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: March 31, 2009
 or
  ̈
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 Commission
File Number: 333-39629
 
 KID
CASTLE EDUCATIONAL CORPORATION
 (Exact
name of Registrant as specified in its charter)
 
 Florida
                59-2549529(State
      or other jurisdiction of incorporation or
                  organization)
                (IRS
      Employer Identification No.)
  8th
Floor, No. 98 Min Chuan Road, Hsien Tien
 Taipei,
Taiwan ROC
 (Address
of principal executive offices)
  011-886-2-2218
5996
 (Registrant’s
telephone number, including area code)
  NONE
 (Former
name, former address and former fiscal year, if changed since last
report)
  Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  ̈No  ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer  ̈
                    
                    Accelerated
      filer  ̈Non-accelerated
      filer    ̈
                    
                    Smaller
      reporting company  x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  ̈    
No  x
  As of
March 31, 2009, there were 25,000,000 shares of the Registrant’s common stock
outstanding.
  
 
 FORM
10-Q
 
 KID
CASTLE EDUCATIONAL CORPORATION
 
 TABLE
OF CONTENTS
  PagePART
      I
                              FINANCIAL
      INFORMATIONItem 1.
                              Condensed
      Consolidated Financial Statements
                              
                              
                              2a)
      Condensed Consolidated Balance Sheets as of March 31, 2009 (unaudited) and
      December 31, 2008
                              
                              
                              2b)
      Condensed Consolidated Statements of Operations for the three months ended
      March 31, 2009 and March 31, 2008 (unaudited)
                              
                              
                              4c)
      Condensed Consolidated Statements of Stockholders’ Equity
      (unaudited)
                              
                              
                              5d)
      Condensed Consolidated Statements of Cash Flows for the three months ended
      March 31, 2009 and March 31, 2008 (unaudited)
                              
                              
                              6e)
      Notes to Condensed Consolidated Financial Statements
                              
                              
                              8Item 2.
      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              
                              
                              19Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                              
                              
                              23Item
      4. Controls and Procedures
                              
                              
                              23PART
      II.
                              OTHER
      INFORMATION
                              
                              
                              24Item
      1. Legal Proceedings
                              
                              
                              24Item
      1A Risk Factors
                              
                              
                              24Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                              
                              
                              24Item
      3. Defaults upon Senior Securities
                              
                              
                              25Item
      4. Submission of Matters to a Vote of Security Holders
                              
                              
                              25Item
      5. Other Information
                              
                              
                              25Item
      6 Exhibits and Reports on Form 8-K
                              
                              
                              25SIGNATURES
                              
                              
                              
                              25
  - 1
-
 
 PART
I. FINANCIAL INFORMATION
 ITEM
1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Kid
Castle Educational Corporation
 Condensed
Consolidated Balance Sheets
 (Expressed
in US Dollars)
 (Unaudited)
                                  March 31,
                                  2009
                                
                                
                                December 31,
                                  2008ASSETSCurrent
      assetsCash
      and bank balances
                                
                                $
                                1,294,151
                                
                                
                                $
                                1,985,818Bank
      fixed deposits - pledged (Note 11)
                                
                                
                                23,751
                                
                                
                                
                                2,847Notes
      and accounts receivable, net (Note 5)
                                
                                
                                2,565,925
                                
                                
                                
                                2,171,768Inventories,
      net (Note 6)
                                
                                
                                1,430,312
                                
                                
                                
                                1,933,153Other
      receivables (Note 7)
                                
                                
                                148,826
                                
                                
                                
                                396,003Prepayments
      and other current assets (Note 8)
                                
                                
                                537,613
                                
                                
                                
                                475,617Pledged
      notes receivable (Note 11)
                                
                                
                                435,064
                                
                                
                                
                                416,238Deferred
      income tax assets
                                
                                
                                52,092
                                
                                
                                
                                45,617Total
      current assets
                                
                                
                                6,487,734
                                
                                
                                
                                7,427,061Deferred
      income tax assets
                                
                                
                                51,864
                                
                                
                                
                                49,528Prepayment
      of long-term investments
                                
                                
                                1,055,532
                                
                                
                                -Long-term
      investments (Note 9)
                                
                                
                                76,552
                                
                                
                                
                                68,336Property
      and equipment, net
                                
                                
                                2,731,307
                                
                                
                                
                                2,775,663Intangible
      assets, net of amortization (Note 10)
                                
                                
                                279,822
                                
                                
                                
                                371,056Long-term
      notes receivable
                                
                                
                                344,426
                                
                                
                                
                                356,901Pledged
      notes receivable (Note 11)
                                
                                
                                260,759
                                
                                
                                
                                283,469Other
      assets
                                
                                
                                301,147
                                
                                
                                
                                255,288Total
      assets
                                
                                $
                                11,589,143
                                
                                
                                $
                                11,587,302LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesBank
      borrowings - short-term and maturing within one year (Note
    11)
                                
                                $
                                1,294,625
                                
                                
                                $
                                242,879Notes
      and accounts payable
                                
                                
                                687,144
                                
                                
                                
                                1,017,552Accrued
      expenses
                                
                                
                                1,301,448
                                
                                
                                
                                1,617,717Other
      payables
                                
                                
                                235,181
                                
                                
                                
                                270,458Deposits
      received
                                
                                
                                809,629
                                
                                
                                
                                751,151Receipts
      in advance (Note 12)
                                
                                
                                2,350,717
                                
                                
                                
                                2,305,980Income
      tax payable
                                
                                
                                106,806
                                
                                
                                
                                39,115Total
      current liabilities
                                
                                
                                6,785,550
                                
                                
                                
                                6,244,852Bank
      borrowings maturing after one year (Note 11)
                                
                                
                                455,073
                                
                                
                                
                                1,583,968Receipts
      in advance (Note 12)
                                
                                
                                1,003,728
                                
                                
                                
                                1,001,801Deposits
      received
                                
                                
                                691,194
                                
                                
                                
                                839,295Deferred
      liability
                                
                                
                                41,801
                                
                                
                                
                                41,775Accrued
      pension liabilities (Note 13)
                                
                                
                                430,496
                                
                                
                                
                                446,038Total
      liabilities
                                
                                
                                9,407,842
                                
                                
                                
                                10,157,729
  - 2
-
  Kid
Castle Educational Corporation
  Condensed
Consolidated Balance Sheets – Continued
  (Expressed
in US Dollars)
 
 (Unaudited)
                              March 31,
                              2009
                            
                            
                            December 31,
                                2008Commitments
      and contingencies (Note 15)Minority
      interest
                            
                            
                            236,045
                            
                            
                            
                            216,754Shareholders’
      equityCommon
      stock, no par share:60,000,000
      shares authorized; 25,000,000 issued and outstanding at March 31, 2009 and
      December 31, 2008
                            
                            
                            8,592,138
                            
                            
                            
                            8,592,138Additional
      paid-in capital
                            
                            
                            194,021
                            
                            
                            
                            194,021Legal
      reserve
                            
                            
                            65,320
                            
                            
                            
                            65,320Accumulated
      deficit
                            
                            
                            (5,616,291
                            )
                            
                            
                            (6,340,449
                            )Accumulated
      other comprehensive loss
                            
                            
                            (1,027,874
                            )
                            
                            
                            (1,026,713
                            )Net
      loss not recognized as pension cost
                            
                            
                            (262,058
                            )
                            
                            
                            (271,498
                            )Total
      shareholders’ equity
                            
                            
                            1,945,256
                            
                            
                            
                            1,212,819Total
      liabilities and shareholders’ equity
                            
                            $
                            11,589,143
                            
                            
                            $
                            11,587,302
  See
accompanying Notes to Condensed Consolidated Financial
Statements.
  - 3
-
 
 Kid
Castle Educational Corporation
 
 Condensed
Consolidated Statements of Operations (Unaudited)
 
 (Expressed
in US Dollars)
  Three months ended March 31,2009
                                              
                                              
                                              2008Operating
      RevenueSales
      of goods
                                              
                                              $
                                              2,363,684
                                              
                                              
                                              $
                                              2,364,109Franchising
      income
                                              
                                              
                                              520,369
                                              
                                              
                                              
                                              556,229Other
      operating revenue
                                              
                                              
                                              560,968
                                              
                                              
                                              
                                              479,186Total
      net operating revenue
                                              
                                              
                                              3,445,021
                                              
                                              
                                              
                                              3,399,524Operating
      costsCost
      of goods sold
                                              
                                              
                                              (923,330
                                              )
                                              
                                              
                                              (1,007,236
                                              )Cost
      of franchising
                                              
                                              
                                              (66,511
                                              )
                                              
                                              
                                              (98,309
                                              )Other
      operating costs
                                              
                                              
                                              (451,990
                                              )
                                              
                                              
                                              (69,957
                                              )Total
      operating costs
                                              
                                              
                                              (1,441,831
                                              )
                                              
                                              
                                              (1,175,502
                                              )Gross
      profit
                                              
                                              
                                              2,003,190
                                              
                                              
                                              
                                              2,224,022Advertising
      costs
                                              
                                              
                                              (20,853
                                              )
                                              
                                              
                                              (21,513
                                              )Other
      operating expenses
                                              
                                              
                                              (1,230,874
                                              )
                                              
                                              
                                              (1,513,671
                                              )Income
      from operations
                                              
                                              
                                              751,463
                                              
                                              
                                              
                                              688,838Interest
      expense, net
                                              
                                              
                                              (15,821
                                              )
                                              
                                              
                                              (23,101
                                              )Share
      of income (loss) of investments
                                              
                                              
                                              8,173
                                              
                                              
                                              
                                              (2,069
                                              )Other
      non-operating income (loss), net
                                              
                                              
                                              74,904
                                              
                                              
                                              
                                              132,158Income
      before income taxes
                                              
                                              
                                              818,719
                                              
                                              
                                              
                                              795,826Provision
      for taxes
                                              
                                              
                                              (75,405
                                              )
                                              
                                              
                                              (36,897
                                              )Income
      after income taxes
                                              
                                              
                                              743,314
                                              
                                              
                                              
                                              758,929Minority
      interest income
                                              
                                              
                                              (19,156
                                              )
                                              
                                              
                                              (28,702
                                              )Net
      income
                                              
                                              $
                                              724,158
                                              
                                              
                                              $
                                              730,227Earnings
      per share - basic and diluted
                                              
                                              $
                                              0.029
                                              
                                              
                                              $
                                              0.029Weighted-average
      shares used to compute earnings per share - basic and
    diluted
                                              
                                              
                                              25,000,000
                                              
                                              
                                              
                                              25,000,000
  See
accompanying Notes to Condensed Consolidated Financial
Statements.
  - 4
-
  Kid
Castle Educational Corporation
 
 Condensed
Consolidated Statements of Stockholders’ Equity
 
 (Expressed
in US Dollars)
 
 Common StockNumber of
                              shares
                            
                            
                            Amount
                            
                            
                            Additional
                              paid-in
                              capital
                            
                            
                            Legal
                              reserve
                            
                            
                            Accumulated
                              deficit
                            
                            
                            Accumulated
                              other
                              comprehensive
                              loss
                            
                            
                            Net loss not
                              recognized as
                              pension cost
                            
                            
                            TotalBalance,
      December 31, 2007
                            
                            
                            25,000,000
                            
                            
                            $
                            8,592,138
                            
                            
                            $
                            194,021
                            
                            
                            $
                            65,320
                            
                            
                            $
                            (7,179,418
                            )
                            
                            $
                            (932,027
                            )
                            
                            $
                            (220,032
                            )
                            
                            $
                            520,002Net
      income for 2008
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            838,969
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            838,969Cumulative
      translation adjustment
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (94,686
                            )
                            
                            
                            
                            
                            
                            
                            (94,686
                            )Comprehensive
      income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            744,283Net
      loss not recognized as pension cost
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            (51,466
                            )
                            
                            $
                            (51,466
                            )Balance,
      December 31, 2008
                            
                            
                            25,000,000
                            
                            
                            $
                            8,592,138
                            
                            
                            $
                            194,021
                            
                            
                            $
                            65,320
                            
                            
                            $
                            (6,340,449
                            )
                            
                            $
                            (1,026,713
                            )
                            
                            $
                            (271,498
                            )
                            
                            $
                            1,212,819Net
      income for the three months ended March 31, 2009
    (Unaudited)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            724,158
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            724,158Cumulative
      translation adjustment (Unaudited)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (1,161
                            )
                            
                            
                            
                            
                            
                            
                            (1,161
                            )Comprehensive
      income (Unaudited)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            722,997Net
      income not recognized as pension cost
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            9,440
                            
                            
                            $
                            9,440Balance,
      March 31, 2009 (Unaudited)
                            
                            
                            25,000,000
                            
                            
                            $
                            8,592,138
                            
                            
                            $
                            194,021
                            
                            
                            $
                            65,320
                            
                            
                            $
                            (5,616,291
                            )
                            
                            $
                            (1,027,874
                            )
                            
                            $
                            (262,058
                            )
                            
                            $
                            1,945,256
  See
accompanying Notes to Condensed Consolidated Financial
Statements.
  - 5
-
 
 Kid
Castle Educational Corporation
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
 (Expressed
in US Dollars)
 Three months ended March 31,2009
                                  
                                  
                                  2008Cash
      flows from operating activitiesNet
      income
                                  
                                  $
                                  724,158
                                  
                                  
                                  $
                                  730,227Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      of property and equipment
                                  
                                  
                                  101,035
                                  
                                  
                                  
                                  66,622Impairment
      of goodwill
                                  
                                  
                                  44,925
                                  
                                  
                                  
                                  11,224Amortization
      of intangible assets
                                  
                                  
                                  39,743
                                  
                                  
                                  
                                  42,836Allowance
      for sales returns
                                  
                                  
                                  41,287
                                  
                                  
                                  
                                  82,723Allowance
      for doubtful debts
                                  
                                  
                                  33,453
                                  
                                  
                                  
                                  81,955Reversal
      of allowance for loss on inventory obsolescence and slow-moving
      items
                                  
                                  
                                  (2,598
                                  )
                                  
                                  
                                  (23,684
                                  )Loss
      on disposal of PP&E
                                  
                                  
                                  -
                                  
                                  
                                  
                                  715Minority
      interests
                                  
                                  
                                  19,156
                                  
                                  
                                  
                                  28,702Share
      of loss (gain) of investments
                                  
                                  
                                  (8,173
                                  )
                                  
                                  
                                  2,069(Increase)/decrease
      in:Notes
      and accounts receivable
                                  
                                  
                                  (630,361
                                  )
                                  
                                  
                                  (531,916
                                  )Inventories
                                  
                                  
                                  442,808
                                  
                                  
                                  
                                  546,540Other
      receivables
                                  
                                  
                                  482,985
                                  
                                  
                                  
                                  13,829Prepayments
      and other current assets
                                  
                                  
                                  (79,360
                                  )
                                  
                                  
                                  (172,246
                                  )Deferred
      income tax assets
                                  
                                  
                                  (12,247
                                  )
                                  
                                  
                                  (22,287
                                  )Other
      assets
                                  
                                  
                                  (55,312
                                  )
                                  
                                  
                                  32,970Increase/(decrease)
      in:Notes
      and accounts payable
                                  
                                  
                                  (298,133
                                  )
                                  
                                  
                                  450,301Accrued
      expenses
                                  
                                  
                                  (268,007
                                  )
                                  
                                  
                                  198,549Other
      payables
                                  
                                  
                                  (29,835
                                  )
                                  
                                  
                                  (291,538
                                  )Receipts
      in advance
                                  
                                  
                                  (15,216
                                  )
                                  
                                  
                                  (147,636
                                  )Income
      taxes payable
                                  
                                  
                                  69,778
                                  
                                  
                                  
                                  40,679Deferred
      liability
                                  
                                  
                                  1,494
                                  
                                  
                                  
                                  (656
                                  )Deposits
      received
                                  
                                  
                                  (34,684
                                  )
                                  
                                  
                                  (10,781
                                  )Accrued
      pension liabilities
                                  
                                  
                                  (34
                                  )
                                  
                                  
                                  661Net
      cash provided by operating activities
                                  
                                  
                                  566,862
                                  
                                  
                                  
                                  1,129,858Cash
      flows from investing activitiesPurchase
      of property and equipment
                                  
                                  
                                  (153,739
                                  )
                                  
                                  
                                  (64,757
                                  )Proceeds
      from disposal of property and equipment
                                  
                                  -
                                  
                                  
                                  
                                  2,202Prepayment
      of long-term investments
                                  
                                  
                                  (874,769
                                  )
                                  
                                  
                                  (26,076
                                  )Bank
      fixed deposits-pledged
                                  
                                  
                                  (21,225
                                  )
                                  
                                  
                                  18,609Pledged
      notes receivable
                                  
                                  
                                  (20,660
                                  )
                                  
                                  
                                  (26,536
                                  )Net
      cash used in investing activities
                                  
                                  
                                  (1,070,393
                                  )
                                  
                                  
                                  (96,558
                                  )
  - 6
-
  Kid
Castle Educational Corporation
 
 Condensed
Consolidated Statements of Cash Flows – Continued
 
 (Unaudited)
 (Expressed
in US Dollars)
 
 Three months ended March 31,2009
                                
                                
                                2008Cash
      flows from financing activitiesRepayment
      of bank borrowings
                                
                                $
                                (13,772
                                )
                                
                                $
                                (573,968
                                )Repayment
      of loan from stockholders and transactions of related
    parties
                                
                                
                                (176,752
                                )
                                
                                
                                (31,108
                                )Net
      cash used in financing activities
                                
                                
                                (190,524
                                )
                                
                                
                                (605,076
                                )Net
      increase (decrease) in cash and cash equivalents
                                
                                
                                (694,055
                                )
                                
                                
                                428,224Effect
      of exchange rate changes on cash and cash equivalents
                                
                                
                                2,388
                                
                                
                                
                                (328,789
                                )Cash
      and cash equivalents at beginning of period
                                
                                
                                1,985,818
                                
                                
                                
                                1,238,212Cash
      and cash equivalents at end of period
                                
                                $
                                1,294,151
                                
                                
                                $
                                1,337,647
 
 See
accompanying Notes to Condensed Consolidated Financial
Statements.
  - 7
-
 
 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 child education
focusing on the English language. The business comprises publication, sales and
distribution of related books, magazines, audio and videotapes and compact disc,
franchising and sales of merchandises complementary to the business. KCIT
commenced operations in April 2000 when it acquired the above business from Kid
Castle Enterprises Limited which was formerly owned by Mr. Kuo-An Wang and Mr.
Yu-En Chiu. Kid Castle Enterprises Limited has ceased operations on December 25,
2003.
  On March
9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment
Property Limited incorporated, in the British Virgin Islands, which held the
entire common stock of Higoal Developments Limited (“Higoal”) incorporated in
the Cayman Islands on March 8, 2001. On September 10, 2001, Higoal
established a wholly owned subsidiary, Kid Castle Educational Software
Development Company Limited (“KCES”) in the People’s Republic of China (the
“PRC”). The existing operations of Higoal are principally located in Taiwan and
are being expanded in the PRC. In June 2002, after KCIT undertook a series of
group restructurings, KCIT became the direct owner of the outstanding shares of
Higoal. Premier Holding Investment Property Limited was then liquidated in June
2003.
  On
September 18, 2002, Higoal issued 11,880,000 shares of common stock to the
stockholders of KCIT in exchange for 100% of the outstanding common stock of
KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary
of Higoal. On October 1, 2002, Kid Castle Educational Corporation (the
“Company”), formerly King Ball International Technology Limited Corporation,
entered into an exchange agreement with Higoal whereby the Company issued to the
stockholders of Higoal 11,880,000 shares of common stock of the Company in
exchange for 100% of the issued and fully paid up capital of
Higoal.
  As a
result of the share exchange, the former stockholders of Higoal hold a majority
of the Company’s outstanding capital stock. Generally accepted accounting
principles require in certain circumstances that a company whose stockholders
retain the majority voting interest in the combined business to be treated as
the acquirer for financial reporting purposes. Accordingly, the acquisition has
been accounted for as a “reverse acquisition” whereby Higoal is deemed to have
purchased the Company. However, the Company remains the legal entity and the
registrant for Securities and Exchange Commission (“SEC”) reporting
purposes.
  In July
2003, KCES entered into an agreement with 21st Century
Publishing House to incorporate Jiangxi 21st Century
Kid Castle Culture Media Co., Ltd (“Culture Media”). It was agreed that KCES and
21st
Century Publishing House would each own 50% of Culture Media and that each party
would contribute Renminbi (“RMB”) 1 million for its ownership interest. On July
2, 2004, KCES acquired additional 40% of ownership in Culture Media from 21st Century
Publishing House. KCES now owns 90% of Culture Media.
  On
December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid
Castle Educational Info Constitution Company Limited (“KCEI”) in the PRC, with
registered total capital of RMB1,200,000, in order to operate schools controlled
by us in PRC. As of March 31, 2009, KCEI had total registered capital of
RMB3,500,000.
 
 The
Company, Higoal and its subsidiaries are collectively referred to as the
“Group”. The operations of the Group are principally located in Taiwan and the
PRC.
  - 8
-
 
 NOTE
2 - BASIS OF PRESENTATION
  The
accompanying financial data as of March 31, 2009 and for the three months ended
March 31, 2009 and 2008 have been prepared by the Group, without audit, pursuant
to the rules and regulations of the SEC using generally accepted accounting
principles in the United States. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. However, the Group believes that
the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Group’s audited annual
financial statements for the year ended December 31, 2008.
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
that affect the reported amounts of assets, liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities. Actual results could
differ from these estimates.
  Since
inception, the Group had incurred operating losses during most of its reporting
periods, although the Group has been profitable since 2007. Our accumulated
deficit has improved since Messrs. Pai and Yang have assumed their respective
management roles, and as of March 31, 2009, our accumulated deficit was
$5,616,291. Although we have an accumulated deficit, we have positive cash flow
from operations. Barring significant, unforeseen developments in the PRC,
we believe we can decrease our reliance on loans from shareholders and banks to
meet our funding requirements in the future. Despite our expectation to decrease
reliance on loans, we may be required to seek additional financing to meet our
future funding requirements and no assurances can be given that bank loans or
loans from shareholders will be available in the future. If we are unable to
secure sufficient financing, our liquidity position would be adversely affected,
and we may need to seek a more expensive source of funding to finance our
operations.
 
 NOTE
3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES
  REVENUE
RECOGNITION
  Sales of
books, magazines, audio and video tapes, compact disc and other merchandises are
recognized as revenue on the transfer of risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to customers and
title has passed. Provision is made for expected future sales returns and
allowances when revenue is recognized.
  Franchise
fees are the annual licensing fees for franchisees to use the Group’s brand name
and consulting services. Franchising income is recognized on a straight-line
basis over the terms of the relevant franchise agreements.
  ALLOWANCE
FOR DOUBTFUL ACCOUNTS
  An
allowance for doubtful accounts is provided based on the evaluation of
collectibility and on aging analysis of notes and accounts
receivables.
  INVENTORIES
  Inventories
are stated at the lower of cost or market. Cost includes all costs of purchase,
cost of conversion and other costs incurred in bringing the inventories to their
present location and condition, and is calculated using the weighted average
method. Market value is determined by reference to the sales proceeds of items
sold in the ordinary course of business after the balance sheet date or to
management estimates based on prevailing market conditions.
  - 9
-
 
 PROPERTY
AND EQUIPMENT AND DEPRECIATION
  Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:
  Estimated useful life
                                (in years)Land
                              
                              IndefiniteBuildings
                              
                              50Furniture
      and fixtures
                              
                              3-10Transportation
      equipment
                              
                              2.5-5Miscellaneous
      equipment
                              
                              5-10
  Maintenance,
repairs and minor renewals are charged directly to the statement of operations
as incurred. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the financial statements and any resulting
gain or loss is included in the statement of operations.
  LONG-LIVED
ASSETS
  Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable. The
Group does not perform a periodic assessment of assets for impairment in the
absence of such information or indicators. Conditions that would necessitate an
impairment assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in which an
asset is used, or a significant adverse change that would indicate that the
carrying amount of an asset or group of assets is not recoverable. For
long-lived assets to be held and used, the Group measures fair value based on
quoted market prices or based on discounted estimates of future cash
flows.
  INCOME
TAXES
  The
Company and its subsidiaries account for income taxes in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for
Income Taxes”. Under SFAS No. 109, deferred tax liabilities or assets at the end
of each period are determined using the currently enacted tax rate. Valuation
allowances are established when it is considered more likely than not that the
deferred tax assets will not be realized.
  INTANGIBLE
ASSETS
  Franchises
and copyrights are stated at cost and amortized on the straight-line method over
their estimated useful lives of 10 years, the goodwill is tested for impairment
on a recurring basis.
  COMPREHENSIVE
INCOME (LOSS)
  Comprehensive
income (loss) is defined as the change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to owners.
Comprehensive income (loss) is disclosed in the condensed consolidated
statement of stockholders’ equity.
  NET
EARNINGS (LOSS) PER COMMON SHARE
  The Group
computes net earnings (loss) per share in accordance with SFAS No. 128,
“Earnings per Share”. Under the provisions of SFAS No. 128, basic net earnings
(loss) per share is computed by dividing the net earnings (loss) available to
common shareholders for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of diluted net
earnings (loss) per share gives effect to common stock equivalents. For the
three months ended March 31, 2009 and 2008, the Group did not have any potential
common stock shares.
  RECLASSIFICATION
  The
presentation of certain prior information has been reclassified to conform to
current presentation.
  - 10
-
 
 NOTE
4 - RECENT ACCOUNTING PRONOUNCEMENTS
  In
May 2008, the FASB released SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This statement identifies the sources of accounting
principles and the framework for selecting the accounting principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. SFAS No. 162 is effective 60 days after the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles”. The Company does not expect the implementation of this guidance to
have a material impact on the financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS No. 161
gives financial statement users better information about the reporting entity's
hedges by providing for qualitative disclosures about the objectives and
strategies for using derivatives, quantitative data about the fair value of and
gains and losses on derivative contracts, and details of credit-risk-related
contingent features in their hedged positions. SFAS No. 161 is effective for
financial statements issued for fiscal years beginning after November 15, 2008
and interim periods within those years. The Group does not expect the adoption
of SFAS No. 161 to have a material effect on the Group’s Consolidated Financial
Statements.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Group’s present or future
Consolidated Financial Statements.
 
 In
February 2007, the FASB released SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” The standard is effective for
fiscal years beginning after November 15, 2007. The standard provides entities
the ability, on an elective basis, to report most financial assets and financial
liabilities at fair value, with corresponding gains and losses recognized in
current earnings. We did not elect the fair value option under SFAS No. 159 as
of January 1, 2009 for any of our financial assets and liabilities that were not
already accounted for at fair value. We will consider applying the fair value
option to future transactions as provided by the standard.
 
 In
December 2007, the FASB released SFAS No. 141(R), “Business Combinations.” This
standard revises and enhances the guidance set forth in SFAS No. 141 by
establishing a definition for the “acquirer,” providing additional guidance on
the recognition of acquired contingencies and non-controlling interests, and
broadening the scope of the standard to include all transactions involving a
transfer in control, irrespective of the consideration involved in the transfer.
SFAS No. 141(R) is effective for business combinations for which the acquisition
date occurs in a fiscal year beginning on or after December 15, 2008. Although
the standard will not have any impact on our current Consolidated Financial
Statements, application of the new guidance could be significant to the Company
in the context of future merger and acquisition activity.
 
 In
December 2007, the FASB released SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51.”  This
statement amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. We do not expect the standard to have a material impact on
our Consolidated Financial Statements.
  - 11
-
  NOTE
5 - NOTES AND ACCOUNTS RECEIVABLE
 
 March 31,
                                  2009
                                
                                
                                December 31,
                                  2008(Unaudited)Notes
      and accounts receivable-
      Third parties
                                
                                $
                                3,025,628
                                
                                
                                $
                                2,492,199-
      Related parties
                                
                                
                                96,953
                                
                                
                                
                                183,597Total
                                
                                
                                3,122,581
                                
                                
                                
                                2,675,796Allowance
      for doubtful accounts and sales returns
                                
                                
                                (556,656
                                )
                                
                                
                                (504,028
                                )Notes
      and accounts receivable, net
                                
                                $
                                2,565,925
                                
                                
                                $
                                2,171,768
 
 NOTE
6 - INVENTORIES
 
 March 31,
                              2009
                            
                            
                            December 31,
                              2008(Unaudited)Work
      in process
                            
                            $
                            148,293
                            
                            
                            $
                            109,163Finished
      goods and other merchandises
                            
                            
                            1,574,930
                            
                            
                            
                            2,130,1161,723,223
                            
                            
                            
                            2,239,279Less:
      Allowance for obsolete inventories and decline of market
    value
                            
                            
                            (292,911
                            )
                            
                            
                            (306,126
                            )$
                            1,430,312
                            
                            
                            $
                            1,933,153
 
 NOTE
7 - OTHER RECEIVABLES
 
 March 31,
                                  2009
                                
                                
                                December 31,
                                  2008(Unaudited)Other
      receivables - third parties:Advances
      to staff
                                
                                $
                                119,624
                                
                                
                                $
                                90,521Other
      receivables
                                
                                
                                28,154
                                
                                
                                
                                304,416Sub-total
                                
                                
                                147,778
                                
                                
                                
                                394,937Other
      receivables - related parties
                                
                                
                                1,048
                                
                                
                                
                                1,066$
                                148,826
                                
                                
                                $
                                396,003
  - 12
-
  NOTE
8 - PREPAYMENTS AND OTHER CURRENT ASSETS
  March 31,
                                  2009
                                
                                December 31,
                                  2008(Unaudited)Prepayments
                                
                                $
                                528,192
                                
                                
                                $
                                467,414Temporary
      payments
                                
                                
                                60
                                
                                
                                
                                62Others
                                
                                
                                9,361
                                
                                
                                
                                8,141$
                                537,613
                                
                                
                                $
                                475,617
 
 NOTE
9- INTEREST IN ASSOCIATES
  March 31,
                                  2009
                                
                                
                                December 31,
                                  2008(Unaudited)21stCentury Kid Castle Language and Education Center (“Education
      Center”) (Note (i))Investment
      cost
                                
                                $
                                109,695
                                
                                
                                $
                                109,628Share
      of loss
                                
                                
                                (26,365
                                )
                                
                                
                                (42,696
                                )$
                                83,330
                                
                                
                                $
                                66,932Tianjin
      Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin
      Consulting”) (Note (ii))Investment
      cost
                                
                                $
                                102,383
                                
                                
                                $
                                102,319Share
      of loss
                                
                                
                                (109,161
                                )
                                
                                
                                (100,915
                                )$
                                (6,778
                                )
                                
                                $
                                1,404Total
                                
                                $
                                76,552
                                
                                
                                $
                                68,336
  Note:
  (i)
                  In
      October 2003, the Group obtained the PRC government’s approval
      to co-found Education Center with 21stCentury Publishing House in the PRC. In 2004, Education Center’s total
      registered capital was RMB 1,500,000, with  KCES and
      21stCentury Publishing House each owning 50% of the investment. It
      has been determined that the Group has significant influence and should
      therefore account for its investment in Education Center on the equity
      method.For
      the three months ended March 31, 2009 and 2008, the Group recognized
      investment income accounted for under the equity method in Education
      Center of $16,357 and $6,780,
respectively.
 
   - 13
-
 
 (ii)
                  On
      April 1, 2004, the Group signed a joint venture agreement with Tianjin
      Foreign Enterprises & Experts Service Corp., in Tianjin City, PRC.
      Pursuant to this joint venture agreement, the Group and Tianjin Foreign
      Enterprises & Experts Service Corp. each owns a 50% interest in
      Tianjin Kid Castle Educational Investment Consulting Co., Ltd. It has been
      determined that the Group has significant influence and should therefore
      account for its investee on the equity method.For
      the three months ended March 31, 2009 and 2008, the Group recognized an
      investment loss of $8,184 and $8,850, respectively, accounted for under
      the equity method, in Tianjin
Consulting.
  NOTE
10 - INTANGIBLE ASSETS
  March 31,
                                                    2009
                                                  
                                                  
                                                  December 31,
                                                    2008(Unaudited)Gross
      carrying amountFranchise
                                                  
                                                  $
                                                  990,766
                                                  
                                                  
                                                  $
                                                  1,026,455Copyrights
                                                  
                                                  
                                                  582,411
                                                  
                                                  
                                                  
                                                  603,391Goodwill
                                                  
                                                  
                                                  235,185
                                                  
                                                  
                                                  
                                                  235,0391,808,362
                                                  
                                                  
                                                  
                                                  1,864,885Less:
      Accumulated amortizationFranchise
                                                  
                                                  
                                                  (891,689
                                                  )
                                                  
                                                  
                                                  (898,148
                                                  )Copyrights
                                                  
                                                  
                                                  (524,170
                                                  )
                                                  
                                                  
                                                  (527,967
                                                  )(1,415,859
                                                  )
                                                  
                                                  
                                                  (1,426,115
                                                  )Less:
      impairment of goodwill
                                                  
                                                  
                                                  (112,681
                                                  )
                                                  
                                                  
                                                  (67,714
                                                  )(1,445,615
                                                  )
                                                  
                                                  
                                                  (67,714
                                                  )Net
                                                  
                                                  $
                                                  279,822
                                                  
                                                  
                                                  $
                                                  371,056
  Amortization
charged to operations was $39,743 and $42,836 for the three months ended March
31, 2009 and 2008, respectively, and the impairment of goodwill charged to
operations was $44,925 and $11,224 for the three months ended March 31, 2009 and
2008, respectively.
  The
estimated aggregate amortization expenses for each of the succeeding fiscal
years are as follows:
  2010
                      
                      $
                      39,330$
                      39,330
  - 14
-




NOTE
11 - BANK BORROWINGS




March 31,
                    2009
                  
                  
                  December 31,
                    2008(Unaudited)Bank
      term loans (Note (i))
                  
                  $
                  526,635
                  
                  
                  $
                  514,471Mid-term
      secured bank loan (Note (ii))
                  
                  
                  1,223,063
                  
                  
                  
                  1,312,3761,749,698
                  
                  
                  
                  1,826,847Less:
      Balances maturing within one year included in current
      liabilitiesBank
      term loans
                  
                  
                  71,562
                  
                  
                  
                  76,946Mid-term
      secured bank loan
                  
                  
                  1,223,063
                  
                  
                  
                  165,9331,294,625
                  
                  
                  
                  242,879Bank
      borrowings maturing after one year
                  
                  $
                  455,073
                  
                  
                  $
                  1,583,968




Note:




(i)
              This
      line item represents bank loans that have been secured by a pledge of
      post-dated checks amounting to $727,091 and $755,824 that we have received
      from franchisees and the Group’s bank deposits of $23,751 and $2,839 as of
      March 31, 2009 and December 31, 2008, respectively, for the purpose of
      financing operations. The repayment dates of the loans coincided with the
      maturity dates of the corresponding pledged post-dated checks, which were
      extended on October 18, 2008 and will be due on September 30, 2009. The
      weighted average interest rates were 5.4% and 5.86% per annum as of
      March 31, 2009 and 2008,
respectively.




For the
three months ended March 31, 2009 and 2008, interest expense charged to
operations in respect of bank loans was $6,342 and $8,257,
respectively.





(ii)
              In
      November 28, 2007, KCIT obtained a new bank loan of $1,542,401. The loan
      is secured by the Group’s land and buildings and is personally guaranteed
      by two directors of the Group. It bears interest at the lending bank’s
      basic fixed deposit rate plus 1.45% per annum. Of the principal, $370,176
      is repayable in 24 equal monthly installments. A final balloon payment of
      $1,172,225 is due on November 28, 2009. The applicable interest rate is
      approximately 3.76% per
annum.




For the
three months ended March 31, 2009 and 2008, interest expense charged to
operations amounted to $9,615 and $17, respectively.


- 15
-


NOTE
12 - RECEIPTS IN ADVANCE




The
balance comprises:




March 31,
                        2009
                      
                      
                      December 31,
                        2008(Unaudited)Current
      liabilities:Sales
      deposits received (Note (i))
                      
                      $
                      480,233
                      
                      
                      $
                      277,823Franchising
      income received (Note (ii))
                      
                      
                      1,333,274
                      
                      
                      
                      1,480,947Subscription
      fees received (Note (iii))
                      
                      
                      461,495
                      
                      
                      
                      471,088Related
      party
                      
                      -
                      
                      
                      
                      414Others
                      
                      
                      75,715
                      
                      
                      
                      75,7082,350,717
                      
                      
                      
                      2,305,980Long-term
      liabilities:Franchising
      income received (Note (ii))
                      
                      
                      1,003,728
                      
                      
                      
                      1,001,801$
                      3,354,445
                      
                      
                      $
                      3,307,781




Note:




(i)
            The
      balance represents receipts in advance from customers for goods
      sold.




(ii)
              The
      balance mainly represents franchising income received in advance which is
      attributable to the periods after the respective period end dates.




(iii)
              The
      balance represents subscription fees received in advance for subscription
      of magazines published by the
Group.


- 16
-





NOTE
13 - RETIREMENT PLANS





The
Group maintains tax-qualified defined contribution and benefit retirement plans
for its employees in accordance with the ROC Labor Standard Law. As a result,
the Group currently maintains two different retirement plans with contribution
and benefit calculation formulas. On July 1, 2005, the Bureau of National Health
Insurance issued new labor retirement pension regulations in Taiwan. The Group
has a new defined contribution retirement plan (the “New Plan”) covering all
regular employees of KCIT. KCIT contributes monthly an amount equal to 6% of the
employees’ base salaries and wages to the Bureau of National Health Insurance.
The Group still maintains the benefit retirement plan (the “Old Plan”) which
commenced in September 2003, and only applies to the regular employees of
KCIT who were employed prior to June 2005. KCIT contributes monthly an amount
equal to 2% of the employees’ total salaries and wages to an independent
retirement trust fund deposited with the Central Trust of China in accordance
with the ROC Labor Standards Law in Taiwan. The retirement fund is not included
in the Group’s financial statements. Net periodic pension cost is based on
annual actuarial valuations which use the projected unit credit cost method of
calculation and is charged to the consolidated statement of operations on a
systematic basis over the average remaining service lives of current employees.
Under the Old Plan, the employees are entitled to receive retirement benefits
upon retirement in the manner stipulated by the ROC Labor Standard Law in
Taiwan. The benefits under the Old Plan are based on various factors such as
years of service and the final base salary preceding retirement.





The
net periodic pension cost is as follows:




Three months ended March 31,2009
                    
                    
                    2008(Unaudited)Service
      cost
                    
                    $
                    -
                    
                    
                    $
                    -Interest
      cost
                    
                    
                    3,972
                    
                    
                    
                    3,228Expected
      return on assets
                    
                    
                    (1,590
                    )
                    
                    
                    (523
                    )Amortization
      of unrecognized loss
                    
                    
                    2,464
                    
                    
                    
                    808Net
      periodic pension cost
                    
                    $
                    4,846
                    
                    
                    $
                    3,513


- 17
-




NOTE
14 - GEOGRAPHICAL SEGMENTS




The Group
is principally engaged in the business of child educational teaching materials
and related services focusing on English language in Taiwan and the PRC.
Accordingly, the Group has two reportable geographic segments: Taiwan and the
PRC. The Group evaluates the performance of each geographic segment based on its
net income or loss. The Group also accounts for inter-segment sales as if the
sales were made to third parties. Information concerning operations in these
geographical segments is as follows:





Taiwan
                    
                    
                    The
      PRC
                    
                    
                    Total
                    
                    
                    Corporate
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedThree months
                      ended
                      March 31,
                      2009
                    
                    
                    Three months
                      ended
                      March 31,
                      2008
                    
                    
                    Three months
                      ended
                      March 31,
                      2009
                    
                    
                    Three months
                      ended
                      March 31,
                      2008
                    
                    
                    Three months
                      ended
                      March 31,
                      2009
                    
                    
                    Three months
                      ended
                      March 31,
                      2008
                    
                    
                    Three months
                      ended
                      March 31,
                      2009
                    
                    
                    Three months
                      ended
                      March 31,
                      2008
                    
                    
                    Three months
                      ended
                      March 31,
                      2009
                    
                    
                    Three months
                      ended
                      March 31,
                      2008
                    
                    
                    Three months
                      ended
                      March 31,
                      2009
                    
                    
                    Three months
                      ended
                      March 31,
                      2008RevenueExternal
      revenue
                    
                    $
                    1,568,159
                    
                    
                    $
                    1,667,695
                    
                    
                    $
                    1,876,862
                    
                    
                    $
                    1,731,829
                    
                    
                    $
                    3,445,021
                    
                    
                    $
                    3,399,524
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    3,445,021
                    
                    
                    $
                    3,399,524Inter-segment
      revenue
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    1,568,159
                    
                    
                    $
                    1,667,695
                    
                    
                    $
                    1,876,862
                    
                    
                    $
                    1,731,829
                    
                    
                    $
                    3,445,021
                    
                    
                    $
                    3,399,524
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    3,445,021
                    
                    
                    $
                    3,399,524Profit
      fromOperations
                    
                    $
                    311,004
                    
                    
                    $
                    176,323
                    
                    
                    $
                    458,472
                    
                    
                    $
                    549,377
                    
                    
                    $
                    769,476
                    
                    
                    $
                    725,700
                    
                    
                    $
                    (18,013
                    )
                    
                    $
                    (36,862
                    )
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    751,463
                    
                    
                    $
                    688,838Capital
      expenditures
                    
                    $
                    77,405
                    
                    
                    $
                    57,643
                    
                    
                    $
                    16,659
                    
                    
                    $
                    265,760
                    
                    
                    $
                    94,064
                    
                    
                    $
                    323,403
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    94,064
                    
                    
                    $
                    323,403





March 31,
                  2009
                
                
                December 31,
                  2008
                
                
                March 31,
                  2009
                
                
                December 31,
                  2008
                
                
                March 31,
                  2009
                
                
                December 31,
                  2008
                
                
                March 31,
                  2009
                
                
                December 31,
                  2008
                
                
                March 31,
                  2009
                
                
                December 31,
                  2008
                
                
                March 31,
                  2009
                
                
                December 31,
                  2008Total
      assets
                
                $
                6,594,140
                
                
                $
                7,770,317
                
                
                $
                5,290,797
                
                
                $
                4,459,044
                
                
                $
                11,884,937
                
                
                $
                12,229,361
                
                
                $
                3,319
                
                
                $
                2,950
                
                
                $
                (299,113
                )
                
                $
                (434,919
                )
                
                $
                11,589,143
                
                
                $
                11,797,392


- 18
-


NOTE
15 - COMMITMENT AND CONTINGENCIES





A.
Lease Commitment





As of March 31, 2009, the Company’s future minimum
lease payments under a non-cancelable operating lease expiring in excess of one
year are as follows:




Years
      ending December 31,2010
                
                $
                369,6982011
                
                
                341,6122012
                
                
                707,8232013
                
                
                507,554Years
      2014 to 2027
                
                
                2,475,641$
                4,402,328





B.
Going concern





The
accompanying financial statements have been prepared assuming the Group will
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.





ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION





This
report contains certain forward-looking statements within the meaning of Section
21E of the Securities and Exchange Act of 1934, as amended, and information
relating to us that are based on the beliefs and assumptions made by our
management as well as information currently available to the management. When
used in this document, the words “anticipate,” “believe,” “estimate,” “expect”
and similar expressions, are intended to identify forward-looking statements.
Such statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions. If one or more of these
risks or uncertainties materialize, or if underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. Certain of these risks and
uncertainties are discussed under the caption “Factors That May Affect Our
Future Results And Financial Condition” contained herein and other factors
disclosed in our filings with the SEC including, but not limited to our Annual
Report on Form 10-K for the year ended December 31, 2008. We do not intend
to update these forward-looking statements.




OVERVIEW




We are a leading provider in the PRC and Taiwan of English-language
instruction and educational services to children for whom Chinese is the primary
language. Our focus is on children between two and twelve years old. In 2008 we
taught or provided educational materials for approximately 1,460,000 students at
over 7,550 locations through our franchise and cooperative school
operations.





We
commenced operations in 1986 as an English-language school, and since then we
have expanded our franchise operations to provide bilingual kindergarten
instruction, computer training, and tutorial services. In September 1999, we
began offering a variety of multimedia, including educational videos, textbooks,
workbooks, and educational software, authored by us as fully functional,
stand-alone products or as supplements to our classroom-based and Internet-based
instruction.




- 19
-




CRITICAL
ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES


Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to product returns, bad
debts, inventories, equity investments, income taxes, financing operations,
pensions, commitments and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our financial statements.





Revenue Recognition.
We recognize sales of teaching materials and educational tools and equipment as
revenue when title of the product and risk of ownership are transferred to the
customer, which occurs at the time of delivery, or when the goods arrive at the
customer designated location, depending on the associated shipping terms.
Additionally, we deliver products sold by our distributors directly to the
distributors’ customers and as such the delivered goods are recognized as
revenue in a similar way as sales to our direct customers. We estimate sales
returns and discounts based on historical experience and record them as
reductions to revenues. If market
conditions were to decline, we may take actions to increase sales discounts,
possibly resulting in an incremental reduction of revenue at the time when
revenues are recognized.




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





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





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





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





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





As
of March 31, 2009, the balance of our amortizable intangible assets was
$157,318, including franchise-related intangible assets of $99,077 and
copyrights of $58,241. The amortizable intangible assets are amortized on a
straight-line basis over estimated useful lives of 10 years, and the
balance of goodwill was $122,504, which is tested for impairment on a recurring
basis. In determining the useful lives and recoverability of the intangibles,
assumptions must be made regarding estimated future cash flows and other factors
to determine the fair value of the assets, which may not represent the true fair
value. If these estimates or their related assumptions change in the future,
there may be significant impact on our results of operations in the period of
the change incurred.


- 20
-





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





RESULTS
OF OPERATIONS





Three
Months Ended March 31, 2009 compared to Three Months Ended March 31,
2008




Total Net Operating Revenue. Total net operating revenue consists of sales of
goods, franchising income and other operating revenue. Total net operating
revenue increased by $45,497, or 1%, to $3,445,021 for the three months ended
March 31, 2009 from $3,399,524 for the three months ended March 31,
2008. This was mainly due to the increase in other operating revenues of
$81,782, decrease in sales of goods of $425 and decrease in franchising income
of $35,860.
 
 Sales of goods. The sales of goods decreased by $425, from $2,364,109 for the
three months ended March 31, 2008 to $2,363,684 for the three months ended
March 31, 2009.  The decrease was mainly due to the difference in
exchange rates between the two periods.
 
 Franchising income. The 6% decrease in franchising income, from $556,229 for the
three months ended March 31, 2008 to $520,369, for the three months ended
March 31, 2009, was mainly due to the decrease in franchising income from
reclassifying income from Shanghai operations in the amount of
$49,774.
 
 Other operating revenue. Our other operating revenues represent revenues from
other activities and services such as training of teachers, arranging for
personal English language tutors, organizing field trips and educational fairs,
fees for designing the school layout of our franchised schools, and school
tuition. Other operating revenue increased by $81,782, or 17%, to $560,968 for
the three months ended March 31, 2009, from $479,186 for the three months
ended March 31, 2008. The increase was mainly due to revenue from schools
controlled by us in the PRC.
 
 Gross Profit. Gross profit decreased by $220,832, or 10%, to $2,003,190 for the
three months ended March 31, 2009, from $2,224,022 for the three months
ended March 31, 2008. The decrease in Gross Profit was mainly due to the
increase in the operating costs of schools controlled by us in the
PRC.
 
 Total Operating Expenses. Total operating expenses decreased by $283,457 to
$1,251,727 for the three months ended March 31, 2009, from $1,535,184 for
the three months ended March 31, 2008, an 18% decrease. The decrease in
total operating expenses was mainly due to decreases in expenditures to fund
daily operations.
 
 Other Operating Expenses. Other operating expenses decreased by $282,797, or
19%, to $1,230,874 for the three months ended March 31, 2009, from
$1,513,671 for the three months ended March 31, 2008.The decrease in
operating expenses was mainly due to decreases in expenditures to fund daily
operations.
 
 Interest Expense, Net. Net interest expenses decreased by $7,280, or 32%, to
$15,821 for the three months ended March 31, 2009 from $23,101 for the
three months ended March 31, 2008. The decrease in net interest expenses
was mainly due to the decrease of interest rates during the three months ended
March 31, 2009, compared to the three months ended March 31, 2008.
(See Note 11 to our Condensed Consolidated Financial Statements for more
information.)
 
 Other
Non-operating Income, Net. Net other non-operating income decreased by $57,254,
or 43%, to $74,904 for the three months ended March 31, 2009, from $132,158 for
the three months ended March 31, 2008. The decrease in net other non-operating
income was mainly due to the difference in exchange rates between the two
periods.
 
 Provision for Taxes. Provision for taxes for the three months ended
March 31, 2009 and 2008 were $75,405 and $36,897, respectively. These
provisions for income taxes relate to income taxes resulting from our operations
in Taiwan.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As
of March 31, 2009, our principal sources of liquidity included cash and
bank balances of $1,294,151, which decreased $691,667 from the balance of
$1,985,818 at December 31, 2008. The decrease was mainly due to the
increase in the net cash used in the prepayment of long term
investments.





- 21
-




We have
assertively expanded our business in the PRC. Our Shanghai operations turned
profitable in 2006, and the Group turned profitable in the first quarter of
2007. We anticipate continued expansion of the demand for learning materials and
an increase in the number of franchise schools. Furthermore, we foresee better
utilization of capital and funds as we identify and implement alternatives for
restructuring and refinancing. In order to increase its profit margin, the Group
has operated direct-owned schools since 2007. Due to the rapid expansion in our
Shanghai operations, the Group foresees additional need for funds in the near
future to facilitate its expansion plans during 2009. As discussed in Note 11 to
our Condensed Consolidated Financial Statements, the majority of the Group’s
existing loans are guaranteed by two directors of the Group who have expressed
their willingness to continue to support the Group until other sources of funds
have been obtained. Moreover, management believes that, with the support of the
directors and continuous PRC sales, the Company would have sufficient funds for
its operations, but may need new a bank facility to fulfill its business plan to
expand its operations in the future.





Net cash
provided by operating activities was $566,862 and $1,129,858 during the three
months ended March 31, 2009 and 2008, respectively. The $562,996 increase
was primarily due to (i) an increase in notes and accounts receivable of
$630,361 during the three months ended March 31, 2009, $98,445 more than the
increase of notes and accounts receivable of $531,916 during the three months
ended March 31, 2008, and (ii) a decrease of notes and accounts payable in the
amount of $298,133 during the three months ended March 31, 2009, compared to an
increase of notes and accounts payable in the amount of $450,301 during the
three months ended March 31, 2008, a net cash decrease of $748,434.





Net cash
used in investing activities was $1,070,393 during the three months ended March
31, 2009, and net cash provided by investing activities was $96,558 during the
three months ended March 31, 2008. The $973,835 difference was primarily
attributable to (i) an increase in cash used in the purchase of property and
equipment of $153,739 during the three months ended March 31, 2009,
compared to a decrease of $64,757 during the three months ended March 31, 2008,
(ii) increase in cash used in prepayment of long-term investments of $874,769
during the three months ended March 31, 2009, compared to cash used in the
prepayment of long-term investments of $26,076 during the three months ended
March 31, 2008, for a net negative difference in cash of
$848,693.





Net cash
used in financing activities during the three months ended March 31, 2009
was $190,524, as compared to $605,076 during the three months ended
March 31, 2008. The $414,552 difference was primarily attributable to
$13,772 in cash used to repay bank borrowings during the three months ended
March 31, 2009, compared to $573,968 used for the same purpose during the three
months ended March 31, 2008.





Off-Balance
Sheet Arrangements





As
of March 31, 2009, we did not engage in any off-balance sheet arrangements
as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC
under the Securities Exchange Act of 1934.





Bank
Borrowing





We
currently utilize bank loans as one of our financing sources.  As of
March 31, 2009 and 2008, the balances of bank borrowings, including current
and non-current portions, were $1,749,698 and $2,549,668,
respectively.





Pension
Benefit





As of
July 1, 2005, the Group maintains two different retirement plans, according to
the ROC Labor Standard Law, a non-contributory and funded defined contribution
retirement plan (the “New Plan”) covering all regular employees of KCIT, our
subsidiary in Taiwan, and the benefit retirement plan (the “Old Plan”) which
commenced in September 2003, and only applies to the regular employees of KCIT
who were employed prior to June 2005, as described in Note14 to our Condensed
Consolidated Financial Statements. The benefits expected to be paid in each of
the next five fiscal years, and in the aggregate for the five fiscal years
thereafter, are $0 and $16,735, respectively. We also make defined contributions
to a retirement benefits plan for our employees in the PRC in accordance with
local regulations. The contributions made by us for the three months ended March
31, 2009 and 2008 amounted to $19,256, and $13,755, respectively.





New
Accounting Pronouncements





See Note
4 to the Consolidated Financial Statements


- 22
-





Non-GAAP
Financial Measures





None.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We
are exposed to market risk, including from changes in certain foreign currency
exchange rates and interest rates. All of these market risks arise in the normal
course of business, as we do not engage in speculative trading activities. We
have not entered into derivative or hedging transactions to manage risk in
connection with such fluctuations.





The
following analysis provides quantitative information regarding our exposure to
foreign currency exchange risk and interest rate risk.





Interest
rate exposure





We are
exposed to fluctuating interest rates related to variable rate bank borrowings.
In analyzing the effect of interest rate fluctuations based on the average
balances of our outstanding bank borrowings for fiscal year 2009, we have
projected that, if interest rates were to increase by one percent, the result
would be an annual increase in our interest expense of $17,681. This analysis
does not take into consideration the effect of changes in the level of overall
economic activity on interest rate fluctuations.





Foreign
currency exposure





We
have operations in both Taiwan and the PRC. The functional currency of Higoal
and its subsidiary, KCIT, is NT Dollars and the financial records are
maintained and the financial statements are prepared for these entities in NT
Dollars. The functional currency of KCES and its consolidated
investee, Culture Media and KCEI is RMB and the financial records
are maintained and the financial statements are prepared for these entities in
RMB. In the normal course of business, these operations are not exposed to
fluctuations in currency values. We do not generally enter into derivative
financial instruments in the normal course of business, nor do we use such
instruments for speculative purposes. The translation from the applicable local
currency assets and liabilities to the U.S. Dollar is performed using exchange
rates in effect at the balance sheet date except for shareholders’ equity, which
is translated at historical exchange rates. Revenue and expense accounts are
translated using average exchange rates during the period. Gains and losses
resulting from such translations are recorded as a cumulative translation
adjustment, a separate component of shareholders’ equity.





ITEM
4. CONTROLS AND PROCEDURES





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures





Pursuant
to Exchange Act Rule 13a-15(b), our management has performed an evaluation of
the effectiveness of our disclosure controls and procedures. The term disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) means controls
and other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.


- 23
-


Management
has concluded, based on deficiencies noted by our auditors in past reviews, and
other issues noted by management in its evaluation, that as of March 31, 2009
our disclosure controls and procedures were ineffective. Several quarters ago we
began taking measures to improve our disclosure controls and procedures. We
initiated the installment of a new Enterprise Resource Planning (“ERP”) system
and engaged an outside accounting firm to advise the Company with respect to
setting up internal auditing and other controls and procedures. The ERP system,
when fully operational, will enable the centralization of all information
required to be disclosed pursuant to the Exchange Act to be digitally recorded,
processed, summarized and reported in a timely and secured manner. During the
final phase of ERP system integration, certain difficulties have been
encountered that have prevented the ERP system to be satisfactorily declared
effective and independently operational by management. One cause of the delay
was that the company hired to assist with our implementation of the new ERP
system unexpectedly ceased its operation in September 2008. We are currently
searching for the right consulting company to assist us with integration of the
RRP system as well as provide on-going monitoring, guidance and supervisory
support. Management anticipates that the new system will become fully
operational in the fourth fiscal quarter 2010. The old system used by the
Company will then be phased out.





The
Company recognizes that the disclosure controls and procedures were inadequate;
it is assertively attending to the inadequacy and believes that implementation
of ERP will significantly strengthen the Company’s disclosure controls and
procedures.





The
certifications required by Section 302 of the Sarbanes-Oxley Act of 2002
are filed as Exhibits 31.1 and 31.2, respectively, to this Form
10-Q.





Changes
in Internal Control over Financial Reporting




There
were no changes in the Company’s internal control over financial reporting
during the quarter ended March 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





During
the last quarter, we have continued the efforts to implement the integration of
a comprehensive ERP system that, when fully operational, will enhance our
internal controls over financial reporting. The ERP system has been fully
installed and the system has been running in parallel with the old system since
2007.  The system is expected to be fully operational in the fourth
fiscal quarter 2010. The ERP system will perform the following
functions:





o
            Maintain
      detailed records and produce comprehensive financial statements on a
      periodic basis allowing management to review and detect irregular
      financial activities;




o
            Place
      different check-points on the progression of ordinary monetary activities
      of the business; and




o
            Delineate
      individual and/departmental responsibilities and effectively separate
      respective departmental transactions so as to prevent occurrence of
      intentional misappropriation of
funds.





PART
II OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





We have
no material pending legal proceedings.





ITEM
1A. RISK FACTORS





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part 1, “Item 1A. Risk Factors” in
our Annual Report on Form 10-K for the year ended December 31, 2008, which
could materially affect our business, financial condition or future results. We
caution the reader that these risk factors may not be exhaustive. We operate in
a continually changing business environment and new risk facts emerge from time
to time. Management cannot predict such new risk factors, nor can we assess the
impact, if any, of such new risk factors on our business or the extent to which
any factor, or combination of factors, may impact our business. There have not
been any material changes during the quarter ended March 31, 2009 from the risk
factors disclosed in the above-mentioned Form 10-K for the year ended
December 31, 2008.





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





None.


- 24
-





ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM
5. OTHER INFORMATION





None.





ITEM
6. EXHIBITS





A.
              
              Exhibits31.1
              
              Rule 13a-14(a)
      Certification of Principal Executive Officer31.2
              
              Rule 13a-14(a)
      Certification of Principal Financial Officer32.1
              
              Section 1350
      Certification of Principal Executive Officer and Principal Financial
      Officer




SIGNATURES


In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Dated:
May 13, 2009





By:
              /s/ Suang-Yi PaiSUANG-YI
      PAICHIEF
      FINANCIAL OFFICER


- 25
-