and regulatory requirements; | |||
• | geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships; | |||
• | legal uncertainties or unanticipated changes regarding regulatory requirements, liability, export and import restrictions, tariffs and other trade barriers; | |||
• | uncertainties of laws and enforcement relating to the protection of intellectual property; | |||
• | political, economic and social conditions in the foreign countries where we conduct operations; | |||
• | currency risks and exchange controls; | |||
• | potential inflation in the applicable foreign economies; and | |||
• | foreign taxation of earnings and payments received by us from our franchisees and affiliates. |
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 December 2003,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 Staffvalidity and scope of the Securitiesproprietary rights of others. This litigation could result in substantial costs and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,”the diversion of our management and technical resources, which supersedes SAB 101, “Revenue Recognitioncould harm our business.
In addition, laws in Financial Statements.” SAB 104’s primary purposethe 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 rescind accounting guidance containedpay 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 SAB 101 related to multiple element revenue arrangementsour experience, our bank loans and revises the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” thatloans from financial institutions have been, codified in Topic 13. SAB 104 was effective immediately and did not have a material impact on our financial reporting and disclosures.
In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 aboutpast, a stable source of funding, no assurances can be given that this will continue to be the assets, obligations,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 flowsresources, we will be required to seek additional debt or equity financing. Our ability to obtain sufficient financing and net periodic benefitthe cost of defined benefit pensionsuch financing will depend on numerous factors, some of which are beyond our control, including:
• | our financial condition; | |||
• | general economic and capital market conditions; | |||
• | availability of credit from banks or lenders and conditions in the financial markets; | |||
• | investor confidence in us; and | |||
• | economic, political and other conditions in Taiwan and the PRC. |
If we are unable to obtain sufficient funding for our operations or development plans on commercially acceptable terms, or at all, our liquidity and other defined benefit postretirement plans. The required information shouldfinancial condition may be provided separately for pension plansadversely affected.
Because we conduct operations in New Taiwan Dollars and for other postretirement benefit plans. This Statement, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ended after December 15, 2003. We have adopted this Statement sinceRenminbi (RMB), we are subject to risk from exchange rate fluctuations.
Our transactions with suppliers and customers are effected in New Taiwan dollars, the year ended December 31, 2003,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 adoptionRMB will affect our reported shareholders’ equity from one period to the next. Such impacts could be meaningful and are independent of this Statement has no impact onthe underlying performance of our consolidated financial statements.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION
Investing inbusiness. The market price of our securities involves a high degree of risk. In additioncould be significantly affected by unfavorable changes in exchange rates. We do not actively manage our exposure to the other information containedsuch unfavorable changes in this quarterly report, you should consider the following factors before investing in our securities.exchange rates.
Because our officers and directors are not U.S. Persons,persons, and our operating subsidiaries are Taiwan and People’s Republic of China companies, you may not be ableunable to enforce judgments under the Securities Act.
Our operating subsidiaries are a Taiwanese company and a People’s Republic of ChinaPRC 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 courts judgments obtained against such persons in the United States courts and predicated upon the civil liability provisions of the Securities Act.
BecauseOur internal controls and management systems are not currently consistent with international practices in certain respects and we face competitionare 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 established competitors,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 maintain market share.
Our primary competitors have significant financial, technical and marketing resources, and/or name recognition, including Giraffe, G-Telp and Jia Yin. Somecertify the management’s assertion 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,the effectiveness of our competitors may be able to adapt more quickly to changes in customer needs, offer products and services at lower prices than us, devote greater resources
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thaninternal controls as required under the Sarbanes-Oxley Act of 2002. This could subject us to developmentregulatory scrutiny and saleresult in a loss of teaching/learning products and services,public confidence in our management, which could, result in reducingamong other things, adversely affect our market share.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.
Because we conduct operations in New Taiwan (NT) 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, KCIT, and increasingly in RMB, the functional currency of our PRC subsidiary, KCES, as a result of our expansion in the PRC. Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the NT dollar and the RMB will affect our reported financial results 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 harmed based on unfavorable changes in exchange rates. We do not actively manage our exposure to such effects.
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:
We cannot predict whether demand for our products and services will continue to develop, particularly at the volume or prices that we need to remain profitable.
Although the market for English language instruction and education is growing rapidly, we cannot be certain that this growth will continue in its present form, or at all. We believe our success ultimately will depend upon, among other things, our ability to:
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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 revenues 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, and 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 and hence, as of June 30, 2004, the balance of accumulated deficit was $6,987,774. We incurred net losses of $(1,940,591), $(1,906,996), and $(2,500) for the years ended December 31, 2003, 2002 and 2001, respectively, and had cash flow from operations of $(2,689,688), 33,886 and $0 in 2003, 2002 and 2001, 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 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 and 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.
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.
If we fail to protect our intellectual property, we may be exposed to expensive litigation or risk jeopardizing our competitive position. The steps we have taken may be inadequate to protect our
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intellectual property. 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 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.
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.
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
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taxation, restrictions on currency conversion, imports and sources of supply, 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, our subsidiary, KCES, entered into agreements in July 2003 to establish two joint ventures, Culture Media and Education Center, with a local Chinese party, 21st Century Publishing House, in Jiangxi Province. We established Culture Media and Education Center to engage mainly in the publication and distribution of English language education materials, the operation of kindergarten and language schools, and the running of cooperative schools in China. We intend to use these joint ventures as one of our primary vehicles for our expansion in the PRC market. Although we have 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, respectively, 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 U.S., 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.
“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 spouse)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.
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An outbreak of Severe Acute Respiratory Syndrome (“SARS”)(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 inan outbreak of SARS, a highly contagious form of atypical pneumonia. Although the SARS epidemic now appears to become under control, some experts fear that the SARS epidemic might resurface as number of isolated SARS cases have been reported recently. 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 an individual.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
Market We are exposed to market risk, represents the risk of loss that may affect us due to adverseincluding from changes in financial market prices and rates. Our market risk exposure is primarily fluctuations incertain foreign currency exchange rates and interest rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. We have not entered into derivative or hedging transactions to manage risk in connection with such fluctuations.
The following analysis provides quantitative information regarding our exposure to foreign currency exchange risk and interest rate risk.
Interest rate exposure
We are exposed to fluctuating interest rates related to variable rate bank borrowings. It is estimatedIn analyzing the effect of interest rate fluctuations based on the average balances of our outstanding bank borrowings for
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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 $30,523. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action. Further, this$43,030. This analysis does not considertake into consideration the effect of the changechanges in the level of overall economic activity that could exist in such an environment.on interest rate fluctuations.
Foreign currency exposure
We have operations in both Taiwan and the PRC. The functional currency of Higoal Development Ltd. and its subsidiaries other than KCESsubsidiary, Kid Castle Internet Technologies Ltd. is NT Dollars and the financial records are maintained and the financial statements are prepared for these entities in NT$.NT Dollars. The functional currency of KCESKid Castle Educational Software Development Company Ltd. and its consolidated investee, Jiangsi 21th Century Kid Castle Culture Media Co. Ltd. is RMB and the financial records are maintained and the financial statements are prepared for KCESthese entities in RMB. In the normal course of business, these operations are not exposed to fluctuations in currency values. We do not generally enter into derivative financial instruments in the normal course of business, nor aredo we use such instruments used for speculative purposes. However, fluctuations in the relative exchange rate will affect our reported financial results. The translation from the applicable local currency assets and liabilities to the US dollarU.S. Dollar is performed using exchange rates in effect at the balance sheet date except for stockholders’shareholders’ equity, which is translated at historical exchange rates. Revenue and expense accounts are translated using average exchange rates during the period. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of stockholders’shareholders’ equity.
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. Based on this evaluation asSince April 2004, we have been in the process of June 30,implementing a system with respect to internal control over financial reporting. In May 2004, ourwe 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 have concludedbelieve that steps can be taken tosuch measures will help improve our disclosure controls and procedures. Nevertheless,Based on this information, as of March 31, 2005, our CEO and our CFO believe that, subject to the limitations noted
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above, our disclosure controls and procedures are effective to ensurein ensuring that material information required to be included in this reportKid Castle’s SEC reports is made known to them on a timely basis.
During the quarter ended June 30, 2004, there were no changes in In May 2005, our accounting manager, who assisted our CFO with our internal control over financial reporting, that have materially affected, orresigned. We are reasonably likelyin the process of searching for a candidate to materially affect,hire as an accounting manager to handle our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have no material pending legal proceedings.
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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 June 30, 2004,March 31, 2005, we had not yet issued any shares to GWIL pursuant to the August 18, 2003 stock purchase agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on June 28, 2004, the following proposals were adopted by the margins indicated:
PROPOSAL 1: Annual Election of Directors. The nominees for election as directors were Kuo-An Wang, Yu-En Chiu, Suang-Yi Pai, Chin-Chen Huang, Yu-Fang Lin, Ming-Tsung Shih, Yuanchau Liour and Robert Theng. Each of these nominees was elected to serve for a one-year term, by the following margins of votes:
Nominees | For | Withheld | ||||||
Kuo-An Wang | 13,963,212 | 760,520 | ||||||
Yu-En Chiu | 13,963,212 | 760,520 | ||||||
Suang-Yi Pai | 13,963,212 | 760,520 | ||||||
Chin-Chen Huang | 13,963,212 | 760,520 |
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Nominees | For | Withheld | ||||||
Yu-Fang Lin | 13,963,212 | 760,520 | ||||||
Ming-Tsung Shih | 13,963,212 | 760,520 | ||||||
Yuanchau Liour | 13,963,212 | 760,520 | ||||||
Robert Theng | 13,963,212 | 760,520 |
PROPOSAL 2: Ratification of the selection of PricewaterhouseCoopers LLP to serve as our independent auditors for the fiscal year ending December 31, 2004.
For | Against | Abstain | |||||||
1,3963,212 | 0 | 760,520 |
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. | Exhibits | |
31.1 | Certification of Kuo-An Wang, 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, 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. |
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32.1 | Certification of Kuo-An Wang, 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, 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. |
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