ITEM
1 BUSINESS
Overview
We
are a
leading provider in the People’s Republic of China (“ PRC ” or “ China ”) and
Republic of China (“ROC” or “Taiwan”) of English-language instruction and
educational services to children for whom Chinese is the primary language.
Our
focus is on children between two and twelve years old. In 2006, we taught or
provided educational materials for approximately 1,000,000 students at over
5,350 locations through our franchise and cooperative school
operations.
We
commenced operations in 1986 as an English-language school, and since then
we
have expanded our franchise operations to provide bilingual kindergarten
instruction, computer training, and tutorial services. In September 1999, we
began offering a variety of multimedia, including educational videos, textbooks,
workbooks, and educational software, authored by us as fully functional,
stand-alone products or as supplements to our classroom-based and Internet-based
instruction.
English
is the language of international business, and we believe 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
that 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 instruction for educational purposes, the English-language-instruction
market will experience significant growth.
As
part
of our efforts to provide superior English-language instruction, we have worked
with numerous universities to introduce foreign teachers into Taiwan from
countries such as the United States, Canada, and England. We provide
comprehensive training regimens and supportive plans for all of our
teachers.
A
significant part of our strategy is to design and market our innovative
educational materials. These include English publications for students three
to
eight years old, supplemental English materials for students seven to eight
years old, and children’s English materials for students seven to twelve years
old. We have won awards relating to our products and services from major cities
and educational bureaus including Taipei City, Taipei County, Taoyuan County,
Taichung County, and Kaohsiung County.
Our
Philosophy of Education
Teaching
young children English is not simply language instruction; we must also consider
the learning group’s social and language development. Kid Castle aims at
cultivating a mature child, not just teaching a skill. We understand that
language learning has close connections with all learning for young
children.
Therefore,
we have designed our teaching system following these significant
principles:
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We
start with the respective skills and abilities that children already
have
because the teaching system must consider
adaptability.
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We
encourage interaction because the ultimate goal of learning a language
is
to communicate with others.
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We
assist students’ comprehension with the language in various ways through
conversation coordination — e.g., interactive games, activities,
etc.
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We
encourage children to participate fully in the learning process through
role-playing games.
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We
foster our students’ abilities to learn independently; our teaching
focuses on guiding and inspiring a child’s self-learning
abilities.
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We
create a relaxed, happy, and supportive learning environment so as
to
encourage children’s learning.
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We
use consistent testing and learning methods for
children.
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Our
teaching materials and curriculum are specifically designed to suit different
age-groups of children. Likewise, our teachers are specifically trained to
work
with children of different age groups. Listening, speaking, writing, and
spelling skills form the basis of our primary curriculum.
Our
Programs
Kid
Castle
After-School
Education Program — Fostering Children’s Multiple
Talents
Our
After-School Education Program is becoming one of the most recognized and
respected institutions of its kind in Taiwan. This program features
professionally designed, in-depth research into curriculum and child development
implemented by caring teachers. The guiding principle behind the program is
to
open up students’ minds to a more international worldview with a focus on
information and technology.
The
teaching materials of the After-School Education Program help our students
learn
basic conversational English through various themes and units. Beginning with
the ABCs, by the time most students complete our program, they can speak and
understand basic English. They have a foundation upon which they can build
as
they continue their studies. Fun activities that focus on speaking and listening
are an integral part of each class.
Kid
Castle recognizes that today’s children are the adults of tomorrow. To better
prepare our students for the future, the program also includes a series of
moral
stories for students that teach them basic life skills and how to be better
members of society.
Kid
Castle Preschool — Establishing English Learning
Networks
Preparing
our students to be leaders has always been one of our missions. We teach our
children a number of different subjects in order to expose them to the wonders
of the world and to what their future holds. Established island-wide in Taiwan,
the successful Kid Castle Pre-Schools are where children three to six years
old
can get their start.
We
have
incorporated into our preschool curriculum an interactive teaching method that
helps children learn English more effectively. We believe that our interactive
multi-media and computer materials, including CD ROMs, make learning more
appealing and interesting to children. We recognize that going to preschool
is
the first step many young children will take in their education and that each
student’s needs are unique. To aid our students in learning, Kid Castle
incorporates a number of teaching features into the preschool curriculum, such
as colorful pictorial displays in our text books, posters, and educational
VCD
and DVD, and audio sound effects in our audio tapes and CDs.
To
aid
our students in socialization, Kid Castle fosters interaction among all of
the
children in the class. We help them begin to establish interpersonal relations,
gain self-confidence, and learn how to express themselves through English,
Total
Physical Response, arts and crafts, and other means.
Finally,
Kid Castle places much emphasis on the interaction and relationship between
children, parents, teachers, and administrators at the preschools. Regular
academic and development reports and meetings between the various parties help
keep parents informed of their children’s progress and assist the parents when
supervising studies of their children after school.
Kid
Castle Publishing — Bringing English to Your Children
Our
specially designed educational materials are an essential part of our business.
Kid Castle publishes a wide range of successful teaching and learning materials
for children, including Chinese textbooks for kindergartens, English textbooks,
workbooks, English magazines, and accompanying guides, music CDs, tapes, VCD
and
DVD, and other supplemental materials for kindergarten and elementary levels.
Our market includes individuals, organizations, elementary schools, and
third-party language schools. In addition to publications, Kid Castle provides
relevant complimentary resources (including provision of note books and
stationery) and services (including serving after-school snacks) to its
customers.
Competitive
Strengths
We
are
one of the leading English-language tutoring centers in Taiwan. We are in the
process of establishing our market position in China, with far-reaching
connections across both regions. We believe that our competitive strengths
distinguish us from our competitors. Those strengths include:
Marketing
advantages
Kid
Castle has:
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over
5,350 schools using our materials.
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Superior
Quality
We
believe that we have created a successful corporate brand name. We have over
21
years of management experience in the education industry, and we have received
recognition for our teaching materials from five local school districts in
the
ROC. We also have engaged highly-qualified English teachers from some of the
finest learning institutions in the United States and England, including the
University of California Los Angeles, Brown University, Cornell University,
Cambridge University, the University of London, and Warwick
University.
The
English-language Education Market
Analysis
of Preschool and Elementary School Markets in Taiwan
Preschool
Educational Market
.
Among
the 1.3 million children in Taiwan between the ages of two to six, we estimate
that 45% (approximately 585,000 children) attend preschools and that
approximately 70 % (about 910,000 children) purchase English-learning materials
(population data provided by the Taiwanese Ministry of the Interior -
http://www.moi.gov.tw/stat/index.asp
).
Elementary
School English-language Materials
.
The
Department of Education of ROC 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, over the next decade, nearly 1.8 million students (the number
of
students in ROC public schools) will require English-language materials as
study
aids. Taiwanese schools have little experience in the new curriculum, proper
teaching materials are inadequate, and qualified teaching personnel are in
short
supply.
After-School
Education
.
We
believe that children’s after-school education will move in the direction of
diversification of products, increased dissemination of information, and
additional education that complements the school curriculum with English and
computer skills. We estimate that approximately 60% of Taiwan’s 1.8 million
elementary students aged seven to twelve will participate in after-school
courses over the next decade.
China
Market Overview
According
to the 2006 market survey by the National Bureau of Statistics of China (“NBSC”)
(available at
http://www.moe.edu.cn/edoas/website18/info20732.htm
)
the
English-education market in China is comprised of 226 million children for
the
preschool market and 107 million elementary students for the after-school
tutoring market.
Despite
such a large market potential and business opportunity, it remains difficult
to
establish private child-education businesses in China. Foreign companies have
difficulties operating in China due to differences in cultural background and
teaching methods. We believe that we are an ideal candidate to operate in China
because we operate successful education institutions in Taiwan, a country that
shares similarities with China in terms of culture, teaching methods, and
expectations for learning outcomes.
Over
the
past ten years, China has seen impressive economic growth. With this economic
growth, consumers have greatly increased their expenditures. And with the
government motto, “Children are our treasure,” parents are generously investing
in their children’s education, including enrolling their children into premium
kindergartens and after-school tutoring to improve English-language skills
and
computer literacy. Parents invest in their children’s education with the desire
and expectation that their children will be qualified to enroll in prominent
secondary schools and internationally recognized universities.
In
2002,
China began to aggressively incorporate English into its elementary school
curriculum. The teaching materials and methods of the state kindergartens are
not able to satisfy the demand of parents searching for a high-quality,
comprehensive learning environment. Chinese society has begun to demand that
kindergarten curriculum be taught in English and Chinese. At 226 million
preschoolers, we believe the current size of China’s preschool education market
is still only at its nascent stages.
The
belief 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. That belief
coincides with the following other factors that we believe will transform
Chinese elementary education:
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Hosting
the 2008 Olympics has triggered country-wide modernization, investments
in
infrastructure, and policy changes that encourage economic growth
in
China. In particular, the service industry has enjoyed significant
investment and modernization since the announcement of the 2008 Olympics.
Because of that industry’s demand for employees with English-language
skills, we believe that such modernization and growth will offer
broader
opportunities for private foreign business entities in general and
English-language education providers in
particular.
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China’s
preparations for the 2008 Olympics have encouraged broad scientific
and
cultural advancements. Such advancements further China’s emphasis on
education and on its children. We believe that this will translate
into an
increased demand for English-language instruction.
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Encouraging
multi-lingual abilities and improving the quality of education are
primary
concerns for the PRC government. Consequently, the English-language
instruction industry has seen a relaxation in government regulation
that
will allow KCEC to better realize its potential in
China.
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As
a result of joining the World Trade Organization, China is transforming
its education systems to match international standards, including
English-language instruction.
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Many
college graduates leave China to continue their academic careers
in
foreign countries where proficiency in the English language is a
necessity.
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Many
foreign companies are establishing operations in China. The benefits
of
working for a foreign international company encourage parents to
ensure
their children acquire strong English-language skills that will qualify
them for such employment.
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China
has a long-term plan to develop a more international orientation
for its
economy and its government. Such plan requires a larger pool of workers
with English-language skills. In 1996, the then Premier Mr. Zhu Rongi
stated that education is the key to promoting the PRC’s economy. This
fundamental principle evolved into specific policies implemented
by the
PRC in 2001 and 2003. These policies relaxed entry restrictions to
foreign
investment in the education industry and made it easier for foreign
education providers to operate in China. Article Three to the
PRC
Private Education Promotion Law
stated that private education organizations are a beneficial and
desirable
attribute to society and should be highly encouraged and supported.
The
Chinese government has recently encouraged development of privately
operated elementary schools and has launched a cooperative program
aimed
at improving Chinese educational systems using foreign knowledge
and
resources. We believe such government policy will greatly expand
the
private elementary school market and create enormous market
potential.
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On
February 1, 2005, the PRC Government implemented the “Special Commercial
Permit Management Regulation” (the “Management Rule”), which superseded
the “Special Commercial Permit Management Regulation.” The Management Rule
promotes predictability for private businesses in China’s mixed economy.
It provides clear guidelines as to market entry requirements, disclosure
mechanisms, and regulations that affect and regulate private businesses.
The adoption of the Management Rule exemplifies the PRC Government’s
determination to support foreign investment in private business;
it
increased transparency and set out clear guidelines that allow KCEC
to
better comply with regulations, which in turn led to better efficiency
and
operational performance. Because China needs foreign resources and
know-how in the English-language education market, it has utilized
its
relaxed regulatory scheme to target companies like
KCEC.
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Strategy
From
2003
to 2006, we substantially increased our sales and marketing efforts in order
to
more aggressively market our franchises in China. Such expansion resulted in
growth in the sales of our English-learning materials. While we expect to
continue expanding our market share in China, we intend to do so by more
efficiently utilizing our management and capital resources to more effectively
manage our cost of goods sold and other operating expenses. We will continue
to
devote our resources to increasing the number of our franchises and expanding
our publishing operations. On the other hand, we will cut nonessential
operations to reduce our operating costs and improve our
profitability.
We
will
plan our growth cautiously by carefully considering the choice of location
for
each of our franchise schools. We first consider whether a particular location
is saturated with our franchise schools or other schools and potential
development. In the process, we conduct market research, analysis, and surveys.
Then, once we have identified a region, we begin a marketing campaign that
includes attending school fairs and expositions, conducting seminars, and
employing news print, media, and other marketing methods. The increase in the
number of franchises may require us to hire more personnel, including managers
and personnel who provide staff and teacher training, in order to ensure that
each franchise has the proper oversight and that the quality of our franchised
operations is maintained.
Operations
Our
operations are divided between (1) delivery of classroom-based tutoring services
through our own franchises and cooperating schools, (2) distribution and sale
of
our published materials, and (3) delivery of education services through the
Internet
.
Kid
Castle has marketing advantages over its franchises and various schools as
it
actively controls the distribution channels of the franchises and various
schools’ teaching and learning curriculum.
Kid
Castle provide its franchises the followin g services:
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Management
guidelines specifically designed for individual regional districts
to
ensure that franchises are fully realizing their students’
potentials.
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Teaching
materials that can be applied in complete units and are not dependant
on
supplementary texts.
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Support
during the establishment of the
Franchise.
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Regularly
scheduled conferences and seminars for head teachers and supervisors
of
franchise schools that provide updated educational and promotional
strategies aimed at improving student enrollment and management of
the
franchises.
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Combined
promotional campaigns whereby the Company is responsible for planning
and
designing various print and broadcast
advertisements.
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Regularly
scheduled education training, administration and management seminars
for
franchise.
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The
following table sets forth, as at December 31, for the period indicated, the
principle categories of our consolidated operating revenue:
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2004
($)
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2005
($)
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2006
($)
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Sales
of goods
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6,822,420
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7,020,532
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6,774,260
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Franchise
income
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2,442,746
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2,289,655
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2,080,551
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Other
operating revenue
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463,947
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922,147
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856,772
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Total
operating revenue
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9,729,113
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10,232,334
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9,711,583
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Franchises
and Cooperating Schools
Our
classroom-based courses and tutoring services are provided through
company-operated locations, cooperating schools, and our independent franchises.
We believe there is significant potential for additional franchised schools
to
be established both in Taiwan and China, and we are actively seeking to expand
franchises in these territories. Our franchisees provide Kid Castle courses
and
tutoring services under the “Kid Castle” brand name within a specified territory
in accordance with a franchise agreement signed with us. The revenues from
our
franchises are comprised of annual licensing fees for using the Kid Castle
brand
name, consulting service fees, and purchase fees for purchase of Kid Castle
teaching and learning materials. Our franchisees typically enter into exclusive
agreements to purchase our course and marketing materials, which they use in
conducting and promoting their classes.
Franchisees
must obtain our approval for the location and design of a Kid Castle school
and
must operate the franchised school in accordance with certain methods,
standards, and specifications developed by us. The franchisee is usually
required to purchase from us all of its teaching materials, as well as student
explanatory and promotional brochures. Franchisees also have to purchase from
us, or through a channel that we provide, other items necessary for the
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 our franchisees and their employees
training seminars each year. Franchise training seminars are designed for each
type of school and may include:
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Preschool
English Teaching Seminar;
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Children’s
English Teaching Seminar;
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Caretaking
English Teaching Seminar; and
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English
Kindergarten Teaching Seminar.
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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); to introduce our materials; and to help
teachers incorporate our three teaching methods into the daily teaching plan.
We
employ division directors who act as consultants to assist franchises in
technology implementation, business development, marketing, education, and
operations. These employees also facilitate regular communications between
franchisees and Kid Castle.
Unlike
franchise schools, our cooperating schools are not affiliated with our company,
but have entered into contracts with us to use our teaching and learning
materials. Unlike the franchises, the cooperating schools are not required
to
exclusively use our materials or participate in our training
seminars.
Cooperating
caretaking schools are our third type of school. These schools serve preschool
and elementary school children in both caretaker and educator roles. These
schools are not affiliated with our company, but enter into contracts with
us to
use our teaching and learning materials.
Currently,
there are approximately 220 and 130 Kid Castle franchises in Taiwan and in
China, respectively, and approximately 5,000 cooperating schools in the two
countries. The cooperating schools include Kid Castle Kindergarten, Kid Castle
Computer School, and Kid Castle Remedial School. The following table shows
the
number of our franchises and cooperating schools, and cooperating caretaking
schools included as of the dates indicated:
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December
31,
2005
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December
31,
2006
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Franchises
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350
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350
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Cooperating
schools*
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4,500
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5,000
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*
includes caretaking schools
Publishing
Our
extensive experience in the education industry has enabled us to carefully
develop what we believe to be superior teaching products that incorporate
diverse and innovative content. Our educational products feature a wide range
of
technology, including multimedia and audio publications and the Internet. In
addition, we are developing interactive educational programs that utilize a
child’s senses of hearing, sight, and touch.
Published
materials make up approximately 70% of our revenue. The three main channels
that
purchase our published teaching materials are franchise schools, kindergartens,
and elementary schools. Our franchise schools are obligated to exclusively
use
Kid Castle teaching and learning materials. Based on data from the NBSC, as
of
December 31, 2006 there were approximately 124,400 kindergartens and 366,200
public and private elementary schools in China, all of which are our potential
customers.
Teaching
Features and Curriculum
Our
children’s English curriculum is summarized as follows:
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Category
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Class
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Student
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Levels
in Total
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Period
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Preschool
Learning
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Preschool
children
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Ages
3-6
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Six
levels
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Six
months
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Language
Learning
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Young
children
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Ages
7-9
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Fourteen
levels
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Six
months
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Language
Learning
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Older
children
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Ages
10-12
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Fourteen
levels
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Three
months
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Kid
Castle’s Young Children Teaching Materials incorporate the following
features:
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full
conformity with natural language-development patterns for listening,
speaking, reading, and writing;
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design
and development based on the unique factors of individual students,
such
as age, learning habits, and cognitive
ability;
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contemporary
topics that capture and reflect students’ interests and
needs;
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practical
scenarios purposely designed to cater to daily life so as to increase
the
relevance of language usage;
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emphasis
on oral communication;
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games
and activities that give students an opportunity to practice language
skills and increase interest in learning
English;
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categorization
of curriculum from easy to difficult with subjects that correspond
to the
subsequent levels; and
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diverse
subjects and content.
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Sales
and Marketing
The
majority of our students’ parents 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 franchises and
relationships with the cooperating schools. Kid Castle also maintains an
internal sales force and engages in national and local advertising through
print
and broadcast media and through direct sales to targeted demographics.
Advertising is centrally monitored and is directed primarily at local markets
in
which a kindergarten is located. All marketing activity is tracked to measure
effectiveness and to provide information for future activities. All responses
to
advertising are analyzed to provide data and references for future marketing
efforts.
Individual
franchises have their own marketing methodologies for students. However, we
monitor and provide general marketing strategies to facilitate the franchises’
promotional campaigns. Policies, standards, and procedures for new franchises
and cooperating schools are established centrally, but are implemented at the
local level through an employee in the marketing department. Cooperating schools
also increase our company exposure. As these schools use our teaching and
learning materials, we believe parents and children will grow more familiar
with
the “Kid Castle” brand name and the after-school education we provide through
our caretaking schools.
Competition
The
English-language teaching and educational services industry in Asia 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
our
company from our competitors. Other providers of English-language instruction
include individual tutors, small language schools operated by individuals,
public institutions, and franchises or branches of larger language teaching
companies, some of which operate internationally. The smaller operations
typically offer large-group teaching and self-teaching materials for home study,
while some larger competitors concentrate on the higher-priced,
business-oriented segment by offering intensive, individualized
programs.
The
following table sets forth our competitors in Taiwan:
COMPETITOR
ANALYSIS IN TAIWAN
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Company
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Year
Established
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Internet
Learning
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Number
of Schools
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In
House R&D
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Interest
Administration Platform
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Automatic
Speech Analysis System
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Magazine
Publication
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Training
Program for Teachers
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Kid
Castle
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1986
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x
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250
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x
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x
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x
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x
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Giraffe
Language School
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1986
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450
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x
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Joy
Enterprise Organization
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1981
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230
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x
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x
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x
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Jordan’s
Language School
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1982
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x
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182
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x
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Gram
English
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1981
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x
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56
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x
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x
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Sesame
English Franchised Schools
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1987
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50
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Ha
Po Computer English School
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1996
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|
|
x
|
|
|
150
|
|
|
|
|
|
|
|
|
x
|
|
|
|
|
|
|
|
|
Hess
Educational Organization
|
|
|
1983
|
|
|
|
|
|
40
|
|
|
x
|
|
|
x
|
|
|
|
|
|
|
|
|
x
|
|
The
following table sets forth our competitors in China:
COMPETITOR
ANALYSIS IN CHINA
|
Company
|
|
Year
Established
|
|
Internet
Learning
|
|
Number
of Schools
|
|
In
House R&D
|
|
Interest
Administration Platform
|
|
Automatic
Speech Analysis System
|
|
Magazine
Publication
|
|
Training
Program for Teachers
|
|
|
Kid
Castle
|
|
|
2001
|
|
|
x
|
|
|
137
|
|
|
x
|
|
|
x
|
|
|
x
|
|
|
x
|
|
|
x
|
|
|
English
First
|
|
|
1993
|
|
|
x
|
|
|
80
|
|
|
x
|
|
|
x
|
|
|
|
|
|
|
|
|
x
|
|
|
New
Oriental
|
|
|
1993
|
|
|
x
|
|
|
100
|
|
|
x
|
|
|
x
|
|
|
|
|
|
x
|
|
|
x
|
|
|
DD
Dragon
|
|
|
1997
|
|
|
|
|
|
20
|
|
|
x
|
|
|
|
|
|
|
|
|
|
|
|
x
|
|
|
Onlyedu
|
|
|
2004
|
|
|
x
|
|
|
403
|
|
|
x
|
|
|
|
|
|
|
|
|
|
|
|
x
|
|
|
BRIEF
SUMMARY OF COMPETITORS IN
TAIWAN
|
|
Company
Name
|
|
Description
|
|
Joy
Enterprise Organization (“JEO”)
|
|
JEO
was established in 1981. Its operation focuses on English learning
schools
and kindergartens. JEO is also engaged in the language education
publishing business. Currently JEO owns approximately 230 schools
in
Taiwan.
|
|
|
|
|
|
Gram
English (“Gram”)
|
|
Gram
was established in 1981. Gram focuses on English education for elementary
and high school children and for adults and is not present in the
kindergarten market. Currently, Gram has 56 schools in
Taiwan.
|
|
|
|
|
|
Jordan’s
Language School (“Jordan”)
|
|
Jordan
was established in 1982 and currently has 182 schools in Taiwan.
In
addition to English education, it is also engaged in teaching mathematics
and computer skills to children. In 2001, Jordan entered the market
in
mainland China.
|
|
|
|
|
|
Giraffe
Language School (“Giraffe”)
|
|
Giraffe
was established in 1986. Giraffe currently has 450 English schools
in
Taiwan, which is more than other competitors in Taiwan. Giraffe’s
operations include English schools and kindergarten.
|
|
|
|
|
|
Ha
Po Computer English School
(“Ha
Po”)
|
|
Ha
Po was established in 1996. It currently has 150 schools in Taiwan,
where
it offers 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 50 schools in
Taiwan.
|
|
|
|
|
|
Hess
Educational Organization (“Hess”)
|
|
Hess
was established in 1983 and currently has 40 English schools in Taiwan.
Hess also operates kindergartens.
|
|
|
|
BRIEF
SUMMARY OF COMPETITORS IN CHINA
|
|
|
|
Company
Name
|
|
Description
|
|
Onlyedu
Education Group (“Onlyedu”)
|
|
Onlyedu
was established in 2004. It currently has over 430 franchise schools
located in 18 provinces of China.
|
|
|
|
|
|
English
First
|
|
English
First began its development in China in 1993 and currently has 80
kindergarten schools. Its franchise fee and its tuition are higher
than
the market average
,
which poses a significant entry barrier for potential franchises.
English
First has not been established long enough to be well
known.
|
|
|
|
|
|
DD
Dragon Education Organization (“DDDEO”)
|
|
DDDEO
was established in 1997. It currently has over 20 franchise schools
in the
PRC.
|
|
|
|
|
|
New
Oriental Educational & Technology Group (“New
Oriental”)
|
|
New
Oriental entered the Shanghai market in 1993 and caters to adult
students
rather than to children. It currently has over 100
schools.
|
Employees
As
of
December 31, 2006, we had a total of 159 full-time employees and four part-time
employees for the ROC and PRC operations. We intend to hire additional employees
on a part-time or independent contractor basis in connection with certain
projects in China. We do not intend to hire U.S.-based employees in the
foreseeable future. None of our employees are represented by a labor union,
and
we consider our relationships with our employees to be good.
Regulatory
Environment
Taiwan
The
Ministry of Education of Taiwan (“MOE”) requires that teaching and learning
materials that are to be used by elementary schools and junior high schools
for
compulsory education first be submitted to the MOE for review. The material
submission process is as follows:
|
|
·
|
Following
the submission of materials, the MOE will review the materials and
submit
a decision within 90 days, subject to an extension of 30
days.
|
|
|
·
|
If
the MOE approves the materials, the applicant must send three copies
of
the final version to the MOE. The MOE performs a final review and
makes a
final decision within 60 days.
|
|
|
·
|
If
the MOE does not approve the initial submission, the applicant has
45 days
to resubmit the materials with any corrections that the MOE deems
necessary.
|
|
|
·
|
The
MOE 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 MOE, the applicant has 30 days to make additional corrections
and
submit the corrected materials to the MOE. The MOE will then return
its
decision within 30 days.
|
|
|
·
|
If
the MOE does not approve the corrections on the third resubmission,
the
applicant may appeal within 30 days and the MOE will review the appeal
and
make a decision within 30 days after its receipt of the
appeal.
|
|
|
·
|
If
the appeal is rejected by the MOE, the applicant must start the approval
process over.
|
The
Employment Service Act of Taiwan and relevant regulations require all foreign
supplementary education instructor applicants to be 20 years of age or older.
In
addition, it is our company policy to hire candidates with university bachelor
degrees and to have each foreign employee teach the national language of the
country issuing his or her passport.
China
According
to the China-Foreign School Cooperation Regulation (“CFSCR”) effective September
2003, foreign companies cannot operate educational franchises through
wholly-owned entities, but must do so in cooperation with local Chinese
investors. These cooperative arrangements must be approved by the Chinese
government. The CFSCR limits the number of seats on the board of directors
(or
any controlling board or committee) that may be offered to foreign investors
or
their nominees to no more than half of the total number of seats. The director
of the school, as well as the chairman of the board, can be foreign individuals;
however, the qualification of the principal or the person responsible for
administration must be reviewed by the government.
The
China
Ministry of Education (“CMOE”) has general guidelines for every province and
major city. In addition, each province and some major cities, such as Shanghai
and Beijing, have their own administrative body for education and their own
regulations and requirements. All of our educational materials must comply
with
the national curriculum guideline as set out by the central government.
Depending on the administrative procedures of the individual provincial
governments, our educational materials may have to also be recorded with local
governments.
The
CMOE,
under the Kindergarten Operation and Management Regulation, requires the
following:
|
|
·
|
the
location of the kindergarten must be in accordance with the safety
standards set by the CMOE;
|
|
|
·
|
schoolmasters,
principals, and teachers must have a diploma from a teachers’ college or
higher and a background in children’s
education;
|
|
|
·
|
school
staff must have the equivalent of a junior high education or diploma;
and
|
|
|
·
|
nurses
and similar positions must have a high school education or
diploma.
|
The
following violations will result in penalties, including reorganization or
correction to be completed by a certain deadline, suspension of student
enrollment, and suspension of operation:
|
|
·
|
unlicensed
operation, where the location and environment are unsatisfactory
to
government standards; and
|
|
|
·
|
distributing
materials that are inappropriate for children or materials that violate
the Educational Standards set by the
CMOE.
|
More
severe violations, such as illegal controlled substance usage, possession of
dangerous instruments, corporal punishment, 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
The
name
“Kid Castle” and various drawings used in our materials are trademarked and
registered to us in Taiwan and PRC. 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.
Corporate
History
We
are a
Florida corporation that was incorporated on July 19, 1985 as Omni Doors, Inc.
From inception through June 30, 1998, our primary business was the assembly
and
distribution of industrial doors for sale to building contractors in the South
Florida market. Until April 6, 1998, we were a wholly-owned subsidiary of
Millennia, Inc., a publicly-owned Delaware corporation. 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 our
common stock for each four shares of Millennia common stock. This distribution
of approximately 570,000 shares of our company represented approximately 5%
of
the total issued and outstanding shares of our common stock.
Pursuant
to a contract dated July 14, 1998, Millennia sold 10,260,000 shares
(representing 90% of the total outstanding shares) of our common stock to an
unrelated firm, China Economic Growth Investment Corp., LLC, which then
distributed the shares to its three members, 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 our common stock from Zheng Yao, representing approximately 60% of
our
issued and outstanding shares of common stock. Simultaneously with this change
-
in - control transaction, Sophia Yao, our then sole officer and director,
resigned. Kevin B. Halter, Sr., as President and director, and Kevin B. Halter,
Jr., as Secretary-Treasurer and director, were elected to replace
her.
On
June
19, 2002, pursuant to a stock purchase agreement dated June 6, 2002, Powerlink
International Finance, Inc., a British Virgin Islands corporation, purchased
2,830,926 shares of our common stock from Halter Capital Corporation,
representing approximately 57% of our issued and outstanding shares of common
stock. Simultaneously with the purchase, the officers and directors of the
Company resigned. Chin-Chung Hsu, President, Treasurer, and Director; Wen-Hao
Hsu, Secretary and Director; and Chien-Hwa Liu, Director, were elected to
replace them.
On
June
25, 2002, we changed our name to King Ball International Technology Corporation
and, on August 22, 2002, we changed our name again to Kid Castle Educational
Corporation. On October 1, 2002, we acquired all of the issued and outstanding
stock of Higoal, a Cayman Islands company, pursuant to an Exchange Agreement
dated as of October 1, 2002 (the “Exchange Agreement”). The Exchange Agreement
was among Higoal, the shareholders of Higoal, Kuo-An Wang, and Kid Castle.
Higoal, which is based in Taipei, Taiwan, is the parent company of KCIT and
KCES. Pursuant to the Exchange Agreement, Higoal became our wholly-owned
subsidiary. In exchange for 100% of the issued and fully paid-up capital of
Higoal, we issued 11,880,000 shares of our common stock to the shareholders
of
Higoal. As a result of the share exchange, the former shareholders of Higoal
hold a majority of our outstanding capital stock.
On
September 26, 2005, Mr. and Mrs. Pai purchased 806,960 and 693,040 shares of
the
common stock of the Company, respectively. On December 28, 2006, pursuant to
the
loan settlement and conversion agreement, Mr. Pai received an additional
2,000,297 shares of the common stock. As of December 31, 2006, Mr. Pai, his
spouse, and direct next of kin together controlled 4,841,377 shares or 19.36%
of
the total outstanding common stock of the Company. Mr. and Mrs. Yang purchased
1,641,538 and 500,000 shares of the common stock of the Company in 2005,
respectively. On September 26, 2006, Mr. Yang purchased 3,024,000 shares of
the
common stock and on December 28, 2006, pursuant to the loan settlement and
conversion agreement, Mr. Yang received an additional 4,000,000 shares of the
common stock, As of December 31, 2006, Mr. Yang and his wife together controlled
9,165,538 shares or 36.66% of the total outstanding common stock of the
Company.
On
December 27, 2006, we established a wholly-owned subsidiary, KCEI with
registered total capital of Renmibi("RMB")$1.2million.
Company
Organization Chart
Where
You Can Find More Information
We
file
annual, quarterly, and special reports, proxy statements, and other information
with the Securities and Exchange Commission (“SEC”). Our SEC filings are
available to the public over the Internet from the SEC’s website 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 room. Our website address is
http://www.kidcastle.com
.
ITEM
1A. RISK FACTORS
Risks
Relating to Our Business
We
have a history of operating losses and we anticipate losses to continue for
the
foreseeable future despite the actual results that reflect that the extent
of
loss has been improving.
Our
ability to attain a positive cash flow and become profitable depends on our
ability to generate and maintain greater revenue while incurring reasonable
expenses. This, in turn, depends, among other things, on the development of
our
business in Taiwan and the PRC. 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
products on a timely basis;
|
|
|
·
|
compete
effectively with existing and potential competitors;
|
|
|
|
|
|
|
·
|
further
develop our business activities;
|
|
|
|
|
|
|
·
|
manage
expanding operations; or
|
|
|
|
|
|
|
·
|
attract
and retain qualified personnel.
|
We
have
incurred operating losses since inception. As a result, as of December 31,
2006,
we had an accumulated deficit of $9,056,567. We incurred net losses of
$1,254,592, $1,698,282, and $46,211 for the years ended December 31, 2004,
2005,
and 2006, respectively. The net cash used in operation activities were$1,544,902
and $1,295,250 for years ended December 31, 2004 and 2005, respectively. The
net
cash provided by operation activities was $1,773,267 for the year ended December
31,2006. The accumulated deficit has improved since Messrs. Pai and Yang have
assumed their respective management roles, and we anticipate that the
accumulated deficit can be continually improved for the foreseeable
future.
Our
inability to achieve or maintain profitability could result in disappointing
financial results, impede implementation of our growth strategy, or cause the
market price of our common stock to decrease. Therefore, we have to effectively
maintain, improve, and develop our products and services and be able to recover
our fixed costs or otherwise turn profitable.
We
cannot predict whether demand for our products and services will continue to
develop, particularly at the volume or prices that we need to be
profitable.
The
market for English-language instruction and education is growing rapidly. 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.
|
Because
our operating results are tied, in part, to the success of our franchises,
the
failure of our franchises could adversely affect our operating
results.
Our
revenues include licensing fees received from franchises of Kid Castle.
Accordingly, our future revenues will be impacted by the gross revenues of
Kid
Castle franchises and the number of schools operating by these franchises.
Although our revenues from Kid Castle franchise operations will vary directly
with the gross revenues of our franchises, we are not directly dependent on
the
franchises’ profitability. We believe, however, that the profitability of
existing franchises is key to our ability to attract new franchises and open
new
franchised schools. Therefore, factors that adversely affect the revenues and
profitability of our franchises may have an adverse effect on our operating
results.
There
can
be no assurance that our franchises will operate schools successfully. While
no
individual franchise represents more than 1 % of our franchise revenues, a
significant failure of our franchises to operate successfully could adversely
affect our operating results. The resolution of certain franchise financial
difficulties may cause us to incur additional costs due to uncollectible
accounts receivable related to franchise and license fees, the purchase of
teaching and learning materials, and potential claims by franchises that could
have a material adverse effect on our results of operations.
An
increase in market competition could have a negative impact on our
business.
Our
market is new, rapidly evolving and highly competitive. We expect this
competition to persist and intensify in the future. This increase in competition
could impact our business as it leads to price reductions, increases in the
Company’s overhead expenses, under-utilization of employees, and increases in
operation costs.
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
|
Because
we face competition from established competitors, we
cannot
guarantee
future
profits.
Our
primary competitors include Giraffe, Jordan, Ha Po and Hess in Taiwan; JEO
in
Taiwan and the PRC; and Onlyedu and English First in the PRC. Our primary
competitors have significant financial, technical, and marketing resources,
and
established brand recognition. 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, in the ROC market, we need to increase our service quality or decrease
our fees to maintain our customer level. In the PRC, we have to assertively
develop the market and increase our reputation as well as our market share.
In
performing the aforementioned in the respective markets, we may incur increased
operational cost and or reduce our profit and therefore we cannot guarantee
future profits.
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
and
customs;
|
|
|
|
|
|
|
·
|
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 franchises
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.
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 of those laws has been sporadic
at
best. Any further reduction in the legal protections granted to 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, these measures may not be
adequate to prevent others from claiming that we violated their copyrights,
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 the rights to use or modify our products.
We
substantially rely
on
loans from shareholders and bank loans and our inability to obtain sufficient
funding may adversely affect our liquidity and financial
condition.
As
of
December 31, 2004, 2005, and 2006, our bank loans and loans from financial
institutions were $4,284,807, $3,157, 297, and $1,787,360, respectively. As
of
December 31, 2006, outstanding loans from our shareholders were $0.3 million.
Although we had an accumulated deficit, as of December 31, 2006, we had a
positive cash flow from operations. Barring significant, unforeseen developments
in the PRC, our management expects that we can continue to decrease our reliance
on loans from shareholders and banks to meet our funding requirements. Despite
our decreased reliance on loans, we may again be required to seek loans to
meet
our funding requirements and no assurances can be given that bank loans or
loans
from shareholders will be available in the future. If we are unable to secure
sufficient financing, our liquidity position would be adversely affected, and
we
may be required to seek more expensive sources of funding to finance our
operations.
Implementing
our strategies may require substantial capital expenditures. To the extent
these
expenditures exceed our cash resources, we will be required to seek additional
debt or equity financing. Our ability to obtain sufficient financing and the
cost of such financing will depend on numerous factors, some of which are beyond
our control, including:
|
|
·
|
our
financial condition;
|
|
|
|
|
|
|
·
|
general
economic and capital market conditions;
|
|
|
|
|
|
|
·
|
availability
of credit from banks or lenders;
|
|
|
|
|
|
|
·
|
conditions
in the financial markets;
|
|
|
|
|
|
|
·
|
investor
confidence in us; and
|
|
|
|
|
|
|
·
|
economic,
political and other conditions in Taiwan and the
PRC.
|
If
we are
unable to obtain sufficient funding for our operations or development plans
on
commercially acceptable terms, or at all, our liquidity and financial condition
may be adversely affected.
Because
we conduct operations in New Taiwan Dollars (“NT dollars”) and RMB, we are
subject to risk from exchange rate fluctuations.
Our
transactions with suppliers and customers are effected in NT dollars, the
functional currency of our Taiwanese subsidiary, KCIT. As a result of our
expansion in the PRC, our transactions are also effected in RMB, the functional
currency of our PRC subsidiary, KCES and KCEI. 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 dollars, and the RMB will affect our reported
shareholders’ equity from one period to the next. Such impacts could be material
and are independent of the underlying performance of our business. The market
price of our securities could be significantly affected by unfavorable changes
in exchange rates. We do not actively manage our exposure to such unfavorable
changes in exchange rates.
Because
our officers and directors are not U.S. persons, and our operating subsidiaries
are
companies
formed under the laws of Taiwan and
the
People’s
Republic of China, you may be unable to enforce judgments under the Securities
Act.
Our
operating subsidiaries are a Taiwanese company and a PRC company, and our
officers and directors are residents of various jurisdictions outside the United
States. All or a substantial portion of the assets of both our business and
our
officers and directors are located outside the United States. As a result,
it
may be difficult for investors to affect service of process upon such persons,
or to enforce court judgments obtained against such persons in United States
courts, when their claims are predicated upon the civil liability provisions
of
the Securities Act.
Our
internal controls and management systems are currently not consistent with
international practices, and we are in the process of improving these controls
to enable us to certify their effectiveness in accordance with the
Sarbanes-Oxley Act of 2002. Our failure to timely and successfully upgrade
these
controls and systems could subject us to regulatory actions and harm the price
of our stock.
Our
internal control and management systems were designed to meet the standards
generally adopted by private Taiwan companies, and the internal control and
management systems of our PRC subsidiaries were designed to meet the standards
generally adopted by companies in China. These standards are different from
the
standards and best practices adopted by companies in the United States. We
have
identified areas in which our current control and management systems do not
meet
international standards and practices. In addition, during their audit, our
external auditors brought to our attention a number of areas in which our
current internal controls and management systems do not reduce undetected
material errors or fraud to a relatively low level of risk, which could
adversely affect our ability to accurately and timely record, process,
summarize, and report financial data. Pursuant to the Sarbanes-Oxley Act of
2002
and related rules and regulations, we are required, within certain deadlines
established by the SEC, to evaluate our internal controls over financial
reporting and to file an assessment of its effectiveness with the U.S.
Securities and Exchange Commission. Our external auditors are required to attest
to such evaluation. Unless we successfully upgrade our controls and systems,
we
will not be able to satisfactorily comply with our obligation under the
Sarbanes-Oxley Act of 2002, and our external auditors will be unable to provide
a satisfactory certification. We have prepared an internal plan of action for
compliance, which includes a schedule of activities to address our need to
meet
these standards and best practices. If we fail to successfully complete the
improvements we have scheduled on a timely basis, or if the activities fail
to
raise our internal controls and management systems to the levels required by
international standards or legal requirements, or if we fail to implement new
or
improved controls, then we may fail to meet our reporting obligations and our
auditors may be unable to certify the management’s assertion of the
effectiveness of our internal controls as required under the Sarbanes-Oxley
Act
of 2002. This could subject us to regulatory scrutiny and result in a loss
of
public confidence in our management, which could, among other things, adversely
affect our stock price.
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, Mr. Min-Tan Yang, our Chief Executive Officer, and Mr. Suang-Yi Pai,
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 educators and management, and 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.
“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
currently falls within the definition of penny stock and may be 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
spouses).
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 and current quotations for the securities
to both the broker-dealer and the registered representative. 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.
Risks
Relating to The People’s Republic of China
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, the imposition of confiscatory taxation, restrictions
on
currency conversion, imports and sources of supply, restrictions on the manner
of operating educational institutions or disseminating educational materials,
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. Despite the
fact that the exposure to this risk may decrease in the future as the Chinese
economy globalizes and regulation relaxes, there is no assurance 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, in July 2003, our subsidiary, KCES, entered into agreements with
a
local Chinese party, 21
st
Century
Publishing House, in Jiangxi Province, to establish two joint ventures, Jiangxi
21
st
Century
Kid Castle Culture Media Co., Ltd. (“KC Culture Media”) and 21
st
Century
Kid Castle Language and Education Center (“KC Education Center”), and to
establish a wholly-owned subsidiary, KCEI. KC Culture Media and KC
Education Center primarily publish and distribute English-language education
materials, enter into franchise and consulting relationships with kindergarten
and language schools, and provide services to cooperative schools in China.
KCEI
has entered into a direct-owned school in the PRC. We intend to use them as
one
of our primary vehicles for our expansion into the PRC market. Although we
received, on January 19, 2004, and October 31, 2003, licenses from the
applicable government authorities to conduct the business of KC Culture Media
and KC Education Center in the PRC, there exist various factors that render
the
regulatory environment volatile and uncertain. Therefore, it could only be
concluded that the PRC market would eventually be more transparent and less
uncertain as it gradually opens up to foreign investors.
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.