[X]
2006
333-39629
Florida
59-2549529
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Florida | 59-2549529 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
code)
x
| Page | ||||
| PART I | FINANCIAL INFORMATION | |||
| Item 1. | Unaudited Condensed Consolidated Financial Statements | 2 | ||
| a) Condensed Consolidated Balance Sheet as of June 30, 2006 and December 31, 2005 | 2 | |||
| b) Condensed Consolidated Statements of Operations for the three months ended June 30, 2006 and June 30, 2005 | 3 | |||
| c) Condensed Consolidated Statements of Operations for the six months ended June 30, 2006 and June 30, 2005 | 4 | |||
| d) Condensed Consolidated Statements of Stockholders’ Equity | 5 | |||
| e) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005 | 6 | |||
| f) Notes to Condensed Consolidated Financial Statements | 8 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 | ||
| Item 4. | Controls and Procedures | 29 | ||
| PART II. | OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 31 | ||
| Item 1A | Risk Factors | 31 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 | ||
| Item 3. | Defaults upon Senior Securities | 31 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 31 | ||
| Item 5. | Other Information | 31 | ||
| Item 6 | Exhibits | 31 | ||
| SIGNATURES | 32 | |||
#
Explanatory Note
Our original filing of the Form 10-Q for the period ended June 30, 2005 contained a formatting error. The error caused the certifications of our principal executive and financial officers attached as exhibits to the originally filed report to be blank. This filing corrects that formatting error.
#
ITEM 1.
INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
(Unaudited)
ASSETS
June 30, 2005
December 31, 2004
(Unaudited)
(Audited)
June 30, 2006 | December 31, 2005 | ||||||
| (Unaudited) | |||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and bank balances | $ | 1,285,438 | $ | 613,391 | |||
| Bank fixed deposits - pledged (Note 12) | 129,698 | 120,813 | |||||
| Notes and accounts receivable, net (Notes 5) | 3,009,621 | 2,593,276 | |||||
| Inventories, net (Note 6) | 1,553,396 | 2,069,492 | |||||
| Other receivables (Notes 7) | 271,769 | 223,063 | |||||
| Prepayments and other current assets (Note 8) | 319,025 | 411,526 | |||||
| Pledged notes receivable (Note 12) | 650,383 | 849,704 | |||||
| Deferred income tax assets | 123,006 | 72,992 | |||||
| Total current assets | 7,342,336 | 6,954,257 | |||||
| Deferred income tax assets | 48,609 | 46,382 | |||||
| Long-term investments (Note 9) | 62,719 | 71,158 | |||||
| Property and equipment, net | 1,765,360 | 1,808,411 | |||||
| Intangible assets, net of amortization (Note 11) | 625,284 | 699,246 | |||||
| Long-term notes receivable | 875,663 | 482,483 | |||||
| Pledged notes receivable (Note 12) | 188,784 | 357,825 | |||||
| Other assets | 346,883 | 563,175 | |||||
| Total assets | $ | 11,255,638 | $ | 10,982,937 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities | |||||||
| Bank borrowings - short-term and maturing within one year (Note 12) | $ | 1,046,430 | $ | 1,516,906 | |||
| Notes and accounts payable | 1,369,230 | 1,385,478 | |||||
| Accrued expenses | 728,868 | 560,733 | |||||
| Amounts due to related parties (Note 10) | 841,437 | 977,838 | |||||
| Other payables (Note 14) | 801,372 | 1,057,161 | |||||
| Deposits received | 599,761 | 462,007 | |||||
| Receipts in advance (Note 13) | 2,887,189 | 2,353,680 | |||||
| Income tax payable | 226,735 | 122,481 | |||||
| Other Current Liabilities | 95,079 | — | |||||
| Total current liabilities | 8,596,101 | 8,436,284 | |||||
| Bank borrowings maturing after one year (Note 12) | 1,347,655 | 1,640,391 | |||||
| Receipts in advance (Note 13) | 1,542,355 | 1,130,207 | |||||
| Deposits received | 789,236 | 864,196 | |||||
| Deferred liability | 35,757 | 35,416 | |||||
| Accrued pension liabilities (Note 15) | 183,145 | 174,387 | |||||
| Total liabilities | 12,494,249 | 12,280,881 | |||||
Current Assets:
Cash and bank balances
$
766,626
$
213,564
Bank fixed deposits – pledged
355,850
294,331
Notes and accounts receivable, net
4,570,800
2,401,904
Inventories
3,024,509
2,979,738
Other receivables
426,502
337,848
Prepayments and other currant assets
672,309
478,752
Pledged notes receivable
---
1,218,356
Deferred income tax assets
256,105
218,574
Total current assets
10,072,701
8,143,067
Deferred income tax assets
167,093
170,477
Prepaid interest in associates
---
24,165
Interest in associates
137,213
99,467
Property and equipment, net
2,189,853
2,188,092
Intangible assets, net of amortization
834,743
894,419
Long-term notes receivable
--
240,971
Pledged notes receivable
--
407,149
Other assets
620,127
613,617
Total Assets
$ 14,021,730
$ 12,781,424
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Borrowings – short-term and maturing
within one year
$ 2,177,097
$ 2,632,982
Notes and accounts payable
2,282,930
1,506,543
Accrued expenses
856,836
703,407
Other payables
511,361
283,080
Deposits received
350,801
498,266
Receipts in advance
4,316,920
2,996,558
Income tax payable
180,864
97,142
Obligation under capital leases due within one year
---
8,659
Total current liabilities
10,676,809
8,726,637
Borrowings maturing after one year
1,848,709
1,651,825
Receipts in advance
---
1,124,809
Obligation under capital leases
---
---
Deposits received
939,546
689,530
Accrued pension liabilities
219,917
160,907
Total liabilities
13,684,981
12,353,708
Minority Interests
53,139
33,791
(cont.)
- Continued
(Unaudited)
June 30, 2005
December 31, 2004
(Unaudited)
(Audited)
Stockholders’ Equity:
Capital Stock
7,669,308
7,669,308
Additional paid in capital
194,021
194,021
Statutory reserve
65,320
65,320
Retained deficit
(7,570,531)
(7,312,074)
Accumulated other comprehensive
loss
(74,508)
(222,650 )
Total stockholders’ equity
283,610
393,925
Total Liabilities and Stockholders’ Equity
$
14,021,730
$
12,781,424
The
June 30, 2006 | December 31, 2005 | ||||||
| (Unaudited) | |||||||
| Commitments and contingencies (Note 17) | |||||||
| Minority interest | 42,549 | 28,627 | |||||
| Shareholders’ equity | |||||||
| Common stock, no par share: | |||||||
| 25,000,000 shares authorized; 18,999,703 shares issued and outstanding at June 30, 2006 and December 31, 2005 | 7,669,308 | 7,669,308 | |||||
| Additional paid-in capital | 194,021 | 194,021 | |||||
| Legal reserve | 65,320 | 65,320 | |||||
| Accumulated deficit | (8,925,276 | ) | (9,010,356 | ) | |||
| Accumulated other comprehensive loss | (284,533 | ) | (244,864 | ) | |||
| Total shareholders’ equity | (1,281,160 | ) | (1,326,571 | ) | |||
| Total liabilities and shareholders’ equity | $ | 11,255,638 | $ | 10,982,937 | |||
#
Statements of Operations Statements of OperationsBalance Sheets(Unaudited)Six Month Periods Ended June 30,20052004Operating Revenue: Sales of goods $ 3,549,331 $ 3,216,779 Franchising income 1,308,046 1,192,740 Other operating revenue 306,348 203,914 Total net operating revenue5,163,7254,613,433Operating costs: Cost of goods sold 1,507,173 1,324,923 Cost of franchising 176,655 245,504 Other operating costs 177,271 135,739 Total operating costs1,861,0991,706,166Gross profit 3,302,626 2,907,267Advertising costs (56,854) ( 454,492)Other operating expenses(3,250,544) (3,430,104)Loss from operations (4,772) (977,329)Interest expenses, net (115,983) (64,936)Share of income of investments 12,483 31,425Other non-operating income, net53,62481,770Loss before income taxes and minority interest (54,648) (929,070)Provision for taxes ( 184,750) (1,222)Loss before minority interest (239,398) (930,292)Minority interestin income (19,059) ---Net loss $(258,457) $ (930,292)Loss per share – basic and diluted $ ( .01)$ ( .05)Weighted-average shares used to compute loss per share – basic and diluted18,999,70318,999,703 The Three months ended June 30, 2006 2005 (Unaudited) Operating Revenue Sales of goods $ 1,309,033 $ 1,174,176 Franchising income 688,141 710,121 Other operating revenue (70,988 ) 156,436 Total net operating revenue 1,926,186 2,040,733 Operating costs Cost of goods sold (562,738 ) (579,442 ) Cost of franchising (91,242 ) (63,042 ) Other operating costs (39,326 ) (103,075 ) Total operating costs (693,306 ) (745,559 ) Gross profit 1,232,880 1,295,174 Advertising costs (14,747 ) (23,491 ) Other operating expenses (1,429,510 ) (1,465,044 ) (Loss) income from operations (211,377 ) (193,361 ) Interest expenses, net (86,752 ) (56,730 ) Share of income (loss) of investments (491 ) Other non-operating income (loss), net 38,910 102,563 (Loss) income before income taxes (259,710 ) (147,528 ) Benefit (provision) for taxes (18,428 ) ( 41,297 ) (Loss) income after income taxes (278,138 ) (188,825 ) Minority interest income 5,359 (19,202 ) Net (loss) income $ (272,779 ) $ (208,027 ) (Loss) earnings per share - basic and diluted $ (0.014 ) $ ( 0.01 ) Weighted-average shares used to compute (loss) earnings per share - basic and diluted 18,999,703 18,999,703 are an integral part of theseto Condensed Consolidated Financial Statements.Balance Sheets(Unaudited)Three Month Periods Ended June 30,20052004Operating Revenue Sales of goods$1,174,176$ 1,186,926 Franchising income 710,121 664,608 Other operating revenue 156,436 151,561 Total net operating revenue 2,040,7332,003,095Operating costs Cost of goods sold 579,442 650,418 Cost of franchising 63,042 113,403 Other operating costs103,075 78,544 Total operating costs745,559842,365Gross profit 1,295,174 1,160,730Advertising costs (23,491) (327,850)Other operating expenses(1,465,044 ) (1,413,680)Loss from operations (193,361) (580,800)Interest expenses, net (56,730) (43,171)Share of loss of investments--- (15,542)Other non-operating (loss) income, net102,56338,097Loss before income taxes and minority interest income (147,528) (601,416)Provision for taxes(41,297)( 1,222)Loss before minority interest (188,825) (602,638)Minority interest income(19,202 ) ---Net loss$ (208,027) $ (602,638)Loss per share – basic and diluted $ ( .01) $ ( .03)Weighted-average shares used to computer loss per share-basic and diluted18,999,703 18,999,703The Six months ended June 30, 2006 2005 (Unaudited) Operating Revenue Sales of goods $ 3,529,529 $ 3,549,331 Franchising income 1,194,688 1,308,046 Other operating revenue 174,496 306,348 Total net operating revenue 4,898,713 5,163,725 Operating costs Cost of goods sold (1,370,225 ) (1,507,173 ) Cost of franchising (171,367 ) (176,655 ) Other operating costs (81,577 ) (177,271 ) Total operating costs (1,623,169 ) (1,861,099 ) Gross profit 3,275,544 3,302,626 Advertising costs (17,288 ) (56,854 ) Other operating expenses (2,844,640 ) (3,250,544 ) (Loss) income from operations 413,616 (4,772 ) Interest expenses, net (120,125 ) (115,983 ) Share of income (loss) of investments (9,085 ) 12,483 Other non-operating income (loss), net 1,175 53,624 (Loss) income before income taxes 285,581 (54,648 ) Benefit (provision) for taxes (186,909 ) ( 184,750 ) (Loss) income after income taxes 98,672 (239,398 ) Minority interest income (13,592 ) (19,059 ) Net (loss) income $ 85,080 $ (258,457 ) (Loss) earnings per share - basic and diluted $ 0.004 $ ( 0.01 ) Weighted-average shares used to compute (loss) earnings per share - basic and diluted 18,999,703 18,999,703 are an integral part of theseto Condensed Consolidated Financial Statements.
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Statements of Stockholders’ Equity Statements of Cash Flows Financial Statements statements. 2005 $277,424. franchising income. borrowings from shareholders. 2005 $131,852. franchising income. principally due to decreases in salary expenses resulting from a reduction in employee headcount in our Taiwan operations. borrowings from shareholders. Taiwan and Shanghai. which was $386,928 during the six months ended June 30, 2006 compared to $1,625,505 during the six months ended June 30, 2005. 2006. $2,394,085 and $4,026,406, respectively. 2005 amounted to $16,403, and $40,880, respectively. future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. fluctuations. implemented: OTHER INFORMATIONKidBalance Sheets(Unaudited)Six Month Periods Ended June 30 ,20052004Cash flows from operating activities:Net loss$ (258,457)$ (930,292) Adjustments Common Stock Additional Accumulated other Amount comprehensive loss Total Balance, December 31, 2004 18,999,703 $ 7,669,308 $ 194,021 $ 65,320 $ (7,312,074 ) $ (222,650 ) $ 393,925 Net loss for 2005 - - - - (1,698,282 ) - (1,698,282 ) Cumulative translation adjustment - - - - - (22,214 ) (22,214 ) Comprehensive loss (1,720,496 ) Balance, December 31, 2005 18,999,703 $ 7,669,308 $ 194,021 $ 65,320 $ (9,010,356 ) $ (244,864 ) $ (1,326,571 ) Net income for the six months ended June 30, 2006 (Unaudited) - - - - 85,080 - 85,080 Cumulative translation adjustment (Unaudited) - - - - - (39,669 ) (39,669 ) Comprehensive loss (Unaudited) 45,411 Balance, June 30, 2006 (Unaudited) 18,999,703 $ 7,669,308 $ 194,021 $ 65,320 $ (8,925,276 ) $ (284,533 ) $ (1,281,160 ) reconcile net loss to net cash used in operating activities: Depreciation and amortization 223,862 188,553 Allowance for sales returns 92,463 (13,126) Allowance for doubtful debts 110,063 130,866 Provision for (reversal of) allowance for loss on inventory obsolescence and slow-moving items 95,147 34,970 Minority interest in income 19,059 --- Share of gain of investments (12,483) (31,425) (Increase)/decrease in: Notes and accounts receivable(2,371,422) 402,524 Inventories (139,918) (185,880) Other receivables (88,654) (202,283) Prepayments and other current assets (169,392) 9,484 Deferred income tax assets (34,147) 3,306 Other assets ( 6,510) (86,257) Increase/(decrease) in: Notes and accounts payable 776,387 219,374 Accrued expenses 153,429 ( 36,063) Other payables 228,281 205,497 Receipts in advance 195,553 (202,230) Income taxes payable 83,722 (3,306) Deposits received 102,551 99,576 Accrued pension liabilities59,010 8,882Net cash used in operating activities(941,456) (387,830)Cash flows from investing activities Purchases of property and equipment (165,947) ( 47,371) Proceeds from disposal of property and equipment --- --- Bank fixed deposits – pledged (61,519) (111,678) Pledged notes receivable 1,625,505 11,407 Collection of long term notes 240,971 --- Increase in interest in associates ( 24,977) --- Acquisition of long term investments --- (103,346)Net cash used in investing activities1,614,033 (250,988)KidCondensed Consolidated Financial Statements.Balance Sheets(Unaudited)Six Months Periods Ended June 30 ,20052004Cash flows from financing activities Proceeds from bank borrowings 795,968 2,865,929 Repayment of bank borrowings(1,054,969) (2,346,878) Proceeds from capital leases 57,086 (13,933) Repayment of capital leases (65,748 --- Repayment of loan from officers/stockholders ---- (585,006)Net cash consumed by financing activities(267,657)(79,888)Net increase (decrease) in cash and cash equivalents 404,920 (718,706)Effect of changes in exchange rate on cash and 148,142 (12,829) cash equivalentsCash and cash equivalents at beginning of period213,564 1,273,723Cash and cash equivalents at end of period$ 766,626 $ 542,188Supplemental disclosure of cash flows information:Cash payments for income taxes were $86,801for the 2005 period and $ 1,222 in the 2004 period. Cash payments for interest were $ 106,178 in the 2005 period and $ 64,936 in the 2004 period. None of the interest was capitalized.The Six months ended June 30, 2006 2005 (Unaudited) Cash flows from operating activities Net (loss) income $ 85,080 $ (258,457 ) Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation of property and equipment 93,908 223,862 Amortization of intangible assets 83,873 Allowance for sales returns 2,356 92,463 Allowance for doubtful debts 609,912 110,063 Provision (reversal) of allowance for loss on inventory obsolescence and slow-moving items 90,588 95,147 Minority interests 13,592 19,059 Share of loss (gain) of investments 9,085 (12,483 ) (Increase)/decrease in: Notes and accounts receivable (1,369,563 ) (2,371,422 ) Inventories 456,634 (139,918 ) Other receivables 104,051 (88,654 ) Prepayments and other current assets 98,622 (169,392 ) Deferred income tax assets (50,939 ) (34,147 ) Other assets 225,219 ( 6,510 ) Increase/(decrease) in: Notes and accounts payable (35,104 ) 776,387 Accrued expenses 176,759 153,429 Other payables (541,031 ) 228,281 Receipts in advance 904,189 195,553 Income taxes payable 103,224 83,722 Deferred liability (137 ) — Deposits received 516,262 102,551 Other current liabilities 95,652 — Accrued pension liabilities (5,971 ) 59,010 Net cash provided by (used in) operating activities 1,666,261 (941,456 ) Cash flows from investing activities Purchase of property and equipment (26,115 ) (165,947 ) Proceeds from disposal of property and equipment — — Amount due from stockholder/director — — Prepayment of long-term investments — — Acquisition of long-term investments — — Collection of long term notes 240,971 Increase in interest in associates ( 24,977 ) Bank fixed deposits - pledged (7,302 ) (61,519 ) Pledged notes receivable 386,928 1,625,505 Advances to ex-CFO (1,544,244 ) Repayments of advances to ex-CFO 1,544,244 Net cash provided by investing activities 353,511 1,614,033 Six months ended June 30, 2006 2005 (Unaudited) Cash flows from financing activities Proceeds from bank borrowings $ 215,463 $ 795,968 Proceeds from loan from a stockholder — — Repayment of bank borrowings (1,026,017 ) (1,054,969 ) Proceeds from capital leases — 57,086 Repayment of capital leases — (65,748 ) Repayment of loan from officers/stockholders (509,847 ) — Net cash used in financing activities (1,320,401 ) (267,657 ) Net increase in cash and cash equivalents 699,371 404,920 Effect of exchange rate changes on cash and cash equivalents (27,324 ) 148,142 Cash and cash equivalents at beginning of period 613,391 213,564 Cash and cash equivalents at end of period $ 1,285,438 $ 766,626 are an integral part of theseto Condensed Consolidated Financial Statements.#KidBalance Sheets(Unaudited)1.unaudited interim condensed consolidatedaccompanying financial statements of Kid Castle Education Corporation (“the Company”)data as of June 30, 2005,2006 and for the six month and three month periodsmonths ended June 30, 20052006 and 2004,2005 have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. The results of operations for the quarter ended June 30, 2005 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2005.Certain information and disclosures normally included in the notes to financial statementsAmerica have been condensed or omitted as permitted by thepursuant to such rules and regulations ofregulations. However, the Securities and Exchange Commission, althoughGroup believes that the Company believes the disclosure isdisclosures are adequate to make the information presented not misleading. The accompanying unauditedThese financial statements should be read in conjunction with the financial statements ofand the Companynotes thereto included in the Group’s audited annual financial statements for the year ended December 31, 2005. As Previously Reported Advances to ex-CFO (1,544,244 ) Repayments of advances to ex-CFO 1,544,244 Net cash (used in) provided by investing activities 1,614,033 1,614,033 Land Indefinite Buildings 50 Furniture and fixtures 3-10 Transportation equipment 2.5-5 Miscellaneous equipment 5-10 (Unaudited) Notes and accounts receivable - Third parties $ 3,959,039 $ 2,944,574 - Related parties (NOTE 10) 421,793 401,184 Total 4,380,832 3,345,758 Allowance for doubtful accounts and sales returns (1,371,211 ) (752,482 ) Notes and accounts receivable, net $ 3,009,621 $ 2,593,276 (Unaudited) Work in process $ 107,138 $ 127,001 Finished goods and other merchandises 2,300,907 2,696,942 2,408,045 2,823,943 Less: Allowance for obsolete inventories and decline of market value (854,649 ) (754,451 ) $ 1,553,396 $ 2,069,492 (Unaudited) Other receivables - third parties: Tax paid on behalf of landlord $ — $ 2,013 Advances to staff 192,687 125,590 Grants from Market Information Center Receivables from Shanghai Wonderland Educational Resources Co., Ltd. (“Shanghai Wonderland”) (Note (i)) 372,065 368,528 Other receivables 69,396 86,141 Less : Allow for doubtful accounts (372,065 ) (368,528 ) Sub-total 262,083 213,744 Other receivables - related parties (NOTE 10) 9,686 9,319 $ 271,769 $ 223,063 (i) Shanghai Wonderland was a distributor of the Group. The Group loaned Shanghai Wonderland RMB$450,000 (approximately $54,000), RMB$500,000 (approximately $60,000) and RMB$2,500,000 (approximately $310,000) for operations in December 2003, July 2005 and August 2005, respectively. The identified loans were unsecured and bore no interest. Shanghai Wonderland has fully repaid the loan of RMB$450,000 in December 2004 and January 2005. As of June 30, 2006, Shanghai Wonderland still owes the Group a balance of RMB$3,000,000 (approximately $372,065). Such sum has now been itemized and recorded as "allowance for doubtful accounts" compared to its prior recognition as "Other receivables". (Unaudited) Prepayments $ 287,922 $ 399,659 Temporary payments 4,409 11,038 Tax recoverable — — Prepaid interest 59 — Others 26,635 829 $ 319,025 $ 411,526 (Unaudited) Investment cost $ 93,834 $ 92,942 Share of loss (32,873 ) (40,803 ) $ 60,961 $ 52,139 Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (ii)) Investment cost $ 87,579 $ 86,746 Share of loss (94,997 ) (80,360 ) $ (7,418 ) $ 6,386 Lanbeisi Education &Culture Industrial Co., Ltd (“Lanbeisi”) (Note (iii)) Investment cost $ 45,040 $ 44,612 Share of loss (35,864 ) (31,979 ) $ 9,176 $ 12,633 Total $ 62,719 $ 71,158 (i) (ii) 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. (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, 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. A. Names of related parties and relationship with the Group are as follows: Mr. Kuo-An Wang In October 2005 resigned as chairman of the board of directors, president and chief executive officer of the Company. On October 18, 2006 resigned as director of the board of directors. Mr. Yu-En Chiu On June 1, 2006 resigned as chief financial officer and director of the board of directors. Mr. Chiu remained the Chairman of PRC operation until February 28, 2007, Mr. Min-Tan Yang Director and chief executive officer of the Company since November 2, 2005. Mr. Suang-Yi Pai Director and chairman of the board of directors since November 2, 2005. Private Kid Castle Short Term Language Cram School (“PKC Language”) Its chairman of the board of directors is Mr. Yu-En Chiu. Taipei Country Private Kid Castle Short Term Language Cram School (“TCP PKC”) Its chairman of the board of directors is Mr. Yu-En Chiu. Taipei Country Private Chevady Preschool (“TCP Chevady”) Its chairman of the board of directors is Mr. Yu-En Chiu. Taipei Country Private Chung-hua Preschool (“TCP Chung-hua”) Its chairman of the board of directors is Mr. Yu-En Chiu. Taipei Country Private Wonderland Preschool (“TCP Wonderland”) Its chairman of the board of directors is Mr. Yu-En Chiu. Taipei City Private Kid Castle Preschool (“TCP Kid Castle”) Its chairman of the board of directors is Mr. Yu-En Chiu. Taipei Country Private Kid’s Castle Yin Cyun Preschool(“TCP Yin Cyun”) Its chairman of the board of directors is Mr. Min-Tan Yang. Taipei Country Private Yin Tzu Preschool (“TCP Yin Tzu”) Its chairman of the board of directors is Mr. Min-Tan Yang. Private Kuan Lung Short Term Language Cram School (“Kuan Lung Language”) Its chairman of the board of directors is Mr. Min-Tan Yang. Taipei City Private Chu Sheng Preschool (“TCP Chu Sheng”) Its chairman of the board of directors is Mr. Min-Tan Yang. Taipei Country Private Chu Yao Preschool (“TCP Chu Yao”) Its chairman of the board of directors is Mr. Min-Tan Yang. Private Liang Yu Language & Computer School ("Liang Yu Language") Its chairman of the board of directors is Mr. Min-Tan Yang. 21st Century Publishing House (“Publishing House”) A joint venture partner (third-party after July 2004). Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”) An investment accounted for under the equity method before July 2, 2004. It has become a consolidated entity after July 2, 2004. 21st Century Kid Castle Language and Education Center (“Education Center”) An investment accounted for under the equity method. Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) An investment accounted for under the equity method. Sichuan Lanbeisi Kid Castle Education Development Co., Ltd. (“Lanbeisi”) An investment accounted for under the equity method. B. Significant transactions and balances with related parties are as follows: (Unaudited) (i) - PKC Language $ — $ 5,425 - TCP PKC 5,425 - TCP Chung-hua 3,468 15,508 - TCP Chevady 4,917 - TCP Wonderland 4,917 - TCP Kid Castle 9,823 - Kuan Lung Language 7,924 - TCP Chu Yao 18,212 - TCP Chu Sheng 7,636 - TCP Yin Cyun 41,636 - TCP Yin Tzu 21,835 - Liang Yu Language 27,197 - English School 10,532 1,838 - Tianjin Consulting 16,802 176 - Lanbeisi 9,907 3,947 $ 165,149 $ 51,976 (ii) - CCE $ 1,242 $ 951 $ 1,242 $ 951 (iii) - TCP Kid Castle $ — $ 6,811 - TCP Chung-Hua - TCP Wonderland 3,406 - TCP Chu Sheng 5,810 - TCP Yin Cyun 2,556 - TCP Yin Tzu 5,577 - Liang Yu Language $ 1,242 $ — $ 15,185 $ 10,217 (iv) The two directors and stockholders, Mr. Min-Tan Yang and Mr. Suang-Yi Pai, have given personal guarantees to certain bank loans and borrowings. Please see the details as described in Note 12 - Bank Borrowings. (v) Accounts and notes receivable - related parties: Name of related parties (Unaudited) - PKC Language 39,007 26,147 - TCP PKC 39,007 52,294 - TCP Chung-hua 51,131 53,665 - TCP Chevady 48,290 48,685 - TCP Wonderland 48,290 48,685 - TCP Kid Castle 56,531 58,172 - Kuan Lung Language 2,050 - TCP Chu Yao 20,260 - TCP Chu Sheng 12,706 - TCP Yin Cyun 39,443 33,585 - TCP Yin Tzu 14,451 29,062 - Liang Yu Language 9,145 12,071 - Education Center - Tianjin Consulting 18,193 20,826 - Lanbeisi 23,289 17,992 $ 421,793 $ 401,184 (vii) Other receivables - related parties: Name of related parties (Unaudited) Amount due from Publishing House (Note 1) Amount due from Education Center (Note 2) Amount due from Tianjin Consulting (Note 3) Amount due from Lanbeisi (Note 4) 1. As of December 31, 2003, the amount due from Publishing House consists primarily of amounts due under a loan of RMB$1,000,000 (approximately $120,000 from the Group to Publishing House for the incorporation of Culture Media). The loan is unsecured and bears no interest. Pursuant to the terms of the loan, Publishing House was obligated to repay the loan on or before June 27, 2004 or it would be required to transfer its 40% ownership interest in Culture Media to the Group. On July 2, 2004, as Publishing House did not repay the loan, the Group decided to take over the 40% ownership from Publishing House, and therefore, the Group’s ownership in Culture Media has increased to 90% and Culture Media has become a consolidated entity. 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 interest. 3. 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 interest. (viii) Significant transactions and balances with related parties are as follows: Mr. Kuo-An Wang $ $ 60,911 Mr. Min-Tan Yang (note 1) $ 840,789 $ 840,789 Mr. Suang-Yi Pai $ $ 76,138 Education Center $ 520 $ Lanbeisi $ 128 $ $ 841,437 $ 977,838 (Unaudited) Gross carrying amount Franchise $ 1,050,122 $ 1,036,178 Copyrights 617,303 609,106 1,667,425 1,645,284 Less: Accumulated amortization Franchise (656,326 ) (595,802 ) Copyrights (385,815 ) (350,236 ) (1,042,141 ) (946,038 ) $ 625,284 $ 699,246 2007 2008 2009 2010 Notes (Unaudited) Bank term loans (i) Short-term unsecured bank loans (ii) Mid-term loan (iii) Mid-term secured bank loan (iv) Less: Balances maturing within one year included in current liabilities Bank term loans Short-term unsecured bank loans Mid-term loan Notes (Unaudited) Mid-term secured bank loan Bank borrowings maturing after one year (i) This line item represents bank loans that have been secured by a pledge of post-dated checks amounting to $590,761 and $873,215 that we have received from franchisees and the Group’s bank deposits of $47,301 and $46,456 as of June 30, 2006 and December 31, 2005, respectively, for the purpose of financing operations. The repayment dates of the loans coincided with the maturity dates of the corresponding pledged post-dated checks. The weighted average interest rates were 6.055% and 5.88% per annum as of June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, the interest expenses charged to operations amounted to $12,887 and $27,775, respectively. (ii) In August 2005, KCIT obtained an unsecured short-term loan in the amount of $304,553 and was extended on February 2006, which was collateralized by notes receivables in the amount approximately the loan balance, the KCIT’s refundable deposits of $60,911 and notes receivables approximating 30% of loan balance, and guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the lending bank’s basic borrowing rate plus 3.29% per annum and is due and payable in August 2006. The applicable interest rate is approximately 5% per annum as of June 30, 2006. In April 2006, KCIT obtained an unsecured short-term loan in the amount of $214,173, which was guaranteed by two directors and stockholders of the Group, to finance the Group’s operations. The loan bears interest at the Taiwan basic borrowing rate plus 1.65% per annum and was fully settled in March 2007. For the six months ended June 30, 2006 and 2005, the interest expense charged to operations from the above six unsecured short-term loans amounted to $14,622 and $28,504, respectively. (iii) In June 2005, KCIT obtained a loan of $609,106 from a financial institution, which bore interest at 5% per annum and was repayable in 18 equal monthly installments, to finance the Group’s operations. The last installment was due on December 13, 2006. As of June 30, 2006, the loan was collateralized by the KCIT’s refundable deposits of 121,821 and notes receivables approximating 20% of loan balance, and the Group repaid $406,376. For the six months ended June 30, 2006 and 2005, the interest expenses charged to operations from the aforementioned loans amounted to $8,600 and $34,836, respectively. (iv) In August 2005, KCIT obtained a bank loan in the principal amount of $944,115 to repay its mortgage loan that was originally granted by a bank on August 10, 2005 and to finance its operations. The loan is secured by the Group’s land and buildings and personal guarantees provide by two directors of the Group. The loan bears interest at the lending bank’s basic fixed deposit rate plus 0.69% between annum for the year 2005 to 2007, and plus 1.69% from the annum for the year 2008. On August 10, 2005, the bank extended the term of the loan and the Group repays the loan, which is now repayable in 84 equal monthly installments starting August 10, 2012. As of June 30, 2006, the applicable interest rate is approximately 2.4%, the Group repaid $44,287 In February 2005, KCIT obtained a new bank loan of $456,830, which bears interest at 6% per annum and is repayable in 36 equal monthly installments. The last installment will be due on February 2, 2008, was collateralized by notes receivables in 30% approximating the loan balance, and guaranteed by two directors of the Group. As of June 30, 2006, the Group repaid $196,724 In August 2005, KCIT obtained a new bank loan of $213,187, which bears interest at 3.7% per annum, and is repayable in 60 equal monthly installments. The last installment will be due on August 10, 2010, and guaranteed by two directors of the Group. As of June 30, 2006, the Group repaid $33,511 For the six months ended June 30, 2006 and 2005, the interest expense charged to operations amounted to $25,378 and $29,298, respectively. Notes (Unaudited) Current liabilities: Sales deposits received (i) Franchising income received (ii) Subscription fees received (iii) Others Long-term liabilities: Franchising income received (ii) (i) The balance represents receipts in advance from customers for goods sold to them. (ii) (iii) The balance represents subscription fees received in advance for subscription of magazines published by the Group. (Unaudited) Service cost $ $ 25,500 Interest cost 6,181 4,884 Expected return on assets (2,455 ) (1,697 ) Amortization of unrecognized loss 1,496 428 Net periodic pension cost $ 5,222 $ 29,115 Taiwan The PRC Total Corporate Eliminations Consolidated Revenue External revenue Inter-segment revenue Profit (loss) from Operations Capital expenditures June 30, 2006 December 31, 2005 June 30, 2006 December 31, 2005 June 30, 2006 December 31, 2005 June 30, 2006 December 31, 2005 June 30, 2006 December 31, 2005 June 30, 2006 December 31, 2005 Total assets Years ending December 31, 2007 $ 244,847 2008 61,481 2009 20,494 2010 2011 $ 326,822 2004.#ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONForward Looking Statements.Certain of the statements contained in this Quarterly Report on Form 10-Q includes "forward looking statements". All statements other than statements of historical facts included in this Form 10-Q regarding the Company's financial position, business strategy, and plans and objectives of management for future operations and capital expenditures, and other matters, are forward looking statements. These2005. We do not intend to update these forward-looking statements are based upon management's expectations of future events. Although we believe the expectations reflected in such forward looking statements are reasonable, there can be no assurances that such expectations will prove to be correct. Additional statements concerning important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in the Cautionary Statements section and elsewhere in our Form 10-K for the period ended December 31, 2 004. Readers are urged to refer to the section entitled “Cautionary Statements” and elsewhere in our Form 10-K for a broader discussion of these statements, risks, and uncertainties. All written and oral forward looking statements attributable to us or persons acting on our behalf subsequent to the date of this Form 10-Q are expressly qualified in their entirety by the referenced Cautionary Statements.exceptio nalexceptional English language and computer skills, and to provide a pre-school education program.li abilitiesliabilities 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.Recognition. 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 way as sales to our direct customers. We estimate sales returns and discounts based on historical experience and record them as reductions to revenues.Accounts. 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.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.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.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.Assets. 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.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 in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability. Actual results may differ significantly from management’s estimate.20052006 and 2004is comprisedconsists of sales of goods, franchising income and other operating revenue. Total net operating revenues increaseddecreased by $37,638,$114,547, or 1.9%6%, to $1,926,186 for the three months ended June 30, 2006 from $2,040,733 for the three months ended June 30, 2005, from $2,003,095 forincluding the three months ended June 30, 2004. The increase for the 2005 period reflects a decrease in sales of goods of $12,750, and an increase of$134,857, the decrease in franchising income of $45,513$21,980 and the other operating revenues of $4,875, all from the amounts of the comparable prior period in 2004.decreaseincrease in sales of goods, of $12,750 or 1.1%, from $1,186,926 for the three months ended June 30, 2004 to $1,174,176 for the three months ended June 30, 2005 was mainly due to the temporary suspension of publishing of Kids Talk magazine in April, 2005 and the termination of an authorized direct marketing distributor in Taiwan. Franchising income. The increase in franchising income of $45,513 or 6.8%, from $664,608$1,309,033 for the three months ended June 30, 20042006, or 11%, was mainly due to increase in our Taiwan operations.increasedecrease in franchising income from certain schools that exceeded the number of our franchised schoolsincreases in Shanghai.increaseddecreased by $4,875,$227,424, or 3.2%145%, to ($70,988) for the three months ended June 30, 2006 from $156,436 for the three months ended June 30, 2005 from $151,5612005. The decrease was mainly due to the reclassification of the copyright revenue of $111,244 to Franchising income.2004. The increase was mainly due to revenue generated2006 from our services rendered in connection with the construction and design layout of our franchised schools and sales of education-related equipment to our franchised schools. Operating Costs. Operating costs are comprised o f cost of goods sold, cost of franchising and other operating costs. For the three month period ending June 30, 2005, total operating costs decreased by $96,806 or 11.5% from $842,365 for the comparable period in 2004. The decrease for the 2005 period reflects a decrease of $70,976 in costs of goods sold, a decrease of $50,361 in costs of franchising, and increase of $24,531 in other operating costs, all from the amounts of the comparable prior period in 2004. Cost of Goods Sold. The decrease of costs of goods sold of $70,976 or 10.9% from $650,418$1,295,174 for the three months ended June 30, 20042005. The decrease in gross profit was attributable to $579,442the decrease in revenue.isprincipally due mainly to decreasedecreases in sales of goods. Costs of Franchising. The decreasesalary expenses resulting from a reduction in the costs of franchising of $50,361employee headcount in our Taiwan and Shanghai operations.44.4% from $113,4032%, to $1,429,510 for the three months ended June 30, 2004 to $ 63,042 for the three months ended June 30, 2005 is due mainly to cost control in our Shanghai operation. Other Operating costs. The increase in other operating costs of $24,531 or 31.2%2006 from $78,544 for the three months ended June 30, 2004 to $103,075 for the three months ended June 30, 2005 is due mainly to increase in other operating revenue. Gross Profit. Gross profit increased by $134,444, or 11.6%, to $1,295,174 for the three months ended June 30, 2005 from $1,160,730 for the three months ended June 30, 2004. The increase in gross profit was attributable to increase in Franchise income and decrease in our franchising costs for the same period. Advertising Costs. Advertising costs decreased by $304,359, or 92.8%, to $23,491 for the three months ended June 30, 2005 from $327,850 for the three months ended June 30, 2004. This decrease was mainly due to additional expenses in connection with promotion of the Company’s new products during the three months ended June 30, 2004. Other Operating Expenses. Other operating expenses which reflects general and administrative and selling expenses increased by $51,364, or 3.6%, to $1,465,044 for the three months ended June 30, 2005, principally due to decreases in salary expenses resulting from $1,413,680a reduction in employee headcount in our Taiwan operations.2004 due to officei mprovements for our Shanghai office and move of a warehouse for our Shanghai operation. Loss From Operations. Loss2006 from operations decreased $387,439 or 66.7% from $580,800 for the three months ended June 30, 2004 to $193,361 for the three months ended June 30, 2005 for the reasons discussed above. Interest Expenses, Net. Net interest expenses increased by $13,559, or 31.4%, to $56,730 for the three months ended June 30, 2005, from $43,171 for the three months ended June 30, 2004, primarily due to the increase in bank borrowings that occurred during the three months ended June 30, 2005. Other non-operating income (net) which reflects changes in valuation of asset due to changes in exchange rate, lease income and penalty received from customers was $38,097 for the 2004 period compared with $102,563 mainly due to changes in exchange rate in favor of the Company.2004 were $41,297, and $1,222, respectively. These provisions for income taxes relate to income taxes resulting from our operations in Taiwan. Net Loss. As a result of the matters described above, we incurred a net loss of $208,027, or $(0.01) per diluted common share, for the three months ended June 30, 2005 as compared to a net loss of $602,638, or $(0.03) per diluted common share, for the three months ended June 30, 2004.20052006 and 2004increaseddecreased by $550,292, or 11.9%$265,012, or5%, to $4,898,713 for the Six months ended June 30, 2006 from $5,163,725 for the sixSix months ended June 30, 2005, from $4,613,433 forincluding the six months ended June 30, 2004. The increase for the 2005 period reflects increasesdecrease in sales of goods of $332,552,$19,802 and the franchising income of $115,306,$113,358 and the other operating revenues of $102,434 all from the amounts of the comparable prior period in 2004.increasedecrease in sales of goods, from $3,216,779 for the six months ended June 30, 2004 to $3,549,331 for the sixSix months ended June 30, 2005 to $3,529,529 for the Six months ended June 30, 2006, or 10.3%0.6%, was mainly due to exchange rate differences.increase in net sales of goods generated from our Shanghai operations offset by a small decrease in sales of good generated from our Taiwan operations. Franchising income. The increase in franchising income from $1,192,740 forcertain schools that exceeded the six months ended June 30, 2004 to $1,308,046 for the six months ended June 30, 2005, or 9.7%, was mainly due to the increaseincreases in the number of our franchised schools in Shanghai.increaseddecreased by $102,434,$131,852, or 50.2%43%, to $306,348$174,496 for the sixSix months ended June 30, 20052006 from $203,914$306,348 for the sixSix months ended June 30, 2004.2005. The increasedecrease was mainly due to revenue generated from our services renderedthe decrease in connection with the construction and design layout of our franchised schools and sales of education-related equipment to our franchised schools. Operating Costs. Operating costs are comprised o f cost of goods sold, cost of franchising and other operating costs. For the six month period ending June 30, 2005, total operating costs increased$154,933$27,082, or 9.1 from $1,706,1660.8%, to $3,275,544 for the comparable period in 2004. The increase for the 2005 period reflects an increase of $182,250 in costs of goods sold, a decrease of $68,849 in costs of franchising, and increase of $41,532 in other operating costs, all from the amounts of the comparable prior period in 2004. Cost of Goods Sold. The increase of costs of goods sold of $182,250 or 13.8% from $1,324,923 for the sixSix months ended June 30, 2004 to $1,507,173 for the for the six months ended June 30, 2005 is due mainly to the sales of new versions of educational materials. Costs of Franchising. The decrease in the costs of franchising of $ 68,849 or 28%2006 from $ 245,504 for the six months ended June 30, 2004 to $ 176,655 for the six months ended June 30, 2005 is due mainly to cost control in our Shanghai operation. Other Operating costs. The increase in other operating costs of $ 41,532 or 30.6% from $ 135,739 for the six months ended June 30, 2004 to $ 177,271 for the six months ended June 30, 2005 is due mainly to increase in other operating revenue. Gross Profit. Gross profit increased by $395,359, or 13.6%, to $3,302,626 for the six months ended June 30, 2005 from $2,907,2672005. The decrease in gross profit was attributable to the decrease in revenue.2004. The increase in gross profit was attributable to increase in franchising income and decrease in our franchising costs for the same period. Advertising Costs. Advertising costs decreased by $397,638, or 87.5%, to $56,8542006 from $3,307,398 for the six months ended June 30, 2005, from $454,492 for the six months ended June 30, 2004. This decrease was mainly due to additional expenses in connection with promotion of the Company’s new products during the three months ended June 30, 2004. Other Operating Expenses. Other operating expenses which reflects general and administrative and selling expenses decreased by $179,560, or 5.2%, to $3,250,544 for the six months ended June 30, 2005 from $3,430,104 for the six months ended June 30, 2004, principally due to decreases in salary expenses resulting from a reduction in employee headcount in our Taiwan and Shanghai operations. Loss From Operations. Loss from operations$972,557by $405,904, or 99.5% from $977,32912%, to $2,844,640 for the six months ended June 30, 2004 to $4,7722006 from $3,250,544 for the six months ended June 30, 2005, for the reasons discussed above.$51,047,$4,142, or 78.6%4%, to $120,125 for the six months ended June 30, 2006 from $115,983 for the six months ended June 30, 2005, from $64,936 for the six months ended June 30, 2004, primarily due to the increase in bank borrowings during the six months ended June 30, 2005 comparing to the six months ended June 30, 2004. Other non-operating income (net) which reflects changes in valuation of asset due to changes in exchange rate, lease income and penalty received from customers was $81,770 for the 2004 period compared with $53,624 due to changes in exchange rate not in favor of the Company.2004 were $184,750, and $1,222, respectively. These provisions for income taxes relate to income taxes resulting from our operations in Taiwan. Net Loss. As a result of the matters described above, we incurred a net loss of $258,457, or $(0.01) per diluted common share, for the six months ended June 30, 2005 as compared to a net loss of $930,292, or $(0.05) per diluted common share, for the six months ended June 30, 2004.2005,2006, our principal sources of liquidity included cash and bank balances of $766,626$1,285,438 which increased from $213,564$613,391 at December 31, 2004, an increase of 553,062.2005. The increase is resultswas mainly due to decreases in expenses of investment in operations in PRC operations occurred during 2004.used in(used in) provided by operating activities was $941,456$1,666,261 and $387,830 during the six months ended June, 2005 and 2004, respectively. The increase during the six months ended June, 2005 was primarily attributed to increase in Prepayments and other current assets. Net cash provided by (used in) investing activities were $1,614,033 and $(250,988)$(941,456) during the six months ended June 30, 2006 and 2005, respectively. Net cash used in operating activities during the six months ended June 30, 2006 was primarily attributed to the net income, increase in receipts in advance and 2004,decrease in notes and accounts receivable.changes$1,260,522 difference was primarily attributable to changes in pledgedless cash provided by the Pledged notes receivable, and collection of long term notes.consumed byused in financing activities during the six months ended June 200530, 2006 was $267,657$1,320,401 as compared to $79,888$267,657 during the six months ended June 30, 2004.2005. The $1,052,744 difference was primarily attributable to the decrease of net proceeds from bank borrowings and no Repaymentuse in repayment of loans toloan from officers/shareholders. The Repayment of loans to officers/shareholders was $585,006stockholders during the six months ended June 30, 2004.2005,2006, we did not engage in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC under the Securities Exchange Act of 1934. Bank borrowing 3,157 1,643 515 147 93 93 666 Pension benefit 29 — — — — — 29 Operating leases 1,644 305 248 222 208 135 526 Total 4,830 1,948 763 369 301 228 1,221 $4,025,806.Equity InvestmentsJoint Ventures On May 28, 2004,Taiwan, and we signed a joint venture agreement with Zhangjhou Yu Hua Educational Investment Co.still maintains the benefit retirement plan (the “Old Plan”), Ltd.which commenced in Henan Province, PRCSeptember 2003 and only applies to establish a company, Henan Kid Castle Education Development Co., Ltd. with registered capitalthe regular employees of RMB$300,000. PursuantKCIT whom were employed before June 2005, as described in Note15 to this joint venture agreement, weour Condensed Consolidated Financial Statements. The benefits expected to be paid in each of the next five fiscal years, and Zhangjhou Yu Hua Educational Investment Co., Ltd. own 65% and 35% interests in Henan Kid Castle Education Development Co., Ltd., respectively. No capital contribution has yet been madethe aggregate for the joint venture as of June 30, 2005. On June 29, 2004, we signedfive fiscal years thereafter are $0 and $29,969, respectively. We also make defined contributions to a joint venture agreement with Li Kai and Zhang Wuen Shouretirement benefits plan for our employees in the PRC to establish a company, Shanxi Kid Castle Education Development Co., Ltd.in accordance with registered capital of RMB$500,000. Pursuant to this joint venture agreement, we , Li Kai and Zhang Wuen Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid Castle Education Development Co., Ltd. No capital contribution has yet beenlocal regulations. The contributions made by us for the joint venture as ofsix months ended June 30, 2005.Operating Leases We have entered into several non-cancelable lease arrangements for administrative office space, warehouse space2006 and sales offices for various lengths of time.wethe Group will continue as a going concern. As we arethe Group is aggressively expanding its business in the PRC and ourthe Group’s PRC operation is still in an emerging stage and has not turned profitable, we ha vethe Group has suffered recurring losses from operations.operations and has a net capital deficiency. The above conditions raise substantial doubt about ourthe Group’s ability to continue as a going concern, if the investment in the PRC does not gradually see returns. TheAs discussed in Note 12 to our Condensed Consolidated Financial Statements, the majority of ourthe Group’s existing loans were guaranteed by two directors of the Group who have expressed their continuous support to usthe Group until other sources of funds have been obtained. Moreover, the Group successfully obtained new bank facilities in the fourth quarter of 2005. Management believes that, with continuous growth in the sales in the PRC, the existing directors’ support and the new bank facilities, wethe Group will have sufficient funds for operations. The financial statements do not include any adjustments to reflect the possible In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed statement until further guidance is issued for its application. The proposed statement will clarify the meaning ofother-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investment accounted for under the cost method. The Group is currently evaluating the effect of this proposed statement on its financial position and results of operations.FASB issued Statement of Financial Accounting Standards (SFAS)Board (“FASB”) issued SFAS No. 151, Inventory“Inventory Costs which(as amended) an amendment of ARB No. 43. This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 willThis statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” It is effective for inventory costs incurred duringall fiscal years beginning after June 15, 2005. We doThe Company does not believeexpect the adoptionimplementation of SFAS No. 151 willthis statement to have a material impact on ourits 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.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKinterest rates andcertain foreign currency exchange rates that may adversely affect our resultsand interest rates. All of operations and financial position. In seekingthese 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 minimize the risks and/or costs associatedmanage risk in connection with such activities, we managefluctuations. changes in interest rates and foreign currency exchange risk and interest rate risk.throughrelated to variable rate bank borrowings. In analyzing the effect of interest rate fluctuations based on the average balances of our regular operating and financing activities. We do not presently use derivative instrumentsoutstanding bank borrowings for fiscal year 2006, we have projected that, if interest rates were to adjustincrease by 1%, the result would be an annual increase in our interest expense of $24,057. This analysis does not take into consideration the effect of changes in the level of overall economic activity on interest rate risk profile. We do not utilize financial instruments for trading or speculative purposes, nor do we utilize leveraged financial instruments.ITEM 4. CONTROLS AND PROCEDURES We are inprocessEffectiveness of identifying, developingDisclosure Controls and implementing measuresProceduresimproveExchange Act Rule 13a-15(b) our management has performed an evaluation of the effectiveness of our disclosure controls and procedures. The term disclosure controls and procedures as defined in Exchange Act Rule Rule 13a-15(e) means controls and in particular, internal controls, including plansother procedures of an issuer that are designed to enhance our resources, systems and training with respectensure that information required to our financial reporting and disclosure responsibilities, and to review our actions withbe disclosed by the audit committee and independent auditors. Since April 2004, we have beenissuer in the process of implementing a system with respectreports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to internal control over financial reporting. In May 2004, we began installing a new ERP system through an application service provider, and we expect the installationensure that information required to be completeddisclosed by an issuer in the fourth quarterreports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.2005. Our CEOcompany funds by a company officer, and other issues noted in our CFO believemanagement’s evaluation, our conclusion is that such measures will helpas of December 31, 2005 our disclosure controls and procedures were ineffective. We are taking steps to improve our disclosure controls and procedures, instituting a new ERP system and engaging an outside accounting firm to advise the Company with respect to setting up internal auditing and other controls and procedures. Based on this information, asThe ERP system is expected to complete its trial run period by end of June 30, 2005, our CEO2007 and our CFO believe that, subjectbecome independently and fully operational. The old system used by the Company would be phased out in the first six months of 2007. The phase out period involves the amalgamation of old data into the new ERP system, providing staff education and training of how to utilize the limitations noted above, our disclosu re controlsnew ERP system as well as parallel running various functions and procedures are effective in ensuring that material information required to be included in Kid Castle’s SEC reportsoperations of the new ERP system along side the old system.made known to them on a timely basis. In May 2005, our accounting manager, who assisted our CFO with ourresponsible for establishing and maintaining adequate internal control over financial reporting, resigned. We areas such term is defined in the processrules promulgated under the Securities Exchange Act of searching for a candidate to hire as1934. Under the supervision and with the participation of our management, including our principal executive, and financial accounting officer, we have conducted an accounting manager to handle our internal control over financial reporting. Although this personnel change caused a temporary interruptionevaluation of the effectiveness of our internal control over financial reporting, we believereporting.ongoinginternal controls and procedures adopted by the Company were inadequate and gave rise to misappropriation of funds as disclosed in our Current Report on Form 8-K filed on June 23, 2006. Among other improvements, we began implementing a comprehensive ERP system that would improve the Company’s internal controls. The ERP system is currently at trial and test-run stage. The required software and hardware input have been fully installed and the system is now running to detect bugs that may reside in the system. The system is expected to be fully operational in third fiscal quarter 2007. The Company believes that full implementation of ourits new system with respect to internal control over financial reporting andERP System will prevent misappropriation of funds by Company employees because the installation of our ERP system have minimized any adverse effect that maywill perform the following functions:· Maintain detailed records and produce comprehensive financial statements on a periodic basis allowing management to review and detect irregular financial activities. · Place different check-points on the progression of ordinary monetary activities of the business. · Delineate individual unit/departmental responsibilities and effectively separate respective departmental transactions so as to avoid intentional misappropriation of funds from taking place. caused by such resignation.· All departments requesting funds must obtain written approval from the Chief Executive Officer or the Chairman of the Board before the accounting department may commence processing payments. · All fund transfer applications must be approved by the applicable department supervisor before the application may be processed. No one can authorize their own application. This is applicable to all staff including staff at the managerial level. · Fund transfer applications in the PRC must additionally be approved by the headquarters in Taiwan. · All fund transfer applications must be accompanied by supporting documentation, such as a copy of the relevant contract copy of the relevant invoice or stock pre-payment statement. · Stock purchases require the approval of the supervisor or manager of the relevant department, the approval of the accounts department, and a stock receipt and suppliers’ certification. Finally the application must be approved by the Chairman of the Board before funds may be released. · All pre-payments must be tracked by the fund applicant and the payments must be cleared within the month of payment or in accordance with the date stipulated in the relevant contract. -ITEM 1. LEGAL PROCEEDINGSITEM 1. ITEM 2. CHANGES IN SECURITIESITEM 1A. NoneITEM 2. ITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 5. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-KA. Exhibits 31.1 Rule 13a-14(a) Certification of Principal Executive Officer 31.2 Rule 13a-14(a) Certification of Principal Financial Officer 32.1 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
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.
32 Certification s of Kuo-An Wang, Chief Executive Officer and 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
On April 15, 2005, we filed a Form 8-K reporting the resignation of Yuanchau Liour as a member of our board of directors and from our Audit Committee which occurred on April 12, 2005.
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
By: /s/ Kuo-An Wang
Name: Kuo-An Wang
Title: Chief Executive Officer
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| By: | /s/ Suang-Yi Pai | ||
Name: Suang-Yi Pai Title: Chief Financial Officer |