Kid Castle Educational Corporation is a Florida corporation (“Kid Castle” or the “Company”) and was incorporated on July 19, 1985. From inception through June 30, 1998, the Company’s primary business had been the assembly and distribution of industrial doors for sale to building contractors in the South Florida geographic market.
From its initial incorporation through April 6, 1998, the Company was a wholly-owned subsidiary of Millennia, Inc., a publicly-owned Delaware corporation (“Millennia”). On April 6, 1998, the Board of Directors of Millennia declared the payment of a stock dividend to Millennia’s stockholders. Millennia stockholders received one share of the Company’s common stock for each four shares of Millennia common stock owned. This distribution of approximately 570,000 shares of the Company represented approximately five percent (5.0%) of the total issued and outstanding shares of the Company.
Pursuant to a contract dated July 14, 1998, Millennia sold 10,260,000 shares (representing 90% of the total outstanding shares) of the common stock of the Company to an unrelated firm, China Economic Growth Investment Corp., LLC, which then distributed the shares to its three partners: Yong Chen, Zuxiang Huang and Zheng Yao.
On April 6, 2001, pursuant to a stock purchase agreement dated April 2, 2001, Halter Capital Corporation, a privately-owned Texas corporation, purchased 6,822,900 shares of the Company’s common stock from Zheng Yao, representing approximately 60% of the Company’s issued and outstanding shares of common stock. Simultaneously with this change in control transaction, Sophia Yao, the then sole officer and director of the Company, resigned and the following two persons were elected to replace her: Kevin B. Halter, Sr. as President and Director, and Kevin B. Halter, Jr. as Secretary-Treasurer and Director.
On June 19, 2002, pursuant to a stock purchase agreement dated June 6, 2002, Powerlink International Finance, Inc., a British Virgin Islands corporation (“Powerlink”), purchased 2,830,926 shares of the Company’s common stock from Halter Capital Corporation, representing approximately 57% of the Company’s issued and outstanding shares of common stock.
Simultaneously with the purchase, the current officers and directors of the Company resigned and the following three persons were elected to replace them: Chin-Chung Hsu, President, Treasurer and Director; Wen-Hao Hsu, Secretary and Director; and Chien-Hwa Liu, Director.
On August 22, 2002, the Company changed its name from King Ball International Technology Corporation to Kid Castle Educational Corporation, and on October 1, 2002, it acquired all of the issued and outstanding stock of Higoal Developments Limited, a Cayman Islands company (“Higoal”) pursuant to an Exchange Agreement dated as of October 1, 2002, by and among Higoal, the shareholders of Higoal, Kuo-An Wang and Kid Castle (the “Exchange Agreement”). Higoal based in Taipei, Taiwan, is the parent company of Kid Castle Internet Technologies Limited and Kid Castle Educational Software Development Company Limited.
Pursuant to the Exchange Agreement, Higoal became a wholly-owned subsidiary of the Company, and in exchange for the Higoal shares, the Company issued 11,880,000 shares of its common stock to the shareholders of Higoal, in exchange for 100% of the issued and fully paid-up capital of Higoal. In connection with the exchange and change in control, the current officers and directors of the Company resigned and the following five persons were appointed officers and directors of the Company: Kuo-An Wang, Director, President and Chief Executive Officer; Yu-En Chiu, Director, Chief Financial Officer and Secretary; Suang-Yi Pai, Director; Chin-Chen Huang, Director; and Yu-Fang Lin, Director.
As a result of the share exchange, the former stockholders of Higoal hold a majority of the Company’s outstanding capital stock. Generally accepted accounting principles require in certain circumstances that a company whose stockholders retain the majority voting interest in the combined business to be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” whereby Higoal is deemed to have purchased the Company. However, the Company remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes. The Company, Higoal and its subsidiaries collectively are referred to as “the Group.” The operations of the Group are principally located in Taiwan and are being expanded in the People’s Republic of China (“PRC”).
The historical consolidated financial statements prior to October 1, 2002 are those of Higoal. All shares and per share data prior to the acquisition have been restated to reflect the stock issuance as a recapitalization of Higoal.
General Business Description
Kid Castle Educational Corporation (together with its operating subsidiaries, “Kid Castle”) is a provider of English language instruction and educational services to children for whom Chinese is their primary language. Kid Castle’s operations are focused in Taiwan and China. Based on our experience providing English language instruction and educational services to our core ages 2-12 market, we believe we are among the leading providers in Taiwan and China of such services and products to 2-12 year-old students for whom Chinese is their primary language. In 2003, Kid Castle through its franchise and cooperative school operations, provided approximately 323,000 students at over 2,800 locations with English language instruction and other educational services.
Kid Castle commenced operations in 1986 as an English language school and since that time has expanded its franchise operations to provide bilingual kindergarten instruction, computer training and tutorial services. In September 1999, we began offering a variety of multimedia, educational videos, textbooks, workbooks and educational software authored by us as fully functional stand-alone products or as supplements to our classroom-based and Internet-based instruction. In July 2000, we launched our fully developed Internet-based education program that provides an interactive environment in which Kindergarten through 12 th grade (“K-12”) students develop English language and computer skills.
English is the language of international business and Kid Castle believes that a working knowledge of English has become increasingly important to long-term success throughout the world. Because English is becoming more prevalent around the world, we believe there is growing demand for bilingual instruction in Chinese and English throughout a child’s educational process. As more parents and students seek such bilingual language instruction for educational purposes, we believe that the English language instruction market will experience significant growth. Kid Castle uses a combination of live, personalized instruction, small group classes and interactive computer-based instruction.
We believe the Company’s teaching materials are some of the most widely used educational tools in Taiwan and China. Our operations include over 2,800 franchises and cooperative schools (public schools in alliance with Kid Castle) serving more than 323,000 students.
Kid Castle Company Chart
We have three main operations – Franchise, Publishing and Internet/Computer Education. Our operations are unique in that the franchise, publishing and internet/computer education operations can function independently and yet also support and assist each other.
Franchisees
Our classroom-based courses and tutoring services are provided through company-operated locations, cooperating schools and our independent franchisees. Our franchisees provide Kid Castle courses and tutoring services under the Kid Castle brand name within a specified territory in accordance with franchise agreements with us. The revenues from our franchisees are comprised of annual licensing fees for using the Kid Castle brand name and consulting services, and the purchase of Kid Castle teaching/learning materials. Our franchisees are under exclusive agreements to purchase our course and marketing materials, which they use in conducting and promoting their classes.
Franchisees must obtain our approval of the location and design of a Kid Castle school and must operate the franchise school in accordance with our methods, standards and specifications. The franchisee is required to purchase from us all of its instructional materials as well as student explanatory and promotional brochures developed by us. We specify requirements for other items necessary for operation of a franchise school, such as computers, instructional materials and furniture.
We actively manage our franchise system. We require franchisees and their employees to attend initial training seminars in franchise school operations and Kid Castle educational programs. We also offer franchisees continuing training seminars each year. Franchisee training seminars are designed for each type of school and include:
| • | Pre-School English Teaching Seminar; | |
| • | Children English Teaching Seminar; | |
| • | Care-Taking English Teaching Seminar; and | |
| • | English Kindergarten Teaching Seminar. |
The initial training seminar is designed to familiarize teachers with the three Kid Castle teaching methods – Audio-Lingual, Total Physical Response and Communicative Language Teaching – and materials, as well as incorporate our three teaching methods into the daily teaching plan.
We employ division directors who act as “consultants” to provide assistance to franchisees in technology implementation, business development, marketing, education and operations. These employees also facilitate regular communications between franchisees and Kid Castle.
We believe there is significant potential for additional franchised schools both in Taiwan and China. We are actively seeking to expand franchisees in these territories.
In addition to franchise schools, our operations also include Cooperating Schools, which are not affiliated with Kid Castle but contract with us to use our teaching/learning materials. Unlike the franchisees, the Cooperating Schools are not required to use solely Kid Castle materials and are not required to participate in Kid Castle training seminars.
The third type of school, Cooperating Care-taking schools, are similar to after-school and care-taking classes that serve children of preschool and elementary school age. These schools are not affiliated with Kid Castle but contract with us to use our materials, although on a much smaller scale than the Cooperating Schools.
Currently, there are approximately 300 Kid Castle franchisees, approximately 2,000 cooperating schools and approximately 500 cooperating after-school/caretaking schools. Kid Castle-operated locations include Kid Castle Kindergarten, Kid Castle Computer School and Kid Castle Remedial School.
2003 Student Population
Student Population of Kid Castle Franchise Schools: 42,000.
Student Population of Cooperating Kindergartens: 151,000.
Student Population of Cooperating After-school/Caretaking Schools: 130,000.
Publishing
We have accumulated years of experience in the education field to carefully develop what we believe to be superior and effective products, with content we believe to be complete in its diversification and innovation. Aside from our traditional, tried-and-true teaching materials, we have also incorporated computer technology into our teaching materials. We have developed internet, multimedia, audio publications, educational videos/VCD, and a complete series of products for the purpose of educating children. We are also developing interactive education programs to assist in development of the senses that engage the senses of hearing, sight and touch.
Internet/Computer
Our Internet program combines the English education, computer education, pre-schooling and multimedia into a complete specialized package. We combine these materials and Internet networking technology, together with animation, entertainment games and multimedia, to establish a specialized children’s education network program. This interactive network includes our Kid Castle Internet Education for Children and Kid Castle Internet English Schooling Program, which allow 2-12 year-old students to choose among a variety of learning methods, programs and program content. Currently, our internet products and services are exclusively available to franchisees and cooperating schools through an educational website at no additional charge. We plan to offer this service to the public as a fee based website.
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Franchise, Publishing, Internet, Assimilation Cycle
Market Overview
English is the language of international business and we believe that a working knowledge of English has become increasingly important to long-term success throughout the world. Because English is becoming more prevalent around the world, we believe there is growing demand for bilingual instruction in Chinese and English throughout a child’s educational process. As more parents and students seek such bilingual language instruction for educational purposes, we believe that the English language instruction market will experience significant growth.
Taiwan Market Overview
Our target market in Taiwan consists of all elementary and pre-school age children. According to a study by the Taiwan Department of Education in 2001, approximately 52.7% of elementary school students are receiving extra-curricular tutoring. In other words, one out of every two students is being
tutored in some form of class or institution outside of their regular schooling. There also has been an aggressive effort to provide English education programs with particular emphasis on fifth and sixth graders. We believe such programs can benefit all children from pre-school through elementary school age. We offer a series of programs and products that we believe are well-suited to meet the English instruction and education needs of these pre-school and elementary age children in the market segments briefly described below.
Analysis of Pre-School and Elementary School Market
Pre-school Educational Market. Conservatively speaking, among the 1.2 million two to six year old children in Taiwan, 60% of them (approximately 720,000 children) attend pre-schools, and approximately 70% of them (about 840,000 children) purchase pre-school English learning materials.
Elementary School English Language Materials . The Taiwan Department of Education has issued a directive that from the 2002 academic year onward, computer skills and English must be incorporated into the school curriculum for all students in third grade and above. As a result, we believe that nearly 1.93 million students will require English language materials for remedial purposes. Taiwan’s schools have little experience in the new curriculums, few materials and a lack of qualified teachers.
Elementary Remedial Education . We believe that children’s remedial education will move in the direction of diversification of products, increased dissemination of information, and complementing of the school curriculum with English and computer skills. We estimate that approximately 50% of the 1.93 million 7 to 12-year-old elementary students will participate in remedial courses.
Advantages and Disadvantages of Taiwan Market
We believe that the primary advantages of the Taiwanese market include:
| • | Every first to fourth grade class will have some form of English language education in its curriculum; and | |
| • | Under Taiwan’s National Development Plan, according to the Executive Yuan, the government plans to budget US$970,000,000 from 2002 to 2007 for training talent of English education and online education. |
The primary disadvantage of the Taiwanese market is that it is well-established and saturated with competitors.
China Market Overview
According to the 2003 market survey by the National Bureau of Statistics of China, the English Education Market is comprised of 25 million children for kindergarten education market and 122 million elementary students for the after-school tutoring market.
Yet, despite such a large market and business opportunity, it is still difficult to establish such business. Foreign companies have difficulties operating in China due to differences in cultural background and educational methods. We believe that we are an ideal candidate to operate in China because we started in Taiwan with similarities in culture, educational methods and expectations.
In the past ten years, China has seen an impressive economic growth rate. With this economic growth, consumers have greatly increased their expenditures. And with the government motto of “children are our treasure,” parents are heavily investing in their children’s education whether these
investments are putting their children into premium kindergartens, enrolling them into after-school tutoring institutions to improve their English language skills and/or providing computers and other educational technologies. A large portion of the parent’s investment is to place their children into a prominent school and an internationally recognized university so that they may become leaders of the society.
Currently, according to the Company’s survey, China’s children educational industry has six core markets worth a total of approximately 340 billion RMB per year: Preschool Educational, Children’s English Remedial Education, Children’s English Teaching Material, Private Primary School, International Primary School, and Children’s Internet-based Education.
Remedial English Education
The teaching materials and methods of PRC government-sponsored kindergartens are not able to satisfy the demanding needs of parents searching for high quality learning environment. At the same time, Chinese society has begun to demand that the kindergarten curriculum be taught in English and Chinese. At 25 million pre-schoolers, we believe the current size of China’s pre-school education market is still only at its nascent stages.
In 2002, China began to aggressively incorporate English into its elementary school curriculum. The mentality that “English language is a necessity to function in the modern world” is being embedded in the minds and hearts of every household in China and coincides with other events that we believe will transform Chinese elementary education:
| • | Because China is the host of the 2008 Olympics, its government is beginning to initiate radical changes in the education curriculum. | |
| • | As a result of its entrance into the World Trade Organization (WTO), China is moving to internationalize their education systems. Learning the English language is a logical process. | |
| • | Many college graduates leave China to continue their academic careers in foreign countries where fluency in the English language is a necessity. | |
| • | China’s economy has become a target of foreign industries as a developing environment. The benefits of working in an international company entice parents to have their children acquire strong English skills so they may be able to enter the new international environment. | |
| • | China, in the long term, has planned to diversify their enterprise and government agencies to a more international orientation. Many people have sought to learn English in order to raise their value in the competitive job market. |
Privately Operated Elementary School Market
The Chinese government has recently been encouraging development of privately operated elementary schools. The Chinese government has also launched a China/Foreign education co-operative operation with the plan to raise the level of its own educational systems by using foreign know-how and resources. We believe this type of government policy will greatly expand the Private Elementary School Market and create impressive market potential.
Technology Advancements
China currently has 100 million cable subscribers according to the Ministry of Information Industry of the PRC. This set-up has allowed the government to connect the people with up-to-date information. The government has already begun a cable/optics and networking system that would expedite the exchange of information more quickly and more reliably. With such technology and the increasing value of Internet-based education, we believe the Children’s Internet-based Education Market will have the technology and the demand to experience significant growth.
China’s Daily Spending Ability
The following table is the economic growth rate from 1998 to 2003 for the selected countries. From the table, it is apparent that China is the major growth center with the yearly growth percentage nearing double digits. We believe this economic growth can and will translate to an increase in consumer spending in the English language learning market.
Major Countries’ Economic Growth Percentage (1998-2003)
From 1998 to 2003, China has been consistently growing at an average of 7.88 percent while the US grew at an average rate of 3.03 percent and Hong Kong grew at 2.40 percent during the same period.
| Country |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
||||||||||||||||||
Mainland China |
7.8 | 7.1 | 8.0 | 7.3 | 8.0 | 9.1 | ||||||||||||||||||
U.S.A. |
4.2 | 4.5 | 3.7 | 0.5 | 2.2 | 3.1 | ||||||||||||||||||
Japan |
-1.1 | 0.1 | 2.8 | 0.4 | -0.4 | 2.7 | ||||||||||||||||||
Germany |
2.0 | 2.0 | 2.9 | 0.8 | 0.2 | -0.1 | ||||||||||||||||||
Hong Kong |
-5.0 | 3.4 | 10.0 | 0.5 | 2.3 | 3.2 | ||||||||||||||||||
Singapore |
-0.9 | 6.4 | 9.4 | -2.4 | 2.2 | 0.8 | ||||||||||||||||||
Korea |
-6.7 | 10.9 | 9.3 | 3.1 | 6.3 | 2.5 | ||||||||||||||||||
Malaysia |
-7.4 | 6.1 | 8.5 | 0.3 | 4.1 | 4.8 | ||||||||||||||||||
Thailand |
-10.5 | 4.5 | 4.8 | 2.1 | 5.4 | 6.4 | ||||||||||||||||||
Taiwan |
4.6 | 5.4 | 5.9 | -2.2 | 3.6 | 3.2 |
Entrance to China’s Market
Our Taiwanese subsidiary, Kid Castle Internet Technologies Limited (“KCIT”), is the base for Kid Castle’s global operations and will be the center of research and development for expansion of our operations into China. We are very enthusiastic about the potential of China’s children education market and we believe we have made the necessary preparation to penetrate the market.
Since November 2001, we have opened 60 company-operated kindergarten and franchise remedial schools in China.
Our two subsidiary, Kid Castle Educational Software Development Company Limited (“KCES”), entered into agreements in July 2003 to establish two joint ventures, Jiangxi 21 st Century Kid Castle Culture Media Co., Ltd. (“Culture Media”) and 21 st Century Kid Castle Language and Education Center (“Education Center”), with a local Chinese party, 21 st Century Publishing House, in Jiangxi Province. On January 19, 2004, Culture Media obtained its license to conduct business in the PRC. Education Center received its license to conduct business in the PRC on October 31, 2003.
Culture Media and Education Center will 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 believe they will accelerate the development of English language education and children education in China, and we intend to use them as one of our primary vehicles for our expansion into the PRC market.
Advantages and Disadvantages of China Market
We believe that the primary advantages of the Chinese market include:
| • | rapid national income increase as a result of China’s rapid economic growth, resulting in a greater amount of consumer spending; | |
| • | willingness of families to spend most of their income on their child’s education due to China’s “one-child” policy; | |
| • | the opening of children education and kindergartens to public and foreign investment; and | |
| • | the government’s need to cooperate with private companies for teaching methodology and teaching materials. |
The primary disadvantage is that, while opening up the process, the government still retains strict control on the children education and publishing business.
Competition
The English language instruction and educational services industry is highly fragmented, varying significantly among different geographic locations and types of consumers. Our ability to compete depends on our ability to improve existing or create new English language learning materials and courses to distinguish Kid Castle from its competitors. Other providers of English language instruction include individual tutors, small language schools operated by individuals and public institutions, and franchisees or branches of large language instruction companies, some of which operate internationally. The smaller operations typically offer large group instruction and self-teaching materials for home study, while some larger competitors concentrate on the higher-priced, business-oriented segment of the English language instruction market by offering programs of intensive and individualized instruction. As the demand for English language skills rises due to the evolution of the information-based global economy, competing English language instruction and materials providers are likely to try to strengthen their positions in the market by expanding their operations, pursuing strategic alliances and acquiring small competitors. This increasing competition may adversely affect our ability to grow our English language instruction business and may also adversely affect our profitability. Additional competitive pressures exist specifically in Taiwan due to the saturation of the market for English language instruction and materials providers in that country.
Competitors in Taiwan
| Company Name |
Current Competition |
|
Jia Yin
|
Jia Yin was established in 1981 and its operation focuses on English learning schools and kindergartens. Jia Yin is also engaged in the language education publishing business. Currently Jia Yin owns approximately 210 schools in Taiwan. | |
Gram English (“Gram”)
|
Gram was established in 1981. Gram focuses on English education to children and adults and is not present in the |
| Company Name |
Current Competition |
|
| kindergarten market. Currently Gram has 62 schools in Taiwan. | ||
Jordan’s Language School (“Jordan”)
|
Jordan was established in 1982 and currently has 111 schools in Taiwan. In addition to English education, its business also includes mathematics education and computer learning for children. 2001 Jordan entered the market in mainland China. | |
Giraffe Language School (“Giraffe”)
|
Giraffe was established in 1986. Giraffe currently has 403 English schools in Taiwan, which is more than other competitors in Taiwan. Giraffe’s operation includes English schools and kindergarten. | |
Ha Po Computer English School (“Ha
Po”)
|
Ha Po was established in 1996 and currently owns 175 schools in Taiwan. Its operation includes both computer and English education. | |
Sesame English Franchised Schools,
Taiwan (“Sesame”)
|
Sesame was established in 1987 in Taiwan. It is a franchise of an international English educational institution. Currently it has 163 schools in Taiwan. |
Competitors in China
| Company Name |
Current Competition |
|
Cambridge Youth School
|
Operation of children/teenager English learning and not present in the kindergarten market. Although charges a moderate tuition, they are unable to provide sophisticated teaching programs, reliance on examinations, insufficient experience in English conversation, established early therefore more known. | |
Education First
|
Began its development in Shanghai in 1997. Catered to adults and ages 7-14 but has no kindergarten schools. High entrance fee into franchise. Have not been established enough to be well known. High tuition costs. | |
G-TELP
|
Entered the China market in 1993. Direct sale of books as core operation. Respectable in its industry. Has just recently been expanding towards the English education school market. | |
Shane Education
|
Entered the Shanghai market in 2000. Caters more to adult education and leans towards England-styled English. Higher tuition. Operation limited to Shanghai region. | |
Jia Yin
|
Entered into China market in recent years. Teaching materials as their core operation. Has already expanded two operations of franchise schools in Cheng Duo. |
Sales and Marketing
The majority of the parents of our students choose our education programs and materials based on the recommendations of other parents and teachers. We also build awareness of our brand and promote our products through our franchisees and relationships with the cooperating schools. We maintain an internal sales force and engage in some international, national and local advertising.
We engage in a broad range of activities to inform potential students and franchisees about our teaching/learning model and the programs offered. These activities include print and broadcast advertising and direct sale at targeted demographics. A substantial portion of new students and franchisees are referred by parents of students, and current franchisees and current users of our published materials.
Advertising is centrally monitored and is directed primarily at local markets in which a kindergarten is located. We approve and monitor all advertising. In addition, all responses are analyzed to provide data for future marketing efforts.
We market our programs and products primarily through advertising and direct mail. Marketing activity is primarily directed at parents of potential students. All marketing activity is tracked to measure effectiveness and to provide information for future activities.
Individual franchisees have their own marketing methodologies for students, yet we monitor and provide general marketing strategies to help these franchisees. Policies and standards and procedures for new franchisees and cooperating schools are established centrally, but are implemented at the local level through an employee in the marketing department.
Cooperating Schools also create more exposure for Kid Castle. By having these schools use our teaching/learning materials, parents and children will be more exposed to the Kid Castle brand name as well as the after school education that we provide through our care-taking schools.
Strategy
Our on-going goal is to provide children’s education through innovative learning materials by focusing heavily upon research and development to produce innovative materials for children’s learning improvement. We aim our business towards providing learning materials for ages 2-12 and Kid Castle franchises. Our important research and development efforts are advanced by several different departments, including our Information department, Design department and Pre-school Academic Affairs department. Overall, we spent $680,511 and $589,801 to develop publishing products, books and software for the years ended December 31, 2003 and 2002, respectively.
We are committed to providing excellent and diverse teachers by continually seeking qualified teachers with exceptional attributes. We have established a website for potential foreign teachers wishing to teach English in Taiwan or China. This site includes comprehensive instructions and information for foreigners to teach in China or Taiwan and offer contact information to these potential teachers.
We have substantially increased, and expect to further increase our sales and marketing efforts in order to market more aggressively our franchises in China and thereby increase distribution of our English learning materials. Recognizing the importance of brand names in parents’ decision as to their children’s education, we will continue to use our franchise, publishing and internet operations, as well as various advertising channels, trade shows, and conventions to improve and publicize the Kid Castle brand name.
Government Regulation
Taiwan
The Ministry of Education requires that teaching/learning materials to be published must first be submitted to the Bureaus of Education (“BOE”) for review. The BOE regulates study regulation, social education, compulsory education, and physical and health education on a county and city level. The material submission process is as follows: Following the submission of materials, the BOE will review the materials and submit a decision within 90 days. If the BOE approves the materials, the applicant must send three copies of the final version to the BOE. The BOE performs a final review and makes a final decision within 60 days. If the BOE does not approve the initial submission, the applicant has 45 days to resubmit the materials with any corrections that the BOE deems necessary. The BOE reviews the resubmitted materials and makes its decision within 45 days. If the materials are not approved, or the corrections are not satisfactory to the BOE, the applicant has 30 days to make additional corrections and submit the corrected materials to the BOE. The BOE will then return its decision within 30 days. If the BOE does not approve the corrections on the third re-submission, the applicant will have to start the approval process over.
The Foreigner Employment for Foreign Language Remedial Education Regulation issued by the Taiwan Province Taipei Ministry of Education on September 22, 1994 and updated on June 3, 1999, requires all foreign remedial education instructor applicants to be above twenty years of age, have a diploma from a professional school or college and have certification in a language teaching related program. The foreign applicant must also provide a health and drug examination certification and is required to submit the above certifications, diplomas and documents translated into Chinese.
China
According to China-Foreign School Cooperation Regulation effective January 1995, foreign companies cannot operate educational franchises through wholly owned entities, but must do so in cooperation with local Chinese investors. The Regulation also limits the number of seats for foreign investors on the board of directors or any controlling board or committee to no more than half. The director of the school as well as the chairman of the board must be of Chinese citizenship and must have authority over the school.
Teaching/learning materials must be submitted to the Provincial Municipal Education Administration for approval.
The Ministry of Education has general guidelines for every province and major city, but each province and some major cities, such as Shanghai and Beijing, have their own education administration body and their own regulations and requirements.
The China Ministry of Education (“MOE”), under the Kindergarten Operation and Management Regulation, stipulates the following:
| • | the location of the kindergarten must be in accordance to the safety standards determined by the MOE; | |
| • | schoolmasters, principals, and teachers each must have a diploma from a teachers’ college and backgrounds in children’s education or higher; | |
| • | school staff must have a junior high education/diploma equivalent or higher; and | |
| • | nurse and similar positions must have a high school education/diploma or higher. |
The following violations will result in penalties including reorganization/correction (with deadline), suspension of student enrollment, and/or suspension of operation: non-licensed operation, location and environment unsatisfactory to government standards; distributing material that are inappropriate for children or materials that violate the Educational Standards set by the MOE. More severe violations such as illegal controlled substance usage, possession of dangerous instruments, corporal punishment, and/or embezzlement of school funds or property will result in punishment and sanctions in accordance with the degree of violation.
Intellectual Property and Property Rights
Our copyrights, trademarks, service marks, trade secrets, proprietary technology and other intellectual property rights distinguish our products and services from those of our competitors, and contribute to our competitive advantage in our target markets. To protect our brand, products and services and the systems that deliver those products and services to our customers we rely on a combination of copyright, trademark and trade secret laws as well as confidentiality agreements and licensing arrangements with our employees, customers, independent contractors, sponsors and others.
We strategically pursue the registration of our intellectual property rights. However, effective patent, trademark, service mark, copyright and trade secret protection may not always be available. Existing laws do not provide complete protection, and monitoring the unauthorized use of our intellectual property requires significant resources. We cannot be sure that our efforts to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate these rights. In addition, there can be no assurance that competitors will not independently develop similar intellectual property. If others are able to copy and use our products and delivery systems, we may not be able to maintain our competitive position. If litigation is necessary to enforce our intellectual property rights or determine the scope of the proprietary rights of others, we may have to incur substantial costs or divert other resources, which could harm our business.
In addition, competitors and others may claim that we have infringed their intellectual property rights. Defending any such lawsuit, whether with or without merit, could be time-consuming, result in costly litigation or prevent us from offering our products and services, which could harm our business. If a lawsuit against us is successful, we may lose the rights to use our products or be required to modify them, or we may have to pay financial damages.
In order to develop, improve, market and deliver new products and services, we may be required to obtain licenses from others. There can be no assurance that we will be able to obtain licenses on commercially reasonable terms or at all or that rights granted under any licenses will be valid and enforceable.
Employees
As of December 31, 2003, we had 260 full-time employees and 34 part-time employees.
The chart below sets forth the names, positions, and education of some of our executive officers and other key employees.
| Name |
Position |
Educational Background |
||
Kuo An Wang
|
CEO and President | Da-Yeh University (Graduate). Co-Founder of Kid Castle Educational Corporation. Managing Director of Taipei Publishing Association. |
| Name |
Position |
Educational Background |
||
Yu En Chiu
|
CFO and Vice President | Da-Yeh University (Graduate). Co-Founder of Kid Castle Educational Corporation. R.O.C. International English Education Managing Director. | ||
Eu Ze Fung
|
Senior Vice President of Academics | University of Washington, Seattle. Industrial Management Major. A founder of Kid Castle Educational Corporation. 15 years of experience in Children/Pre-schooler. | ||
| English Education Senior Editor. | ||||
| Zue Li Business School. | ||||
Tzing Zhen Huang
|
Senior Vice President | Kid Castle Educational Corporation International Franchise Division Chief Managing Director. 13 years of experience in kindergarten franchise promotion and management. | ||
Jion Ming Su
|
Executive Vice President |
Master’s Degree from National Taipei University of Technology.
15 years experience in managing children’s English After School.
Kid Castle Educational Corporation Publishing Distribution Systems Chief Coordinator. 10 years experience in publishing/distribution |
||
Ming Ji Tzao
|
Vice President | 5 years experience in education franchise marketing. 4 years in publishing distribution and children’s education franchise. | ||
Malcolm Higgins
|
Vice President of Overseas Operations | More than 5 years experience in compiling writing teaching materials. | ||
Jacob P.E. Roth
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Editor of English Teaching Material | Brown University 4 years in English Education. More than 4 years of experience in writing/editing children’s English teaching materials. | ||
Chris Jackson
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Editor of English Teaching Materials | Humboldt State University, Journalism Major. More than 3 years experience as a journalist and editor. | ||
Bi Qing Hong
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English Education | Wenzhou Teaching University. | ||
| Director | 7 years experience in Children’s Education. | |||
| 5 years experience in editing children’s teaching materials. |
RISK FACTORS
In addition to the other information contained in this annual report, including the reports we incorporate by reference, you should consider the following factors that may affect our future results and financial condition 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 be unable to enforce judgments under the Securities Act.
Our operating subsidiaries are a Taiwanese company and a People’s Republic of China company and 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 court judgments obtained against such persons in the United States courts and predicated upon the civil liability provisions of the Securities Act.
Because we face competition from established competitors, we may be unable to maintain market share.
Our primary competitors have significant financial, technical and marketing resources, and/or name recognition, including Giraffe, G-Telp and Jia Yin. Some of these competitors have a longer operating history and greater overall resources than we do. These companies also have established customer support and professional services organizations. As a result, our competitors may be able to adapt more quickly to changes in customer needs, offer products and services at lower prices than us, devote greater resources than us to development and sale of teaching/learning products and services, which could result in reducing our market share.
If we lose key management or other personnel, we may experience delays in our product development and other negative effects on our business.
Our success is dependent upon the personal efforts and abilities of our executive officers, Kuo-An Wang, Chief Executive Officer and Yu-En Chui, 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 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 New Taiwan 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 become profitable.
Although the market for English language instruction and education is growing rapidly, we cannot be certain that this growth will continue in its present form, or at all. We believe our success ultimately will depend upon, among other things, our ability to:
| • | increase awareness of our brand and the availability of our products and services; | |
| • | continue to attract and develop relationships with educational institutions and regulatory authorities in our targeted geographic markets; and | |
| • | continue to attract and retain customers. |
If we are unable to maintain, improve and develop our products and services, we may not achieve profitability.
We have incurred operating losses since inception and hence, as of December 31, 2003, the balance of accumulated deficit was $6,057,482. In order to turn profitable, we need to maintain and improve our current products and services and to develop or license new ones on a timely basis. If we cannot effectively maintain, improve and develop products and services we may not be able to recover our fixed costs or otherwise turn profitable. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes, evolving education industry standards or customer needs and trends on a timely basis. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products, services and service enhancements. These new products, services and service enhancements may not achieve market acceptance or our competitors may develop alternative technologies and methods that gain broader market acceptance than our products and services.
Because we may not be able to protect our proprietary rights on a global basis, we may incur substantial costs to defend or protect our business and intellectual property.
We strategically pursue the registration of our intellectual property rights. However, effective patent, trademark, service mark, copyright and trade secret protection may not always be available and the steps we have taken may be inadequate to protect our intellectual property. In addition, there can be no assurance that competitors will not independently develop similar intellectual property. If others are able to copy and use our products and delivery systems, we may not be able to maintain our competitive position. If we fail to protect our intellectual property, we may be exposed to expensive litigation or risk jeopardizing our competitive position. 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 or we may lose rights to use our products to modify them.
Because we intend to expand internationally, we will be subject to risks of conducting business in foreign countries.
As we expand our operations outside of Taiwan, we will be subject to the risks of conducting business in foreign countries, including:
| • | our inability to adapt our products and services to local cultural traits, customs and mobile user preferences; | |
| • | our inability to locate qualified local employees, partners and suppliers; | |
| • | difficulties managing foreign operations; | |
| • | the potential burdens of complying with a variety of foreign laws; | |
| • | trade standards and regulatory requirements; | |
| • | geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships; | |
| • | legal uncertainties or unanticipated changes regarding regulatory requirements, liability, export and import restrictions, tariffs and other trade barriers; | |
| • | uncertainties of laws and enforcement relating to the protection of intellectual property; | |
| • | political, economic and social conditions in the foreign countries where we conduct operations; | |
| • | currency risks and exchange controls; | |
| • | potential inflation in the applicable foreign economies; and | |
| • | foreign taxation of earnings and payments received by us from our franchisees and affiliates. |
We cannot be certain that the risks associated with our anticipated foreign operations will not negatively affect our operating results or prospects, particularly as these operations expand in scope, scale and significance.
Our operations in the PRC are subject to political, regulatory and economic uncertainties.
Our operations and assets in the PRC are subject to significant political, regulatory and economic uncertainties. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on 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 joint ventures, Culture Media and Education Center, with a local Chinese party, 21 st Century Publishing House, in
Jiangxi Province. Culture Media and Education Center are established 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 them as one of our primary vehicles for our expansion into 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 United States, the PRC has a civil law system based on written statutes in which judicial decisions have little precedential value. The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the PRC government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.
“Penny Stock” regulations may impose certain restrictions on marketability of our common stock.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock may fall within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell our common stock in the secondary market.
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 an outbreak of SARS, a highly contagious form of atypical pneumonia. 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 individual
tutors or forego supplemental English learning altogether. Although the World Health Organization removed all of the above regions from its list of areas affected by SARS by the summer of 2003 and there have been only a relatively small number of confirmed cases of SARS since that time, we cannot rule out the possibility of a future outbreak or predict the effect any such future outbreak could have on the Company.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
