KID CASTLE EDUCATIONAL CORP - Quarter Report: 2004 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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: March 31, 2004
or

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-61286

KID CASTLE EDUCATIONAL CORPORATION

8th Floor, No. 98 Min Chuan Road, Hsien Tien
Taipei, Taiwan ROC
(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered under Section 12(g) of the Act:

Title of class
None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the last ninety days. Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x No o

As of April 30, 2004, there were 18,999,703 shares of the Registrant’s common stock outstanding.

Documents incorporated by reference: None.

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FORM 10-Q

KID CASTLE EDUCATIONAL CORPORATION

TABLE OF CONTENTS

i

KID CASTLE EDUCATIONAL CORPORATION

UNAUDITED CONDENSED

AS OF MARCH 31, 2004 AND DECEMBER 31, 2003

KID CASTLE EDUCATIONAL CORPORATION

ii

Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets

(Expressed in US Dollars)

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Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets - Continued

(Expressed in US Dollars)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Operations

(Expressed in US Dollars)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Expressed in US Dollars)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows

(Expressed in US Dollars)

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows – Continued

(Expressed in US Dollars)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Notes to Condensed Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Kid Castle Internet Technologies Limited (“KCIT”) was incorporated on December 17, 1999 under the provisions of the Company Law of the Republic of China (“ROC”) as a limited liability company. KCIT is engaged in the business of children’s education focusing on the English language. The business comprises publication, sales and distribution of related books, magazines, audio and videotapes and compact disc, franchising and sales of merchandises complementary to the business. KCIT commenced operations in April 2000 when it acquired the above business from a related company, Kid Castle Enterprises Limited (“KCE”), which was owned by two directors and stockholders of KCIT.

On March 9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment Property Limited incorporated in the British Virgin Islands, which held the entire common stock of Higoal Developments Limited (“Higoal”) incorporated in the Cayman Islands on March 8, 2001. On September 10, 2001, Higoal established a wholly owned subsidiary, Kid Castle Educational Software Development Company Limited (“KCES”) in the People’s Republic of China (the “PRC”). The existing operations of Higoal are principally located in Taiwan and are being expanded in the PRC. In June 2002, after KCIT undertook a series of group restructurings, KCIT became the direct owner of the outstanding shares of Higoal. Premier Holding Investment Property Limited was then liquidated in June 2003.

On September 18, 2002, Higoal issued 11,880,000 shares of common stock to the stockholders of KCIT in exchange for 100% of the outstanding common stock of KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary of Higoal. On October 1, 2002, Kid Castle Educational Corporation, formerly King Ball International Technology Limited Corporation (the “Company”) entered into an exchange agreement with Higoal whereby the Company issued to the stockholders of Higoal 11,880,000 shares of common stock of the Company in exchange for 100% of the issued and fully paid up capital of Higoal.

As a result of the share exchange, the former stockholders of Higoal hold a majority of the Company’s outstanding capital stock. Generally accepted accounting principles require in certain circumstances that a company whose stockholders retain the majority voting interest in the combined business to be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” whereby Higoal is deemed to have purchased the Company. However, the Company remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes. The Company, Higoal and its subsidiaries collectively are referred to as the “Group”. The operations of the Group are principally located in Taiwan and the PRC.

NOTE 2 - BASIS OF PRESENTATION

The accompanying financial data as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in

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financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Group believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Group’s audited annual financial statements for the year ended December 31, 2003.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of March 31, 2004 and the results of operations for the three months ended March 31, 2004 and 2003 have been made. The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the operating results for the full year.

NOTE 3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Sales of books, magazines, audio and video tapes, compact disc and other merchandises are recognised as revenue on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. Provision is made for expected future sales returns and allowances when revenue is recognized.

Franchise fees are the annual licensing fees for franchisees to use the Group’s brand name and consulting services. Franchising income is recognized on a straight-line basis over the terms of the relevant franchise agreements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

An allowance for doubtful accounts is provided based on the evaluation of collectibility and aging analysis of notes and accounts receivables.

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:

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Maintenance, repairs and minor renewals are charged directly to the statement of operations as incurred. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the financial statements and any resulting gain or loss is included in the statement of operations.

LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Group does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Group measures fair value based on quoted market prices or based on discounted estimates of future cash flows.

INCOME TAXES

The Company and its subsidiaries accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established when it is considered more likely than not that the deferred tax assets will not be realized.

INTANGIBLE ASSETS

Franchises and copyrights are stated at cost and amortized on the straight-line method over their estimated useful lives of 10 years.

COMPREHENSIVE INCOME (LOSS)

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

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(loss) per share gives effect to common stock equivalents. For the three months ended March 31, 2004 and 2003, the Group did not have any potential common stock shares.

RECLASSIFICATION

The presentation of certain prior information has been reclassified to conform with current presentation.

NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No.46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity. FIN 46 provides general guidance as to the definition of a variable interest entity and requires a variable interest entity to be consolidated if a company absorbs the majority of the variable interest entity’s expected losses, or is entitled to receive a majority of the variable interest entity’s residual returns, or both. In December 2003, the FASB issued a revised interpretation of FIN 46 (“FIN 46-R”), which supercedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities created prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. We have performed a review of all entities created prior to and subsequent to January 31, 2003, and determined the adoption of FIN 46 and FIN 46-R did not have a material impact on the Group’s financial reporting and disclosures.

On April 30, 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”(“SFAS No. 149”) SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Group does not expect SFAS No. 149 to have a material impact on the Group’s consolidated financial statements upon adoption.

In May 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Group does not expect SFAS No. 150 to have a material impact on the Group’s consolidated financial statements upon adoption.

In December 2003, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supercedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB

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101 related to multiple element revenue arrangements and revises the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” that have been codified in Topic 13. SAB 104 was effective immediately and did not have a material impact on the Group’s financial reporting and disclosures.

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ended after December 15, 2003. The Group has adopted this Statement since the year ended December 31, 2003, and the adoption of this Statement has no impact on the Group’s consolidated financial statements.

NOTE 5 – NOTES AND ACCOUNTS RECEIVABLE

NOTE 6 – INVENTORIES

For the three months ended March 31, 2004 and 2003, the Group recognized reversal of provision for loss on inventory obsolescence and slow-moving items of $75,130 and $210,150, respectively. As of March 31, 2004 and December 31, 2003, the balances of provision for loss on inventory obsolescence and slow-moving items were $600,551 and $651,795, respectively.

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NOTE 7 – OTHER RECEIVABLES

Note:

NOTE 8 – PREPAYMENTS AND OTHER CURRENT ASSETS

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NOTE 9 – LONG-TERM INVESTMENTS

Note:

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NOTE 10 – RELATED PARTY TRANSACTIONS

AMOUNT DUE TO OFFICERS

As of December 31, 2002, the outstanding balance of amount due to a stockholder, which was unsecured and carried interest at 25.2% per annum, was $606,208 (including the principal of $600,000 and related interests). On November 15, 2003, the Group entered into a liability transfer agreement with the stockholder, to transfer its liability to Mr. Kuo-An Wang and Mr. Yu-En Chiu. According to the agreement, it is stated that the Group would transfer its original liability of $600,000 and the interests separately in two lump sums. The first transfer was completed on December 30, 2003 for $70,000, and the remaining balance, including the principal of $530,000 and related interests, which had yet to be transferred, amounted to $572,160 as of December 31, 2003. The Group completed the transfer subsequent to December 31, 2003. And as of March 31, 2004, there is no underlying amount due to officers.

NOTE 11 – INTANGIBLE ASSETS

Amortization charged to operations was $40,509 and $38,970 for the three months ended March 31, 2004 and 2003, respectively.

The estimated aggregate amortization expenses for each of the five succeeding fiscal years are as follows:

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NOTE 12 – BANK BORROWINGS

Notes:

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NOTE 13 – RECEIPTS IN ADVANCE

The balance comprises:

Notes:

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NOTE 14 – RETIREMENT PLANS

The Group has a defined benefit retirement plan (the “Plan”) covering all regular employees of KCIT, its ROC subsidiary in Taiwan. Under the funding policy of the Plan, commencing from September 2003, KCIT contributes monthly an amount equal to 2% of the employees’ total salaries and wages, to an independent retirement trust fund deposited with the Central Trust of China in accordance with the ROC Labor Standards Law in Taiwan. The retirement fund is not included in the Group’s financial statements. Net periodic pension cost is based on annual actuarial valuations which use the projected unit credit cost method of calculation and is charged to the consolidated statement of operations on a systematic basis over the average remaining service lives of current employees. Under the plan, the employees are entitled to receive retirement benefits upon retirement in the manner stipulated by the ROC Labor Standard Law in Taiwan. The benefits under the plan are based on various factors such as years of service and the final base salary preceding retirement.

The net periodic pension cost is as follows:

The Group previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $54,355 to the Plan in 2004. As of March 31, 2004, $15,893 of contributions has been made. The Group presently anticipates contributing an additional $38,462 to fund the Plan in 2004 for a total of $54,355.

NOTE 15 – GEOGRAPHICAL SEGMENTS

The Group is principally engaged in the business of children education 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 segment is as follows:

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[Continued from above table, first column(s) repeated]

NOTE 16 – COMMITMENT

In October 2003, KCES entered into a purchase obligation agreement with Haicheng (Shanghai) Information Technologies Limited to provide cooperating and franchise schools with equipment sets to facilitate their educational programs. The equipment mainly consists of computer systems. As was disclosed in the previous financial statements for the year ended December 31, 2003, the Group expected to purchase 300 sets of equipment prior to June 30, 2004, which was amounted to $1,012,948. During the three months ended March 31, 2004, the Group purchased 12 sets of equipment and made payment of $13,027. As of March 31, 2004, our purchase obligation amounted to $999,921.

NOTE 17 – SUBSEQUENT EVENTS

On April 1, 2004, KCES 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.

On April 28, 2004, KCES 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.

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This report contains certain forward-looking statements and information relating to us that are based on the beliefs and assumptions made by our management as well as information currently available to the management. When used in this document, the words “anticipate”, “believe”, “estimate”, and “expect” and similar expressions, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are discussed under the caption “Factors That May Affect Our Future Results And Financial Condition” contained herein and other factors disclosed in our filings with the Securities and Exchange Commission including, but not limited to our Annual Report on Form 10-KSB for the year ended December 31, 2003. We do not intend to update these forward-looking statements.

GENERAL

We are engaged in the business of children’s education, focusing on the publication and sale of kindergarten language school and primary school teaching materials and magazines. We also provide management and consulting services to our franchised kindergarten and language schools. Our teaching materials include books, audio tapes, video tapes and compact discs. A major portion of our educational materials focuses on English language education. We also sell educational tools and equipment that are complementary to our business. Currently, our major business is in Taiwan. In 2001, we started to expand our business in the People’s Republic of China (“PRC”). We officially launched our operations in Shanghai in April 2002. As in Taiwan, we offer advanced teaching materials and tools, and monthly and bi-weekly magazines to provide children ranging from two to twelve years of age a chance to learn exceptional English language and computer skills, and to provide a pre-school education program.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, equity investments, income taxes, financing operations, pensions and commitment 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 similar to sales to our direct customers. We estimate sales returns and discounts based on historical experience and record as reductions to revenues.

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If market conditions were to decline, we may take actions to increase sales discounts, possibly resulting in an incremental reduction of revenue at the time when revenues are recognized.

Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Allowance for obsolete inventories and lower of cost or market. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about inventory aging, future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Investment impairments. We hold equity interests in companies having operations in areas within our strategic focus. We record an investment impairment charge when we believe an investment has experienced a decline in value that is not temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Fixed assets and depreciation. Our fixed assets are stated at cost. Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs that do not extend the life of the applicable asset are charged to expense as incurred. Buildings are depreciated over a 50-year term. Fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from two and a half years to ten years.

Impairment of long-lived assets. We review our fixed assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimate of fair value is generally based on quoted market prices or on the best available information, including prices for similar assets and the results of using other valuation techniques.

As of March 31, 2004, the balance of our amortizable intangible assets was $976,906, including franchise-related intangible assets of $615,242 and copyrights of $361,664. The amortizable intangible assets are amortized on a straight-line basis over estimated useful lives of 10 years. In determining the useful lives and recoverability of the intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets, which may not represent the true fair value. If these estimates or their related assumptions change in the future, there may be significant impact on our results of operations in the period of the change incurred.

Income taxes. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon

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management’s estimates of realizability. Actual results may differ significantly from management’s estimate.

Currency Risk

Our transactions with suppliers and customers are primarily effected in New Taiwan dollars, which is the functional currency of our Taiwanese subsidiary, Kid Castle Internet Technologies Limited (“KCIT”). As a result of our expansion in the PRC, our transactions denominated in Renminbi, which is the functional currency of our PRC subsidiary, Kid Castle Educational Software Development Company Limited (“KCES”), are increasing. Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the New Taiwan dollar and the Renminbi will affect our reported financial results. Such impacts could be meaningful and are independent of the underlying performance of the business. The market price of our securities could be significantly harmed based on unfavorable changes in exchange rates. We do not actively manage our exposure to such effects.

RESULTS OF OPERATIONS

Three months ended March 31, 2004 and 2003

Total net operating revenues increased by $20,461, or 0.8%, to $2,610,338 for the three months ended March 31, 2004 from $2,589,877 for the three months ended March 31, 2003, including the decreases in sales of goods of $72,645 and other operating revenues of $3,375, and the increase in franchising income of $96,481. The decrease in sales of goods, from $2,102,498 for the three months ended March 31, 2003 to $2,029,853 for the three months ended March 31, 2004, or 3%, was mainly due to mild turndown in the net sales of goods generated from our Taiwan operations of $299,940 for the three months ended March 31, 2004 from sales on monthly magazines, and sales from preschool channel distributors. In addition, net sales of goods generated from our Shanghai operations increased by $158,364, or 114%, to $297,751 for the three months ended March 31, 2004 from $139,387 for the three months ended March 31, 2003. The increase in franchising income, from $431,651 for the three months ended March 31, 2003 to $528,132 for the three months ended March 31, 2004, was mainly due to the increase in numbers of our franchised schools and the increase in the annual franchising fees. Our other operating revenues represent revenues from other activities and services such as training of teachers, arranging for personal English language tutors, organizing field trips and educational fairs and designing the school layout for franchised schools. Other operating revenues decreased by $3,375, or 6%, to $52,353 for the three months ended March 31, 2004 from $55,728 for the three months ended March 31, 2003. The decrease was mainly due to the decrease in organizing field trips of $5,805.

Gross profit decreased by $130,133, or 7%, to $1,746,537 for the three months ended March 31, 2004 from $1,876,670 for the three months ended March 31, 2003. Gross margin decreased to 67% for the three months ended March 31, 2003 from 72% for the same period in prior year. The decrease was mainly due to the reversal of provision for loss on inventory obsolescence and slow-moving items that was written down significantly in 2001. The reversal of such provision amounted to $75,130 and $210,150 for the three months ended March 31, 2004 and 2003, respectively, causing a decrease of gross profit by $135,020.

Total operating expenses increased by $450,744, or 27%, to $2,143,066 for the three months ended March 31, 2004 from $1,692,322 for the three months ended March 31, 2003. Advertising costs increased by $82,667, or 188%, to $126,642 for the three months ended March 31, 2004 from $43,975 for the three months ended March 31, 2003. The increase was mainly because we spent more advertising costs on the promotion of our products and franchised schools. Other operating expenses increased by $368,077, or 22%, to $2,016,424 for the three months ended March 31, 2004 from $1,648,347 for the

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three months ended March 31, 2003, principally due to increases in commission fees from monthly magazines and in expenses as a result of the expansion in Shanghai, PRC. Commission fees increased by $224,252, or 226%, to $323,347 for the three months ended March 31, 2004 from $99,095 for the three months ended March 31, 2003, was mainly due to the new promotion of our monthly magazines sold to pre-school. In addition, we incurred additional professional fees in relation to SEC filings of approximately $42,898.

Net interest expenses decreased by $52,256, or 71%, to $21,765 for the three months ended March 31, 2004 from $74,201 for the three months ended March 31, 2003, primarily due to a loan from a stockholder in April 2002 (please refer to Note 10 to the condensed consolidated financial statements) that had a monthly interest rate of 2.1% and was fully repaid subsequent to December 31, 2003..

Share of gain (loss) of investments increased by $59,677, or 470%, to $46,967 for the three months ended March 31, 2004 from ($12,710) for the three months ended March 31, 2003, primarily due to our new investment in Culture Media on July 8, 2003 that incurred an investment gain of $47,007 (please refer to Note 9 to our condensed consolidated financial statements).

In addition, On June 5, 2003, pursuant to a special resolution adopted by our board of directors, we resolved to amend the agreement we entered into on May 16, 2001 with Global International Education Investment Ltd. (“Global International”) to change our cooperation relationship. On June 10, 2003, we entered into a letter of intent with Global International to change the payment structure on the strategic alliance from equity ownership to franchising fees and such amendment to the original agreement should be completed by the end of August 2003. Pursuant to the change on the payment structure, we were to give up the 15% ownership in Global International at the effective date of the change of the agreement. On August 25, 2003, the Group entered into a revised agreement with Global International to provide consulting services to Global International. Pursuant to this revised agreement, the Group charges 15% of Global International’s annual net income as consulting fees. The service period covered by the revised agreement began on July 1, 2003. However, as of March 31, 2003, we recognized an investment loss of $12,710 in Global International.

Other non-operating income decreased by $12,456, or 22%, to $43,673 for the three months ended March 31, 2004 from $56,129 for the three months ended March 31, 2003, primarily because we started to negotiate more favorable terms with our vendors since Q3 in 2003, that led to a significant reduction of purchasing costs, and as a result, the cash rebates from vendors decreased by $10,295.

Income tax provision for the three months ended March 31, 2003 was $148,497. This income tax provision mainly represents the use of net operating loss carry-forwards to offset the income generated from operations in Taiwan and an increase in the valuation allowance against deferred tax assets generated from our Shanghai operations so as to reduce the deferred tax assets to the extent that the tax benefit is more likely than not to be realized.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2004, our principal sources of liquidity included cash and bank balances of $1,250,445, which decreased from $1,273,723 at December 31, 2003. The decrease was mainly due to the expenditures to fund the daily operations.

Net cash provided by (used in) operating activities was $45,426 and ($196,989) during the three months ended March 31, 2004 and 2003, respectively. Net cash provided by operating activities during the three months ended March 31, 2004 was primarily attributed to the decrease of notes and accounts receivable

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of $192,461 and inventory of $204,320. As compared to net cash used in operating activities during the three months ended March 31, 2003, which was primarily attributed to the increases in all receivables of $982,492, the notes and accounts payable of 385,967, accrued expenses of $153,499 and receipts in advance of $265,487.

Net cash used in investing activities amounted to $105,689 and $201,684 during the three months ended March 31, 2004 and 2003, respectively. During the three months ended March 31, 2004, bank fixed deposits pledged increased by $135,818, compared to increase of $80,957 during the three months ended March 31, 2003. Pledged notes receivable decreased by $30,129 compared to an increase of $86,038 for the same period in prior year.

Net cash provided by financing activities during the three months ended March 31, 2004 was $67,777 as compared to $793,482 during the three months ended March 31, 2003. The $725,705 difference was primarily attributed to the repayment of loans from officers/stockholders of $636,529 in the first quarter of 2004.

As of March 31, 2004, the Company has a total line of credit of $2,561,784 from certain banks and the unused credit facility was $321,084.

Off-Balance Sheet Arrangement

The Securities and Exchange Commission (“SEC”) has described various characteristics to identify contractual arrangements that would fall within the SEC’s definition of off-balance sheet arrangements.

The following table represents the Group’s contractual obligations:

Bank borrowing

One of our financing sources is from bank borrowings. As of March 31, 2004 and December 31, 2003, the balances of bank borrowings, including current and non-current portions, were $3,217,258 and $2,484,471, respectively.

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Purchase obligation with equipment

In October 2003, KCES entered into a purchase obligation agreement with Haicheng (Shanghai) Information Technologies Limited to provide cooperating and franchise schools with equipment sets to facilitate their educational programs. The equipment mainly consists of computer systems. As we are expecting to purchase 300 sets of such equipment prior to June 30, 2004 pursuant to the agreement, the total amount of the purchase obligation was $1,012,948 as of December 31, 2003. In the first quarter of 2004, we purchased 12 sets and made payment of $13,027. As of March 31, 2004, our purchase obligation amounted to $999,921.

Equity investments in joint ventures

On July 8, 2003, KCES entered into agreements with 21st Century Publishing House in Jiangxi Province of the PRC to establish two joint ventures, 21st Century Kid Castle Culture Media Co., Ltd and Jiangxi 21st Century Kid Castle Language and Education Center. Pursuant to these agreements, KCES and 21st Century Publishing House each owns 50% interests in 21st Century Kid Castle Culture Media Co., Ltd and Jiangxi 21st Century Kid Castle Language and Education Center.

On April 1, 2004, KCES signed a joint venture agreement with Tianjin Foreign Enterprises & Experts Service Corp., in Tianjin City PRC. Pursuant to this joint venture agreement, KCES and Tianjin Foreign Enterprises & Experts Service Corp. each owns a 50% interest in Tianjin Kid Castle Educational Investment Consulting Co., Ltd.

On April 28, 2004, KCES 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, KCES, 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.

Pension Benefit

We have a defined benefit retirement plan (the “Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, as described in Note 14 to the Consolidated Financial Statements. The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are $0 and $40,913, respectively. We also make defined contributions to a retirement benefits plan for its employees in the PRC in accordance with local regulations. The contributions made by us for the years ended March 31, 2004 and 2003 amounted to $23,319 and $13,655, respectively.

Operating Leases

We have entered into several non-cancelable lease arrangements for administrative office space, warehouse space and sales offices in various periods.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is

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effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Management is currently evaluating the effect of adopting FIN 46 on its results of operations and financial position.

On April 30, 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”(“SFAS No. 149”) SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We believe that the adoption of SFAS No. 149 will have no material impact on our consolidated financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We believe that the adoption of SFAS No. 150 will have no material impact on our consolidated financial statements.

In December 2003, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supercedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements and revises the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” that have been codified in Topic 13. SAB 104 was effective immediately and did not have a material impact on the Company’s financial reporting and disclosures.

In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement, which also requires new disclosures for interim periods beginning after December 15, 2003, is effective for fiscal years ended after December 15, 2003. The Company has adopted this Statement since the year ended December 31, 2003, and the adoption of this Statement has no impact on the Company’s consolidated financial statements.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION

Investing in our securities involves a high degree of risk. In addition to the other information contained in this quarterly report, you should consider the following factors before investing in our securities.

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Because our officers and directors are not U.S. Persons, and our operating subsidiaries are Taiwan and People’s Republic of China companies, you may be unable to enforce judgments under the Securities Act.

Our operating subsidiaries are a Taiwanese company and a People’s Republic of China company, our officers and directors are residents of various jurisdictions outside the United States. All or a substantial portion of the assets of our business and of such persons are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to enforce in the United States courts judgments obtained against such persons in United States courts and predicated upon the civil liability provisions of the Securities Act.

Because we face competition from established competitors, we may be unable to maintain market share.

Our primary competitors have significant financial, technical and marketing resources, and/or name recognition, including Giraffe, G-Telp and Jia Yin. Some of these competitors have a longer operating history and greater overall resources than we do. These companies also have established customer support and professional services organizations. As a result, our competitors may be able to adapt more quickly to changes in customer needs, offer products and services at lower prices than us, devote greater resources than us to development and sale of teaching/learning products and services, which could result in reducing our market share.

If we lose key management or other personnel, we may experience delays in our product development and other negative effects on our business.

Our success is dependent upon the personal efforts and abilities of our executive officers, Kuo-An Wang, our Chief Executive Officer, and Yu-En Chui, our Chief Financial Officer. If these key officers cease employment with us before we find qualified replacements, it would have a significant negative impact on our operations. We do not have employment agreements with any of our executive officers.

Moreover, our growth and success depend on our ability to attract, hire and retain additional highly qualified management, educators, technical, marketing and sales personnel. These individuals are in high demand and we may not be able to attract the staff we need. The hiring process is intensely competitive, time consuming and may divert the attention of our management from our operations. Competitors and others have in the past, and may in the future, attempt to recruit our employees. If we lose the services of any of our senior management or key education personnel, or if we fail to continue to attract qualified personnel, our business could suffer.

Because we conduct operations in New Taiwan (NT) Dollars and Renminbi (RMB), we are subject to risk from exchange rate fluctuations.

Our transactions with suppliers and customers are effected in New Taiwan dollars, the functional currency of our Taiwanese subsidiary, KCIT, and increasingly in RMB, the functional currency of our PRC subsidiary, KCES, as a result of our expansion in the PRC. Our financial statements are reported in U.S. dollars. As a result, fluctuations in the relative exchange rate among the U.S. dollar, the NT dollar and the RMB will affect our reported financial results from one period to the next. Such impacts could be meaningful and are independent of the underlying performance of our business. The market price of our securities could be significantly harmed based on unfavorable changes in exchange rates. We do not actively manage our exposure to such effects.

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An increase in market competition could have a negative impact on our business.

Our markets are new, rapidly evolving and highly competitive, and we expect this competition to persist and intensify in the future. This increase in competition could lead to price reductions, decreased sales-volume, under-utilization of employees, reduced operating margins and loss of market share. There can be no assurance that we will be able to successfully compete for customers in our targeted markets.

Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter current or potential competition from a number of sources, including:

We cannot predict whether demand for our products and services will continue to develop, particularly at the volume or prices that we need to remain profitable.

Although the market for English language instruction and education is growing rapidly, we cannot be certain that this growth will continue in its present form, or at all. We believe our success ultimately will depend upon, among other things, our ability to:

If we are unable to maintain, improve and develop our products and services, we may not achieve profitability.

We have incurred operating losses since inception and hence, as of March 31, 2004, the balance of accumulated deficit was $6,385,136.

In order to turn profitable, we need to maintain and improve our current products and services and to develop or license new ones on a timely basis. If we cannot effectively maintain, improve and develop products and services we may not be able to recover our fixed costs or otherwise turn profitable. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes, evolving education industry standards or customer needs and trends on a timely basis. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products, services and service enhancements. These new products, services and service enhancements may not achieve market acceptance or our competitors may develop alternative technologies and methods that gain broader market acceptance than our products and services.

Because we may not be able to protect our proprietary rights on a global basis, we may incur substantial costs to defend or protect our business and intellectual property.

If we fail to protect our intellectual property, we may be exposed to expensive litigation or risk jeopardizing our competitive position. The steps we have taken may be inadequate to protect our intellectual property. We may have to litigate to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could

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result in substantial costs and the diversion of our management and technical resources which could harm our business.

In addition, laws in the PRC have traditionally been less protective of intellectual property rights and enforcement relating to the protection of intellectual property in the PRC has been sporadic at best. Deterioration in compliance with existing legal protections or reductions in the legal protection for intellectual property rights in the PRC could adversely affect our revenue as we continue to expand into the PRC market.

Because we may not be able to avoid claims that we infringed the proprietary rights of others, we may incur substantial costs to defend or protect our business and intellectual property.

Although we have taken steps to avoid infringement claims from others, these measures may not be adequate to prevent others from claiming that we violated their copyrights, other trademarks or other proprietary rights. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. A party making a claim could secure a judgment that requires us to pay substantial damages.

Because we intend to expand internationally, we will be subject to risks of conducting business in foreign countries.

As we expand our operations outside of Taiwan, we will be subject to the risks of conducting business in foreign countries, including:

We cannot be certain that the risks associated with our anticipated foreign operations will not negatively affect our operating results or prospects, particularly as these operations expand in scope, scale and significance.

Our operations in the PRC are subject to political, regulatory and economic uncertainties.

Our operations and assets in the PRC are subject to significant political, regulatory and economic uncertainties. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on

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our business, results of operations and financial condition. Under its current leadership, the PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the PRC government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

In addition, our subsidiary, KCES, entered into agreements in July 2003 to establish two joint ventures, Culture Media and Education Center, with a local Chinese party, 21st Century Publishing House, in Jiangxi Province. We established Culture Media and Education Center to engage mainly in the publication and distribution of English language education materials, the operation of kindergarten and language schools, and the running of cooperative schools in China. We intend to use these joint ventures as one of our primary vehicles for our expansion in the PRC market. Although we have received, on January 19, 2004 and October 31, 2003, licenses from the applicable government authorities to conduct the business of Culture Media and Education Center, respectively, in the PRC, the regulations with respect to operation of businesses by foreign-owned entities are still in flux. There is no assurance that the licenses will not be challenged by the PRC authorities.

The lack of remedies and impartiality under the PRC’s legal system could negatively impact us.

Unlike the U.S., the PRC has a civil law system based on written statutes in which judicial decisions have little precedential value. The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.

“Penny Stock” regulations may impose certain restrictions on marketability of our common stock.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock may fall within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse).

For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell our common stock in the secondary market.

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An outbreak of Severe Acute Respiratory Syndrome (“SARS”) may adversely affect our results of operations.

In March 2003, Guangdong Province of the PRC, Hong Kong, Singapore, Taiwan and several other Asian countries encountered in outbreak of SARS, a highly contagious form of atypical pneumonia. Although the SARS epidemic now appears to become under control, some experts fear that the SARS epidemic might resurface as number of isolated SARS cases have been reported recently. In the future, if any of our employees or students is suspected to have contracted SARS, under certain circumstances such employees, students and affected areas of our premises may have to be quarantined. As a result, we may have to temporarily suspend all or part of our operations. Furthermore, a future outbreak of SARS may negatively impact our ability to attract foreign teachers, who may be less inclined to come to Taiwan, and students, whose parents may choose to have them taught at home by an individual.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily fluctuations in foreign exchange rates and interest rates. We have not entered into derivative or hedging transactions to manage risk in connection with such fluctuations.

INTEREST RATE EXPOSURE

If interest rates were to decrease 1%, the result would be an annual decrease in our interest income related to our cash and cash equivalents of approximately $32,087. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effect of the change in the level of overall economic activity that could exist in such an environment.

FOREIGN CURRENCY EXPOSURE

     We have operations in both Taiwan and the PRC. The functional currency of Higoal and its subsidiaries other than KCES is NT Dollars and the financial records are maintained and the financial statements are prepared for these entities in NT$. The functional currency of KCES is RMB and the financial records are maintained and the financial statements are prepared for KCES 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 are such instruments used for speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

We have carried out an evaluation, under the supervision and with the participation of our Chairman and CEO and our CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our CEO and our CFO concluded that, as of March 31, 2004, our disclosure controls and procedures are effective in timely alerting us to material information required to be included in our periodic reports filed with the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

During the quarter ended March 31, 2004, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control

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over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We have no material pending legal proceedings.

ITEM 2. CHANGES IN SECURITIES

Pursuant to a stock purchase agreement dated August 18, 2003, Globe Wisdom Investments Limited (“GWIL”), a Samoan international business company, subscribed for 175,500 shares of our common stock at an aggregate purchase price of $122,850 in a private offering. As of April 30, 2004, we had not yet issued any shares to GWIL pursuant to the August 18, 2003 stock purchase agreement.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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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: May 14, 2004

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