KID CASTLE EDUCATIONAL CORP - Quarter Report: 2005 September (Form 10-Q)
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: September 30, 2005
or
o
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
|
(IRS
Employer
|
|
|
incorporation
or organization)
|
Identification
No.)
|
|
|
8th
Floor, No. 98 Min Chuan Road, Hsien Tien
Taipei,
Taiwan ROC
|
||
|
(Address
of principal executive offices)
|
Registrant’s
telephone number, including area code: 011-886-22218
5996
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
o
Indicate
by check mark whether the Registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act).
Yes
o No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
As
of
June 8, 2006, there were 18,999,703 shares of the Registrant’s common stock
outstanding.
ITEM
1 - FINANCIAL STATEMENTS
Kid
Castle Educational Corporation
Condensed
Consolidated Balance Sheets
(Expressed
in US Dollars)
|
ASSETS
|
September
30,
2005
|
December
31,
2004
|
|||||
|
(Unaudited)
|
(Audited)
|
||||||
|
Current
assets
|
|||||||
|
Cash
and bank balances include pledged bank fixed deposits of $67,064
and
$294,331
|
$
|
273,925
|
$
|
507,895
|
|||
|
Notes
and accounts receivable include pledged notes receivables of $1,133,305
and $1,218,356, net of provision for doubtful accounts and sales
returns
of $1,021,047 and $196,188
|
4,513,386
|
3,620,260
|
|||||
|
Inventories,
net
|
2,681,349
|
2,979,738
|
|||||
|
Other
receivables
|
178,069
|
337,848
|
|||||
|
Prepayments
and other current assets
|
738,222
|
478,752
|
|||||
|
Deferred
income tax assets
|
197,453
|
218,574
|
|||||
|
Total
current assets
|
8,582,404
|
8,143,067
|
|||||
|
Deferred
income tax assets
|
180,285
|
170,477
|
|||||
|
Prepaid
long-term investments
|
—
|
24,165
|
|||||
|
Long-term
investments
|
102,475
|
99,467
|
|||||
|
Property
and equipment, net
|
2,114,023
|
2,188,092
|
|||||
|
Intangible
assets, net of amortization
|
766,645
|
894,419
|
|||||
|
Long-term
notes receivable includes pledged notes receivable of $484,523
and
$407,149
|
694,163
|
648,120
|
|||||
|
Other
assets
|
676,893
|
613,617
|
|||||
|
Total
assets
|
$
|
13,116,888
|
$
|
12,781,424
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Bank
borrowings - short-term and maturing within one
year
|
$
|
2,313,652
|
$
|
2,632,982
|
|||
|
Notes
and accounts payable
|
2,080,556
|
1,506,543
|
|||||
|
Accrued
expenses
|
1,110,392
|
703,407
|
|||||
|
Other
payables
|
319,095
|
283,080
|
|||||
|
Deposits
received
|
837,496
|
498,266
|
|||||
|
Receipts
in advance
|
2,753,266
|
2,996,558
|
|||||
|
Income
tax payable
|
208,181
|
97,142
|
|||||
|
Obligation
under capital leases due within one year
|
36,748
|
8,659
|
|||||
|
Total
current liabilities
|
9,659,386
|
8,726,637
|
|||||
|
Bank
borrowings maturing after one year
|
1,768,217
|
1,651,825
|
|||||
|
Receipts
in advance
|
1,189,140
|
1,124,809
|
|||||
|
Obligation
under capital leases
|
22,149
|
—
|
|||||
|
Deposits
received
|
413,487
|
689,530
|
|||||
|
Accrued
pension liabilities
|
245,995
|
160,907
|
|||||
|
Total
liabilities
|
13,298,374
|
12,353,708
|
|||||
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
-2-
Kid
Castle Educational Corporation
Condensed
Consolidated Balance Sheets - Continued
(Expressed
in US Dollars)
|
September
30,
2005
|
December
31,
2004
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
|
Minority
interest
|
17,774
|
33,791
|
|||||
|
Shareholders’
equity
|
|||||||
|
Capital
Stock
|
|||||||
|
Common
stock, no par share:
|
|||||||
|
25,000,000
shares authorized; 18,999,703 shares issued and outstanding at
September
30, 2005 and December 31, 2004
|
7,669,308
|
7,669,308
|
|||||
|
Legal
reserve
|
65,320
|
65,320
|
|||||
|
Retained
deficit
|
(8,001,668
|
)
|
(7,312,074
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(126,241
|
)
|
(222,650
|
)
|
|||
|
Total
shareholders’ equity
|
(199,260
|
)
|
393,925
|
||||
|
Total
liabilities and shareholders’ equity
|
$
|
13,116,888
|
$
|
12,781,424
|
|||
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
-3-
Kid
Castle Educational Corporation
Condensed
Consolidated Statements of Operations
(Expressed
in US Dollars)
(Unaudited)
|
Nine
months ended
September
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Operating
Revenue
|
|||||||
|
Sales
of goods
|
$
|
6,372,162
|
$
|
5,661,046
|
|||
|
Franchising
income
|
1,914,925
|
1,814,984
|
|||||
|
Other
operating revenue
|
448,807
|
389,846
|
|||||
|
Total
net operating revenue
|
8,735,894
|
7,865,876
|
|||||
|
Operating
costs
|
|||||||
|
Cost
of goods sold
|
(2,701,227
|
)
|
(2,426,012
|
)
|
|||
|
Cost
of franchising
|
(547,535
|
)
|
(373,980
|
)
|
|||
|
Other
operating costs
|
(307,076
|
)
|
(307,660
|
)
|
|||
|
Total
operating costs
|
(3,555,838
|
)
|
(3,107,652
|
)
|
|||
|
Gross
profit
|
5,180,056
|
4,758,224
|
|||||
|
Other
operating expenses
|
(5,609,858
|
)
|
(5,409,916
|
)
|
|||
|
Loss
from operations
|
(429,802
|
)
|
(651,692
|
)
|
|||
|
Interest
income
|
11,000
|
22,582
|
|||||
|
Interest
expenses
|
(182,346
|
)
|
(123,474
|
)
|
|||
|
Share
of profit (loss) of investments
|
(21,633
|
)
|
10,609
|
||||
|
Other
non-operating income, net
|
192,401
|
70,982
|
|||||
|
Loss
before income taxes and minority interest
|
(430,380
|
)
|
(670,993
|
)
|
|||
|
Provision
for taxes
|
(275,361
|
)
|
(111,567
|
)
|
|||
|
Loss
before minority interest
|
(705,741
|
)
|
(782,560
|
)
|
|||
|
Minority
interest in (income) loss
|
16,147
|
(2,611
|
)
|
||||
|
Net
loss
|
$
|
(689,594
|
)
|
$
|
(785,171
|
)
|
|
|
Loss
per share - basic and diluted
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
|
|
Weighted-average
shares used to compute loss per share - basic and diluted
|
18,999,703
|
18,999,703
|
|||||
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
-4-
Kid
Castle Educational Corporation
Condensed
Consolidated Statements of Operations
(Expressed
in US Dollars)
(Unaudited)
|
Three
months ended
September
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Operating
Revenue
|
|||||||
|
Sales
of goods
|
$
|
2,822,830
|
$
|
2,444,267
|
|||
|
Franchising
income
|
606,879
|
622,244
|
|||||
|
Other
operating revenue
|
142,459
|
185,932
|
|||||
|
Total
net operating revenue
|
3,572,168
|
3,252,443
|
|||||
|
Operating
costs
|
|||||||
|
Cost
of goods sold
|
(1,194,054
|
)
|
(1,101,089
|
)
|
|||
|
Cost
of franchising
|
(370,880
|
)
|
(128,476
|
)
|
|||
|
Other
operating costs
|
(129,805
|
)
|
(171,921
|
)
|
|||
|
Total
operating costs
|
(1,694,739
|
)
|
(1,401,486
|
)
|
|||
|
Gross
profit
|
1,877,429
|
1,850,957
|
|||||
|
Other
operating expenses
|
(2,302,459
|
)
|
(1,525,320
|
)
|
|||
|
Income
(loss) from operations
|
(425,030
|
)
|
325,637
|
||||
|
Interest
income
|
2,622
|
3,412
|
|||||
|
Interest
expenses
|
(57,985
|
)
|
(39,368
|
)
|
|||
|
Share
of loss of investments
|
(34,116
|
)
|
(20,816
|
)
|
|||
|
Other
non-operating income (loss), net
|
138,777
|
(10,788
|
)
|
||||
|
Income
(loss) before income taxes and minority interest
|
(375,732
|
)
|
258,077
|
||||
|
Provision
for taxes
|
(90,611
|
)
|
(110,345
|
)
|
|||
|
Income
(loss) before minority interest
|
(466,343
|
)
|
147,732
|
||||
|
Minority
interest in (income) loss
|
35,206
|
(2,611
|
)
|
||||
|
Net
income (loss)
|
$
|
(431,137
|
)
|
$
|
145,121
|
||
|
Earnings
(loss) per share - basic and diluted
|
$
|
(0.02
|
)
|
$
|
0.01
|
||
|
Weighted-average
shares used to compute earnings (loss) per share - basic and
diluted
|
18,999,703
|
18,999,703
|
|||||
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
-5-
Kid
Castle Educational Corporation
Condensed
Consolidated Statement of Comprehensive Income (Loss)
(Expressed
in US Dollars)
(Unaudited)
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
income (loss)
|
$
|
(689,594
|
)
|
$
|
(785,171
|
)
|
$
|
(431,137
|
)
|
$
|
145,121
|
||
|
Other
comprehensive income (loss):
|
|||||||||||||
|
Foreign
currency translation gain (loss)
|
96,409
|
(5,879
|
)
|
21,901
|
273
|
||||||||
|
Total
comprehensive income (loss)
|
$
|
(593,185
|
)
|
$
|
(791,050
|
)
|
$
|
(409,236
|
)
|
$
|
145,394
|
||
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
-6-
Kid
Castle Educational Corporation
Condensed
Consolidated Statements of Cash Flows
(Expressed
in US Dollars)
(Unaudited)
|
Nine
months ended
September
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
flows from operating activities
|
|||||||
|
Net
loss
|
$
|
(689,594
|
)
|
$
|
(785,171
|
)
|
|
|
Adjustments
to reconcile net loss to
net cash used in operating activities:
|
|||||||
|
Depreciation
and amortization
|
333,388
|
258,261
|
|||||
|
Allowance
for doubtful debts and sales returns
|
1,231,289
|
172,537
|
|||||
|
Provision
for allowance for loss on inventory obsolescence and slow-moving
items
|
58,325
|
113,573
|
|||||
|
Gain
on disposal of property and equipment
|
(30,333
|
)
|
(10,609
|
)
|
|||
|
Decrease
in deferred income tax assets
|
11,313
|
67,378
|
|||||
|
Minority
interest in income
|
(16,017
|
)
|
2,611
|
||||
|
Share
of loss of investments
|
21,157
|
—
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Increase
in notes and accounts receivable
|
(2,124,415
|
)
|
(561,081
|
)
|
|||
|
Decrease
in inventories
|
240,064
|
(403,744
|
)
|
||||
|
Increase
in other receivables
|
159,779
|
(99,282
|
)
|
||||
|
Increase
in prepayments and other current assets
|
(259,470
|
)
|
(250,194
|
)
|
|||
|
Increase
in other assets
|
(63,276
|
)
|
(122,453
|
)
|
|||
|
Increase
in notes and accounts payable
|
574,013
|
572,556
|
|||||
|
Increase
in accrued expenses
|
406,985
|
(104,349
|
)
|
||||
|
Increase
in other payables
|
36,015
|
(88,561
|
)
|
||||
|
Decrease
in receipts in advance
|
(178,961
|
)
|
349,247
|
||||
|
Increase
in income taxes payable
|
111,039
|
42,967
|
|||||
|
Increase
in deposits received
|
63,187
|
129,455
|
|||||
|
Increase
in accrued pension liabilities
|
85,088
|
10,406
|
|||||
|
Net
cash used in operating activities
|
(30,424
|
)
|
(706,453
|
)
|
|||
|
Cash
flows from investing activities
|
|||||||
|
Purchases
of property and equipment
|
(111,270
|
)
|
(197,389
|
)
|
|||
|
Proceeds
from disposal of property and equipment
|
78,661
|
79,135
|
|||||
|
Acquisition
of long-term investments
|
—
|
(103,563
|
)
|
||||
|
Acquisition
of long-term notes receivable
|
(46,043
|
)
|
—
|
||||
|
Advances
to shareholder
|
(2,267,424
|
)
|
—
|
||||
|
Repayments
of advances to shareholder
|
2,267,424
|
—
|
|||||
|
Net
cash used in investing activities
|
(78,652
|
)
|
(221,817
|
)
|
|||
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
-7-
Kid
Castle Educational Corporation
Condensed
Consolidated Statements of Cash Flows - Continued
(Expressed
in US Dollars)
|
Nine
months ended
September
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from bank borrowings
|
791,450
|
2,500,962
|
|||||
|
Repayment
of bank borrowings
|
(994,388
|
)
|
(1,652,431
|
)
|
|||
|
Repayment
of capital leases
|
(18,365
|
)
|
(22,086
|
)
|
|||
|
Repayment
of loan from officers/shareholders
|
—
|
(581,228
|
)
|
||||
|
Net
cash consumed by financing activities
|
(221,303
|
)
|
245,217
|
||||
|
Net
decrease in cash and cash equivalents
|
(330,379
|
)
|
(683,053
|
)
|
|||
|
Effect
of changes in exchange rate on cash and cash equivalents
|
96,409
|
3,561
|
|||||
|
Cash
and cash equivalents at beginning of period
|
507,895
|
1,478,612
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
273,925
|
$
|
799,120
|
|||
Supplemental
disclosure of cash flows information:
Cash
payments for income taxes were $6,280 for the 2005 period and $6,280 in the
2004
period. Cash payments for interest were $251,071 in the 2005 period and $238,225
in the 2004 period. None of the interest was capitalized.
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
-8-
Kid
Castle Educational Corporation
Notes
to Condensed Consolidated Financial Statements
(Expressed
in US Dollars)
(Unaudited)
NOTE
1.
BASIS OF PRESENTATION
The
unaudited interim condensed consolidated financial statements of Kid Castle
Education Corporation (“the Company”) as of September 30, 2005, and for the nine
month and three month periods ended September 30, 2005 and 2004 have been
prepared in accordance with accounting principles generally accepted in the
United States of America. In the opinion of management, such information
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for such periods. The results
of operations for the quarter and nine month period ended September 30, 2005
are
not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 2005.
Certain
information and disclosures normally included in the notes to financial
statements have been condensed or omitted as permitted by the rules and
regulations of the Securities and Exchange Commission, although the Company
believes the disclosure is adequate to make the information presented not
misleading. The accompanying unaudited financial statements should be read
in
conjunction with the financial statements of the Company included in the annual
report on Form 10-K for the year ended December 31, 2004.
NOTE
2.
OTHER OPERATING EXPENSES
|
Nine
months ended
September
30,
|
Three
months ended
September
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Commissions
|
$
|
137,783
|
$
|
421,994
|
$
|
49,407
|
$
|
103,747
|
|||||
|
Advertising
|
54,442
|
400,591
|
28,050
|
(5,521
|
)
|
||||||||
|
Amortization
and depreciation
|
333,388
|
308,114
|
116,721
|
88,713
|
|||||||||
|
Allowance
for doubtful accounts
|
1,167,068
|
(3,454
|
)
|
820,825
|
0
|
||||||||
|
Insurance
|
184,793
|
175,854
|
56,667
|
46,785
|
|||||||||
|
Professional
Fees
|
300,440
|
287,339
|
113,653
|
138,951
|
|||||||||
|
Rent
|
385,744
|
278,111
|
115,045
|
85,994
|
|||||||||
|
Salary
|
2,131,239
|
2,424,194
|
648,425
|
672,445
|
|||||||||
|
Other
expenses
|
914,961
|
1,117,173
|
353,666
|
394,206
|
|||||||||
|
Other
operating expenses
|
$
|
5,609,858
|
$
|
5,409,916
|
$
|
2,302,459
|
$
|
1,525,320
|
|||||
-9-
NOTE
3.
RELATED PARTY TRANSACTIONS
During
the nine months period ended September 30, 2005, the Company’s CFO at the time,
Mr. Yu-En Chiu, effected numerous withdrawals and repayment of Company funds
that the Company has determined to treat for accounting purposes as short term
interest free loans. The total amount of the withdrawals totaled NT$71,900,000
($2,267,424). As of September 30, 2005, Mr. Chiu had repaid all such withdrawals
to the Company. Additional withdrawals were made by Mr. Chiu during the fourth
quarter of 2005 totaling NT$23,100,000 ($728,477). Mr. Chiu’s withdrawals and
the Company’s action with respect thereto are more fully described in the
Company’s Form 8-K dated June 16, 2006. There
were no advances to Mr. Chiu after December 31, 2005.
NOTE
4.
GOING CONCERN
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As the Company is aggressively expanding its
business in the People’s Republic of China (PRC) and the Company’s PRC operation
is still in an emerging stage and has not turned profitable, the Company has
suffered recurring losses from operations, has a working capital deficiency,
and
an equity deficit. The above conditions raise substantial doubt about the
ability of the Company to 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 this uncertainty.
Comparison
of the Three Months Ended September 30, 2005 and 2004
Total
Net
Operating Revenue. Total
net
operating revenues increased by $319,725, or 9.8%, to $3,572,168 for the three
months ended September 30, 2005 from $3,252,443 for the three months ended
September 30, 2004. The increase for the 2005 period reflects an increase
in sales of goods of $378,563 and a decrease of franchising income of $15,365
and other operating revenues of $43,473, all from the amounts of the comparable
prior period in 2004.
Sales
of
goods. The
increase in sales of goods of $378,563, or 15.5%, from $2,444,267 for the three
months ended September 30, 2004 to $2,822,830 for the three months ended
September 30, 2005, was mainly due to an increase in net sales of goods
generated from our Shanghai operations.
Franchising
income. The decrease in franchising income, of $15,365, or 2.5%, from $622,244
for the three months ended September 30, 2004 to $606,879 for the three
months ended September 30, 2005 was attributable to a decrease in
franchising income from certain schools that exceeded the increases in
franchising income from other schools.
Other
operating revenue. Our other operating revenues represent revenues from other
activities and services such as training of teachers, arranging for personal
English language tutors, organizing field trips and educational fairs, and
designing the school layout for franchised schools. Other operating revenues
decreased by $43,473, or 23.4%, from $185,932 for the three months ended
September 30, 2004 to $142,459 for the three months ended
September 30, 2005. The decrease was mainly due to
a
decrease in income from services rendered in connection with the construction
and design layout of our franchised schools in Taiwan.
-10-
Operating
Costs are comprised of cost of goods sold, cost of franchising and other
operating costs. For the three month period ending September 30, 2005, total
operating costs increased by $293,253, or 20.9%, from $1,401,486 for the
comparable period in 2004. The increase for the 2005 period reflects an increase
of $92,965 in cost of goods sold, an increase of $242,404 in costs of
franchising, and a decrease of $42,116 in other operating costs, all from the
amounts of the comparable prior period in 2004.
Cost
of
Goods Sold. The increase of cost of goods sold of $92,965 or 8.4%, from
$1,101,089 for the three months ended September 30, 2004 to $1,194,054 for
the
three months ended September 30, 2005 was due mainly to an increase in sales
of
goods.
Cost
of
Franchising. The increase in the cost of franchising of $242,404 or 188.7%,
from
$128,476 for the three months ended September 30, 2004 to $370,880 for the
three
months ended September 30, 2005 was due mainly to increases in production cost
of advertisements for franchised schools in 2005.
Other
Operating Costs. The decrease in other operating costs of $42,116 or 24.5%,
from
$171,921 for the three months ended September 30, 2004 to $129,805 for the
three
months ended September 30, 2005 was mainly due to a decrease in other operating
income.
Gross
Profit. Gross
profit increased by $26,472, or 1.4%, to $1,877,429 for the three months ended
September 30, 2005 from $1,850,957 for the three months ended
September 30, 2004. The increase in gross profit was attributable to the
increase in sales of goods.
Other
Operating Expenses. Other operating expenses which reflect general and
administrative and selling expenses increased by $777,139, or 50.9%, to
$2,302,459 for the three months ended September 30, 2005 from $1,525,320
for the three months ended September 30, 2004, principally due to higher
advertising, rental and losses on inventory valuation offset by lower commission
expenses. In addition, the substantial increase of allowance for doubtful
accounts was mainly due to the failure of collecting receivables of $720,000
from our distributor, Shanghai Wonderland Educational Resources Co., Ltd.
(“Shanghai Wonderland”) in China.
Income
(loss) From Operations. Income (loss) from operations decreased $750,667, or
230.50%, from $325,637 for the three months ended September 30, 2004 to
$(425,030) for the three months ended September 30, 2005 for the reasons
discussed above.
Interest
Expenses. Interest expense increased by $18,617, or 47.3%, to $57,985 for the
three months ended September 30, 2005 from $39,368 for the three months
ended September 30, 2004, primarily due to an increase in bank
borrowings.
Other
non-operating income (loss), net. Other non-operating income (loss), net
reflects the addition of copyright income of $109,808 in 2005, which did not
exist in the third quarter of 2004.
Provision
for Taxes. Provision
for taxes for the three months ended September 30, 2005 and 2004 were $90,611
and $110,345, respectively. These provisions for income taxes relate to income
taxes resulting from our operations in Taiwan.
Net
Income (loss). As a result of the matters described above, we had a net loss
of
$431,137, or $(0.02) per diluted common share, for the three months ended
September 30, 2005 as compared to a net profit of $145,121, or $0.01 per diluted
common share, for the three months ended September 30, 2004.
-11-
Comparison
of the Nine Months Ended September 30, 2005 and 2004
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 $870,018, or 11%, to $8,735,894 for the nine
months ended September 30, 2005 from $7,865,876 for the nine months ended
September 30, 2004, including the increase in sales of goods of $711,116
and the franchising income of $99,941 and other operating revenues of
$58,961.
Sales
of
goods. The
increase in sales of goods of $711,116, or 12.6%, from $5,661,046 for the nine
months ended September 30, 2004 to $6,372,162 for the nine months ended
September 30, 2005 was mainly due to the increase in net sales of goods
generated from our Shanghai operations.
Franchising
income. The increase in franchising income, from $1,814,984 for the nine months
ended September 30, 2004 to $1,914,925 for the nine months ended
September 30, 2005 or 6%, was mainly due to an increase in the numbers of
our franchised schools in Shanghai.
Other
operating revenue. Our
other
operating revenues represent revenues from other activities and services such
as
training of teachers, arranging for personal English language tutors, organizing
field trips and educational fairs, and designing the school layout for
franchised schools. Other operating revenues increased by $58,961, or 15.1%,
to
$448,807 for the nine months ended September 30, 2005 from $389,846 for the
nine months ended September 30, 2004. The increase was mainly due to
revenue generated from our services rendered in connection with the construction
and design layout of our franchised schools and sales of education-related
equipment to our franchised schools.
Operating
Costs are comprised of cost of goods sold, cost of franchising and other
operating costs. For the nine month period ending September 30, 2005, total
operating costs increased by $448,186, or 14.4%, from $3,107,652 for the
comparable period in 2004. The increase for the 2005 period reflects an increase
of $275,215 in cost of goods sold, an increase of $173,555 in costs of
franchising, and a decrease of $584 in other operating costs, all from the
amounts of the comparable prior period in 2004.
Cost
of
Goods Sold. The increase of cost of goods sold of $275,215 or 11.3%, from
$2,426,012 for the nine months ended September 30, 2004 to $2,701,227 for the
nine months ended September 30, 2005 was due mainly to an increase in sales
of
goods.
Cost
of
Franchising. The increase in the cost of franchising of $173,555 or 46.4%,
from
$373,980 for the nine months ended September 30, 2004 to $547,535 for the nine
months ended September 30, 2005 was due mainly to an increase in the production
costs associated with advertisements for franchised schools in 2005.
Other
Operating Costs. The decrease in other operating costs of $584 or 0.2%, from
$307,660 for the nine months ended September 30, 2004 to $307,076 for the nine
months ended September 30, 2005 was mainly due to a decrease in other operating
income.
Gross
Profit. Gross
profit increased by $421,832, or 8.9%, to $5,180,056 for the nine months ended
September 30, 2005 from $4,758,224 for the nine months ended
September 30, 2004. The increase in gross profit was attributable to the
fact that the rate of increase in our franchising costs and other operating
costs from September 30, 2004 to September 30, 2005 was lower than the
rate of increase in our franchising income and other operating income for the
same period. In addition, the gross margin decreased from 60% for the nine
months ended September 30, 2004 to 59% for the nine months ended
September 30, 2005, primarily because the consolidation of Culture Media
had a lower gross margin than KCIT and KCESD. Culture Media’s gross margin for
the nine months ended September 30, 2005 was approximately
50%.
-12-
Other
Operating Expenses. Other
operating expenses increased by $199,942, or 3.7%, to $5,609,858 for the nine
months ended September 30, 2005 from $5,409,916 for the nine months ended
September 30, 2004, principally due to increases in our Shanghai
operations.
Interest
Expense. Interest
expense increased by $58,872, or 47.7%, to $182,346 for the nine months ended
September 30, 2005 from $123,474 for the nine months ended
September 30, 2004, primarily due to the increase in bank borrowings during
the nine months ended September 30, 2005 comparing to the three months
ended September 30, 2004.
Other
non-operating income, net. Other non-operating income, net includes lease
income, penalties received from customers, and income from copyrights. Income
from copyrights was $245,995 in the 2005 period; there was no such income in
the
2004 period.
Provision
for Taxes. Provision
for taxes for the nine months ended September 30, 2005 and 2004 were $275,361
and $111,567, respectively. These provisions for income taxes relate to income
taxes resulting from our operations in Taiwan.
Net
Loss.
As a result of the matters described above, we had a net loss of $689,594,
or
$(0.04) per diluted common share, for the nine months ended September 30, 2005
as compared to a net loss of $785,171, or $(0.04) per diluted common share,
for
the nine months ended September 30, 2004.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
September 30, 2005, our principal sources of liquidity included cash and bank
balances of $273,925 which decreased from $507,895 at December 31, 2004, a
decrease of $233,970. The decrease was mainly due to the expenditures to fund
daily operations.
Net
cash
used in operating activities was $30,424 and $706,453 during the nine months
ended September 30, 2005 and 2004, respectively. The change during the nine
months ended September 30, 2005 was primarily attributable to an increase in
accounts receivable.
Net
cash
used in investing activities was $78,652
and $221,817 during the nine months ended September 30, 2005 and 2004,
respectively. The change was primarily attributable to changes in purchases
of
property and equipment.
Net
cash
consumed by financing activities during the nine months ended September 30,
2005
was $(221,303)
as compared to $245,217 produced by financing activities during the nine months
ended September 30, 2004. The difference was primarily attributable to the
decrease of net proceeds from bank borrowings and no repayment of loans to
officers/ shareholders. The repayment of loans from officers/shareholders was
$581,228 during the nine months ended September 30, 2004.
Management
does not expect that revenue provided by operating activities in the next three
to six months will be sufficient to cover our cash needs. Management expects
that it will need to raise funds through equity financing in the next quarter
to
fund operations. Management
believes that if the equity financing is not available, other actions can and
will be taken to reduce costs. These actions may entail the Group to reduce
headcount, sales and marketing, and other expansion activities, which may affect
the future growth of the Group’s operations.
-13-
OFF-BALANCE
SHEET ARRANGEMENTS
As
of September 30, 2005, 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.
Going
Concern
The
accompanying financial statements have been prepared assuming we will continue
as a going concern. As we are aggressively expanding our business in the PRC
and
our PRC operation is still in an emerging stage and has not turned profitable,
we have suffered recurring losses from operations. The above conditions raise
substantial doubt about our ability to continue as a going concern, if the
investment in the PRC does not gradually see returns. 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 this uncertainty.
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
Our
interest income and expense is affected by the fluctuating interest rates in
Taiwan mostly related our bank borrowings in Taiwan. In this regard, changes
in
Taiwan interest rates affect the interest expenses on our bank borrowings.
Foreign
currency exposure
We
have operations in both Taiwan and the PRC. The functional currency of Higoal
Development Ltd. and its subsidiary, Kid Castle Internet Technologies Ltd.
is
New Taiwan Dollars (“NT Dollars”) and the financial records are maintained and
the financial statements are prepared for these entities in NT Dollars. The
functional currency of Kid Castle Educational Software Development Company
Ltd.
and its consolidated subsidiary, Jiangsi 21st Century Kid Castle Culture Media
Co. Ltd. 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 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 of assets and liabilities to
U.S.
Dollars is performed as follows:
| (a) |
Current
assets, current liabilities and long term monetary assets and liabilities,
at the rate of exchange in effect as at the balance sheet
date;
|
| (b) |
Non-monetary
long term assets and liabilities, at the exchange rates prevailing
at the
time of the acquisition of the assets or assumption of liabilities;
and,
|
| (c) |
Revenues
and expenses, at the average rate of exchange for the
year.
|
-14-
Gains
and
losses arising from the translation of foreign currency is included in other
comprehensive income, a separate component of shareholders’ equity.
PART
II
OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
We
have
no material pending legal proceedings.
ITEM
2. CHANGES IN SECURITES
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
|
10.1
|
Acknowledgement
of indebtedness for loan extension dated
August 5, 2005, by and among Kidcastle Internet Technologies
Limited and
Fuhwa Commercial Bank.
|
|
|
31.1
|
Certification
of Min-Tan Yang, Chief Executive Officer of the registrant, pursuant
to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Suang-Yi Pai, Chief Financial Officer of the registrant, pursuant
to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Min-Tan Yang, Chief Executive Officer of the registrant, pursuant
to 18
U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification
of Suang-Yi Pai, Chief Financial Officer of the registrant, pursuant
to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
-15-
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.
| KID CASTLE EDUCATIONAL CORPORATION | ||
| |
|
|
| Dated: June 28, 2006 | By: | /s/ Min-Tan Yang |
|
Name:
Min-Tan Yang
|
||
|
Title:
Chief Executive Officer
|
||
-16-