UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended: June 30, 2008
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 333-39629
KID
CASTLE EDUCATIONAL CORPORATION
(Exact
name of Registrant as specified in its charter)
|
Florida
|
|
59-2549529
|
|
(State or other jurisdiction of incorporation or organization)
|
|
(IRS Employer Identification No.)
|
8th
Floor, No. 98 Min Chuan Road, Hsien Tien
Taipei,
Taiwan ROC
(Address
of principal executive offices)
011-886-2-2218
5996
(Registrant’s
telephone number, including area code)
NONE
(Former
name, former address and former fiscal year, if changed since last
report)
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 past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
¨
|
|
Accelerated
filer
¨
|
|
|
|
|
|
Non-accelerated
filer
¨
|
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
x
As
of
June 30, 2008, there were 25,000,000 shares of the Registrant’s common stock
outstanding.
FORM
10-Q
KID
CASTLE EDUCATIONAL CORPORATION
TABLE
OF CONTENTS
|
|
|
|
Page
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1. Condensed Consolidated
Financial Statements
|
|
2
|
|
|
a)
Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited)
and
December 31, 2007
|
|
2
|
|
|
b)
Condensed Consolidated Statements of Operations for the six months
ended
June 30, 2008 and June 30, 2007 (unaudited)
|
|
4
|
|
|
c)
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
|
|
6
|
|
|
d)
Condensed Consolidated Statements of Cash Flows for the six months
ended
June 30, 2008 and June 30, 2007 (unaudited)
|
|
7
|
|
|
e)
Notes to Condensed Consolidated Financial Statements
|
|
9
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
19
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
25
|
|
|
Item
4. Controls and Procedures
|
|
26
|
|
PART
II.
|
OTHER
INFORMATION
|
|
25
|
|
|
Item
1. Legal Proceedings
|
|
26
|
|
|
Item
1A Risk Factors
|
|
26
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
27
|
|
|
Item
3. Defaults upon Senior Securities
|
|
27
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
|
27
|
|
|
Item
5. Other Information
|
|
27
|
|
|
Item
6 Exhibits and Reports on Form 8-K
|
|
27
|
|
SIGNATURES
|
|
28
|
PART
I. FINANCIAL INFORMATION
ITEM
1.
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Kid
Castle Educational Corporation
Condensed
Consolidated Balance Sheets
(Expressed
in US Dollars)
|
|
|
(Unaudited)
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and bank balances
|
|
$
|
1,556,642
|
|
$
|
1,238,212
|
|
|
Bank
fixed deposits - pledged (Note11)
|
|
|
27,752
|
|
|
363,562
|
|
|
Notes
and accounts receivable, net (Note 5)
|
|
|
3,034,520
|
|
|
2,453,868
|
|
|
Inventories,
net (Note 6)
|
|
|
1,993,402
|
|
|
2,008,739
|
|
|
Other
receivables (Note 7)
|
|
|
175,881
|
|
|
88,139
|
|
|
Prepayments
and other current assets (Note 8)
|
|
|
733,143
|
|
|
542,794
|
|
|
Pledged
notes receivable (Note 11)
|
|
|
476,317
|
|
|
557,983
|
|
|
Deferred
income tax assets
|
|
|
48,621
|
|
|
42,335
|
|
|
Total
current assets
|
|
|
8,046,278
|
|
|
7,295,632
|
|
|
Deferred
income tax assets
|
|
|
54,062
|
|
|
50,481
|
|
|
Long-term
investments (Note 9)
|
|
|
93,099
|
|
|
58,625
|
|
|
Property
and equipment, net
|
|
|
2,484,622
|
|
|
2,312,065
|
|
|
Intangible
assets, net of amortization (Note 10)
|
|
|
477,259
|
|
|
572,005
|
|
|
Long-term
notes receivable
|
|
|
552,916
|
|
|
420,636
|
|
|
Pledged
notes receivable (Note 11)
|
|
|
319,841
|
|
|
183,453
|
|
|
Other
assets
|
|
|
339,074
|
|
|
268,388
|
|
|
Total
assets
|
|
$
|
12,367,151
|
|
$
|
11,161,285
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Bank
borrowings - short-term and maturing within one year (Note
11)
|
|
$
|
390,697
|
|
$
|
1,212,534
|
|
|
Notes
and accounts payable
|
|
|
1,134,870
|
|
|
389,639
|
|
|
Accrued
expenses
|
|
|
1,200,891
|
|
|
985,764
|
|
|
Other
payables
|
|
|
283,203
|
|
|
573,237
|
|
|
Deposits
received
|
|
|
213,726
|
|
|
912,535
|
|
|
Receipts
in advance (Note 12)
|
|
|
2,897,296
|
|
|
2,372,403
|
|
|
Income
taxes payable
|
|
|
110,099
|
|
|
124,418
|
|
|
Total
current liabilities
|
|
|
6,230,782
|
|
|
6,570,530
|
|
|
Bank
borrowings maturing after one year (Note 11)
|
|
|
1,794,214
|
|
|
1,752,776
|
|
|
Receipts
in advance (Note 12)
|
|
|
1,308,286
|
|
|
1,034,260
|
|
|
Deposits
received
|
|
|
1,504,380
|
|
|
680,694
|
|
|
Deferred
liability
|
|
|
41,425
|
|
|
38,787
|
|
|
Accrued
pension liabilities (Note 13)
|
|
|
429,724
|
|
|
401,893
|
|
|
Total
liabilities
|
|
|
11,308,811
|
|
|
10,478,940
|
|
Kid
Castle Educational Corporation
Condensed
Consolidated Balance Sheets - Continued
(Expressed
in US Dollars)
|
|
|
(Unaudited)
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
202,724
|
|
|
162,343
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock, no par share :
|
|
|
|
|
|
|
|
|
60,000,000
shares authorized; 25,000,000 issued and outstanding at June 30,
2008 and
December 31, 2007
|
|
|
8,592,138
|
|
|
8,592,138
|
|
|
Additional
paid-in capital
|
|
|
194,021
|
|
|
194,021
|
|
|
Legal
reserve
|
|
|
65,320
|
|
|
65,320
|
|
|
Accumulated
deficit
|
|
|
(6,713,965
|
)
|
|
(7,179,418
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(1,042,693
|
)
|
|
(932,027
|
)
|
|
Net
loss not recognized as pension cost
|
|
|
(239,205
|
)
|
|
(220,032
|
)
|
|
Total
shareholders’ equity
|
|
|
855,616
|
|
|
520,002
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
12,367,151
|
|
$
|
11,161,285
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
Kid
Castle Educational Corporation
Condensed
Consolidated Statements of Operations (Unaudited)
(Expressed
in US Dollars)
|
|
|
Three months ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Operating
Revenue
|
|
|
|
|
|
|
Sales
of goods
|
|
$
|
1,590,509
|
|
$
|
1,262,190
|
|
|
Franchising
income
|
|
|
584,614
|
|
|
536,686
|
|
|
Other
operating revenue
|
|
|
489,939
|
|
|
84,277
|
|
|
Total
net operating revenue
|
|
|
2,665,062
|
|
|
1,883,153
|
|
|
Operating
costs
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(714,218
|
)
|
|
(613,973
|
)
|
|
Cost
of franchising
|
|
|
(88,487
|
)
|
|
(10,643
|
)
|
|
Other
operating costs
|
|
|
(629,212
|
)
|
|
(147,784
|
)
|
|
Total
operating costs
|
|
|
(1,431,917
|
)
|
|
(772,400
|
)
|
|
Gross
profit
|
|
|
1,233,145
|
|
|
1,110,753
|
|
|
Advertising
costs
|
|
|
(1,567
|
)
|
|
(88
|
)
|
|
Other
operating expenses
|
|
|
(1,508,823
|
)
|
|
(1,099,786
|
)
|
|
Income(loss)
from operations
|
|
|
(277,245
|
)
|
|
10,879
|
|
|
Interest
expense, net
|
|
|
(25,643
|
)
|
|
(20,948
|
)
|
|
Share
of income of investments
|
|
|
31,856
|
|
|
4,521
|
|
|
Other
non-operating income (loss), net
|
|
|
28,690
|
|
|
238,628
|
|
|
Income(loss)
before income taxes
|
|
|
(242,342
|
)
|
|
233,080
|
|
|
Provision
for taxes
|
|
|
(22,468
|
)
|
|
(20,069
|
)
|
|
Income(loss)
after income taxes
|
|
|
(264,810
|
)
|
|
213,011
|
|
|
Minority
interest income
|
|
|
36
|
|
|
(5,384
|
)
|
|
Net
income(loss)
|
|
$
|
(264,774
|
)
|
$
|
207,627
|
|
|
Earnings(loss)
per share - basic and diluted
|
|
$
|
(0.01
|
)
|
$
|
0.008
|
|
|
Weighted-average
shares used to compute earnings per share - basic and
diluted
|
|
|
25,000,000
|
|
|
25,000,000
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
Kid
Castle Educational Corporation
Condensed
Consolidated Statements of Operations (Unaudited)
(Expressed
in US Dollars)
|
|
|
Six months ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Operating
Revenue
|
|
|
|
|
|
|
Sales
of goods
|
|
$
|
3,954,618
|
|
$
|
3,696,348
|
|
|
Franchising
income
|
|
|
1,140,843
|
|
|
1,090,178
|
|
|
Other
operating revenue
|
|
|
969,125
|
|
|
337,587
|
|
|
Total
net operating revenue
|
|
|
6,064,586
|
|
|
5,124,113
|
|
|
Operating
costs
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(1,721,454
|
)
|
|
(1,530,628
|
)
|
|
Cost
of franchising
|
|
|
(186,796
|
)
|
|
(111,785
|
)
|
|
Other
operating costs
|
|
|
(699,169
|
)
|
|
(196,366
|
)
|
|
Total
operating costs
|
|
|
(2,607,419
|
)
|
|
(1,838,779
|
)
|
|
Gross
profit
|
|
|
3,457,167
|
|
|
3,285,334
|
|
|
Advertising
costs
|
|
|
(23,080
|
)
|
|
(18,173
|
)
|
|
Other
operating expenses-
|
|
|
(3,022,494
|
)
|
|
(2,382,518
|
)
|
|
Income
from operations
|
|
|
411,593
|
|
|
884,643
|
|
|
Interest
expense, net
|
|
|
(48,744
|
)
|
|
(42,617
|
)
|
|
Share
of income of investments
|
|
|
29,787
|
|
|
15,989
|
|
|
Other
non-operating income (loss), net
|
|
|
160,848
|
|
|
371,229
|
|
|
Income
before income taxes
|
|
|
553,484
|
|
|
1,229,244
|
|
|
Provision
for taxes
|
|
|
(59,365
|
)
|
|
(193,011
|
)
|
|
Income
after income taxes
|
|
|
494,119
|
|
|
1,036,233
|
|
|
Minority
interest income
|
|
|
(28,666
|
)
|
|
(48,904
|
)
|
|
Net
income
|
|
$
|
465,453
|
|
$
|
987,329
|
|
|
Earnings
per share - basic and diluted
|
|
$
|
0.019
|
|
$
|
0.039
|
|
|
Weighted-average
shares used to compute earnings per share - basic and
diluted
|
|
|
25,000,000
|
|
|
25,000,000
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
K
id
Castle Educational Corporation
Condensed
Consolidated Statements of Stockholders’ Equity
(Expressed
in US Dollars)
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
Accumulated
other
|
|
Net loss not
|
|
|
|
|
|
|
Number of
shares
|
|
Amount
|
|
capital
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
25,000,000
|
|
$
|
8,592,138
|
|
$
|
194,021
|
|
$
|
65,320
|
|
$
|
(9,056,567
|
)
|
$
|
(330,713
|
)
|
$
|
(98,952
|
)
|
$
|
(634,753
|
)
|
|
Net
income for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,877,149
|
|
|
|
|
|
|
|
|
1,877,149
|
|
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(601,314
|
)
|
|
|
|
|
(601,314
|
)
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,275,835
|
|
|
Repayment
of a liability by issuance of common stock_
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss not recognized as pension cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(121,080
|
)
|
$
|
(121,080
|
)
|
|
Balance,
December 31, 2007
|
|
|
25,000,000
|
|
$
|
8,592,138
|
|
$
|
194,021
|
|
$
|
65,320
|
|
$
|
(7,179,418
|
)
|
$
|
(932,027
|
)
|
$
|
(220,032
|
)
|
$
|
520,002
|
|
|
Net
income for the six months ended June 30, 2008 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465,453
|
|
|
|
|
|
|
|
|
465,453
|
|
|
Cumulative
translation adjustment (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110,666
|
)
|
|
|
|
|
(110,666
|
)
|
|
Comprehensive
loss (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,787
|
|
|
Net
loss not recognized as pension cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(19,173
|
)
|
|
(19,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2008 (Unaudited)
|
|
|
25,000,000
|
|
$
|
8,592,138
|
|
$
|
194,021
|
|
$
|
65,320
|
|
$
|
(6,713,965
|
)
|
$
|
(1,042,693
|
)
|
$
|
(239,205
|
)
|
$
|
855,616
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
K
id
Castle Educational Corporation
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed
in US Dollars)
|
|
|
Six months ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
|
$
|
465,453
|
|
$
|
987,329
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment
|
|
|
112,392
|
|
|
103,364
|
|
|
Impairment
of goodwill
|
|
|
11,386
|
|
|
-
|
|
|
Amortization
of intangible assets
|
|
|
87,179
|
|
|
81,818
|
|
|
Allowance
for sales returns
|
|
|
15,460
|
|
|
2,229
|
|
|
Allowance
for doubtful debts
|
|
|
42,341
|
|
|
12,065
|
|
|
Reversal
of allowance for loss on inventory obsolescence and slow-moving
items
|
|
|
(27,657
|
)
|
|
(199,792
|
)
|
|
Loss
on disposal of PP&E
|
|
|
728
|
|
|
2,579
|
|
|
Minority
interests
|
|
|
28,666
|
|
|
48,904
|
|
|
Share
of income of investments
|
|
|
(29,787
|
)
|
|
(15,989
|
)
|
|
(Increase)/decrease
in:
|
|
|
|
|
|
|
|
|
Notes
and accounts receivable
|
|
|
(521,104
|
)
|
|
(321,355
|
)
|
|
Inventories
|
|
|
175,657
|
|
|
96,853
|
|
|
Other
receivables
|
|
|
(231,287
|
)
|
|
146,021
|
|
|
Prepayments
and other current assets
|
|
|
(150,623
|
)
|
|
(41,895
|
)
|
|
Deferred
income tax assets
|
|
|
(3,527
|
)
|
|
20,982
|
|
|
Other
assets
|
|
|
(51,511
|
)
|
|
(54,065
|
)
|
|
Increase/(decrease)
in:
|
|
|
|
|
|
|
|
|
Notes
and accounts payable
|
|
|
704,574
|
|
|
145,541
|
|
|
Accrued
expenses
|
|
|
156,927
|
|
|
(204,368
|
)
|
|
Other
payables
|
|
|
(276,747
|
)
|
|
32,420
|
|
|
Receipts
in advance
|
|
|
556,481
|
|
|
347,284
|
|
|
Income
taxes payable
|
|
|
(22,270
|
)
|
|
30,376
|
|
|
Deferred
liability
|
|
|
18
|
|
|
1,186
|
|
|
Deposits
received
|
|
|
16,921
|
|
|
66,348
|
|
|
Accrued
pension liabilities
|
|
|
673
|
|
|
6,987
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,060,343
|
|
|
1,294,822
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(131,431
|
)
|
|
(65,597
|
)
|
|
Change
in investments in associated company
|
|
|
-
|
|
|
(25,759
|
)
|
|
Acquisition,
net of cash acquired
|
|
|
-
|
|
|
46,607
|
|
|
Proceeds
from disposal of property and equipment
|
|
|
2,241
|
|
|
118
|
|
|
Prepayment
of long-term investments
|
|
|
(26,535
|
)
|
|
(306,040
|
)
|
|
Acquisition
of long-term investments
|
|
|
-
|
|
|
(544,135
|
)
|
|
Bank
fixed deposits-pledged
|
|
|
353,178
|
|
|
(353,890
|
)
|
|
Pledged
notes receivable
|
|
|
(4,551
|
)
|
|
(301,050
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
192,902
|
|
|
(1,549,746
|
)
|
K
id
Castle Educational Corporation
Condensed
Consolidated Statements of Cash Flows – Continued
(Unaudited)
(Expressed
in US Dollars)
|
|
|
Six months ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
Proceeds
from bank borrowings
|
|
|
108,569
|
|
|
684,836
|
|
|
Proceeds
from loan from related parties
|
|
|
100,049
|
|
|
4,846
|
|
|
Repayment
of bank borrowings
|
|
$
|
(1,069,693
|
)
|
$
|
(270,231
|
)
|
|
Repayment
of loan from stockholders and transactions of related
parties
|
|
|
(42,196
|
)
|
|
(297,262
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(903,271
|
)
|
|
122,189
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
349,974
|
|
|
(132,735
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(31,544
|
)
|
|
(114,821
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,238,212
|
|
|
1,419,873
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,556,642
|
|
$
|
1,172,317
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
K
id
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 Kid Castle Enterprises Limited which was formerly owned by Mr.
Kuo-An Wang and Mr. Yu-En Chiu. Kid Castle Enterprises Limited ceased operations
on December 25, 2003.
On
March
9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment
Property Limited incorporated in the British Virgin Islands, which held the
entire common stock of Higoal Developments Limited (“Higoal”) incorporated in
the Cayman Islands on March 8, 2001. On September 10, 2001, Higoal
established a wholly owned subsidiary, Kid Castle Educational Software
Development Company Limited (“KCES”) in the People’s Republic of China (the
“PRC”). The existing operations of Higoal are principally located in Taiwan and
are being expanded in the PRC. In June 2002, after KCIT undertook a series
of
group restructurings, KCIT became the direct owner of the outstanding shares
of
Higoal. Premier Holding Investment Property Limited was then liquidated in
June
2003.
On
September 18, 2002, Higoal issued 11,880,000 shares of common stock to the
stockholders of KCIT in exchange for 100% of the outstanding common stock of
KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary
of Higoal. On October 1, 2002, Kid Castle Educational Corporation (the
“Company”), formerly King Ball International Technology Limited Corporation,
entered into an exchange agreement with Higoal whereby the Company issued to
the
stockholders of Higoal 11,880,000 shares of common stock of the Company in
exchange for 100% of the issued and fully paid up capital of
Higoal.
As
a
result of the share exchange, the former stockholders of Higoal hold a majority
of the Company’s outstanding capital stock. Generally accepted accounting
principles require in certain circumstances that a company whose stockholders
retain the majority voting interest in the combined business to be treated
as
the acquirer for financial reporting purposes. Accordingly, the acquisition
has
been accounted for as a “reverse acquisition” whereby Higoal is deemed to have
purchased the Company. However, the Company remains the legal entity and the
registrant for Securities and Exchange Commission (“SEC”) reporting
purposes.
In
July
2003, KCES entered into an agreement with 21
st
Century
Publishing House to incorporate Jiangxi 21
st
Century
Kid Castle Culture Media Co., Ltd (“Culture Media”). It was agreed that KCES and
21
st
Century
Publishing House would each own 50% of Culture Media and that each party would
contribute Renminbi (“RMB”) 1 million for its ownership interest. On July 2,
2004, KCES acquired additional 40% of ownership in Culture Media from
21
st
Century
Publishing House. KCES now owns 90% of Culture Media.
On
December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid
Castle Educational Info Constitution Company Limited (“KCEI”) in the PRC, with
registered total capital of $153,778, in order to operate schools controlled
by
us in PRC. As of June 30, 2008, KCEI had total registered capital of
$507,309.
The
Company, Higoal and its subsidiaries are collectively 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, 2008 and for the six months ended
June 30, 2008 and 2007 have been prepared by the Group, without audit, pursuant
to the rules and regulations of the SEC using generally accepted accounting
principles in the United States. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States 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, 2007.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Since
inception, the Group has incurred operating losses during most of its reporting
periods. However, the Group has been profitable since 2007. The accumulated
deficit has improved since Messrs. Pai and Yang have assumed their respective
management roles, and as of June 30, 2008, the balance of accumulated deficit
was $6,713,965. Although we had an accumulated deficit, we have positive cash
flow from operations. Barring significant, unforeseen developments in the PRC,
we believe we can decrease our reliance on loans from shareholders and banks
to
meet our funding requirements in the future. Despite our expectation to decrease
reliance on loans, we may again be required to seek additional financing to
meet
our funding requirements and no assurances can be given that bank loans or
loans
from shareholders will be available in the future. If we are unable to secure
sufficient financing, our liquidity position would be adversely affected, and
we
may need to seek a more expensive source of funding to finance our
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 on aging analysis of notes and accounts
receivables.
INVENTORIES
Inventories
are stated at the lower of cost or market. Cost includes all costs of purchase,
cost of conversion and other costs incurred in bringing the inventories to
their
present location and condition, and is calculated using the weighted average
method. Market value is determined by reference to the sales proceeds of items
sold in the ordinary course of business after the balance sheet date or to
management estimates based on prevailing market conditions.
PROPERTY
AND EQUIPMENT AND DEPRECIATION
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:
|
|
|
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 account 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 currently enacted tax rate. 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, the goodwill is tested for impairment
on a recurring basis.
COMPREHENSIVE
INCOME (LOSS)
Comprehensive
income (loss) is defined as the change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to owners.
Comprehensive income (loss) is disclosed in the condensed consolidated
statement of stockholders’ equity.
NET
EARNINGS (LOSS) PER COMMON SHARE
The
Group
computes net earnings (loss) per share in accordance with SFAS No. 128,
“Earnings per Share”. Under the provisions of SFAS No. 128, basic net earnings
(loss) per share is computed by dividing the net earnings (loss) available
to
common shareholders for the period by the weighted average number of shares
of
common stock outstanding during the period. The calculation of diluted net
earnings (loss) per share gives effect to common stock equivalents. For the
Six
months ended June 30, 2008 and 2007, the Group did not have any potential common
stock shares.
RECLASSIFICATION
The
presentation of certain prior information has been reclassified to conform
to
current presentation.
NOTE
4 - RECENT ACCOUNTING PRONOUNCEMENTS
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS No. 161
gives financial statement users better information about the reporting entity's
hedges by providing for qualitative disclosures about the objectives and
strategies for using derivatives, quantitative data about the fair value of
and
gains and losses on derivative contracts, and details of credit-risk-related
contingent features in their hedged positions. SFAS No. 161 is effective for
financial statements issued for fiscal years beginning after November 15, 2008
and interim periods within those years. The Group does not expect the adoption
of SFAS No. 161 to have a material effect on the Group’s Consolidated Financial
Statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Group’s present or future
Consolidated Financial Statements.
In
December 2007, the FASB released SFAS No. 141(R), “Business Combinations.” This
standard revises and enhances the guidance set forth in SFAS No. 141 by
establishing a definition for the “acquirer,” providing additional guidance on
the recognition of acquired contingencies and noncontrolling interests, and
broadening the scope of the standard to include all transactions involving
a
transfer in control, irrespective of the consideration involved in the transfer.
SFAS No. 141(R) is effective for business combinations for which the acquisition
date occurs in a fiscal year beginning on or after December 15, 2008. Although
the standard will not have any impact on our current Consolidated Financial
Statements, application of the new guidance could be significant to the Company
in the context of future merger and acquisition activity.
In
December 2007, the FASB released SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51.” This statement
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is
an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. We do not expect the standard to have a material impact
on
our Consolidated Financial Statements.
In
February 2007, the FASB released SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." The standard is effective for
fiscal years beginning after November 15, 2007. The standard provides entities
the ability, on an elective basis, to report most financial assets and financial
liabilities at fair value, with corresponding gains and losses recognized in
current earnings. We did not elect the fair value option under SFAS No. 159
as
of January 1, 2008 for any of our financial assets and liabilities that were
not
already accounted for at fair value. We will consider applying the fair value
option to future transactions as provided by the standard.
NOTE
5
- NOTES AND ACCOUNTS RECEIVABLE
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Notes
and accounts receivable
|
|
|
|
|
|
|
-
Third parties
|
|
$
|
3,313,594
|
|
$
|
2,757,425
|
|
|
-
Related parties
|
|
|
206,613
|
|
|
150,363
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,520,207
|
|
|
2,907,788
|
|
|
Allowance
for doubtful accounts and sales returns
|
|
|
(485,687
|
)
|
|
(453,920
|
)
|
|
|
|
|
|
|
|
|
|
|
Notes
and accounts receivable, net
|
|
$
|
3,034,520
|
|
$
|
2,453,868
|
|
NOTE
6 - INVENTORIES
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Work
in process
|
|
$
|
109,501
|
|
$
|
180,985
|
|
|
Finished
goods and other merchandises
|
|
|
2,201,788
|
|
|
2,151,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,311,289
|
|
|
2,332,947
|
|
|
Less:
Allowance for obsolete inventories and decline of market
value
|
|
|
(317,887
|
)
|
|
(324,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,993,402
|
|
$
|
2,008,739
|
|
NOTE
7
- OTHER RECEIVABLES
|
|
|
June
30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Other
receivables - third parties:
|
|
|
|
|
|
|
Tax
paid on behalf of landlord
|
|
$
|
|
|
$
|
|
|
|
Advances
to staff
|
|
|
108,120
|
|
|
87,188
|
|
|
Grants
from Market Information Center
|
|
|
|
|
|
|
|
|
Other
receivables
|
|
|
66,704
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
174,824
|
|
|
87,821
|
|
|
Other
receivables - related parties
|
|
|
1,057
|
|
|
318
|
|
|
|
|
$
|
175,881
|
|
$
|
88,139
|
|
NOTE
8
-
PREPAYMENTS AND OTHER CURRENT ASSETS
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Prepayments
|
|
$
|
704,468
|
|
$
|
523,199
|
|
|
Temporary
payments
|
|
|
134
|
|
|
15,598
|
|
|
Prepaid
interest
|
|
|
—
|
|
|
2,713
|
|
|
Others
|
|
|
28,541
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
733,143
|
|
$
|
542,794
|
|
NOTE
9- INTEREST IN ASSOCIATES
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
21
st
Century Kid Castle Language and Education Center (“Education
Center”) (Note (i))
|
|
|
|
|
|
|
Investment
cost
|
|
$
|
108,709
|
|
$
|
101,787
|
|
|
Share
of loss
|
|
|
(716
|
)
|
|
(39,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,993
|
|
$
|
62,146
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin
Consulting”) (Note (ii))
|
|
|
|
|
|
|
|
|
Investment
cost
|
|
$
|
101,462
|
|
$
|
95,000
|
|
|
Share
of loss
|
|
|
(116,356
|
)
|
|
(98,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,894
|
)
|
$
|
(3,521
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,099
|
|
$
|
58,625
|
|
Note:
|
|
(i)
|
In
October 2003, the Group obtained the PRC government’s approval to co-found
Education Center with 21
st
Century Publishing House in the PRC. In 2004, Education Center registered
the total capital as RMB 1,500,000, and KCES and 21
st
Century Publishing House each owns 50% of 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
six months ended June 30, 2008 and 2007, the Group recognized investment income
accounted for under the equity method in Education Center of $40,665 and $
19,265, respectively.
|
|
(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.
|
For
the
six months ended June 30, 2008 and 2007, the Group recognized an investment
loss
of $10,878 and an investment revenue of $1,278, respectively, accounted for
under the equity method, in Tianjin Consulting.
|
|
(iii)
|
As
of August 1, 2007, the Group acquired 100% interest in Sichuan Lanbeisi
Kid Castle Education Development Co., Ltd, which became a consolidated
entity. For the six monts ended June 30, 2007, the Group recognized
an
investment loss accounted for under the equity method in Lanbeisi
of
$4,554.
|
NOTE
10
- INTANGIBLE ASSETS
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
|
|
|
|
|
Franchise
|
|
$
|
1,120,428
|
|
$
|
1,049,538
|
|
|
Copyrights
|
|
|
658,631
|
|
|
616,960
|
|
|
Goodwill
|
|
|
233,069
|
|
|
218,227
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated amortization
|
|
|
|
|
|
|
|
|
Franchise
|
|
|
(924,352
|
)
|
|
(813,392
|
)
|
|
Copyrights
|
|
|
(543,371
|
)
|
|
(478,144
|
)
|
|
|
|
|
(1,467,723
|
)
|
|
(1,291,536
|
)
|
|
Less:
Impairment of goodwill
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(67,146
|
)
|
|
(21,184
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
477,259
|
|
$
|
572,005
|
|
Amortization
charged to operations was $87,179 and $81,818 for the six months ended June
30,
2008 and 2007, respectively. The impairment of goodwill was $11,386 for the
six
months ended June 30, 2008.
The
estimated aggregate amortization expenses for each of the two succeeding fiscal
years are as follows:
|
2009
|
|
$
|
177,906
|
|
|
2010
|
|
|
49,972
|
|
|
|
|
|
|
|
|
|
|
$
|
277,878
|
|
NOTE
11 - BANK BORROWINGS
|
|
|
Notes
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
term loans
|
|
|
(i)
|
|
$
|
653,593
|
|
$
|
580,553
|
|
|
Short-term
unsecured bank loans
|
|
|
(ii)
|
|
|
—
|
|
|
1,027,446
|
|
|
Mid-term
secured bank loan
|
|
|
(iii)
|
|
|
1,531,318
|
|
|
1,357,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,184,911
|
|
|
2,965,310
|
|
|
Less:
Balances maturing within one year included in current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Bank
term loans
|
|
|
|
|
|
110,779
|
|
|
185,088
|
|
|
Short-term
unsecured bank loans
|
|
|
|
|
|
—
|
|
|
1,027,446
|
|
|
Mid-term
secured bank loan
|
|
|
|
|
|
279,918
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390,697
|
|
|
1,212,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
borrowings maturing after one year
|
|
|
|
|
$
|
1,794,214
|
|
$
|
1,752,776
|
|
Note:
|
|
(i)
|
This
line item represents bank loans that have been secured by a pledge
of
post-dated checks amounting to $904,682 and $753,962 that we have
received
from franchisees and the Group’s bank deposits of $27,752 and $22,053 as
of June 30, 2008 and December 31, 2007, 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, which
were
extended on October 18, 2007 and will be due on September 30, 2008.
The
weighted average interest rates were 5.86% and 5.85% per annum as of
June 30, 2008 and 2007,
respectively.
|
For
the
six months ended June 30, 2008 and 2007, interest expense charged to operations
in respect of bank loans was $17,672 and $6,549, respectively.
|
|
(ii)
|
In
August 2005, KCIT obtained an unsecured short-term loan to finance
the
Group’s operations in the amount of $304,553, which was collateralized
by
KCIT’s refundable deposits of $60,911 and notes receivables approximating
30% of the loan balance, and guaranteed by two directors and stockholders
of the Group. The loan bore interest at the lending bank’s basic fixed
deposit rate plus 3.29% per annum, which was extended in February
2007 and
was due in February 2008. Of the principal, $146,186 is repayable
in 12
equal monthly installments. The loan was fully repaid on November
28,
2007.
|
In
May
2007, KCES obtained a $339,287 short-term loan to finance the Group’s
operations. The loan was guaranteed by Director Min Tan Yang and KCIT, and
was
collateralized by $340,000 of KCIT deposits. It was due in April 2008. The
loan
bore interest at the PRC basic borrowing rate per annum. The loan was fully
repaid on April 10, 2008.
For
the
six months ended June 30, 2008 and 2007, interest expense charged to operations
in respect of the above unsecured short-term loans was $421 and $11,142,
respectively.
|
|
(iii)
|
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, 2003 and to finance its operations. The loan was secured by the
Group’s land and buildings and personal guarantees provide by two
directors of the Group. The loan bore interest at the lending bank’s basic
fixed deposit rate plus 0.69% per annum for the years 2005 to 2007,
and
plus 1.69% per annum for the year 2008. On August 10, 2005, the
bank extended the term of the loan and it was repayable in 84 equal
monthly installments starting on August 10, 2012. The loan was fully
repaid on November 28, 2007.
|
In
February 2005, KCIT obtained a new bank loan of $456,830, which bore interest
at
6% per annum and was repayable in 36 equal monthly installments. The last
installment was due on February 2, 2008 and the loan was fully repaid on
January 9, 2008.
In
August
2005, KCIT obtained a new bank loan of $213,187, which was repayable in 60
equal
monthly installments. The last installment was due on August 10, 2010, however,
the loan was fully repaid on November 28, 2007.
In
November 28, 2007, KCIT obtained a new bank loan of $1,542,401. The loan is
secured by the Group’s land and buildings and is personally guaranteed by two
directors of the Group. It bears interest at the lending bank’s basic fixed
deposit rate plus 1.45% per annum. Of the principal, $370,176 is repayable
in 24
equal monthly installments. A final balloon payment of $1,172,225 is due on
November 28, 2009. The applicable interest rate was approximately 3.6% per
annum
as of June 2008 and December 2007.
For
the
six months ended June 30, 2008 and 2007, interest expense charged to operations
amounted to $28,787 and $19,647, respectively.
NOTE
12 - RECEIPTS IN ADVANCE
The
balance comprises:
|
|
|
Notes
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Sales
deposits received
|
|
|
(i)
|
|
$
|
735,118
|
|
$
|
303,258
|
|
|
Franchising
income received
|
|
|
(ii)
|
|
|
1,455,755
|
|
|
1,456,267
|
|
|
Subscription
fees received
|
|
|
(iii)
|
|
|
683,456
|
|
|
516,136
|
|
|
Others
|
|
|
|
|
|
21,950
|
|
|
96,742
|
|
|
Related
parties
|
|
|
|
|
|
1,017
|
|
|
—
|
|
|
|
|
|
|
|
|
2,897,296
|
|
|
2,372,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Franchising
income received
|
|
|
(ii)
|
|
|
1,308,286
|
|
|
1,034,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,205,582
|
|
$
|
3,406,663
|
|
Note:
|
(i)
|
The
balance represents receipts in advance from customers for goods sold
to
them.
|
|
(ii)
|
The
balance mainly represents franchising income received in advance
which is
attributable to the periods after the respective period end dates.
|
|
(iii)
|
The
balance represents subscription fees received in advance for
subscription of magazines published by the
Group.
|
NOTE
13 - RETIREMENT PLANS
The
Group
maintains tax-qualified defined contribution and benefit retirement plans for
its employees in accordance to the ROC Labor Standard Law. As a result, the
Group currently maintains two different retirement plans with contribution
and
benefit calculation formulas. On July 1, 2005, the Bureau of National Health
Insurance issued new labor retirement pension regulations in Taiwan. The Group
has a new defined contribution retirement plan (the “New Plan”) covering all
regular employees of KCIT. KCIT contributes monthly an amount equal to 6% of
the
employees’ base salaries and wages to the Bureau of National Health Insurance.
The Group still maintains the benefit retirement plan (the “Old Plan”) which
commenced in September 2003, and only applies to the regular employees of
KCIT who were employed prior to June 2005. 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 financial statements. Net periodic pension cost is based on
annual actuarial valuations which use the projected unit credit cost method
of
calculation and is charged to the consolidated statement of operations on a
systematic basis over the average remaining service lives of current employees.
Under the old 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 old 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,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
Service
cost
|
|
$
|
|
|
$
|
|
|
|
Interest
cost
|
|
|
6,456
|
|
|
6,108
|
|
|
Expected
return on assets
|
|
|
(1,046
|
)
|
|
(1,212
|
)
|
|
Amortization
of unrecognized loss
|
|
|
1,616
|
|
|
1,478
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic pension cost
|
|
$
|
7,026
|
|
$
|
6,374
|
|
NOTE
14
- 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 segments is as follows:
|
|
|
Taiwan
|
|
The PRC
|
|
Total
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
Six months
ended
June 30,
2008
|
|
Six months
ended
June 30,
2007
|
|
Six months
ended
June 30,
2008
|
|
Six months
ended
June 30,
2007
|
|
Six months
ended
June 30,
2008
|
|
Six months
ended
June 30,
2007
|
|
Six months
ended
June 30,
2008
|
|
Six months
ended
June 30,
2007
|
|
Six months
ended
June 30,
2008
|
|
Six months
ended
June 30,
2007
|
|
Six months
ended
June 30,
2008
|
|
Six months
ended
June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenue
|
|
$
|
3,116,020
|
|
$
|
3,255,979
|
|
$
|
2,948,566
|
|
$
|
1,868,134
|
|
$
|
6,064,586
|
|
$
|
5,124,113
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,064,586
|
|
$
|
5,124,113
|
|
|
Inter-segment
revenue
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,116,020
|
|
$
|
3,255,979
|
|
$
|
2,948,566
|
|
$
|
1,868,134
|
|
$
|
6,064,586
|
|
$
|
5,124,113
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,064,586
|
|
$
|
5,124,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from Operations
|
|
$
|
297,645
|
|
$
|
562,771
|
|
$
|
186,397
|
|
$
|
413,827
|
|
$
|
484,042
|
|
$
|
976,598
|
|
$
|
(72,449
|
)
|
$
|
(91,955
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
411,593
|
|
$
|
884,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
60,609
|
|
$
|
6,084
|
|
$
|
71,209
|
|
$
|
39,639
|
|
$
|
131,818
|
|
$
|
45,723
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
131,818
|
|
$
|
45,723
|
|
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
June 30,
2008
|
|
December 31,
2007
|
|
June 30,
2008
|
|
December 31,
2007
|
|
June 30,
2008
|
|
December 31,
2007
|
|
June 30,
2008
|
|
December 31,
2007
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Total
assets
|
|
$
|
8,439,617
|
|
$
|
7,495,418
|
|
$
|
4,459,852
|
|
$
|
4,063,399
|
|
$
|
12,899,469
|
|
$
|
11,558,817
|
|
$
|
2,968
|
|
$
|
2,597
|
|
$
|
(535,286
|
)
|
$
|
(400,129
|
)
|
$
|
12,367,151
|
|
$
|
11,161,285
|
|
NOTE
15 - COMMITMENT AND CONTINGENCIES
A.
Lease Commitment
As
of
June 30, 2008, the Company’s future minimum lease payments under a
non-cancelable operating lease expiring in excess of one year are as
follows:
|
Years
ending December 31,
|
|
|
|
|
2009
|
|
$
|
509,371
|
|
|
2010
|
|
|
291,001
|
|
|
2011
|
|
|
360,940
|
|
|
2012
|
|
|
749,827
|
|
|
Years
2013 to 2017
|
|
|
1,330,513
|
|
|
|
|
|
|
|
|
|
|
$
|
3,241,652
|
|
B.
Going concern
The
accompanying financial statements have been prepared assuming the Group will
continue as a going concern. 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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
This
report contains certain forward-looking statements within the meaning of Section
21E of the Securities and Exchange Act of 1934, as amended, 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,” “expect”
and similar expressions, are intended to identify forward-looking statements.
Such statements reflect our current views with respect to future events and
are
subject to certain risks, uncertainties and assumptions. If one or more of
these
risks or uncertainties materialize, or if underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. Certain of these risks and
uncertainties are discussed under the caption “Factors That May Affect Our
Future Results And Financial Condition” contained herein and other factors
disclosed in our filings with the SEC including, but not limited to our Annual
Report on Form 10-K for the year ended December 31, 2007. We do not intend
to update these forward-looking statements.
OVERVIEW
We
are a
leading provider in the PRC and Taiwan of English-language instruction and
educational services to children for whom Chinese is the primary language.
Our
focus is on children between two and twelve years old. In 2007 we taught or
provided educational materials for approximately 1,300,000 students at over
7,430 locations through our franchise and cooperative school
operations.
We
commenced operations in 1986 as an English-language school, and since then
we
have expanded our franchise operations to provide bilingual kindergarten
instruction, computer training, and tutorial services. In September 1999, we
began offering a variety of multimedia, including educational videos, textbooks,
workbooks, and educational software, authored by us as fully functional,
stand-alone products or as supplements to our classroom-based and Internet-based
instruction.
CRITICAL
ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations
are
based upon our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses,
and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to product returns, bad
debts, inventories, equity investments, income taxes, financing operations,
pensions, commitments and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our financial statements.
Revenue
Recognition.
We
recognize sales of teaching materials and educational tools and equipment as
revenue when 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.
If
market
conditions were to decline, we may take actions to increase sales discounts,
possibly resulting in an incremental reduction of revenue at the time when
revenues are recognized.
Allowance
for Doubtful Accounts.
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment
of
their ability to make payments, additional allowances may be
required.
Allowance
for Obsolete Inventories and Lower of Cost or Market.
We write
down our inventory for estimated obsolescence or unmarketable inventory equal
to
the difference between the cost of inventory and the estimated market value
based upon assumptions about inventory aging, future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Investment
Impairments.
We hold
equity interests in companies having operations in areas within our strategic
focus. We record an investment impairment charge when we believe an investment
has experienced a decline in value that is not temporary. Future adverse changes
in market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment’s current carrying value,
thereby possibly requiring an impairment charge in the future.
Fixed
Assets and Depreciation.
Our
fixed assets are stated at cost. Major improvements and betterments to existing
facilities and equipment are capitalized. Expenditures for maintenance and
repairs that do not extend the life of the applicable asset are charged to
expense as incurred. Buildings are depreciated over a 50-year term. Fixtures
and
equipment are depreciated using the straight-line method over their estimated
useful lives, which range from two-and-a-half years to ten years.
Impairment
of Long-Lived Assets.
We
review our fixed assets and other long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to undiscounted future net
cash flows expected to be generated by the asset over its remaining useful
life.
If such assets are considered to be impaired, the impairment to be recognized
is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. The estimate of fair value is generally based on
quoted market prices or on the best available information, including prices
for
similar assets and the results of using other valuation techniques.
As
of
June 30, 2008, the balance of our amortizable intangible assets was $477,259,
including franchise-related intangible assets of $196,076 and copyrights of
$115,260. The amortizable intangible assets are amortized on a straight-line
basis over estimated useful lives of 10 years. The balance of goodwill was
$165,923, which is tested for impairment on a recurring basis. In determining
the useful lives and recoverability of the intangibles, assumptions must be
made
regarding estimated future cash flows and other factors to determine the fair
value of the assets, which may not represent the true fair value. If these
estimates or their related assumptions change in the future, there may be
significant impact on our results of operations in the period of the change
incurred.
Income
Taxes.
We
account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases, and tax loss
carry-forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in
income in the period that includes the enactment date. Deferred tax assets
are
subject to valuation allowances based upon management’s estimates of
realizability. Actual results may differ significantly from management’s
estimate.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2008 compared to Three Months Ended June 30,
2007
Total
Net Operating Revenue.
Total
net
operating revenue consists of sales of goods, franchising income and other
operating revenue. Total net operating revenues increased by $781,909, or 42%,
to $2,665,062 for the three months ended June 30, 2008 from $1,883,153 for
the
three months ended June 30, 2007, including the increase in other operating
revenue of $405,662, the sales of goods of $328,319 and the franchising income
of $47,928.
Sales
of goods.
The
increase in sales of goods, from $1,262,190 for the three months ended June
30,
2007 to $1,509,509 for the three months ended June 30, 2008, or 26%, was mainly
due to increase in our Shanghai operations.
Franchising
income.
The
increase in franchising income, from $536,686 for the three months ended June
30, 2007 to $584,614 for the three months ended June 30, 2008, or 9%, was mainly
due to the increase in franchising income in Shanghai operations.
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, fees for designing the school layout of
our
franchised schools, and tuition from school controlled by us. Other operating
revenue increased by $405,662, to $489,939 for the three months ended June
30,
2008 from $84,277 for the three months ended June 30, 2007. The increase was
mainly due to operate schools controlled by us in the PRC.
Gross
Profit.
Gross
profit increased by $122,392, or 11%, to $1,233,145 for the three months ended
June 30, 2008 from $1,110,753 for the three months ended June 30, 2007, was
mainly due to increase in sales of goods from Shanghai operations.
Total
Operating Expenses.
Total
operating expenses increased by $410,516, or 37%, to $1,510,390 for the three
months ended June 30, 2008 from $1,099,874 for the three months ended June
30,
2007, principally due to increases in expenditures to fund daily operations
in
our Shanghai operations.
Other
Operating Expenses.
Other
operating expenses increased by $409,037, or 37%, to $1,508,823 for the three
months ended June 30, 2008 from $1,099,786 for the three months ended June
30,
2007, principally due to increases in daily expenditures in our Shanghai
operations.
Interest
Expenses, Net.
Net
interest expenses increased by $4,695, or 22%, to $25,643 for the three months
ended June 30, 2008 from $20,948 for the three months ended June 30, 2007,
primarily due to the increase of the borrowings during the three months ended
June 30, 2008 compared to the three months ended June 30, 2007.
Provision
for Taxes.
Provision
for taxes for the three months ended June 30, 2008 and 2007 were $22,468 and
$20,069, respectively. These provisions for income taxes relate to income taxes
resulting from our operations in Taiwan.
Six
Months Ended June 30, 2008 compared to Six Months Ended June 30,
2007
Total
Net Operating Revenue.
Total
net operating revenue consists of sales of goods, franchising income and other
operating revenue. Total net operating revenues increased by $940,473, or 18%,
to $6,064,586 for the six months ended June 30, 2008 from $5,124,113 for the
six
months ended June 30, 2007. This was mainly due to the increase in sales of
goods of $258,270, the franchising income of $50,665, and the other operating
revenues of $631,538.
Sales
of goods.
The
increase in sales of goods, from $3,696,348 for the six months ended June 30,
2007 to $3,954,618, or 6%, for the six months ended June 30, 2008, was mainly
due to the increase in net sales of goods in Shanghai operations.
Franchising
income.
The 5%
increase in franchising income, from $1,090,178 for the six months ended June
30, 2007 to $1,140,843, for the six months ended June 30, 2008, was mainly
due
to the increase in franchising income from Shanghai operations.
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, fees for designing the school
layout of our franchised schools, and the tuition from schools. Other operating
revenue increased by $631,538, or 1.87%, to $969,125 for the six months ended
June 30, 2008 from $337,587 for the six months ended June 30, 2007. A major
portion of the increase was due to increases in operating revenue from schools
controlled by us in the PRC.
Gross
Profit.
Gross
profit increased by $171,833, or 5%, to $3,457,167 for the six months ended
June
30, 2008 from $3,285,334 for the six months ended June 30, 2007. The increase
in
Gross Profit was mainly due to the increase in sales of goods.
Total
Operating Expenses.
Total
operating expenses increased by $644,883, or 27%, to $3,045,574 for the six
months ended June 30, 2008, from $2,400,691 for the six months ended June 30,
2007. The increase in total operating expenses was mainly due to increases
in
expenditures to fund daily operations in our Shanghai operations.
Other
Operating Expenses.
Other
operating expenses increased by $639,976, or 27%, to $3,022,494 for the six
months ended June 30, 2008, from $2,382,518 for the six months ended June 30,
2007.The increase in operating expenses was mainly due to increases in
expenditures to fund daily operations in our Shanghai operations.
Interest
Expenses, Net.
Net
interest expenses increased by $6,127, or 14%, to $48,744 for the six months
ended June 30, 2008 from $42,617 for the six months ended June 30, 2007. The
increase in net interest expenses was mainly due to the increase of the
borrowings during the six months ended June 30, 2008, compared to the six months
ended June 30, 2007. (See Note 11 to our Condensed Consolidated Financial
Statements for more information.)
Other
Non-operating Income, Net.
Net
other non-operating income decreased by $210,381, or 57%, to $160,848 for the
six months ended June 30, 2008, from $371,229 for the six months ended June
30,
2007. The decrease in net other non-operating income was mainly due to reverse
of inventory provision of $27,657 for the six months ended June 30, 2008,
compare to reverse of inventory provision of $199,792 for the six months ended
June 30, 2007.
Provision
for Taxes.
Provision for taxes for the six months ended June 30, 2008 and 2007 were $59,365
and $193,011, respectively. These provisions for income taxes relate to income
taxes resulting from our operations in Taiwan.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
June 30, 2008, our principal sources of liquidity included cash and bank
balances of $1,556,642, which increased $318,430 from the balance of $1,238,212
at December 31, 2007. The increase was mainly due to the increase in our
net income.
We
have
assertively expanded our business in the PRC. The Shanghai operations have
turned profitable in 2006, and the Group has turned profitable in the first
quarter of 2007. We anticipate continued expansion of the demand for learning
materials and an increase in the number of franchise schools. Furthermore,
we
foresee better utilization of capital and funds as we identify and implement
alternatives for restructuring and refinancing. In order to increase its profit
margin, the Group has operated direct-owned schools beginning since 2007. Due
to
the rapid expansion in our Shanghai operations, the Group foresees additional
need for funds in the near future to facilitate its expansion plans during
2008.
As discussed in Note 11 to our Condensed Consolidated Financial Statements,
the
majority of the Group’s existing loans are guaranteed by two directors of the
Group who have expressed their willingness to continue to support the Group
until other sources of funds have been obtained. Moreover, 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.
Net
cash
provided by operating activities was $1,060,343 and $1,294,822 during the six
months ended June 30, 2008 and 2007, respectively. The $234,479 difference
was
primarily attributed to (i) an increase in notes and accounts receivable of
$521,104 during the six months ended June 30, 2008, compared to an increase
of
notes and accounts receivable of $321,355 during the six months ended June
30,
2007, (ii) an increase of notes and accounts payable in the amount of $704,574
during the six months ended June 30, 2008, compared to a increase of notes
and
accounts payable in the amount of $145,541 during the six months ended June
30,
2007 and (iii) an decrease of reversal of allowance for loss on inventory
obsolescence and slow-moving items in the amounts of $27,657 during the six
months ended June 30, 2008, compared to a decrease of reversal of allowance
for
loss on inventory obsolescence and slow-moving items in the amounts of $199,792
during the six months ended June 30, 2007.
Net
cash
used in investing activities was $192,902 during the six months ended June
30,
2008 and net cash provided by investing activities was $1,549,746 during the
six
months ended June 30, 2007. The $1,742,648 difference was primarily attributable
to (i) more cash used in the purchase of property and equipment which
constituted a decrease in the amount of $131,431 during the six months ended
June 30, 2008, compared to a decrease in the amount of $65,597during the six
months ended June 30, 2007, (ii) cash used in pledged notes receivable of $4,551
during the six months ended June 30, 2008, compared to $301,050 during the
six
months ended June 30, 2007, for a net positive difference in cash of
$296,499.
Net
cash
used in financing activities during the six months ended June 30, 2008 was
$903,271, compared to net cash provided by financing activities of $122,189
during the six months ended June 30, 2007. The $1,025,460 difference was
primarily attributable to $1,069,693 in cash used in repayment of bank
borrowings during the six months ended June 30, 2008, compared to $270,231
used
for the same purpose during the six months ended June 30, 2007.
Off-Balance
Sheet Arrangements
As
of
June 30, 2008, 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
One
of
our financing sources is from bank borrowings. As of June 30, 2008 and 2007,
the
balances of bank borrowings, including current and non-current portions, were
$2,184,911 and $2,965,310, respectively.
Pension
Benefit
As
of
July 1, 2005, the Group maintains two different retirement plans, according
to
the ROC Labor Standard Law, a non-contributory and funded defined contribution
retirement plan (the “New Plan”) covering all regular employees of KCIT, our
subsidiary in Taiwan, and the benefit retirement plan (the “Old Plan”) which
commenced in September 2003, and only applies to the regular employees of KCIT
who were employed prior to June 2005, as described in Note14 to our Condensed
Consolidated Financial Statements. The benefits expected to be paid in each
of
the next five fiscal years, and in the aggregate for the five fiscal years
thereafter are $0 and $16,735, respectively. We also make defined contributions
to a retirement benefits plan for our employees in the PRC in accordance with
local regulations. The contributions made by us for the six months ended June
30, 2008 and 2007 amounted to $28,547, and $22,085, respectively.
New
Accounting Pronouncements
See
Note
4 to the Consolidated Financial Statements
Non-GAAP
Financial Measures
None.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
are
exposed to market risk, including from changes in certain 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.
In analyzing the effect of interest rate fluctuations based on the average
balances of our outstanding bank borrowings for fiscal year 2008, we have
projected that, if interest rates were to increase by one percent, the result
would be an annual increase in our interest expense of $21,413. This analysis
does not take into consideration the effect of changes in the level of overall
economic activity on interest rate fluctuations.
Foreign
currency exposure
We
have
operations in both Taiwan and the PRC. The functional currency of Higoal and
its
subsidiary, KCIT is NT Dollars and the financial records are maintained and
the financial statements are prepared for these entities in NT Dollars. The
functional currency of KCES and its consolidated investee, Culture
Media and KCEI is RMB and the financial records are maintained and the
financial statements are prepared for these 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 do we use such instruments for speculative
purposes. The translation from the applicable local currency assets and
liabilities to the U.S. Dollar is performed using exchange rates in effect
at
the balance sheet date except for 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 shareholders’ equity.
ITEM
4. CONTROLS AND PROCEDURES
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Pursuant
to Exchange 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 other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports 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 ensure that information required to be disclosed by
an
issuer in the reports 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.
Based
on
deficiencies noted by our auditors, problems discovered relating to misuse
of
company funds by a company officer, and other issues noted in our management’s
evaluation our conclusion is that as of June 30, 2008 our disclosure controls
and procedures were ineffective. We are taking measures to improve our
disclosure controls and procedures, including instituting a new Enterprise
Resource Planning (“ERP”) system and engaging an outside accounting firm to
advise the Company with respect to setting up internal auditing and other
controls and procedures. The ERP system when fully operational, will enable
the
centralization of all information required to be disclosed pursuant to the
Exchange Act to be digitally recorded, processed, summarized and reported in
a
timely and secured manner. The ERP system is expected to complete its trial
run
period by the third fiscal quarter 2008 and become fully operational thereafter.
The operation of the old system is scheduled to be terminated by August 31,
2008.
The
Company recognizes that the disclosure controls and procedures were inadequate;
it is assertively attending to the inadequacy and believes that implementation
of ERP will significantly strengthen the Company’s disclosure controls and
procedures.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
During
the last quarter, we have continued to implement a comprehensive ERP system
that, when fully operational, will enhance our internal controls over financial
reporting. The ERP system has been fully installed and the system has been
running in parallel with the old system since 2007. The system is expected
to be
fully operational in the third fiscal quarter 2008. The operation of the old
system is scheduled to be terminated by August 31, 2008. The ERP system will
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; and
|
|
|
¨
|
Delineate
individual and/departmental responsibilities and effectively separate
respective departmental transactions so as to prevent occurrence
of
intentional misappropriation of
funds.
|
PART
II OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
We
have
no material pending legal proceedings.
ITEM
1A. RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part 1, “Item 1A. Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2007, which
could materially affect our business, financial condition or future results.
We
caution the reader that these risk factors may not be exhaustive. We operate
in
a continually changing business environment and new risk facts emerge from
time
to time. Management cannot predict such new risk factors, nor can we assess
the
impact, if any, of such new risk factors on our business or the extent to which
any factor, or combination of factors, may impact our business. There have
not
been any material changes during the quarter ended June 30, 2008 from the risk
factors disclosed in the above-mentioned Form 10-K for the year ended
December 31, 2007.
ITEM
2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
|
A.
|
|
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
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
August 12, 2008
|
By:
|
/s/
Suang-Yi Pai
|
|
|
Name:
|
Suang-Yi
Pai
|
|
|
Title:
|
Chief
Financial Officer
|
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