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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, 2004
or o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 333-61286   KID CASTLE EDUCATIONAL CORPORATION  Florida
(State or other jurisdiction of
incorporation or organization)
    
    59-2549529
(IRS Employer
Identification No.)
 8th Floor, No. 98 Min Chuan Road, Hsien Tien
Taipei, Taiwan ROC
(Address of principal executive offices) Registrants telephone number, including area code:
    
    011-886-22218 5996
 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock
    
    N/A
 Securities registered under Section 12(g) of the Act: Title of classNone Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last ninety days. Yes x No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No o As of April 30, 2004, there were 18,999,703
shares of the Registrants common stock outstanding. Documents incorporated by reference: None. -1-




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FORM 10-Q KID CASTLE EDUCATIONAL CORPORATION TABLE OF CONTENTS PagePART I
    
    FINANCIAL INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements
    
    
    1Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II.
    OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    32Item 3. Defaults upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6 Exhibits and Reports on Form 8-K
    
    
    32SIGNATURES
    
    
    34EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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KID CASTLE EDUCATIONAL CORPORATION UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AS OF MARCH 31, 2004 AND DECEMBER 31, 2003 AND
 FOR THE THREE MONTHS ENDED
 MARCH 31, 2004 AND 2003
 KID CASTLE EDUCATIONAL CORPORATION INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 PagesCondensed Consolidated Balance Sheet
    
    
    12Condensed Consolidated Statements of Operations
    
    
    3Condensed Consolidated Statements of Stockholders Equity
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5  6Notes to Condensed Consolidated Financial Statements
    
    
    7  18
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##### Table of Contents



Kid Castle Educational Corporation 
 Condensed Consolidated Balance Sheets (Expressed in US Dollars) March 31,
    
    December 31,2004
    
    2003(Unadutied)ASSETSCurrent assetsCash and bank balances
    
    $
    1,250,445
    
    
    $
    1,273,723Bank fixed deposits  pledged (Note 12)
    
    
    347,104
    
    
    
    204,889Notes and accounts receivable, net (Notes 5)
    
    
    2,084,532
    
    
    
    2,334,385Inventories, net (Note 6)
    
    
    1,911,992
    
    
    
    1,991,951Other receivables (Notes 7)
    
    
    486,419
    
    
    
    524,974Prepayments and other current assets (Note 8)
    
    
    131,787
    
    
    
    122,292Pledged notes receivable (Note 12)
    
    
    933,939
    
    
    
    1,062,406Deferred income tax assets
    
    
    623,591
    
    
    
    615,286Total current assets
    
    
    7,769,809
    
    
    
    8,129,906Deferred income tax assets
    
    
    129,318
    
    
    
    120,335Prepaid long-term investments
    
    
    
    
    
    
    60,323Long-term investments (Note 9)
    
    
    221,395
    
    
    
    114,200Property and equipment, net
    
    
    1,996,113
    
    
    
    1,993,849Intangible assets, net of amortization (Note 11)
    
    
    976,906
    
    
    
    989,865Long-term notes receivable
    
    
    519,126
    
    
    
    505,091Pledged notes receivable (Note 12)
    
    
    324,325
    
    
    
    444,302Other assets
    
    
    220,746
    
    
    
    184,345Total assets
    
    $
    12,157,738
    
    
    $
    12,542,216LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesBank borrowings  short-term and maturing within
one year (Note 12)
    
    $
    1,690,776
    
    
    $
    1,317,690Notes and accounts payable
    
    
    1,210,879
    
    
    
    1,072,584Accrued expenses
    
    
    779,284
    
    
    
    805,556Amounts due to stockholders/officers (Note 10)
    
    
    
    
    
    
    572,160Other payables
    
    
    202,399
    
    
    
    266,276Deposits received
    
    
    404,716
    
    
    
    421,734Receipts in advance (Note 13)
    
    
    2,485,200
    
    
    
    2,924,636Income tax payable
    
    
    41,972
    
    
    
    44,067Obligation under capital leases due within one year
    
    
    33,378
    
    
    
    32,468Total current liabilities
    
    
    6,848,604
    
    
    
    7,457,171Bank borrowings maturing after one year (Note 12)
    
    
    1,526,482
    
    
    
    1,166,781Receipts in advance (Note 13)
    
    
    1,642,849
    
    
    
    1,467,025Obligation under capital leases
    
    
    
    
    
    
    5,534Deposits received
    
    
    659,961
    
    
    
    603,635Accrued pension liabilities
    
    
    121,486
    
    
    
    134,073Total liabilities
    
    
    10,799,382
    
    
    
    10,834,219
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Kid Castle Educational Corporation Condensed Consolidated
Balance Sheets - Continued (Expressed in US Dollars) March 31,
    
    December 31,2004
    
    2003(Unadutied)Commitments and contingencies (Note 15)Stockholders equityCommon stock, no par share:25,000,000 shares authorized;
18,999,703 shares issued and
outstanding at March 31, 2004 and
December 31, 2003
    
    
    7,669,308
    
    
    
    7,669,308Additional paid-in capital
    
    
    194,021
    
    
    
    194,021Legal reserve
    
    
    65,320
    
    
    
    65,320Accumulated deficit
    
    
    (6,385,136
    )
    
    
    (6,057,482
    )Accumulated other comprehensive loss
    
    
    (185,157
    )
    
    
    (163,170
    )Total stockholders equity
    
    
    1,358,356
    
    
    
    1,707,997Total liabilities and stockholders equity
    
    $
    12,157,738
    
    
    $
    12,542,216
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. -2-




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Kid Castle Educational Corporation Condensed Consolidated Statements of Operations (Expressed in US Dollars) Three months ended March 31,2004
    
    2003(Unaudited)Operating RevenueSales of goods
    
    $
    2,029,853
    
    
    $
    2,102,498Franchising income
    
    
    528,132
    
    
    
    431,651Other operating revenue
    
    
    52,353
    
    
    
    55,728Total net operating revenue
    
    
    2,610,338
    
    
    
    2,589,877Operating costsCost of goods sold
    
    
    (674,505
    )
    
    
    (551,832
    )Cost of franchising
    
    
    (132,101
    )
    
    
    (116,249
    )Other operating costs
    
    
    (57,195
    )
    
    
    (45,126
    )Total operating costs
    
    
    (863,801
    )
    
    
    (713,207
    )Gross profit
    
    
    1,746,537
    
    
    
    1,876,670Advertising costs
    
    
    (126,642
    )
    
    
    (43,975
    )Other operating expenses
    
    
    (2,016,424
    )
    
    
    (1,648,347
    )(Loss) income from operations
    
    
    (396,529
    )
    
    
    184,348Interest expenses, net
    
    
    (21,765
    )
    
    
    (74,021
    )Share of loss of investments
    
    
    46,967
    
    
    
    (12,710
    )Other non-operating income, net
    
    
    43,673
    
    
    
    56,129(Loss) income before income taxes
    
    
    (327,654
    )
    
    
    153,746Benefit (provision) for taxes
    
    
    
    
    
    
    (148,497
    )Net (loss) income
    
    $
    (327,654
    )
    
    $
    5,249(Loss) earnings per share  basic and diluted
    
    $
    (0.017
    )
    
    $
    0.00Weighted-average shares used to compute
(loss) earnings per share  basic and
diluted
    
    
    18,999,703
    
    
    
    15,074,329
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. -3-




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Kid Castle Educational Corporation 
 Condensed Consolidated Statements of Stockholders Equity (Expressed in US Dollars) AccumulatedCommon Stock
    
    Additional
    
    
    
    
    
    
    
    
    
    otherNumber of
    
    
    
    
    
    paid-in
    
    Legal
    
    Accumulated
    
    comprehensiveshares
    
    Amount
    
    capital
    
    reserve
    
    deficit
    
    loss
    
    TotalBalance, December 31, 2002
    
    
    15,074,329
    
    
    $
    4,654,880
    
    
    $
    194,021
    
    
    $
    65,320
    
    
    $
    (4,116,891
    )
    
    $
    (160,764
    )
    
    $
    636,566Net loss for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,940,591
    )
    
    
    
    
    
    
    (1,940,591
    )Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,406
    )
    
    
    (2,406
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,942,997
    )Issuance of common stock for
cash
    
    
    3,592,040
    
    
    
    2,514,428
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,514,428Repayment of a liability by
issuance of common stock
    
    
    333,334
    
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000Balance,
December 31, 2003 (Unaudited)
    
    
    18,999,703
    
    
    
    7,669,308
    
    
    
    194,021
    
    
    
    65,320
    
    
    
    (6,057,482
    )
    
    
    (163,170
    )
    
    
    1,707,997Net loss for the three months ended
March 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (327,654
    )
    
    
    
    
    
    
    (327,654
    )Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,987
    )
    
    
    (21,987
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (349,641
    )Balance, March 31, 2004
    
    
    18,999,703
    
    
    $
    7,669,308
    
    
    $
    194,021
    
    
    $
    65,320
    
    
    $
    (6,385,136
    )
    
    $
    (185,157
    )
    
    $
    1,358,356
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. -4-




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Kid Castle Educational Corporation 
 Condensed Consolidated Statements of Cash Flows (Expressed in US Dollars) Three months ended March 31,2004
    
    2003(Unaudited)Cash flows from operating activitiesNet (loss) income
    
    $
    (327,654
    )
    
    $
    5,249Adjustments to reconcile net (loss) income to
net cash provided by operating activitiesDepreciation of property and equipment
    
    
    52,266
    
    
    
    61,037Amortization of intangible assets
    
    
    40,509
    
    
    
    38,970Allowance for sales returns
    
    
    71,890
    
    
    
    Allowance for doubtful debts
    
    
    156,221
    
    
    
    59,365Reversal of allowance for loss on inventory
obsolescence and slow-moving items
    
    
    (69,180
    )
    
    
    (210,150
    )Share of loss (gain) of investments
    
    
    (46,967
    )
    
    
    12,710(Increase)/decrease in:Notes and accounts receivable
    
    
    192,461
    
    
    
    (1,195,262
    )Inventories
    
    
    204,320
    
    
    
    (151,022
    )Other receivables
    
    
    72,016
    
    
    
    212,770Prepayments and other current assets
    
    
    (6,073
    )
    
    
    (22,556
    )Deferred income tax assets
    
    
    3,314
    
    
    
    148,497Other assets
    
    
    (31,084
    )
    
    
    8,609Increase/(decrease) in:Notes and accounts payable
    
    
    107,712
    
    
    
    385,967Accrued expenses
    
    
    (46,463
    )
    
    
    153,499Other payables
    
    
    (76,311
    )
    
    
    (47,678
    )Receipts in advance
    
    
    (261,384
    )
    
    
    265,847Income taxes payable
    
    
    (3,314
    )
    
    
    Deposits received
    
    
    29,413
    
    
    
    62,574Accrued pension liabilities
    
    
    (16,266
    )
    
    
    14,585Net cash provided by (used in) operating activities
    
    
    45,426
    
    
    
    (196,989
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    
    
    
    
    (32,875
    )Proceeds from disposal of property and equipment
    
    
    
    
    
    
    Amount due from stockholder/director
    
    
    
    
    
    
    (1,814
    )Prepayment of long-term investments
    
    
    
    
    
    
    Acquisition of long-term investments
    
    
    
    
    
    
    Bank fixed deposits  pledged
    
    
    (135,818
    )
    
    
    (80,957
    )Pledged notes receivable
    
    
    30,129
    
    
    
    (86,038
    )Net cash used in investing activities
    
    
    (105,689
    )
    
    
    (201,684
    )
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Kid Castle Educational Corporation Condensed Consolidated Statements of Cash Flows  Continued (Expressed in US Dollars) Three months ended March 31,2004
    
    2003(Unaudited)Cash flows from financing activitiesProceeds from bank borrowings
    
    $
    2,829,827
    
    
    $
    643,173Repayment of bank borrowings
    
    
    (2,169,859
    )
    
    
    (99,980
    )Repayment of capital leases
    
    
    (5,662
    )
    
    
    Proceeds from loan from officers/stockholders
    
    
    
    
    
    
    250,289Repayment of loan from officers/stockholders
    
    
    (586,529
    )
    
    
    Net cash provided by financing activities
    
    
    67,777
    
    
    
    793,482Net increase in cash and cash equivalents
    
    
    7,514
    
    
    
    394,809Effect of exchange rate changes on cash and
cash equivalents
    
    
    (30,792
    )
    
    
    (968
    )Cash and cash equivalents at beginning of period
    
    
    1,273,723
    
    
    
    125,806Cash and cash equivalents at end of period
    
    $
    1,250,445
    
    
    $
    519,647Supplemental disclosure of cash flow information
Interest paid
    
    $
    32,964
    
    
    $
    77,203Supplemental disclosure of significant non-cash
transactionsIncrease (decrease) of notes receivable and
pledged notes receivable corresponding to the
increase (decrease) in the following accounts:Deposits received
    
    $
    (18,896
    )
    
    $
    (12,970
    )Other payables
    
    $
    (10,112
    )
    
    $
    40,387Receipts in advance
    
    $
    (123,465
    )
    
    $
    146,571
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. -6-




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Kid Castle Educational Corporation 
 Notes to Condensed Consolidated Financial Statements (Expressed in US Dollars) NOTE 1  ORGANIZATION AND DESCRIPTION OF BUSINESS Kid Castle Internet Technologies Limited (KCIT) was incorporated on December
17, 1999 under the provisions of the Company Law of the Republic of China
(ROC) as a limited liability company. KCIT is engaged in the business of
childrens education focusing on the English language. The business comprises
publication, sales and distribution of related books, magazines, audio and
videotapes and compact disc, franchising and sales of merchandises
complementary to the business. KCIT commenced operations in April 2000 when it
acquired the above business from a related company, Kid Castle Enterprises
Limited (KCE), which was owned by two directors and stockholders of KCIT. On March 9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding
Investment Property Limited incorporated in the British Virgin Islands, which
held the entire common stock of Higoal Developments Limited (Higoal)
incorporated in the Cayman Islands on March 8, 2001. On September 10, 2001,
Higoal established a wholly owned subsidiary, Kid Castle Educational Software
Development Company Limited (KCES) in the Peoples Republic of China (the
PRC). The existing operations of Higoal are principally located in Taiwan and
are being expanded in the PRC. In June 2002, after KCIT undertook a series of
group restructurings, KCIT became the direct owner of the outstanding shares of
Higoal. Premier Holding Investment Property Limited was then liquidated in
June 2003. On September 18, 2002, Higoal issued 11,880,000 shares of common stock to the
stockholders of KCIT in exchange for 100% of the outstanding common stock of
KCIT. As a result of this reorganization, KCIT became a wholly owned
subsidiary of Higoal. On October 1, 2002, Kid Castle Educational Corporation,
formerly King Ball International Technology Limited Corporation (the Company)
entered into an exchange agreement with Higoal whereby the Company issued to
the stockholders of Higoal 11,880,000 shares of common stock of the Company in
exchange for 100% of the issued and fully paid up capital of Higoal. As a result of the share exchange, the former stockholders of Higoal hold a
majority of the Companys outstanding capital stock. Generally accepted
accounting principles require in certain circumstances that a company whose
stockholders retain the majority voting interest in the combined business to be
treated as the acquirer for financial reporting purposes. Accordingly, the
acquisition has been accounted for as a reverse acquisition whereby Higoal is
deemed to have purchased the Company. However, the Company remains the legal
entity and the Registrant for Securities and Exchange Commission reporting
purposes. The Company, Higoal and its subsidiaries collectively are referred
to as the Group. The operations of the Group are principally located in Taiwan
and the PRC. NOTE 2 - BASIS OF PRESENTATION The accompanying financial data as of March 31, 2004 and for the three months
ended March 31, 2004 and 2003 have been prepared by the Group, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in -7-




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financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. However, the Group believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Groups audited
annual financial statements for the year ended December 31, 2003. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results could differ from these estimates. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position as of
March 31, 2004 and the results of operations for the three months ended March
31, 2004 and 2003 have been made. The results of operations for the three
months ended March 31, 2004 and 2003 are not necessarily indicative of the
operating results for the full year. NOTE 3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES REVENUE RECOGNITION Sales of books, magazines, audio and video tapes, compact disc and other
merchandises are recognised as revenue on the transfer of risks and rewards of
ownership, which generally coincides with the time when the goods are delivered
to customers and title has passed. Provision is made for expected future sales
returns and allowances when revenue is recognized. Franchise fees are the annual licensing fees for franchisees to use the Groups
brand name and consulting services. Franchising income is recognized on a
straight-line basis over the terms of the relevant franchise agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS An allowance for doubtful accounts is provided based on the evaluation of
collectibility and aging analysis of notes and accounts receivables. INVENTORIES Inventories are stated at the lower of cost or market. Cost includes all costs
of purchase, cost of conversion and other costs incurred in bringing the
inventories to their present location and condition, and is calculated using
the weighted average method. Market value is determined by reference to the
sales proceeds of items sold in the ordinary course of business after the
balance sheet date or to management estimates based on prevailing market
conditions. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows: -8-




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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 accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109 Accounting for
Income Taxes. Under SFAS No. 109, deferred tax liabilities or assets at the
end of each period are determined using the tax rate expected to be in effect
when taxes are actually paid or recovered. Valuation allowances are established
when it is considered more likely than not that the deferred tax assets will
not be realized. INTANGIBLE ASSETS Franchises and copyrights are stated at cost and amortized on the straight-line
method over their estimated useful lives of 10 years. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to
owners. Comprehensive income (loss) is disclosed in the condensed consolidated
statement of stockholders equity. NET EARNINGS (LOSS) PER COMMON SHARE The Group computes net earnings (loss) per share in accordance with SFAS No.
128, Earnings per Share. Under the provisions of SFAS No. 128, basic net
earnings (loss) per share is computed by dividing the net earnings (loss)
available to common shareholders for the period by the weighted average number
of shares of common stock outstanding during the period. The calculation of
diluted net earnings -9-




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(loss) per share gives effect to common stock equivalents. For the three months
ended March 31, 2004 and 2003, the Group did not have any potential common
stock shares. RECLASSIFICATION The presentation of certain prior information has been reclassified to conform
with current presentation. NOTE 4  RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No.46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46). FIN 46 clarifies when a company
should consolidate in its financial statements the assets, liabilities and
activities of a variable interest entity. FIN 46 provides general guidance as
to the definition of a variable interest entity and requires a variable
interest entity to be consolidated if a company absorbs the majority of the
variable interest entitys expected losses, or is entitled to receive a
majority of the variable interest entitys residual returns, or both. In
December 2003, the FASB issued a revised interpretation of FIN 46 (FIN 46-R),
which supercedes FIN 46 and clarifies and expands current accounting guidance
for variable interest entities. FIN 46 and FIN 46-R are effective immediately
for all variable interest entities created after January 31, 2003, and for
variable interest entities created prior to February 1, 2003, no later than the
end of the first reporting period after March 15, 2004. We have performed a
review of all entities created prior to and subsequent to January 31, 2003, and
determined the adoption of FIN 46 and FIN 46-R did not have a material impact
on the Groups financial reporting and disclosures. On April 30, 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.(SFAS No.
149) SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for
decisions made as part of the Derivatives Implementation Group (DIG) process
that effectively required amendments to SFAS No. 133, and decisions made in
connection with other FASB projects dealing with financial instruments and in
connection with implementation issues raised in relation to the application of
the definition of a derivative and characteristics of a derivative that
contains financing components. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Group does not expect SFAS No. 149 to have a material impact on the
Groups consolidated financial statements upon adoption. In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Group does not expect SFAS No. 150 to have a material impact on
the Groups consolidated financial statements upon adoption. In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which
supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104s
primary purpose is to rescind accounting guidance contained in SAB -10-




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##### Table of Contents



101 related to multiple element revenue arrangements and revises the SECs
Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers that have been codified in Topic 13. SAB 104 was effective immediately
and did not have a material impact on the Groups financial reporting and
disclosures. In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises employers
disclosures about pension plans and other postretirement benefit plans. It
requires additional disclosures to those in the original SFAS No. 132 about the
assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
required information should be provided separately for pension plans and for
other postretirement benefit plans. This Statement, which also requires new
disclosures for interim periods beginning after December 15, 2003, is effective
for fiscal years ended after December 15, 2003. The Group has adopted this
Statement since the year ended December 31, 2003, and the adoption of this
Statement has no impact on the Groups consolidated financial statements. NOTE 5  NOTES AND ACCOUNTS RECEIVABLE March 31,
    
    December 31,2004
    
    2003(Unaudited)Notes and accounts receivable Third parties
    
    $
    2,602,991
    
    
    $
    2,140,073 Related parties
    
    
    110,877
    
    
    
    631,153Total
    
    
    2,713,868
    
    
    
    2,771,226Allowance for doubtful accounts and sales returns
    
    
    (629,336
    )
    
    
    (436,841
    )Notes and accounts receivable, net
    
    $
    2,084,532
    
    
    $
    2,334,385
 NOTE 6  INVENTORIES March 31,
    
    December 31,2004
    
    2003(Unaudited)Work in process
    
    $
    71,597
    
    
    $
    53,756Finished goods and other merchandises
    
    
    1,840,395
    
    
    
    1,938,195$
    1,911,992
    
    
    $
    1,991,951
 For the three months ended March 31, 2004 and 2003, the Group recognized
reversal of provision for loss on inventory obsolescence and slow-moving items
of $75,130 and $210,150, respectively. As of March 31, 2004 and December 31,
2003, the balances of provision for loss on inventory obsolescence and
slow-moving items were $600,551 and $651,795, respectively. -11-




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##### Table of Contents



NOTE 7  OTHER RECEIVABLES March 31,
    
    December 31,2004
    
    2003(Unaudited)Other receivables  third parties:Tax paid on behalf of landlord
    
    $
    919
    
    
    $
    1,442Advances to staff
    
    
    55,037
    
    
    
    43,242Penalties receivables
    
    
    
    
    
    
    14,658Receivables from Shanghai Wonderland Educational
Resources Co., Ltd. (Shanghai Wonderland) (Note (i))
    
    
    71,009
    
    
    
    105,847Other receivables
    
    
    33,310
    
    
    
    43,622Sub-total
    
    
    160,275
    
    
    
    208,811Other receivables  related parties (Note (ii))
    
    
    326,144
    
    
    
    316,163$
    486,419
    
    
    $
    524,974
 Note:  (i)
    
    Shanghai Wonderland was newly established in October 2003 as a
distributor of the Group. The Group has loaned Shanghai Wonderland
RMB$450,000 (approximately $54,000) for operations, which is unsecured and
carries no interest, and has paid certain pre-operating costs on behalf of
Shanghai Wonderland. Shanghai Wonderland will have to settle the loan of
RMB$450,000 on or before January 23, 2005 and repay the pre-operating
costs in full amount after it starts to generate revenue.  (ii)
    
    The amount due from related parties consists of the loan of RMB$1,000,000
(approximately $121,000) from the Group to 21st Century Publishing House
(Publishing House) for the incorporation of Jiangxi 21st Kid Castle
Culture Media Co., Ltd. (Culture Media). According to the agreement,
the loan is unsecured and carries no interest. However, it is agreed that
Publishing House will have to settle the loan on or before June 27, 2004
or it will transfer 40% of its ownership in Culture Media to the Group.
The amount due from related parties also includes the payment of certain
pre-operating costs paid by the Group on behalf of Culture Media for
$176,211 as of March 31, 2004. Culture Media will repay the Group in full
amount after it starts to generate revenue. The amount due from this
related party has no fixed repayment term and bears no interests. In
addition, the Group also paid on behalf of its related party, 21st Century
Kid Castle Language and Education Center (Education Center), for
inventory purchases. Education Center will repay the Group in full amount
when it starts to generate sufficient revenue. The amount due from the
this related party amounted to $2,317 as of March 31, 2004 and has no
fixed repayment term and bears no interests. NOTE 8  PREPAYMENTS AND OTHER CURRENT ASSETS March 31,
    
    December 31,2004
    
    2003(Unaudited)Prepayments
    
    $
    18,848
    
    
    $
    51,990Temporary payments.
    
    
    3,660
    
    
    
    4,989VAT tax recoverable
    
    
    
    
    
    
    
 -12-




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##### Table of Contents



March 31,
    
    December 31,2004
    
    2003(Unaudited)Tax recoverable
    
    
    30,027
    
    
    
    29,208Prepaid interest
    
    
    51,903
    
    
    
    19,856Others
    
    
    27,349
    
    
    
    16,249$
    131,787
    
    
    $
    122,292
 NOTE 9  LONG-TERM INVESTMENTS March 31,
    
    December 31,2004
    
    2003(Unaudited)Jiangxi 21st Century Kid Castle Culture Media Co., Ltd
(Culture Media) (Note (i))Investment cost
    
    $
    120,555
    
    
    $
    120,646Share of profit
    
    
    35,728
    
    
    
    (11,326
    )$
    156,283
    
    
    $
    109,32021st Century Kid Castle Language and Education Center
(Education Center) (Note (ii))Investment cost
    
    $
    90,415
    
    
    $
    30,161Share of profit
    
    
    (25,303
    )
    
    
    (25,281
    )$
    65,112
    
    
    $
    4,880Total
    
    $
    221,395
    
    
    $
    114,200
 Note:  (i)
    
    In July 2003, the Group entered into an agreement with Publishing House
to incorporate Culture Media. It is agreed in the agreement that KCES,
the Groups wholly owned PRC subsidiary, and Publishing House each has 50%
ownership and that each party contributed RMB$1 million for the
incorporation. As the Groups ownership accounts for 50% equity interest
in Culture Media and that the Group has significant influence and should
therefore account for its interest on the equity method.For the three months ended March 31, 2004, the Group recorded an
investment gain accounted for under the equity method in Culture Media of
$47,007 in the current periods operation results.(ii)
    
    In October 2003, the Group obtained the governments approval to co-found
Education Center with Publishing House in the PRC. In 2004, Education
Center registered the total capital as RMB$1,500,000, and the Company and
Publishing House each owns 50% of the investee. It has been determined
that the Group has significant influence and should therefore account for
its investee on the equity method.For the three months ended March 31, 2004, the Group recognized an
investment loss accounted for under the equity method in Education Center
of $41 in the current periods operation results. -13-




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##### Table of Contents



NOTE 10  RELATED PARTY TRANSACTIONS AMOUNT DUE TO OFFICERS March 31,
    
    December 31,2004
    
    2003(Unaudited)Mr. Kuo-An Wang and Mr. Yu-En Chiu
    
    $
    
    
    
    $
    572,160$
    
    
    
    $
    572,160
 As of December 31, 2002, the outstanding balance of amount due to a
stockholder, which was unsecured and carried interest at 25.2% per annum, was
$606,208 (including the principal of $600,000 and related interests). On
November 15, 2003, the Group entered into a liability transfer agreement with
the stockholder, to transfer its liability to Mr. Kuo-An Wang and Mr. Yu-En
Chiu. According to the agreement, it is stated that the Group would transfer
its original liability of $600,000 and the interests separately in two lump
sums. The first transfer was completed on December 30, 2003 for $70,000, and
the remaining balance, including the principal of $530,000 and related
interests, which had yet to be transferred, amounted to $572,160 as of December
31, 2003. The Group completed the transfer subsequent to December 31, 2003.
And as of March 31, 2004, there is no underlying amount due to officers. NOTE 11  INTANGIBLE ASSETS March 31,
    
    December 31,2004
    
    2003(Unaudited)Gross carrying amountFranchise
    
    $
    1,025,404
    
    
    $
    997,446Copyrights
    
    
    602,773
    
    
    
    586,3381,628,177
    
    
    
    1,583,784Less: Accumulated amortizationFranchise
    
    
    (410,162
    )
    
    
    (374,042
    )Copyrights
    
    
    (241,109
    )
    
    
    (219,877
    )(651,271
    )
    
    
    (593,919
    )Net
    
    $
    976,906
    
    
    $
    989,865
 Amortization charged to operations was $40,509 and $38,970 for the three months
ended March 31, 2004 and 2003, respectively. The estimated aggregate amortization expenses for each of the five succeeding
fiscal years are as follows: -14-




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##### Table of Contents



2005
    
    $
    162,0362006
    
    
    162,0362007
    
    
    162,0362008
    
    
    162,0362009
    
    
    162,036$
    810,180
 NOTE 12  BANK BORROWINGS March 31,
    
    December 31,Notes

    
    2004
    
    2003(Unaudited)Bank term loans
    
    (i)
    
    $
    733,769
    
    
    $
    986,280Short-term unsecured bank loans
    
    (ii)
    
    
    542,495
    
    
    
    234,535Mid-term loan
    
    (iii)
    
    
    976,558
    
    
    
    325,515Mid-term secured bank loan
    
    (iv)
    
    
    964,436
    
    
    
    938,1413,217,258
    
    
    
    2,484,471Less: Balances maturing within one year included
in current liabilitiesBank term loans
    
    
    
    
    558,321
    
    
    
    757,640Short-term unsecured bank loans
    
    
    
    
    542,495
    
    
    
    234,535Mid-term loan
    
    
    
    
    589,960
    
    
    
    325,5151,690,776
    
    
    
    1,317,690Bank borrowings maturing after one year
    
    
    
    $
    1,526,482
    
    
    $
    1,166,781
 Notes:  (i)
    
    The balance represents bank loans with which are pledged by post-dated
checks amounting to $1,258,264 and $1,506,708 received from franchisees
and the Groups bank deposits of $30,649 and $87,621 as of March 31, 2004
and December 31, 2003, respectively, for the purpose of financing
operations. The repayment dates of the loans coincided with the maturity
dates of the corresponding pledged post-dated checks. The applicable
interest rates ranged from 5.66% to 7.60% per annum as of March 31, 2004.
For the three months ended March 31, 2004 and 2003, the interest expenses
charged to operations amounted to $12,177 and $19,564, respectively.(ii)
    
    In August 2003, KCIT obtained an unsecured short-term loan of $234,535,
which is guaranteed by two directors and stockholders of the Group, to
finance the Groups operations. The loan that bears interest at the Taiwan
basic borrowing rate plus 1.66% per annum, is wholly repayable in August
2004. The applicable interest rate is approximately 4.99% per annum as of
March 31, 2004.In March 2004, KCIT obtained another unsecured short-term loan of
$301,386, which is guaranteed by two directors and stockholders of
the Group, to finance the Groups operations. The loan that bears
interest at the Taiwan basic borrowing rate plus 1.65% per annum, is
wholly repayable in September 2004. The applicable interest rate is
approximately 5.16% per annum as of March 31, 2004. -15-




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##### Table of Contents



For the three months ended March 31, 2004, the interest expenses charged
to operations from the above two unsecured short-term loans amounted to
$3,558.(iii)
    
    In March 2003, KCIT obtained a loan of $576,203 from a financial
institution, which bears interest at 13.5% per annum and is repayable by
18 equal monthly installments, to finance the Groups operations. The last
installment is due on September 30, 2004. As of March 31, 2004 and
December 31, 2003, the loan was pledged by KCITs deposits of $90,416 and
$117,268, respectively, and guaranteed by two directors/stockholders of
the Group.In March 2004, KCIT obtained a new bank loan of $753,466, which bears
interest at 5.25% per annum and is repayable by 24 equal monthly
installments, to finance the Groups operations. The last installment is
due on March 31, 2006. As of March 31, 2004, the loan was pledged by the
KCITs deposits of $226,040, and guaranteed by two directors/stockholders
of the Group.For the three months ended March 31, 2004 and 2003, the interest expenses
charged to operations from the aforementioned loans amounted to $9,721
and $0, respectively.(iv)
    
    In August 2003, KCIT obtained a loan of $945,626 from a bank to repay its
mortgage loan as described in note (ii) as well as to finance its
operations. The loan is secured by the Groups land and buildings and
personal guarantees provide by two directors and stockholders of the
Group. The loan, which bears interest at the lending banks basic
borrowing rate plus 1.46% per annum, is wholly repayable in August 2004.
On December 31, 2003, the bank extended the term of the loan and hence the
maturity date is in December 2005. As of March 31, 2004, the applicable
interest rate was approximately 4.79% per annum. For the three months
ended March 31, 2004, the interest expenses charged to operations amounted
to $11,620. NOTE 13  RECEIPTS IN ADVANCE The balance comprises: March 31,
    
    December 31,Notes
    
    2004
    
    2003(Unaudited)Current liabilities:Sales deposits received
    
    (i)
    
    $
    316,342
    
    
    $
    356,575Franchising income received
    
    (ii)
    
    
    1,372,469
    
    
    
    1,703,426Subscription fees received.
    
    (iii)
    
    
    766,467
    
    
    
    842,509Others
    
    
    
    
    29,922
    
    
    
    22,1262,485,200
    
    
    
    2,924,636Long-term liabilities:Franchising income received
    
    (ii)
    
    
    1,602,621
    
    
    
    1,432,343Others
    
    
    
    
    40,228
    
    
    
    34,6821,642,849
    
    
    
    1,467,025$
    4,128,049
    
    
    $
    4,391,661
 Notes:  (i)
    
    The balance represents receipts in advance from customers for goods sold to
them. -16-




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##### Table of Contents



(ii)
    
    The balance mainly represents franchising income received in advance
which is attributable to the periods after the respective period end
dates.  (iii)
    
    The balance represents subscription fees received in advance for
subscription of magazines published by the Group. NOTE 14  RETIREMENT PLANS The Group has a defined benefit retirement plan (the Plan) covering all
regular employees of KCIT, its ROC subsidiary in Taiwan. Under the funding
policy of the Plan, commencing from September 2003, KCIT contributes monthly an
amount equal to 2% of the employees total salaries and wages, to an
independent retirement trust fund deposited with the Central Trust of China in
accordance with the ROC Labor Standards Law in Taiwan. The retirement fund is
not included in the Groups financial statements. Net periodic pension cost is
based on annual actuarial valuations which use the projected unit credit cost
method of calculation and is charged to the consolidated statement of
operations on a systematic basis over the average remaining service lives of
current employees. Under the plan, the employees are entitled to receive
retirement benefits upon retirement in the manner stipulated by the ROC Labor
Standard Law in Taiwan. The benefits under the plan are based on various
factors such as years of service and the final base salary preceding
retirement. The net periodic pension cost is as follows: Three months ended March 31,2004
    
    2003(Unaudited)Service cost
    
    $
    15,424
    
    
    $
    13,210Interest cost
    
    
    1,732
    
    
    
    1,116Expected return on assets
    
    
    (367
    )
    
    
    Amortization of unrecognized loss
    
    
    322
    
    
    
    238Net periodic pension cost
    
    $
    17,111
    
    
    $
    14,564
 The Group previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $54,355 to the Plan in 2004.
As of March 31, 2004, $15,893 of contributions has been made. The Group
presently anticipates contributing an additional $38,462 to fund the Plan in
2004 for a total of $54,355. NOTE 15  GEOGRAPHICAL SEGMENTS The Group is principally engaged in the business of children education focusing
on English language in Taiwan and the PRC. Accordingly, the Group has two
reportable geographic segments: Taiwan and the PRC. The Group evaluates the
performance of each geographic segment based on its net income or loss. The
Group also accounts for inter-segment sales as if the sales were made to third
parties. Information concerning the operations in these geographical segment
is as follows: -17-




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##### Table of Contents



Taiwan
    
    The PRC
    
    TotalThree months
    
    Three months
    
    Three months
    
    Three months
    

    Three months
    
    Three monthsended
    
    ended
    
    ended
    
    ended
    
    ended
    
    endedMarch 31,
    
    March 31,
    
    March 31,
    
    March 31,
    
    March 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003RevenueExternal revenue
    
    $
    2,241,656
    
    
    $
    2,472,515
    
    
    $
    394,238
    
    
    $
    233,849
    
    
    $
    2,635,894
    
    
    $
    2,706,364Inter-segment revenue
    
    
    1,362
    
    
    
    26,646
    
    
    
    
    
    
    
    
    
    
    
    1,362
    
    
    
    26,646$
    2,243,018
    
    
    $
    2,499,161
    
    
    $
    394,238
    
    
    $
    233,849
    
    
    $
    2,637,256
    
    
    $
    2,733,010Profit (loss) from
Operations
    
    $
    (10,560
    )
    
    $
    688,398
    
    
    $
    (293,247
    )
    
    $
    (375,547
    )
    
    $
    (303,807
    )
    
    $
    312,851Capital expenditures
    
    $
    
    
    
    $
    84,936
    
    
    $
    
    
    
    $
    5,642
    
    
    $
    
    
    
    $
    90,578March 31,
    
    December 31,
    
    March 31,
    
    December 31,
    
    March 31,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Total assets
    
    $
    10,358,412
    
    
    $
    10,614,292
    
    
    $
    1,931,618
    
    
    $
    2,053,029
    
    
    $
    12,290,030
    
    
    $
    12,667,321
   [Continued from above table, first column(s) repeated] Corporate
    
    Eliminations
    
    ConsolidatedThree months
    
    Three months
    
    Three months
    
    Three months
    
    Three months
    
    Three monthsended
    
    ended
    
    ended
    
    ended
    
    ended
    
    endedMarch 31,
    
    March 31,
    
    March 31,
    
    March 31,
    
    March 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003RevenueExternal revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,635,894
    
    
    $
    2,706,364Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    (1,362
    )
    
    
    (26,646
    )
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,362
    )
    
    $
    (26,646
    )
    
    $
    2,635,894
    
    
    $
    2,706,364Profit (loss) from
Operations
    
    $
    (69,395
    )
    
    $
    (3,686
    )
    
    $
    31,187
    
    
    $
    (68,688
    )
    
    $
    (342,015
    )
    
    $
    240,477Capital expenditures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    90,578March 31,
    
    December 31,
    
    March 31,
    
    December 31,
    
    March 31,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Total assets
    
    $
    3,480
    
    
    $
    7,487
    
    
    $
    (67,482
    )
    
    $
    (132,592
    )
    
    $
    12,226,028
    
    
    $
    12,542,216
 NOTE 16  COMMITMENT In October 2003, KCES entered into a purchase obligation agreement with
Haicheng (Shanghai) Information Technologies Limited to provide cooperating and
franchise schools with equipment sets to facilitate their educational programs.
The equipment mainly consists of computer systems. As was disclosed in the
previous financial statements for the year ended December 31, 2003, the Group
expected to purchase 300 sets of equipment prior to June 30, 2004, which was
amounted to $1,012,948. During the three months ended March 31, 2004, the
Group purchased 12 sets of equipment and made payment of $13,027. As of March
31, 2004, our purchase obligation amounted to $999,921. NOTE 17  SUBSEQUENT EVENTS On April 1, 2004, KCES signed a joint venture agreement with Tianjin Foreign
Enterprises & Experts Service Corp., in Tianjin City PRC. Pursuant to this
joint venture agreement, the Group and Tianjin Foreign Enterprises & Experts
Service Corp. each owns a 50% interest in Tianjin Kid Castle Educational
Investment Consulting Co., Ltd. On April 28, 2004, KCES signed a joint venture agreement with LANBEISI
Education & Culture Industrial Co., Ltd in Sichuan Province, PRC and Sichuan
Province Education Institutional Service Center in Sichuan Province, PRC.
Pursuant to this joint venture agreement, the Group, LANBEISI Education &
Culture Industrial Co., Ltd and Sichuan Province Education Institutional
Service Center own, respectively, 45%, 45% and 10% interests in Sichuan
LANBEISI Kid Castle Education Development Co., Ltd. -18-




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##### Table of Contents



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION This report contains certain forward-looking statements and information
relating to us that are based on the beliefs and assumptions made by our
management as well as information currently available to the management. When
used in this document, the words anticipate, believe, estimate, and
expect and similar expressions, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. Certain of
these risks and uncertainties are discussed under the caption Factors That May
Affect Our Future Results And Financial Condition contained herein and other
factors disclosed in our filings with the Securities and Exchange Commission
including, but not limited to our Annual Report on Form 10-KSB for the year
ended December 31, 2003. We do not intend to update these forward-looking
statements. GENERAL We are engaged in the business of childrens education, focusing on the
publication and sale of kindergarten language school and primary school
teaching materials and magazines. We also provide management and consulting
services to our franchised kindergarten and language schools. Our teaching
materials include books, audio tapes, video tapes and compact discs. A major
portion of our educational materials focuses on English language education. We
also sell educational tools and equipment that are complementary to our
business. Currently, our major business is in Taiwan. In 2001, we started to
expand our business in the Peoples Republic of China (PRC). We officially
launched our operations in Shanghai in April 2002. As in Taiwan, we offer
advanced teaching materials and tools, and monthly and bi-weekly magazines to
provide children ranging from two to twelve years of age a chance to learn
exceptional English language and computer skills, and to provide a pre-school
education program. CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to product
returns, bad debts, inventories, equity investments, income taxes, financing
operations, pensions and commitment and contingencies. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements. Revenue Recognition.We recognize sales of teaching materials and educational
tools and equipment as revenue when title of the product and risk of ownership
are transferred to the customer, which occurs at the time of delivery, or when
the goods arrive at the customer designated location, depending on the
associated shipping terms. Additionally, we deliver products sold by our
distributors directly to the distributors customers and as such the delivered
goods are recognized as revenue similar to sales to our direct customers. We
estimate sales returns and discounts based on historical experience and record
as reductions to revenues. -19-




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If market conditions were to decline, we may take actions to increase sales
discounts, possibly resulting in an incremental reduction of revenue at the
time when revenues are recognized. Allowance for doubtful accounts.We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Allowance for obsolete inventories and lower of cost or market.We write down
our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about inventory aging, future demand and market conditions.
If actual market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. Investment impairments.We hold equity interests in companies having
operations in areas within our strategic focus. We record an investment
impairment charge when we believe an investment has experienced a decline in
value that is not temporary. Future adverse changes in market conditions or
poor operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investments current carrying value, thereby possibly requiring
an impairment charge in the future. Fixed assets and depreciation.Our fixed assets are stated at cost. Major
improvements and betterments to existing facilities and equipment are
capitalized. Expenditures for maintenance and repairs that do not extend the
life of the applicable asset are charged to expense as incurred. Buildings are
depreciated over a 50-year term. Fixtures and equipment are depreciated using
the straight-line method over their estimated useful lives, which range from
two and a half years to ten years. Impairment of long-lived assets.We review our fixed assets and other
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to
be generated by the asset over its remaining useful life. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. The estimate of fair value is generally based on quoted market prices
or on the best available information, including prices for similar assets and
the results of using other valuation techniques. As of March 31, 2004, the balance of our amortizable intangible assets was
$976,906, including franchise-related intangible assets of $615,242 and
copyrights of $361,664. The amortizable intangible assets are amortized on a
straight-line basis over estimated useful lives of 10 years. In determining the
useful lives and recoverability of the intangibles, assumptions must be made
regarding estimated future cash flows and other factors to determine the fair
value of the assets, which may not represent the true fair value. If these
estimates or their related assumptions change in the future, there may be
significant impact on our results of operations in the period of the change
incurred. Income taxes.We account for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and tax loss carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are subject to valuation allowances based upon -20-




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managements estimates of realizability. Actual results may differ
significantly from managements estimate. Currency Risk Our transactions with suppliers and customers are primarily effected in New
Taiwan dollars, which is the functional currency of our Taiwanese subsidiary,
Kid Castle Internet Technologies Limited (KCIT). As a result of our
expansion in the PRC, our transactions denominated in Renminbi, which is the
functional currency of our PRC subsidiary, Kid Castle Educational Software
Development Company Limited (KCES), are increasing. Our financial statements
are reported in U.S. dollars. As a result, fluctuations in the relative
exchange rate among the U.S. dollar, the New Taiwan dollar and the Renminbi
will affect our reported financial results. Such impacts could be meaningful
and are independent of the underlying performance of the business. The market
price of our securities could be significantly harmed based on unfavorable
changes in exchange rates. We do not actively manage our exposure to such
effects. RESULTS OF OPERATIONS Three months ended March 31, 2004 and 2003 Total net operating revenues increased by $20,461, or 0.8%, to $2,610,338 for
the three months ended March 31, 2004 from $2,589,877 for the three months
ended March 31, 2003, including the decreases in sales of goods of $72,645 and
other operating revenues of $3,375, and the increase in franchising income of
$96,481. The decrease in sales of goods, from $2,102,498 for the three months
ended March 31, 2003 to $2,029,853 for the three months ended March 31, 2004,
or 3%, was mainly due to mild turndown in the net sales of goods generated from
our Taiwan operations of $299,940 for the three months ended March 31, 2004
from sales on monthly magazines, and sales from preschool channel distributors.
In addition, net sales of goods generated from our Shanghai operations
increased by $158,364, or 114%, to $297,751 for the three months ended March
31, 2004 from $139,387 for the three months ended March 31, 2003. The increase
in franchising income, from $431,651 for the three months ended March 31, 2003
to $528,132 for the three months ended March 31, 2004, was mainly due to the
increase in numbers of our franchised schools and the increase in the annual
franchising fees. Our other operating revenues represent revenues from other
activities and services such as training of teachers, arranging for personal
English language tutors, organizing field trips and educational fairs and
designing the school layout for franchised schools. Other operating revenues
decreased by $3,375, or 6%, to $52,353 for the three months ended March 31,
2004 from $55,728 for the three months ended March 31, 2003. The decrease was
mainly due to the decrease in organizing field trips of $5,805. Gross profit decreased by $130,133, or 7%, to $1,746,537 for the three months
ended March 31, 2004 from $1,876,670 for the three months ended March 31, 2003.
Gross margin decreased to 67% for the three months ended March 31, 2003 from
72% for the same period in prior year. The decrease was mainly due to the
reversal of provision for loss on inventory obsolescence and slow-moving items
that was written down significantly in 2001. The reversal of such provision
amounted to $75,130 and $210,150 for the three months ended March 31, 2004 and
2003, respectively, causing a decrease of gross profit by $135,020. Total operating expenses increased by $450,744, or 27%, to $2,143,066 for the
three months ended March 31, 2004 from $1,692,322 for the three months ended
March 31, 2003. Advertising costs increased by $82,667, or 188%, to $126,642
for the three months ended March 31, 2004 from $43,975 for the three months
ended March 31, 2003. The increase was mainly because we spent more
advertising costs on the promotion of our products and franchised schools.
Other operating expenses increased by $368,077, or 22%, to $2,016,424 for the
three months ended March 31, 2004 from $1,648,347 for the -21-




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three months ended March 31, 2003, principally due to increases in commission
fees from monthly magazines and in expenses as a result of the expansion in
Shanghai, PRC. Commission fees increased by $224,252, or 226%, to $323,347 for
the three months ended March 31, 2004 from $99,095 for the three months ended
March 31, 2003, was mainly due to the new promotion of our monthly magazines
sold to pre-school. In addition, we incurred additional professional fees in
relation to SEC filings of approximately $42,898. Net interest expenses decreased by $52,256, or 71%, to $21,765 for the three
months ended March 31, 2004 from $74,201 for the three months ended March 31,
2003, primarily due to a loan from a stockholder in April 2002 (please refer to
Note 10 to the condensed consolidated financial statements) that had a monthly
interest rate of 2.1% and was fully repaid subsequent to December 31, 2003.. Share of gain (loss) of investments increased by $59,677, or 470%, to $46,967
for the three months ended March 31, 2004 from ($12,710) for the three months
ended March 31, 2003, primarily due to our new investment in Culture Media on
July 8, 2003 that incurred an investment gain of $47,007 (please refer to Note
9 to our condensed consolidated financial statements). In addition, On June 5, 2003, pursuant to a special resolution adopted by our
board of directors, we resolved to amend the agreement we entered into on May
16, 2001 with Global International Education Investment Ltd. (Global
International) to change our cooperation relationship. On June 10, 2003, we
entered into a letter of intent with Global International to change the payment
structure on the strategic alliance from equity ownership to franchising fees
and such amendment to the original agreement should be completed by the end of
August 2003. Pursuant to the change on the payment structure, we were to give
up the 15% ownership in Global International at the effective date of the
change of the agreement. On August 25, 2003, the Group entered into a revised
agreement with Global International to provide consulting services to Global
International. Pursuant to this revised agreement, the Group charges 15% of
Global Internationals annual net income as consulting fees. The service
period covered by the revised agreement began on July 1, 2003. However, as of
March 31, 2003, we recognized an investment loss of $12,710 in Global
International. Other non-operating income decreased by $12,456, or 22%, to $43,673 for the
three months ended March 31, 2004 from $56,129 for the three months ended March
31, 2003, primarily because we started to negotiate more favorable terms with
our vendors since Q3 in 2003, that led to a significant reduction of purchasing
costs, and as a result, the cash rebates from vendors decreased by $10,295. Income tax provision for the three months ended March 31, 2003 was $148,497.
This income tax provision mainly represents the use of net operating loss
carry-forwards to offset the income generated from operations in Taiwan and an
increase in the valuation allowance against deferred tax assets generated from
our Shanghai operations so as to reduce the deferred tax assets to the extent
that the tax benefit is more likely than not to be realized. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2004, our principal sources of liquidity included cash and bank
balances of $1,250,445, which decreased from $1,273,723 at December 31, 2003.
The decrease was mainly due to the expenditures to fund the daily operations. Net cash provided by (used in) operating activities was $45,426 and ($196,989)
during the three months ended March 31, 2004 and 2003, respectively. Net cash
provided by operating activities during the three months ended March 31, 2004
was primarily attributed to the decrease of notes and accounts receivable -22-




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of $192,461 and inventory of $204,320. As compared to net cash used in operating
activities during the three months ended March 31, 2003, which was primarily attributed to the
increases in all receivables of $982,492, the notes and accounts payable of
385,967, accrued expenses of $153,499 and receipts in advance of $265,487. Net cash used in investing activities amounted to $105,689 and $201,684 during
the three months ended March 31, 2004 and 2003, respectively. During the three
months ended March 31, 2004, bank fixed deposits pledged increased by $135,818,
compared to increase of $80,957 during the three months ended March 31, 2003.
Pledged notes receivable decreased by $30,129 compared to an increase of
$86,038 for the same period in prior year. Net cash provided by financing activities during the three months ended March
31, 2004 was $67,777 as compared to $793,482 during the three months ended
March 31, 2003. The $725,705 difference was primarily attributed to the
repayment of loans from officers/stockholders of $636,529 in the first quarter
of 2004. As of March 31, 2004, the Company has a total line of credit of $2,561,784 from
certain banks and the unused credit facility was $321,084. Off-Balance Sheet Arrangement The Securities and Exchange Commission (SEC) has described various
characteristics to identify contractual arrangements that would fall within the
SECs definition of off-balance sheet arrangements. The following table represents the Groups contractual obligations: Payments Due By Period (Thousand dollars)Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterContractual obligationsBank borrowing
    
    $
    3,368
    
    
    
    1,691
    
    
    
    1,677
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension Benefit
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Purchase obligations
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    536
    
    
    
    225
    
    
    
    140
    
    
    
    76
    
    
    
    55
    
    
    
    40
    
    
    
    Total
    
    $
    4,945
    
    
    
    2,916
    
    
    
    1,817
    
    
    
    76
    
    
    
    55
    
    
    
    40
    
    
    
    41
 Bank borrowing One of our financing sources is from bank borrowings. As of March 31, 2004 and
December 31, 2003, the balances of bank borrowings, including current and
non-current portions, were $3,217,258 and $2,484,471, respectively. -23-




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Purchase obligation with equipment In October 2003, KCES entered into a purchase obligation agreement with
Haicheng (Shanghai) Information Technologies Limited to provide cooperating and
franchise schools with equipment sets to facilitate their educational programs.
The equipment mainly consists of computer systems. As we are expecting to
purchase 300 sets of such equipment prior to June 30, 2004 pursuant to the
agreement, the total amount of the purchase obligation was $1,012,948 as of
December 31, 2003. In the first quarter of 2004, we purchased 12 sets and
made payment of $13,027. As of March 31, 2004, our purchase obligation
amounted to $999,921. Equity investments in joint ventures On July 8, 2003, KCES entered into agreements with 21st Century Publishing
House in Jiangxi Province of the PRC to establish two joint ventures, 21st
Century Kid Castle Culture Media Co., Ltd and Jiangxi 21st Century Kid Castle
Language and Education Center. Pursuant to these agreements, KCES and 21st
Century Publishing House each owns 50% interests in 21st Century Kid Castle
Culture Media Co., Ltd and Jiangxi 21st Century Kid Castle Language and
Education Center. On April 1, 2004, KCES signed a joint venture agreement with Tianjin Foreign
Enterprises & Experts Service Corp., in Tianjin City PRC. Pursuant to this
joint venture agreement, KCES and Tianjin Foreign Enterprises & Experts Service
Corp. each owns a 50% interest in Tianjin Kid Castle Educational Investment
Consulting Co., Ltd. On April 28, 2004, KCES signed a joint venture agreement with LANBEISI
Education & Culture Industrial Co., Ltd in Sichuan Province, PRC and Sichuan
Province Education Institutional Service Center in Sichuan Province, PRC.
Pursuant to this joint venture agreement, KCES, LANBEISI Education & Culture
Industrial Co., Ltd and Sichuan Province Education Institutional Service Center
own, respectively, 45%, 45% and 10% interests in Sichuan LANBEISI Kid Castle
Education Development Co., Ltd. Pension Benefit We have a defined benefit retirement plan (the Plan) covering all regular
employees of KCIT, our subsidiary in Taiwan, as described in Note 14 to the
Consolidated Financial Statements. The benefits expected to be paid in each
of the next five fiscal years, and in the aggregate for the five fiscal years
thereafter are $0 and $40,913, respectively. We also make defined
contributions to a retirement benefits plan for its employees in the PRC in
accordance with local regulations. The contributions made by us for the years
ended March 31, 2004 and 2003 amounted to $23,319 and $13,655, respectively. Operating Leases We have entered into several non-cancelable lease arrangements for
administrative office space, warehouse space and sales offices in various
periods. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is -24-




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effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003.
Management is currently evaluating the effect of adopting FIN 46 on its results
of operations and financial position. On April 30, 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.(SFAS No. 149) SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. The
new guidance amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group (DIG) process that effectively required amendments to
SFAS No. 133, and decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In
addition, it clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. We believe that the
adoption of SFAS No. 149 will have no material impact on our consolidated
financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. We believe that the adoption of SFAS No. 150 will have no material
impact on our consolidated financial statements. In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which
supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104s
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements and revises the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
that have been codified in Topic 13. SAB 104 was effective immediately and did
not have a material impact on the Companys financial reporting and
disclosures. In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This Statement revises employers
disclosures about pension plans and other postretirement benefit plans. It
requires additional disclosures to those in the original SFAS No. 132 about the
assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
required information should be provided separately for pension plans and for
other postretirement benefit plans. This Statement, which also requires new
disclosures for interim periods beginning after December 15, 2003, is effective
for fiscal years ended after December 15, 2003. The Company has adopted this
Statement since the year ended December 31, 2003, and the adoption of this
Statement has no impact on the Companys consolidated financial statements. FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITION Investing in our securities involves a high degree of risk. In addition to the
other information contained in this quarterly report, you should consider the
following factors before investing in our securities. -25-




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Because our officers and directors are not U.S. Persons, and our operating
subsidiaries are Taiwan and Peoples Republic of China companies, you may be
unable to enforce judgments under the Securities Act. Our operating subsidiaries are a Taiwanese company and a Peoples Republic of
China company, our officers and directors are residents of various
jurisdictions outside the United States. All or a substantial portion of the
assets of our business and of such persons are located outside the United
States. As a result, it may be difficult for investors to effect service of
process within the United States upon such persons or to enforce in the United
States courts judgments obtained against such persons in United States courts
and predicated upon the civil liability provisions of the Securities Act. Because we face competition from established competitors, we may be unable to
maintain market share. Our primary competitors have significant financial, technical and marketing
resources, and/or name recognition, including Giraffe, G-Telp and Jia Yin. Some
of these competitors have a longer operating history and greater overall
resources than we do. These companies also have established customer support
and professional services organizations. As a result, our competitors may be
able to adapt more quickly to changes in customer needs, offer products and
services at lower prices than us, devote greater resources than us to
development and sale of teaching/learning products and services, which could
result in reducing our market share. If we lose key management or other personnel, we may experience delays in our
product development and other negative effects on our business. Our success is dependent upon the personal efforts and abilities of our
executive officers, Kuo-An Wang, our Chief Executive Officer, and Yu-En
Chui, our Chief Financial Officer. If these key officers cease employment
with us before we find qualified replacements, it would have a significant
negative impact on our operations. We do not have employment agreements with
any of our executive officers. Moreover, our growth and success depend on our ability to attract, hire and
retain additional highly qualified management, educators, technical, marketing
and sales personnel. These individuals are in high demand and we may not be
able to attract the staff we need. The hiring process is intensely
competitive, time consuming and may divert the attention of our management from
our operations. Competitors and others have in the past, and may in the
future, attempt to recruit our employees. If we lose the services of any of
our senior management or key education personnel, or if we fail to continue to
attract qualified personnel, our business could suffer. Because we conduct operations in New Taiwan (NT) Dollars and Renminbi (RMB), we
are subject to risk from exchange rate fluctuations. Our transactions with suppliers and customers are effected in New Taiwan
dollars, the functional currency of our Taiwanese subsidiary, KCIT, and
increasingly in RMB, the functional currency of our PRC subsidiary, KCES, as a
result of our expansion in the PRC. Our financial statements are reported in
U.S. dollars. As a result, fluctuations in the relative exchange rate among the
U.S. dollar, the NT dollar and the RMB will affect our reported financial
results from one period to the next. Such impacts could be meaningful and are
independent of the underlying performance of our business. The market price of
our securities could be significantly harmed based on unfavorable changes in
exchange rates. We do not actively manage our exposure to such effects. -26-




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An increase in market competition could have a negative impact on our business. Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. This increase in
competition could lead to price reductions, decreased sales-volume,
under-utilization of employees, reduced operating margins and loss of market
share. There can be no assurance that we will be able to successfully compete
for customers in our targeted markets. Our failure to maintain and enhance our competitive position could seriously
harm our business and operating results. We encounter current or potential
competition from a number of sources, including:  
    
    branches and franchises of international language instruction companies;  
    
    public institutions and private schools; and  
    
    private tutors. We cannot predict whether demand for our products and services will continue to
develop, particularly at the volume or prices that we need to remain
profitable. Although the market for English language instruction and education is growing
rapidly, we cannot be certain that this growth will continue in its present
form, or at all. We believe our success ultimately will depend upon, among
other things, our ability to:  
    
    increase awareness of our brand and the availability of our
products and services;  
    
    continue to attract and develop relationships with educational
institutions and regulatory authorities in our targeted geographic
markets; and  
    
    continue to attract and retain customers. If we are unable to maintain, improve and develop our products and services, we
may not achieve profitability. We have incurred operating losses since inception and hence, as of March 31,
2004, the balance of accumulated deficit was $6,385,136. In order to turn profitable, we need to maintain and improve our current
products and services and to develop or license new ones on a timely basis. If
we cannot effectively maintain, improve and develop products and services we
may not be able to recover our fixed costs or otherwise turn profitable. We may
not be able to develop and introduce new products, services and enhancements
that respond to technological changes, evolving education industry standards or
customer needs and trends on a timely basis. We may experience difficulties
that could delay or prevent the successful development, introduction or
marketing of new products, services and service enhancements. These new
products, services and service enhancements may not achieve market acceptance
or our competitors may develop alternative technologies and methods that gain
broader market acceptance than our products and services. Because we may not be able to protect our proprietary rights on a global basis,
we may incur substantial costs to defend or protect our business and
intellectual property. If we fail to protect our intellectual property, we may be exposed to expensive
litigation or risk jeopardizing our competitive position. The steps we have
taken may be inadequate to protect our intellectual property. We may have to
litigate to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. This litigation could -27-




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result in substantial costs and the diversion of our management and technical
resources which could harm our business. In addition, laws in the PRC have traditionally been less protective of
intellectual property rights and enforcement relating to the protection of
intellectual property in the PRC has been sporadic at best. Deterioration in
compliance with existing legal protections or reductions in the legal
protection for intellectual property rights in the PRC could adversely affect
our revenue as we continue to expand into the PRC market. Because we may not be able to avoid claims that we infringed the proprietary
rights of others, we may incur substantial costs to defend or protect our
business and intellectual property. Although we have taken steps to avoid infringement claims from others, these
measures may not be adequate to prevent others from claiming that we violated
their copyrights, other trademarks or other proprietary rights. Any claim of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract our management from our
business. A party making a claim could secure a judgment that requires us to
pay substantial damages. Because we intend to expand internationally, we will be subject to risks of
conducting business in foreign countries. As we expand our operations outside of Taiwan, we will be subject to the risks
of conducting business in foreign countries, including:  
    
    our inability to adapt our products and services to local cultural
traits, customs and mobile user preferences;  
    
    our inability to locate qualified local employees, partners and suppliers;  
    
    difficulties managing foreign operations;  
    
    the potential burdens of complying with a variety of foreign laws;  
    
    trade standards and regulatory requirements;  
    
    geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships;  
    
    legal uncertainties or unanticipated changes regarding regulatory
requirements, liability, export and import restrictions, tariffs and
other trade barriers;  
    
    uncertainties of laws and enforcement relating to the protection of
intellectual property;  
    
    political, economic and social conditions in the foreign countries
where we conduct operations;  
    
    currency risks and exchange controls;  
    
    potential inflation in the applicable foreign economies; and  
    
    foreign taxation of earnings and payments received by us from our franchisees and affiliates. We cannot be certain that the risks associated with our anticipated foreign
operations will not negatively affect our operating results or prospects,
particularly as these operations expand in scope, scale and significance. Our operations in the PRC are subject to political, regulatory and economic
uncertainties. Our operations and assets in the PRC are subject to significant political,
regulatory and economic uncertainties. Changes in laws and regulations, or
their interpretation, or the imposition of confiscatory taxation, restrictions
on currency conversion, imports and sources of supply, devaluations of currency
or the nationalization or other expropriation of private enterprises could have
a material adverse effect on -28-




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our business, results of operations and financial condition. Under its current
leadership, the PRC government has been pursuing economic reform policies that
encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the PRC government will continue to pursue
these policies, or that it will not significantly alter these policies from
time to time without notice. In addition, our subsidiary, KCES, entered into agreements in July 2003 to
establish two joint ventures, Culture Media and Education Center, with a local
Chinese party, 21st Century Publishing House, in Jiangxi Province. We
established Culture Media and Education Center to engage mainly in the
publication and distribution of English language education materials, the
operation of kindergarten and language schools, and the running of cooperative
schools in China. We intend to use these joint ventures as one of our primary
vehicles for our expansion in the PRC market. Although we have received, on
January 19, 2004 and October 31, 2003, licenses from the applicable government
authorities to conduct the business of Culture Media and Education Center,
respectively, in the PRC, the regulations with respect to operation of
businesses by foreign-owned entities are still in flux. There is no assurance
that the licenses will not be challenged by the PRC authorities. The lack of remedies and impartiality under the PRCs legal system could
negatively impact us. Unlike the U.S., the PRC has a civil law system based on written statutes in
which judicial decisions have little precedential value. The PRC government
has enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, their experience in implementing, interpreting and enforcing these
laws and regulations is limited, and our ability to enforce commercial claims
or to resolve commercial disputes is unpredictable. These matters may be
subject to the exercise of considerable discretion by agencies of the PRC
government, and forces unrelated to the legal merits of a particular matter or
dispute may influence their determination. Penny Stock regulations may impose certain restrictions on marketability of
our common stock. The SEC has adopted regulations which generally define penny stock to be an
equity security that has a market price of less than $5.00 per share. Our
common stock may fall within the definition of penny stock and subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000, or annual
incomes exceeding $200,000 or $300,000, together with their spouse). For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchasers prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealers presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of
broker-dealers to sell our common stock and may affect the ability of investors
to sell our common stock in the secondary market. -29-




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An outbreak of Severe Acute Respiratory Syndrome (SARS) may adversely affect
our results of operations. In March 2003, Guangdong Province of the PRC, Hong Kong, Singapore, Taiwan and
several other Asian countries encountered in outbreak of SARS, a highly
contagious form of atypical pneumonia. Although the SARS epidemic now appears
to become under control, some experts fear that the SARS epidemic might
resurface as number of isolated SARS cases have been reported recently. In the
future, if any of our employees or students is suspected to have contracted
SARS, under certain circumstances such employees, students and affected areas
of our premises may have to be quarantined. As a result, we may have to
temporarily suspend all or part of our operations. Furthermore, a future
outbreak of SARS may negatively impact our ability to attract foreign teachers,
who may be less inclined to come to Taiwan, and students, whose parents may
choose to have them taught at home by an individual. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may affect us due to adverse
changes in financial market prices and rates. Our market risk exposure is
primarily fluctuations in foreign exchange rates and interest rates. We have
not entered into derivative or hedging transactions to manage risk in
connection with such fluctuations. INTEREST RATE EXPOSURE If interest rates were to decrease 1%, the result would be an annual decrease
in our interest income related to our cash and cash equivalents of
approximately $32,087. However, due to the uncertainty of the actions that
would be taken and their possible effects, this analysis assumes no such
action. Further, this analysis does not consider the effect of the change in
the level of overall economic activity that could exist in such an environment. FOREIGN CURRENCY EXPOSURE We have operations in both Taiwan and the PRC. The functional currency of
Higoal and its subsidiaries other than KCES is NT Dollars and the financial
records are maintained and the financial statements are prepared for these
entities in NT$. The functional currency of KCES is RMB and the financial
records are maintained and the financial statements are prepared for KCES in
RMB. In the normal course of business, these operations are not exposed to
fluctuations in currency values. We do not generally enter into derivative
financial instruments in the normal course of business, nor are such
instruments used for speculative purposes. 
 ITEM 4. CONTROLS AND PROCEDURES We have carried out an evaluation, under the supervision and with the
participation of our Chairman and CEO and our CFO, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our CEO and our CFO concluded that, as of March 31, 2004, our
disclosure controls and procedures are effective in timely alerting us to
material information required to be included in our periodic reports filed with
the Securities and Exchange Commission. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. During the quarter ended March 31, 2004, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control -30-




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over financial reporting. -31-




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PART II
OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS We have no material pending legal proceedings. 
 ITEM 2. CHANGES IN SECURITIES Pursuant to a stock purchase agreement dated August 18, 2003, Globe Wisdom
Investments Limited (GWIL), a Samoan international business company,
subscribed for 175,500 shares of our common stock at an aggregate purchase
price of $122,850 in a private offering. As of April 30, 2004, we had not yet
issued any shares to GWIL pursuant to the August 18, 2003 stock purchase
agreement. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A.

    
    Exhibits10.1
    
    English language summary of joint venture agreement dated as of April
1, 2004 by and between Tianjin Foreign Enterprises & Experts Service
Corp. and Kid Castle Educational Software Development Co., Ltd.10.2
    
    English language summary of joint venture agreement dated as of April
28, 2004 by and among LANBEISI Education & Culture Industrial Co.,
Ltd, Sichuan Province Education Institutional Service Center and Kid
Castle Educational Software Development Co., Ltd.31.1
    
    Certification of Kuo-An Wang, Chief Executive Officer of the
registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Yu-En Chiu, Chief Financial Officer of the
registrant, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Kuo-An Wang, Chief Executive Officer of the
registrant, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Exhibits32.2
    
    Certification of Yu-En Chiu, Chief Financial Officer of the
registrant, pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.B.
    
    Reports on Form 8-KNot applicable.
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SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized. Dated: May 14, 2004 By:
    
    /s/ Kuo-An WangName: Kuo-An Wang
Title: Chief Executive Officer
 -34-