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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: September 30, 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 o  No
x o As of November 10, 2004, there were 18,999,703 shares of the Registrants
common stock outstanding. Documents incorporated by reference: None.




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FORM 10-Q KID CASTLE EDUCATIONAL CORPORATION TABLE OF CONTENTS PagePART I    FINANCIAL INFORMATIONItem 1. Unaudited Condensed Consolidated Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    41Item 3. Defaults upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5. Other Information
    
    
    41Item 6 Exhibits and Reports on Form 8-K
    
    
    42SIGNATURESEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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KID CASTLE EDUCATIONAL CORPORATION UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
AND
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003 KID CASTLE EDUCATIONAL CORPORATION 
 INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 PagesCondensed Consolidated Balance Sheet
    
    34Condensed Consolidated Statements of Operations
    
    5Condensed Consolidated Statements of Stockholders Equity
    
    6Condensed Consolidated Statements of Cash Flows
    
    79Notes to Condensed Consolidated Financial Statements
    
    1027
 -2-




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Kid Castle Educational Corporation 
 Condensed Consolidated Balance Sheets (Expressed in US Dollars) September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assetsCash and bank balances
    
    $
    438,694
    
    
    $
    1,273,723Bank fixed deposits  pledged (Note 12)
    
    
    360,426
    
    
    
    204,889Notes and accounts receivable, net (Notes 5 and 10)
    
    
    2,712,030
    
    
    
    2,334,385Inventories, net (Note 6)
    
    
    2,547,764
    
    
    
    1,991,951Other receivables (Notes 7 and 10)
    
    
    361,683
    
    
    
    524,974Prepayments and other current assets
    
    
    168,398
    
    
    
    122,292Prepayments to related party (Note 10)
    
    
    265,559
    
    
    
    Pledged notes receivable (Note 12)
    
    
    957,385
    
    
    
    1,062,406Deferred income tax assets
    
    
    535,200
    
    
    
    615,286Total current assets
    
    
    8,347,139
    
    
    
    8,129,906Deferred income tax assets
    
    
    136,374
    
    
    
    120,335Prepaid long-term investments
    
    
    
    
    
    
    60,323Long-term investments (Note 8)
    
    
    146,432
    
    
    
    114,200Property and equipment, net
    
    
    2,059,880
    
    
    
    1,993,849Intangible assets, net of amortization (Note 11)
    
    
    874,156
    
    
    
    989,865Long-term notes receivable
    
    
    361,196
    
    
    
    505,091Pledged notes receivable (Note 12)
    
    
    248,101
    
    
    
    444,302Other assets
    
    
    306,115
    
    
    
    184,345Total assets
    
    $
    12,479,393
    
    
    $
    12,542,216LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesBank borrowings  short-term and maturing within
one year (Note 12)
    
    $
    1,865,412
    
    
    $
    1,317,690Notes and accounts payable
    
    
    1,175,404
    
    
    
    1,072,584Accounts payable to related party (Note 10)
    
    
    607,310
    
    
    
    Accrued expenses
    
    
    704,675
    
    
    
    805,556Amounts due to officers (Note 10)
    
    
    
    
    
    
    572,160Other payables
    
    
    322,919
    
    
    
    266,276Deposits received
    
    
    535,970
    
    
    
    421,734Receipts in advance (Note 13)
    
    
    3,058,877
    
    
    
    2,924,636Income tax payable
    
    
    86,722
    
    
    
    44,067Obligation under capital leases due within one year
    
    
    16,291
    
    
    
    32,468Total current liabilities
    
    
    8,373,580
    
    
    
    7,457,171Bank borrowings maturing after one year (Note 12)
    
    
    1,467,124
    
    
    
    1,166,781Receipts in advance (Note 13)
    
    
    971,247
    
    
    
    1,467,025Obligation under capital leases
    
    
    
    
    
    
    5,534Deposits received
    
    
    574,581
    
    
    
    603,635Accrued pension liabilities (Note 14)
    
    
    144,839
    
    
    
    134,073Total liabilities
    
    
    11,531,371
    
    
    
    10,834,219
 -3-




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Kid Castle Educational Corporation Condensed Consolidated
Balance Sheets - Continued (Expressed in US Dollars) September 30,
    
    December 31,2004
    
    2003(Unaudited)Commitments and contingencies (Note 16)Minority interest
    
    
    31,075
    
    
    
    Stockholders equityCommon stock, no par share:25,000,000 shares authorized;
18,999,703 shares issued and
outstanding at September 30, 2004
and December 31, 2003
    
    
    7,669,308
    
    
    
    7,669,308Additional paid-in capital
    
    
    194,021
    
    
    
    194,021Legal reserve
    
    
    65,320
    
    
    
    65,320Accumulated deficit
    
    
    (6,842,653
    )
    
    
    (6,057,482
    )Accumulated other comprehensive loss
    
    
    (169,049
    )
    
    
    (163,170
    )Total stockholders equity
    
    
    916,947
    
    
    
    1,707,997Total liabilities and stockholders equity
    
    $
    12,479,393
    
    
    $
    12,542,216
 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 Operations (Expressed in US Dollars) Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Operating RevenueSales of goods
    
    $
    2,444,267
    
    
    $
    2,488,914
    
    
    $
    5,661,046
    
    
    $
    5,476,362Franchising income
    
    
    622,244
    
    
    
    473,337
    
    
    
    1,814,984
    
    
    
    1,320,286Other operating revenue
    
    
    185,932
    
    
    
    126,295
    
    
    

    389,846
    
    
    
    261,814Total net operating revenue
    
    
    3,252,443
    
    
    
    3,088,546
    
    
    
    7,865,876
    
    
    
    7,058,462Operating costsCost of goods sold
    
    
    (1,101,089
    )
    
    
    (912,418
    )
    
    
    (2,426,012
    )
    
    
    (1,982,501
    )Cost of franchising
    
    
    (128,476
    )
    
    
    (139,913
    )
    
    
    (373,980
    )
    
    
    (409,307
    )Other operating costs
    
    
    (171,921
    )
    
    
    (116,050
    )
    
    
    (307,660
    )
    
    
    (220,885
    )Total operating costs
    
    
    (1,401,486
    )
    
    
    (1,168,381
    )
    
    
    (3,107,652
    )
    
    
    (2,612,693
    )Gross profit
    
    
    1,850,957
    
    
    
    1,920,165
    
    
    
    4,758,224
    
    
    
    4,445,769Advertising costs
    
    
    (72
    )
    
    
    (98,483
    )
    
    
    (448,971
    )
    
    
    (297,230
    )Other operating expenses
    
    
    (1,525,248
    )
    
    
    (1,764,537
    )
    
    
    (4,960,945
    )
    
    
    (4,887,230
    )Income (loss) from operations
    
    
    325,637
    
    
    
    57,145
    
    
    
    (651,692
    )
    
    
    (738,691
    )Interest expenses, net
    
    
    (35,956
    )
    
    
    (72,197
    )
    
    
    (100,892
    )
    
    
    (226,669
    )Share of profit (loss) of an investment
    
    
    (20,816
    )
    
    
    
    
    
    
    10,609
    
    
    
    (12,750
    )Loss on write-off of an investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (132,842
    )Other non-operating income (loss), net
    
    
    (10,788
    )
    
    
    69,997
    
    
    
    70,982
    
    
    
    145,000Income (loss) before income taxes
    
    
    258,077
    
    
    
    54,945
    
    
    
    (670,993
    )
    
    
    (965,952
    )Provision for taxes
    
    
    (110,345
    )
    
    
    (148,253
    )
    
    
    (111,567
    )
    
    
    (330,934
    )Net income (loss) from operations
    
    
    147,732
    
    
    
    (93,308
    )
    
    
    (782,560
    )
    
    
    (1,296,886
    )Minority interest income
    
    
    (2,611
    )
    
    
    
    
    
    
    (2,611
    )
    
    
    Net income (loss)
    
    $
    145,121
    
    
    $
    (93,308
    )
    
    $
    (785,171
    )
    
    $
    (1,296,886
    )Earnings (loss) per share  basic and
diluted
    
    $
    0.008
    
    
    $
    (0.005
    )
    
    $
    (0.041
    )
    
    $
    (0.080
    )Weighted-average shares used to
compute earnings (loss) per share 
basic
and diluted
    
    
    18,999,703
    
    
    
    18,190,869
    
    
    
    18,999,703
    
    
    
    16,250,166
 The accompanying notes are
an integral part of these Condensed Consolidated Financial Statements. -5-




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##### Table of Contents



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
    
    
    18,999,703
    
    
    
    7,669,308
    
    
    
    194,021
    
    
    
    65,320
    
    
    
    (6,057,482
    )
    
    
    (163,170
    )
    
    
    1,707,997Net loss for the nine months
ended
September 30, 2004
(Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (785,171
    )
    
    
    
    
    
    
    (785,171
    )Cumulative translation
adjustment (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,879
    )
    
    
    (5,879
    )Comprehensive loss
(Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (791,050
    )Balance, September 30, 2004
(Unaudited)
    
    
    18,999,703
    
    
    $
    7,669,308
    
    
    $
    194,021
    
    
    $
    65,320
    
    
    $
    (6,842,653
    )
    
    $
    (169,049
    )
    
    $
    916,947
 The accompanying notes are
an integral part of these Condensed Consolidated Financial Statements. -6-




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##### Table of Contents



Kid Castle Educational Corporation 
 Condensed Consolidated Statements of Cash Flows (Expressed in US Dollars) Nine months ended September 30,2004
    
    2003(Unaudited)Cash flows from operating activitiesNet loss
    
    $
    (785,171
    )
    
    $
    (1,296,886
    )Adjustments to reconcile net loss to
net cash used in operating activitiesDepreciation of property and equipment
    
    
    137,746
    
    
    
    133,094Amortization of intangible assets
    
    
    120,515
    
    
    
    117,271Provision of allowance for sales returns
    
    
    56,597
    
    
    
    77,077Allowance for doubtful debts
    
    
    115,940
    
    
    
    93,514Provision for (reversal of) loss on inventory
obsolescence and slow-moving items
    
    
    113,573
    
    
    
    (163,831
    )Share of (gain) loss of investments
    
    
    (10,609
    )
    
    
    12,750Minority interest income
    
    
    2,611
    
    
    
    Loss on write-off of an investment
    
    
    
    
    
    
    132,842(Increase)/decrease in:Notes and accounts receivable
    
    
    (482,415
    )
    
    
    (1,939,891
    )Inventories
    
    
    (403,744
    )
    
    
    (144,037
    )Other receivables
    
    
    (99,282
    )
    
    
    (301,096
    )Prepayments and other current assets
    
    
    (250,194
    )
    
    
    (223,779
    )Deferred income tax assets
    
    
    67,378
    
    
    
    330,283Other assets
    
    
    (122,453
    )
    
    
    (18,505
    )Increase/(decrease) in:Notes and accounts payable
    
    
    572,556
    
    
    
    (59,094
    )Accrued expenses
    
    
    (104,349
    )
    
    
    (22,668
    )Other payables
    
    
    (88,561
    )
    
    
    322,151Receipts in advance
    
    
    349,247
    
    
    
    613,267Income taxes payable
    
    
    42,967
    
    
    
    Deposits received
    
    
    129,455
    
    
    
    258,249Accrued pension liabilities
    
    
    10,406
    
    
    
    43,893Net cash used in operating activities
    
    
    (627,787
    )
    
    
    (2,035,396
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (197,389
    )
    
    
    (172,562
    )Acquisition, net of cash acquired
    
    
    79,135
    
    
    
    Proceeds from disposal of property, plant and equipment
    
    
    
    
    
    
    13,416Prepayment of long-term investments
    
    
    
    
    
    
    (58,828
    )Amount due from stockholder/director
    
    
    
    
    
    
    122,973Acquisition of long-term investments
    
    
    (103,563
    )
    
    
    Bank fixed deposits  pledged
    
    
    (156,518
    )
    
    
    (8,719
    )Pledged notes receivable
    
    
    (77,685
    )
    
    
    38,081Net cash used in investing activities
    
    
    (456,020
    )
    
    
    (65,639
    )
 -7-




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Kid Castle Educational Corporation Condensed Consolidated Statements of Cash Flows  Continued (Expressed in US Dollars) Nine months ended September 30,2004
    
    2003(Unaudited)Cash flows from financing activitiesProceeds from bank borrowings
    
    $
    2,500,962
    
    
    $
    2,240,020Repayment of bank borrowings
    
    
    (1,652,431
    )
    
    
    (1,749,178
    )Repayment of capital leases
    
    
    (22,086
    )
    
    
    (13,409
    )Proceeds from loan from officers/stockholders
    
    
    
    
    
    
    69,017Repayment of loan from officers/stockholders
    
    
    (581,228
    )
    
    
    Issuance of common stock for cash
    
    
    
    
    
    
    2,181,578Stock subscriptions received in advance
    
    
    
    
    
    
    122,850Net cash provided by financing activities
    
    
    245,217
    
    
    
    2,850,878Net (decrease) increase in cash and cash equivalents
    
    
    (838,590
    )
    
    
    749,843Effect of exchange rate changes on cash and
cash equivalents
    
    
    3,561
    
    
    
    27,593Cash and cash equivalents at beginning of period
    
    
    1,273,723
    
    
    
    125,806Cash and cash equivalents at end of period
    
    $
    438,694
    
    
    $
    903,242Supplemental disclosure of cash flow information
Interest paid
    
    $
    184,155
    
    
    $
    301,415Income taxes paid
    
    $
    1,419
    
    
    $
    1,738Supplemental disclosure of significant non-cash
transactionsCapital lease of transportation equipment
    
    $
    
    
    
    $
    57,887Increase (decrease) of notes receivable and pledged
notes receivable corresponding to the increase
(decrease) in the following accounts:Other receivables  related parties
    
    $
    
    
    
    $
    (260,734
    )Deposits received
    
    $
    (46,996
    )
    
    $
    Other payables
    
    $
    17,659
    
    
    $
    Receipts in advance
    
    $
    (712,252
    )
    
    $
    83,439
 -8-




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##### Table of Contents



Kid Castle Educational Corporation Condensed Consolidated Statements of Cash Flows  Continued (Expressed in US Dollars) Nine months ended September 30,2004
    
    2003(Unaudited)Increase of long-term investments corresponding to the
(decrease) in the following accounts:Prepaid long-term investments
    
    $
    (61,202
    )
    
    $
    Other receivables  related parties
    
    $
    (120,422
    )
    
    $
    Write-off of an associate investment against deferred incomeBalance of an associate investment
    
    $
    
    
    
    $
    299,752Balance of deferred income
    
    
    
    
    
    
    (166,910
    )Loss on write-off of an associate investment
    
    $
    
    
    
    $
    132,842
 The accompanying notes are
an integral part of these Condensed Consolidated Financial Statements. -9-




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##### Table of Contents



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
(the Company), formerly King Ball International Technology Limited
Corporation entered into an exchange agreement with Higoal whereby the Company
issued to the stockholders of Higoal 11,880,000 shares of common stock of the
Company in exchange for 100% of the issued and fully paid up capital of Higoal. As a result of the share exchange, the former stockholders of Higoal hold a
majority of the Companys outstanding capital stock. Generally accepted
accounting principles require in certain circumstances that a company whose
stockholders retain the majority voting interest in the combined business to be
treated as the acquirer for financial reporting purposes. Accordingly, the
acquisition has been accounted for as a reverse acquisition whereby Higoal is
deemed to have purchased the Company. However, the Company remains the legal
entity and the Registrant for Securities and Exchange Commission reporting
purposes. In July 2003, KCES entered into an agreement with 21st Century Publishing House
to incorporate Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (Culture
Media). It was agreed that KCES and 21st Century Publishing House each owned
50% ownership and that each party contributed RMB$1 million for the
incorporation. On July 2, 2004, KCES acquired additional 40% of ownership in
Culture Media from 21st Century Publishing House. As of September 30, 2004,
the Group owns 90% of Culture Media, which became a consolidated entity. -10-




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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 September 30, 2004 and for the nine
months and three months ended September 30, 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 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. The Group has incurred operating losses since inception and hence, as of
September 30, 2004, the balance of accumulated deficit was $6,842,653. The
Group plans to fund its working capital needs by obtaining new credit lines
from financial institutions and raising capital through the sale of equity
securities. If the Group is unable to meet its current operating plan, it will
be required to obtain additional funding. Management believes such funding
will be available, but there can be no assurances that such funding will be
available, or if it is available, on terms acceptable to the Group. Management
believes that if funding is not available, other actions can and will be taken
to reduce costs. These actions may entail the Group to reduce headcount, sales
and marketing, other expansion activities, which may affect the future growth
of the Groups operations. 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. -11-




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INVENTORIES Inventories are stated at the lower of cost or market. Cost includes all costs
of purchase, cost of conversion and other costs incurred in bringing the
inventories to their present location and condition, and is calculated using
the weighted average method. Market value is determined by reference to the
sales proceeds of items sold in the ordinary course of business after the
balance sheet date or to management estimates based on prevailing market
conditions. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows: Estimated useful life(in years)Land
    
    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) -12-




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Comprehensive income (loss) is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to
owners. Comprehensive income (loss) is disclosed in the condensed consolidated
statement of stockholders equity. NET EARNINGS (LOSS) PER COMMON SHARE The Group computes net earnings (loss) per share in accordance with SFAS No.
128, Earnings per Share. Under the provisions of SFAS No. 128, basic net
earnings (loss) per share is computed by dividing the net earnings (loss)
available to common shareholders for the period by the weighted average number
of shares of common stock outstanding during the period. The calculation of
diluted net earnings (loss) per share gives effect to common stock equivalents.
For the nine months ended September 30, 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
to 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. -13-




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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 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. In September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-01) as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
and investment accounted for under the cost method. The Group is currently
evaluating the effect of this proposed statement on its financial position and
results of operations. NOTE 5  NOTES AND ACCOUNTS RECEIVABLE September 30,
    
    December 31,2004
    
    2003(Unaudited)Notes and accounts receivable Third parties
    
    $
    2,937,632
    
    
    $
    2,140,073 Related parties (NOTE 10)
    
    
    126,325
    
    
    
    631,153Total
    
    
    3,063,957
    
    
    
    2,771,226Allowance for doubtful accounts and sales returns
    
    
    (351,927
    )
    
    
    (436,841
    )Notes and accounts receivable, net
    
    $
    2,712,030
    
    
    $
    2,334,385
 -14-




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##### Table of Contents



NOTE 6  INVENTORIES September 30,
    
    December 31,2004
    
    2003(Unaudited)Work in process
    
    $
    97,019
    
    
    $
    53,756Finished goods and other merchandises
    
    
    3,217,177
    
    
    
    2,589,9903,314,196
    
    
    
    2,643,746Less: Allowance for obsolete inventories and
decline of market value
    
    
    (766,432
    )
    
    
    (651,795
    )$
    2,547,764
    
    
    $
    1,991,951
 NOTE 7  OTHER RECEIVABLES September 30,
    
    December 31,2004
    
    2003(Unaudited)Other receivables  third parties:Tax paid on behalf of landlord
    
    $
    1,522
    
    
    $
    1,442Advances to staff
    
    
    93,921
    
    
    
    43,242Penalties receivables
    
    
    
    
    
    
    14,658Receivables from Shanghai Wonderland Educational
Resources Co., Ltd. (Shanghai Wonderland) (Note (i))
    
    
    131,188
    
    
    
    105,847Other receivables
    
    
    111,990
    
    
    
    43,622Sub-total
    
    
    338,621
    
    
    
    208,811Other receivables  related parties (NOTE 10)
    
    
    23,062
    
    
    
    316,163$
    361,683
    
    
    $
    524,974
 Note:  (i)
    
    Shanghai Wonderland was established in October 2003 as a distributor of
the Group. The Group has loaned Shanghai Wonderland RMB$450,000
(approximately $54,000), and RMB$500,000 (approximately $60,000) for
operations in December 2003 and July 2004, respectively, which are both
unsecured and bears no interest. The Group also paid certain
pre-operating costs on behalf of Shanghai Wonderland. Shanghai Wonderland
will have to repay the loans of RMB$450,000 and RMB$500,000 on or before
January 23, 2005 and August 13, 2005, respectively. -15-




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NOTE 8  LONG-TERM INVESTMENTS September 30,
    
    December 31,2004
    
    2003(Unaudited)Jiangxi 21st Century Kid Castle Culture Media Co., Ltd
(Culture Media) (Note (i))Investment cost
    
    $
    
    
    
    $
    120,646Share of loss
    
    
    
    
    
    
    (11,326
    )$
    
    
    
    $
    109,32021st Century Kid Castle Language and Education Center
(Education Center) (Note (ii))Investment cost
    
    $
    90,431
    
    
    $
    30,161Share of loss
    
    
    (10,294
    )
    
    
    (25,281
    )$
    80,137
    
    
    $
    4,880Tianjin Kid Castle Educational Investment Consulting Co., Ltd.
(Tianjin Consulting) (Note (iii))Investment cost
    
    $
    60,288
    
    
    $
    Share of loss
    
    
    (25,801
    )
    
    
    $
    34,487
    
    
    $
    Lanbeisi Education &Culture Industrial Co., Ltd (Lanbeisi) (Note (iv))Investment cost
    
    $
    43,407
    
    
    $
    Share of loss
    
    
    (11,599
    )
    
    
    $
    31,808
    
    
    $
    Total
    
    $
    146,432
    
    
    $
    114,200
 Note:  (i)
    
    In July 2003, the Group entered into an agreement with 21st Century
Publishing House to incorporate Culture Media. It was agreed that KCES,
the Groups wholly owned PRC subsidiary, and 21st Century Publishing House
each had 50% ownership and that each party contributed RMB$1 million for
the incorporation. On July 2, 2004, the Group acquired additional 40% of
the ownership in Culture Media from 21st Century Publishing House. As of
September 30, 2004, the Group owns 90% of Culture Media, which became a
consolidated entity.(ii)
    
    In October 2003, the Group obtained the governments approval to co-found
Education Center with 21st Century Publishing House in the PRC. In 2004,
Education Center registered the total capital as RMB$1,500,000, and KCES
and 21st Century Publishing House each owns 50% of the investee. It has
been determined that the Group has significant influence and should
therefore account for its investee on the equity method.For the nine months ended September 30, 2004, the Group recognized an
investment income accounted for under the equity method in Education
Center of $14,987 in the current periods operation results. -16-




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##### Table of Contents



(iii)
    
    On April 1, 2004, the Group signed a joint venture agreement with
Tianjin Foreign Enterprises & Experts Service Corp., in Tianjin City, PRC.
Pursuant to this joint venture agreement, the Group and Tianjin Foreign
Enterprises & Experts Service Corp. each owns a 50% interest in Tianjin
Kid Castle Educational Investment Consulting Co., Ltd. It has been
determined that the Group has significant influence and should therefore
account for its investee on the equity method. For the nine months ended
September 30, 2004, the Group recognized an investment loss accounted for
under the equity method in Tianjin Consulting of $25,801.(iv)
    
    On April 28, 2004, the Group 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.
It has been determined that the Group has significant influence and should
therefore account for its investee using the equity method. For the nine
months ended September 30, 2004, the Group recognized an investment loss
accounted for under the equity method in Lanbeisi of $11,599. NOTE 9  ACQUISITION In July 2003, the Group entered into an agreement with 21st Century Publishing
House to incorporate Culture Media. It was agreed that KCES, the Groups
wholly owned PRC subsidiary, and 21st Century Publishing House each had 50%
ownership and that each party contributed RMB$1 million for the incorporation.
On July 2, 2004, the Group acquired additional 40% of the ownership in Culture
Media from 21st Century Publishing House for a purchase price of approximately
$121,000 (RMB $1 million). The Groups management believed that the book value
of the existing assets and liabilities of Culture Media approximated the fair
value of these assets and liabilities, based on which the purchase price was
determined for the purpose of applying purchase accounting. The acquisition
expands the Groups current sales and services in Shanghai and is expected to
increase the Groups competitive position in China. As of September 30, 2004,
the Group owns 90% of Culture Media, which became a consolidated entity. The fair values of Culture Medias assets and liabilities as at July 2, 2004
are presented below: ASSETSCash and bank balances
    
    $
    31,660Accounts receivable, net
    
    
    112,175Inventories, net
    
    
    105,881Other receivables
    
    
    45,757Prepayments and other current assets
    
    
    25,795Total assets
    
    $
    321,268LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    56,635Receipts in advance
    
    
    222Other payable
    
    
    143,965Total liabilities
    
    $
    200,822NET ASSETS ACQUIRED
    
    $
    120,446
 -17-




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The result of operations of Culture Media during the period since July 2, 2004,
the date that the respective acquisition was completed, to September 30, 2004
has been included in the Groups condensed consolidated statements of
operations. The following unaudited pro forma information presents a summary
of the results of operations of the Group assuming the acquisition of Culture
Media occurred on January 1, 2004. And as Culture Media has not commenced its
operation until October 2003, the information presented for the preceding year
does not include the result of operations of Culture Media. Nine months ended September 30,2004
    
    2003(Unaudited)Revenues
    
    $
    8,123,037
    
    
    $
    7,058,462Net income
    
    $
    (758,764
    )
    
    $
    (1,296,886
    )Net income per share  basic and diluted:
    
    $
    (0.040
    )
    
    $
    (0.080
    )
 NOTE 10  RELATED PARTY TRANSACTIONS A. Names of related parties and relationship with the Group are as follows: Names of related parties
    
    Relationship with the CompanyMr. Kuo-An Wang
    
    He is a director, stockholderand chairman of the CompanyMr. Yu-En Chiu
    
    He is a director, stockholderand vice chairman of the CompanyKid Castle Enterprises Limited (KCE)
    
    Its two directors and stockholders are Mr.Kuo-An Wang and Mr. Yu-En ChiuChevady Culture Enterprise Limited
(CCE)
    
    Its chairman is Mr. Kuo-An WangPrivate Kid Castle Short Term Language
Cram School (PKC Language)
    
    Its chairman is Mr. Yu-En ChiuTaipei Country Private Kid Castle
Short Term Language Cram School (TCP
PKC)
    
    Its chairman is Mr. Yu-En ChiuTaipei Country Private Chevady
Preschool (TCP Chevady)
    
    Its chairman is Mr. Yu-En ChiuTaipei Country Private Chung-hua
Preschool (TCP Chung-hua)
    
    Its chairman is Mr. Yu-En ChiuTaipei Country Private Wonderland
Preschool (TCP Wonderland)
    
    Its chairman is Mr. Yu-En ChiuTaipei City Private Kid Castle
Preschool ( TCP Kid Castle)
    
    Its chairman is Mr. Yu-En Chiu21st Century Publishing House
(Publishing House)
    
    A joint venturerJiangxi 21st
Century Kid Castle Culture
Media Co., Ltd (Culture Media)
    
    An investment accounted for under
the equity method before July 2, 2004.  It has
become a consolidated entity after July 2, 2004.
 -18-




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##### Table of Contents



Names of related parties
    
    Relationship with the Company21st Century
Kid Castle Language andEducation Center (Education Center)
    
    An investment accounted for under
the equity method.Tianjin Kid Castle Educational
Investment Consulting Co.,Ltd.(Tianjin Consulting)
    
    An investment accounted for under
the equity methodLanbeisi
Education & CultureIndustrial Co., Ltd (Lanbeisi)
    
    An investment accounted for under
the equity method
 B. Significant transactions and balances with related parties are as follows: Nine months ended September 30,2004
    
    2003(Unaudited)(i
    )
    
    Sales to:- PKC Language
    
    $
    10,496
    
    
    $
    12,553- TCP PKC
    
    
    10,496
    
    
    
    12,553- TCP Chevady
    
    
    11,308
    
    
    
    13,437- TCP Chung-hua
    
    
    13,614
    
    
    
    21,686- TCP Wonderland
    
    
    11,308
    
    
    
    13,437- TCP Kid Castle
    
    
    12,264
    
    
    
    16,960- English School
    
    
    6,419
    
    
    
    - Tianjin Consulting
    
    
    4,875
    
    
    
    - Lanbeisi
    
    
    13,225
    
    
    
    $
    94,005
    
    
    $
    90,626(ii)
    
    Rental income from:- KCE
    
    $
    
    
    
    $
    1,302- CCE
    
    
    1,338
    
    
    
    1,302$
    1,338
    
    
    $
    2,604(iii)
    
    Franchising income from:- PKC Language
    
    $
    496
    
    
    $
    - TCP PKC
    
    
    496
    
    
    
    1,447- TCP Kid Castle
    
    
    6,898
    
    
    
    6,312- TCP Chung-Hua
    
    
    1,770
    
    
    
    1,103- TCP Chevady
    
    
    3,449
    
    
    
    3,156- TCP Wonderland
    
    
    3,449
    
    
    
    3,156$
    16,558
    
    
    $
    15,174
  (iv)
    
    The two directors and stockholders, Mr. Kuo-An Wang and Mr. Yu-Eng Chiu,
have given personal guarantees to certain bank loans and borrowings.
Please see the details as described in Note 12  Bank Borrowings.Our management is of the opinion that the above transactions were carried
out in the normal course of business at agreed upon terms.(v)
    
    Accounts and notes receivable  related parties: -19-




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##### Table of Contents



Name of related parties
    
    2004
    
    2003(Unaudited)- KCE
    
    $
    
    
    
    $
    571,755- PKC Language
    
    
    12,299
    
    
    
    3,358- TCP PKC
    
    
    12,298
    
    
    
    3,358- TCP Chung-hua
    
    
    22,090
    
    
    
    2,863- TCP Chevady
    
    
    20,079
    
    
    
    2,537- TCP Wonderland
    
    
    20,079
    
    
    
    2,537- TCP Kid Castle
    
    
    27,090
    
    
    
    - Education Center
    
    
    578
    
    
    
    - Tianjin Consulting
    
    
    5,029
    
    
    
    42,646- Lanbeisi
    
    
    6,783
    
    
    
    2,099$
    126,325
    
    
    $
    631,153
  (vi)
    
    Other receivables  related parties: September 30,
    
    December 31,Name of related parties
    
    2004
    
    2003(Unaudited)Amount due from Publishing House (Note 1)
    
    $
    13,752
    
    
    $
    135,513Amount due from Culture Media (Note 2)
    
    
    
    
    
    
    178,331Amount due from Education Center (Note 3)
    
    
    267
    
    
    
    2,319Amount due from Lanbeisi (Note 4)
    
    
    9,043
    
    
    
    $
    23,062
    
    
    $
    316,163
 Note:  1.
    
    As of December 31, 2003, the amount due from Publishing House consists
primarily of amounts due under a loan of RMB$1,000,000 (approximately
$120,000 from the Group to Publishing House for the incorporation of
Culture Media). The loan is unsecured and bears no interest. Pursuant to
the terms of the loan, Publishing House was obligated to repay the loan on
or before June 27, 2004 or it would be required to transfer its 40%
ownership interest in Culture Media to the Group. On July 2, 2004, as
Publishing House did not repay the loan, the Group decided to take over
the 40% ownership from Publishing House, and therefore, the Groups
ownership in Culture Media has increased to 90% and Culture Media has
become a consolidated entity as of September 30, 2004.2.
    
    Culture Media was incorporated in December 2003. The Group paid certain
pre-operating costs on behalf of Culture Media. As of December 31, 2003,
the amount due from this related party had no fixed repayment term and
bears no interest. As of September 30, 2004, Culture Media was
consolidated into the Groups financial statements.3.
    
    Education Center was founded in October 2003. The amount due from the
associate is mainly inventory purchases paid by the Group on behalf of
Education Center. The amount due from this related party has no fixed
repayment term and bears no interest. -20-




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##### Table of Contents



4.
    
    Lanbeisi was incorporated in April 2004. The Group paid pre-operating
costs of RMB$75,000 (approximately $9,000) on behalf of Lanbeisi. The
amount due from this related party has no fixed repayment term and bears
no interest.(vii)
    
    Prepayments, other current assets September 30,
    
    December 31,Name of related parties
    
    2004
    
    2003(Unaudited)Prepayments to Publishing House
    
    
    265,559
    
    
    
    $
    265,559
    
    
    $
    
 Prepayments to Publishing House are mainly for inventory ordered by Culture
Media. According to each contract signed with Publishing House, Culture Media
has to prepay a certain percentage of inventories purchased upon the
effectiveness of the contracts. The remaining payments will be made three
months after the initial payment.  (viii)
    
    Accounts payable  related parties: September 30,
    
    December 31,Name of related parties
    
    2004
    
    2003(Unaudited)- Publishing House
    
    $
    607,310
    
    
    $
    $
    607,310
    
    
    $
    
 (ix) Amount due to officers: September 30,
    
    December 31,2004
    
    2003(Unaudited)Mr. Kuo-An Wang and Mr. Yu-En Chiu (Note 1)
    
    $
    
    
    
    $
    572,160$
    
    
    
    $
    572,160
 Note:  1.
    
    As of December 31, 2002, the outstanding balance of the loan amount due
to Mr. Hsi-Ming Pai, a stockholder, which was unsecured and bore interest
at 25.2% per annum, was $606,208 (including the principal of $600,000 and
accrued interest). On November 15, 2003, the Group entered into a
liability transfer agreement with the stockholder to transfer this
liability to Mr. Kuo-An Wang and Mr. Yu-En Chiu. Pursuant to the
liability transfer agreement, the Group transferred its original liability
of $600,000 and the accrued interest thereon separately in two lump sum
payments. The first transfer was completed on December 30, 2003 for
$70,000, and the remaining balance, including the principal of $530,000
and accrued interest was transferred in January 2004. -21-




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NOTE 11  INTANGIBLE ASSETS September 30,
    
    December 31,2004
    
    2003(Unaudited)Gross carrying amountFranchise
    
    $
    1,000,968
    
    
    $
    997,446Copyrights
    
    
    588,408
    
    
    
    586,3381,589,376
    
    
    
    1,583,784Less: Accumulated amortizationFranchise
    
    
    (450,436
    )
    
    
    (374,042
    )Copyrights
    
    
    (264,784
    )
    
    
    (219,877
    )(715,220
    )
    
    
    (593,919
    )Net
    
    $
    874,156
    
    
    $
    989,865
 Amortization charged to operations was $120,515 and $117,271 for the nine
months ended September 30, 2004 and 2003, respectively. The estimated aggregate amortization expenses for each of the five succeeding
fiscal years are as follows: 2005
    
    $
    160,6872006
    
    
    160,6872007
    
    
    160,6872008
    
    
    160,6872009
    
    
    160,687$
    803,435
 NOTE 12  BANK BORROWINGS September 30,
    
    December 31,Notes
    
    2004
    
    2003(Unaudited)Bank term loans
    
    
    (i
    )
    
    $
    603,111
    
    
    $
    986,280Short-term unsecured bank loans
    
    (ii)
    
    
    676,670
    
    
    
    234,535Mid-term loan
    
    (iii)
    
    
    1,124,884
    
    
    
    325,515Mid-term secured bank loan
    
    (iv)
    
    
    927,871
    
    
    
    938,1413,332,536
    
    
    
    2,484,471Less: Balances maturing within one year included
in current liabilitiesBank term loans
    
    
    
    
    
    
    483,470
    
    
    
    757,640Short-term unsecured bank loans
    
    
    
    
    
    
    676,670
    
    
    
    234,535Mid-term loan
    
    
    
    
    
    
    649,914
    
    
    
    325,515Mid-term secured bank loan
    
    
    
    
    
    
    55,358
    
    
    
    
 -22-




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##### Table of Contents



September 30,
    
    December 31,Notes
    
    2004
    
    2003(Unaudited)1,865,412
    
    
    
    1,317,690Bank borrowings maturing after one year
    
    
    
    
    
    $
    1,467,124
    
    
    $
    1,166,781
 Note:  (i)
    
    This line item represents bank loans that have been secured by a pledge
of post-dated checks amounting to $1,205,486 and $1,506,708 that we have
received from franchisees and the Groups bank deposits of $22,091 and
$87,621 as of September 30, 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 range from 5.61% to 7.60% per annum
as of September 30, 2004. For the nine months ended September 30, 2004 and
2003, the interest expenses charged to operations amounted to $30,051 and
$53,384, respectively.(ii)
    
    In August 2003, KCIT obtained an unsecured short-term loan in the amount
of $235,363, which is guaranteed by two directors and stockholders of the
Group, to finance the Groups operations. The loan bears interest at the
Taiwan basic borrowing rate plus 1.20% per annum and is due and payable in
June 2005. The applicable interest rate is approximately 4.50% per annum
as of September 30, 2004.In March 2004, KCIT obtained an unsecured short-term loan in the
amount of $294,204, which is guaranteed by two directors and
stockholders of the Group, to finance the Groups operations. The
loan bears interest at the Taiwan basic borrowing rate plus 1.65%
per annum and is due and payable in February 2005. The applicable
interest rate is approximately 5.11% per annum as of September 30,
2004.In April 2004, KCIT obtained another unsecured short-term loan
in the amount of $147,102, which is also guaranteed by two directors
and stockholders of the Group, to finance the Groups operations.
The loan bears interest at the Taiwan basic borrowing rate plus
1.24% per annum is due and payable in April 2005. The applicable
interest rate is approximately 4.75% per annum as of September 30,
2004.For the nine months ended September 30, 2004 and 2003, the interest
expense charged to operations from the above three unsecured short-term
loans amounted to $20,294 and $2,230, respectively.(iii)
    
    In March 2003, KCIT obtained a loan of $588,408 from a financial
institution, which bore interest at 13.5% per annum and was repayable in
18 equal monthly installments, to finance the Groups operations. The last
installment was due on September 30, 2004 and the Group has extended the
term with the financial institution to September 2006. Pursuant to the
amended terms of the loan, the loan bears interest at 9.69% per annum and
is repayable in 24 equal monthly installments. As of September 30, 2004
and December 31, 2003, the loan was pledged by KCITs deposits of $147,102
and $117,268, respectively, and guaranteed by two directors and
stockholders of the Group. As of September 30, 2004, the Group repaid
$22,318 of the loan. -23-




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##### Table of Contents



In March 2004, KCIT obtained a new bank loan of $735,510, which bears
interest at 5.25% per annum and is repayable in 24 equal monthly
installments, to finance the Groups operations. The last installment is due on March 31, 2006. As of September 30, 2004,
the loan was pledged by the KCITs deposits of $220,653, and guaranteed
by two directors and stockholders of the Group. As of September 30,
2004, the Group repaid $176,718.For the nine months ended September 30, 2004 and 2003, the interest
expenses charged to operations from the aforementioned loans amounted to
$40,223 and $34,094, respectively.(iv)
    
    In August 2003, KCIT obtained a bank loan in the principal amount of
$948,148 to repay its mortgage loan that was originally granted by a bank
on October 5, 2001 and 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 bears interest at the
lending banks basic borrowing rate plus 1.45% per annum. On July 19,
2004, the bank extended the term of the loan and the Group repays the
loan, which is now repayable in 168 equal monthly installments starting
July 30, 2004. As of September 30, 2004, the applicable interest rate is
approximately 3.00% per annum. For the nine months ended September 30,
2004 and 2003, the interest expenses charged to operations amounted to
$29,716 and $7,169, respectively. NOTE 13  RECEIPTS IN ADVANCE The balance comprises: September 30,
    
    December 31,Notes
    
    2004
    
    2003(Unaudited)Current liabilities:Sales deposits received
    
    
    (i
    )
    
    $
    366,362
    
    
    $
    356,575Franchising income received
    
    (ii)
    
    
    2,129,835
    
    
    
    1,703,426Subscription fees received
    
    (iii)
    
    
    535,176
    
    
    
    842,509Others
    
    
    
    
    
    
    27,504
    
    
    
    22,1263,058,877
    
    
    
    2,924,636Long-term liabilities:Franchising income received
    
    (ii)
    
    
    949,162
    
    
    
    1,432,343Others
    
    
    
    
    
    
    22,085
    
    
    
    34,682971,247
    
    
    
    1,467,025$
    4,030,124
    
    
    $
    4,391,661
 Note:  (i)
    
    The balance represents receipts in advance from customers for goods sold to
them.(ii)
    
    The balance mainly represents franchising income received in advance
which is attributable to the periods after the respective period end
dates.(iii)
    
    The balance represents subscription fees received in advance for
subscription of magazines published by the Group. -24-




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##### Table of Contents



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: Nine months ended September 30,2004
    
    2003(Unaudited)Service cost
    
    $
    45,888
    
    
    $
    40,913Interest cost
    
    
    5,153
    
    
    
    3,458Expected return on assets
    
    
    (1,093
    )
    
    
    Amortization of unrecognized loss
    
    
    959
    
    
    
    736Net periodic pension cost
    
    $
    50,907
    
    
    $
    45,107
 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 September 30, 2004, $35,580 of contributions had been made. The Group
presently anticipates contributing an additional $18,775 to fund the Plan in
2004 for a total of $54,355. -25-




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##### Table of Contents



NOTE 15  GEOGRAPHICAL SEGMENTS The Group is principally engaged in the business of child educational teaching
materials and related services focusing on English language in Taiwan and the
PRC. Accordingly, the Group has two reportable geographic segments: Taiwan and
the PRC. The Group evaluates the performance of each geographic segment based
on its net income or loss. The Group also accounts for inter-segment sales as
if the sales were made to third parties. Information concerning the operations
in these geographical segments is as follows: Taiwan
    
    The PRC
    
    TotalNine months ended
    
    Nine months ended
    
    Nine months ended
    
    Nine months ended
    
    Nine months ended
    
    Nine months endedSeptember 30,
    
    September. 30,
    
    September 30,
    
    September. 30,
    
    September 30,
    
    September. 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003RevenueExternal revenue
    
    $
    6,180,392
    
    
    $
    6,227,909
    
    
    $
    1,637,648
    
    
    $
    830,553
    
    
    $
    7,818,040
    
    
    $
    7,058,462Inter-segment revenue
    
    
    6,111
    
    
    
    5,739
    
    
    
    
    
    
    
    
    
    
    
    6,111
    
    
    
    5,739$
    6,186,503
    
    
    $
    6,233,648
    
    
    $
    1,637,648
    
    
    $
    830,553
    
    
    $
    7,824,151
    
    
    $
    7,064,201Profit (loss) from
Operations
    
    $
    339,135
    
    
    $
    471,758
    
    
    $
    (762,233
    )
    
    $
    (708,312
    )
    
    $
    (423,098
    )
    
    $
    (236,554
    )Capital expenditures
    
    $
    22,196
    
    
    $
    150,338
    
    
    $
    175,193
    
    
    $
    80,111
    
    
    $
    197,389
    
    
    $
    230,449
   [Continued from above table, first column(s) repeated] Corporate
    
    Eliminations
    
    ConsolidatedNine months ended
    
    Nine months ended
    
    Nine months ended
    
    Nine months ended
    
    Nine months ended
    
    Nine months endedSeptember 30,
    
    September. 30,
    
    September 30,
    
    September. 30,
    
    September 30,
    
    September. 30,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003RevenueExternal revenue
    
    $
    47,836
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,865,876
    
    
    $
    7,058,462Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    (6,111
    )
    
    
    (5,739
    )
    
    
    
    
    
    
    $
    47,836
    
    
    $
    
    
    
    $
    (6,111
    )
    
    $
    (5,739
    )
    
    $
    7,865,876
    
    
    $
    7,058,462Profit (loss) from
Operations
    
    $
    (264,195
    )
    
    $
    (454,451
    )
    
    $
    35,601
    
    
    $
    (47,686
    )
    
    $
    (651,692
    )
    
    $
    (738,691
    )Capital expenditures
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    197,389
    
    
    $
    230,449
 -26-




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##### Table of Contents



September 30,
    
    December 31,
    
    September 30,
    
    December 31,
    
    September 30,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Total assets
    
    $
    9,505,255
    
    
    $
    10,614,292
    
    
    $
    3,246,966
    
    
    $
    2,053,029
    
    
    $
    12,752,221
    
    
    $
    12,667,321
   [Continued from above table, first column(s) repeated] September 30,
    
    December 31,
    
    September 30,
    
    December 31,
    
    September 30,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Total assets
    
    $
    2,854
    
    
    $
    7,487
    
    
    $
    (275,682
    )
    
    $
    (132,592
    )
    
    $
    12,479,393
    
    
    $
    12,542,216
 NOTE 16  COMMITMENT  (i)
    
    On May 28, 2004, the Group signed a joint venture agreement with
Zhangjhou Yu Hua Educational Investment Co., Ltd. in Henan Province, PRC
to establish a company, Henan Kid Castle Education Development Co., Ltd.
with registered capital of RMB$300,000. Pursuant to this joint venture
agreement, the Group and Zhangjhou Yu Hua Educational Investment Co., Ltd.
each owns 65% and 35% interests in Henan Kid Castle Education Development
Co., Ltd. No capital contribution has yet been made for the joint venture
as of September 30, 2004.(ii)
    
    On June 29, 2004, the Group signed a joint venture agreement with Li Kai
and Zhang Wuen Shou in PRC to establish a company, Shanxi Kid Castle
Education Development Co., Ltd. with registered capital of RMB$500,000.
Pursuant to this joint venture agreement, the Group, Li Kai and Zhang Wuen
Shou own, respectively, 51%, 30% and 19% interests in Shanxi Kid Castle
Education Development Co., Ltd. No capital contribution has yet been made
for the joint venture as of September 30, 2004. -27-




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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 RecognitionWe 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. -28-




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##### Table of Contents



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 accountsWe 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 marketWe 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 impairmentsWe 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 depreciationOur 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 assetsWe 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 September 30, 2004, the balance of our amortizable intangible assets was
$874,156, including franchise-related intangible assets of $550,532 and
copyrights of $323,624. 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 taxesWe 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 -29-




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##### Table of Contents



upon managements estimates of realizability. Actual results may differ
significantly from managements estimate. Currency RiskOur 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. As a result of
our expansion in the PRC, our transactions denominated in Renminbi, which is
the functional currency of our PRC subsidiaries, Kid Castle Educational
Software Development Company Limited and Jiangxi 21st Century Kid Castle
Culture Media Co., Ltd., 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 currency exchange
rate fluctuations. RESULTS OF OPERATIONS The nine months ended September 30, 2004 and 2003 Total net operating revenues increased by $807,414, or 11%, to $7,865,876 for
the nine months ended September 30, 2004 from $7,058,462 for the nine months
ended September 30, 2003, including the increase in sales of goods of $184,684
and the franchising income of $494,698 and other operating revenues of
$128,032. The increase in sales of goods, from $5,476,362 for the nine months
ended September 30, 2003 to $5,661,046 for the nine months ended September 30,
2004, or 3%, was mainly due to the increase in net sales of goods generated
from our Shanghai operations of $510,366, or 92%, to $1,064,466 for the nine
months ended September 30, 2004 from $554,100 for the nine months ended
September 30, 2003. The increase in franchising income, from $1,320,286 for the
nine months ended September 30, 2003 to $1,814,984 for the nine months ended
September 30, 2004, or 37%, was mainly due to the increase in numbers of our
franchised schools in Shanghai. Our other operating revenues represent revenues
from other activities and services such as training of teachers, arranging for
personal English language tutors, organizing field trips and educational fairs,
and designing the school layout for franchised schools. Other operating
revenues increased by $128,032, or 49%, to $389,846 for the nine months ended
September 30, 2004 from $261,814 for the nine months ended September 30, 2003.
The increase was mainly due to the fees paid by our franchised schools for our
services in connection with the construction and decoration of those franchised
schools and the income resulting from the sales of education related equipments
to our franchised schools. Gross profit increased by $312,455, or 7%, to $4,758,224 for the nine months
ended September 30, 2004 from $4,445,769 for the nine months ended September
30, 2003. The increase in gross profit was attributable to the fact that the
rate of increase in franchising costs from September 30, 2003 to September 30,
2004 was lower than the rate of increase in franchising income for the same
period. In addition, our advertising campaign during this period particularly
helped to boost franchising income in both Taiwan and Shanghai, PRC. Total operating expenses increased by $225,456, or 4%, to $5,409,916 for the
nine months ended September 30, 2004 from $5,184,460 for the nine months ended
September 30, 2003. Advertising costs increased by $151,741, or 51%, to
$448,971 for the nine months ended September 30, 2004 from $297,230 for the
nine months ended September 30, 2003. The increase was mainly due to the
additional expenses incurred with respect to the filming of commercials for our
new promotional campaign for our products and franchised schools. Other
operating expenses increased by $73,715, or 2%, to $4,960,945 for the nine
months ended September 30, 2004 from $4,887,230 for the nine months ended
September 30, 2003, principally due to increases in expenses as a result of the
expansion in Shanghai, PRC. -30-




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##### Table of Contents



Net interest expenses decreased by $125,777, or 55%, to $100,892 for the nine
months ended September 30, 2004 from $226,669 for the nine months ended
September 30, 2003, primarily due to the repayment of a loan due to a
stockholder (please refer to Note 12 to our Condensed Consolidated Financial
Statements for more information). Loss on write-off of an investment in the nine months ended September 30, 2003,
was due to an agreement to change of our relationship with Global International
from one of equity ownership to that of a strategic alliance. As a result,
during the nine months ended September 30, 2003, we recognized a loss of
$132,842 in our operating results. The decrease of income tax expenses from $330,934 for the nine months ended
September 30, 2003 to $111,567 for the nine months ended September 30, 2004 was
mainly due to the reversal of tax benefits recognized in prior years in the
amount of approximately $220,000 during the nine months ended September 30,
2003, which was resulted from the provision of valuation allowance against
deferred income tax assets from our Shanghai and Taiwan operations. The three months ended September 30, 2004 and 2003 Total net operating revenues increased by $163,897, or 5%, to $3,252,443 for
the three months ended September 30, 2004 from $3,088,546 for the three months
ended September 30, 2003, including the decrease in sales of goods of $44,647,
increase in franchising income of $148,907 and increase in other operating
revenues of $59,637. The decrease in sales of goods, from $2,488,914 for the
three months ended September 30, 2003 to $2,444,267 for the three months ended
September 30, 2004, or 2%, was mainly due to the termination of the direct
marketing department during this year that generated net sales of $216,697 for
the three months ended September 30, 2003. The increase in franchising income,
from $473,337 for the three months ended September 30, 2003 to $622,244 for the
three months ended September 30, 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 increased to $185,932
for the three months ended September 30, 2004 from $126,295 for the three
months ended September 30, 2003, mainly due to the fees paid by our franchised
schools for our services in connection with the construction and decoration of
those franchised schools and the income resulting from the sales of education
related equipments to our franchised schools. Gross profit decreased by $69,208, or 4%, to $1,850,957 for the three months
ended September 30, 2004 from $1,920,165 for the three months ended September
30, 2003. The decrease was mainly attributable to the consolidation of Culture
media that has a lower margin compared to our usual operations. Total operating expenses decreased by $337,700, or 18%, to $1,525,320 for the
three months ended September 30, 2004 from $1,863,020 for the three months
ended September 30, 2003. Advertising costs decreased by $98,411, or 100%, to
$72 for the three months ended September 30, 2004 from $98,483 for the three
months ended September 30, 2003. The decrease was mainly because we filmed our
new commercials on the promotion of our products and franchised schools in the
first half of 2004 and recorded as occurred in Q2, 2004. Other operating
expenses decreased by $239,289, or 14%, to $1,525,248 for the three months
ended September 30, 2004 from $1,764,537 for the three months ended September
30, 2003, primarily because we saved some personnel expenses by closing down
our direct-marketing department in April, 2004. -31-




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LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2004, our principal sources of liquidity included cash and
bank balances of $438,694 which decreased from $1,273,723 at December 31, 2003.
The decrease was mainly due to the expenditures to fund the daily operations
and the new investments in our Shanghai operations (please refer to Note 8 to
our Condensed Consolidated Financial Statement for more information). Net cash used in operating activities was $627,787 and $2,035,396 during the
nine months ended September 30, 2004 and 2003, respectively. Net cash used in
operating activities during the nine months ended September 30, 2004 was
primarily attributed to net loss and an increase in notes and accounts
receivable, that was partially offset by an increase in notes and accounts
payable. Net cash used in investing activities was $456,020 and $65,639 during the nine
months ended September 30, 2004 and 2003, respectively. The $390,381 difference
was primarily attributable to the collections of amount due from
stockholder/director of $122,973, the acquisitions of long-term investments in
two investees, and the increase in pledged bank deposits of $156,518 during the
nine months ended September 30, 2004. Net cash provided by financing activities during the nine months ended
September 30, 2004 was $245,217 as compared to $2,850,878 during the nine
months ended September 30, 2003. The $2,605,661 difference was primarily
attributable to the net proceeds of $2,181,578 we received from the issuance of
3,116,540 shares of common stock during the nine months ended September 30,
2003, and the repayment of loans from officers/stockholders of $581,228 during
the nine months ended September 30, 2004. As of September 30, 2004, the Company has a total line of credit of $3,926,155
from certain banks and the unused credit facility was $593,619. 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
    
    $
    3,333
    
    
    
    425
    
    
    
    1,656
    
    
    
    449
    
    
    
    60
    
    
    
    62
    
    
    
    681Pension Benefit
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Operating leases
    
    
    339
    
    
    
    62
    
    
    
    97
    
    
    
    81
    
    
    
    54
    
    
    
    39
    
    
    
    6Total
    
    $
    3,713
    
    
    
    487
    
    
    
    1,753
    
    
    
    530
    
    
    
    114
    
    
    
    101
    
    
    
    728
 Bank borrowing One of our financing sources is from bank borrowings. As of September 30, 2004
and December 31, 2003, the balances of bank borrowings, including current and
non-current portions, were $3,332,536 and $2,484,471, respectively. -32-




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Equity investments in joint ventures We did not enter into any joint venture agreements for the three months ended
September 30, 2004. 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 our
Condensed Consolidated Financial Statements. The benefits expected to be paid
in each of the next five fiscal years, and in the aggregate for the five fiscal
years thereafter are $0 and $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 nine
months ended September 30, 2004 and 2003 amounted to $79,528 and $73,855,
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
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 September 30, 2003 and
for hedging relationships designated after September 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. -33-




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In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which
supersedes 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 our 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. We have adopted this Statement
since the year ended December 31, 2003, and the adoption of this Statement has
no impact on our consolidated financial statements. In September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-01) as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
and investment accounted for under the cost method. The Group is currently
evaluating the effect of this proposed statement on its financial position and
results of operations. 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. 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 not
be able 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 -34-




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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. 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: -35-




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
    
    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. We have a history of operating losses, and unless we are able to generate
profits and positive cash flow on a consistent basis we may not be able to
continue operations. Our ability to attain a positive cash flow and become profitable depends on our
ability to generate and maintain greater revenues while incurring reasonable
expenses. This, in turn, depends, among other things, on the development of our
business of child educational teaching materials and related services focusing
on English language in Taiwan and the PRC, and we may be unable to achieve and
maintain profitability if we fail to do any of the following:  
    
    maintain and improve our current products and services and develop or
license new ones on a timely basis;  
    
    compete effectively with existing and potential competitors;  
    
    further develop our business activities;  
    
    manage expanding operations; and  
    
    attract and retain qualified personnel. We have incurred operating losses since inception and hence, as of September
30, 2004, the balance of accumulated deficit was $6,842,653. We incurred net
losses of $1,940,591, $1,906,996, and $2,500 for the years ended December 31,
2003, 2002 and 2001, respectively, and had cash flow from operations of
$(2,689,688), 33,886 and $0 in 2003, 2002 and 2001, respectively. If we are
unable to achieve and maintain a positive cash flow and profitability, we may
be unable to continue our operations. Even if we do achieve a positive cash
flow and profitability, we cannot be certain that we will be able to sustain or
increase them on a quarterly or annual basis in the future. Our inability to achieve or maintain profitability or positive cash flow could
result in disappointing financial results, impede implementation of our growth
strategy or cause the market price of our common stock to decrease.
Specifically, 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.
Accordingly, we cannot assure you that we will be able to generate the cash
flow and profits necessary to sustain our business expectations, which makes
our ability to successfully implement our business plan uncertain. 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. -36-




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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 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; -37-




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
    
    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 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). -38-




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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. 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. Investors could lose confidence in the reliability of the Companys financial
statements if the Company fails to comply with the requirements of Section 404
of the Sarbanes-Oxley Act of 2002. If the Company is unable to complete its assessment as to the adequacy of its
internal control over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability
of the Companys financial statements, which could result in a decrease in the
value of the Companys Common Stock. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities
and Exchange Commission adopted rules requiring public companies to include a
report of management on the companys internal control over financial reporting
in their annual reports on Form 10-K. This report is required to contain an
assessment by management of the effectiveness of such companys internal
controls over financial reporting. In addition, the public accounting firm
auditing a public companys financial statements must attest to and report on
managements assessment of the effectiveness of the companys internal controls
over financial reporting. While the Company is expending significant resources
in developing the necessary documentation and testing procedures required by
Section 404, there is a significant risk that the Company will not comply with
all of the requirements imposed by Section 404. If the Company fails to
implement required new or improved controls, it may be unable to comply with
the requirements of SEC 404 in a timely manner. This could result in an
adverse reaction in the financial markets due to a loss of confidence in the
reliability of the Companys financial statements, which could cause the market
price of the Companys Common Stock to decline and make it more difficult for
the Company to finance its operations. -39-




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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 We are exposed to fluctuating interest rates related to variable rate bank
borrowings. In analyzing the effect of interest rate fluctuations based on the
average balances of our outstanding bank borrowings for the nine months ended
September 30, 2004, we have projected that, if interest rates were to increase
by 1%, the result would be an annual increase in our interest expense of
$29,085. This analysis does not take into consideration the effect of changes
in the level of overall economic activity on interest rate fluctuations. Foreign currency exposure We have operations in both Taiwan and the PRC. The functional currency of
Higoal and its subsidiaries other than KCES is NT Dollars and the financial
records are maintained and the financial statements are prepared for these
entities in NT$. 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. However, fluctuations in the
relative exchange rate will affect our reported financial results. The
translation from the applicable local currency assets and liabilities to the US
dollar is performed using exchange rates in effect at the balance sheet date
except for stockholders equity, which is translated at historical exchange
rates. Revenue and expense accounts are translated using average exchange rates
during the period. Gains and losses resulting from such translations are
recorded as a cumulative translation adjustment, a separate component of
stockholders equity. 
 ITEM 4. CONTROLS AND PROCEDURES We are in the process of identifying, developing and implementing measures to
improve the effectiveness of our disclosure controls and procedures, and, in
particular, internal controls, including plans to enhance our resources,
systems and training with respect to our financial reporting and disclosure
responsibilities, and to review our actions with the audit committee and
independent auditors. Since April 2004, we have been in the process of
implementing a system with respect to internal control over financial
reporting. In May 2004, we began installing a new Enterprise Resource Planning
(ERP) system through [an application service provider], and we expect the
installation to be completed in 2005. Our CEO and our CFO believe that such
measures will help improve our disclosure controls and procedures. Based on
this information, as of September 30, 2004, our CEO and our CFO believe that,
subject to the limitations noted above, our disclosure controls and procedures
are effective in ensuring that material information required to be included in
Kid Castles SEC reports is made known to them on a timely basis. In July 2004, our accounting manger, who was in charge of handling our internal
control over financial reporting, resigned. We hired a new accounting manager
in August 2004, who is responsible for general accounting matters and
coordinating our internal control over financial reporting. Although this
personnel change caused a temporary interruption of our internal control over
financial reporting, we believe that our timely replacement of accounting
personnel, the ongoing implementation of our new system with respect to
internal control over financial reporting and the installation of our ERP
system have minimized any adverse effect that may have been caused by such
resignation. -40-




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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 September 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.
    
    Exhibits31.1
    
    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 2002.32.2
    
    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: November 15, 2004 By:
    
    /s/ Kuo-An WangName: Kuo-An Wang
Title: Chief Executive Officer
 2