UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K
CURRENT
REPORT PURSUANT
TO
SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date
of
report (Date of earliest event reported): June 1, 2006
KID
CASTLE EDUCATIONAL CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Florida
(State
or
Other Jurisdiction of
Incorporation)
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333-39629
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59-2549529
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(Commission
File Number)
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(IRS
Employer Identification No.)
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8th
Floor, No. 98 Min Chuan Road, Hsien Tien, Taipei, Taiwan
ROC
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(886)
22218 5996
(Registrant’s
Telephone Number, Including Area Code)
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General
Instruction A.2. below):
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Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
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ITEM
5.02. DEPARTURE
OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF
PRINCIPAL OFFICERS
On
June
1, 2006 Mr. Yu-En Chiu resigned as Chief Financial Officer and a Director
of Kid Castle Educational Corporation (the “Company”). The circumstances
surrounding Mr. Chiu’s resignation are more fully described in Item 7.01 to this
Report on 8-K.
Mr.
Chiu
has not furnished the Company with any written correspondence concerning the
circumstances of his resignation. Mr. Chiu was given a copy of the disclosure
in
this Form 8-K regarding his resignation and the opportunity to furnish a written
response. Mr. Chiu has elected not to furnish a written response.
On
June
1, 2006 the Board of Directors appointed Company Chairman of the Board Gene
S.
Y. Pai, to temporarily fill the role of chief financial officer as Acting Chief
Financial Officer.
Mr. Pai
is 46 years old. Mr. Pai graduated from National Taipei University of
Technology, and obtained a Diploma in Chemical Engineering in 1981. Since 1998
he has assumed the office of Managing Director of Chin Yi Fung Enterprises
Co.
Ltd.
ITEM
7.01. REGULATION
FD DISCLOSURE
The
Company wishes to disclose certain inappropriate use of
funds by
Mr. Yu-En Chiu, the Chief Financial Officer and a Director of the Company,
and
the resignation by Mr. Chiu from such positions as of June 1, 2006. Mr. Gene
S.
Y. Pai, the Chairman of the Board of Directors of the Company, has temporarily
assumed the position as the Acting Chief Financial Officer of the
Company.
The
Company has determined that during 2004 and 2005, Mr. Chiu appropriated Company
funds for his personal use. Mr. Chiu was appointed as the CFO of the Company
in
October 2002. The appropriated funds were withdrawn and paid back by Mr. Chiu
at
various points in time. Mr. Chiu has described the appropriated funds as loans
but the withdrawals were never adequately booked or documented as loans. Mr.
Chiu appropriated the funds by approving withdrawals in his capacity as CFO,
directing the funds to be deposited into his personal or nominated account,
and
recording the withdrawals on the Company’s books as a prepaid stock asset. The
Company has not been able to confirm whether the Company’s prior Chief Executive
Officer or any other officers approved Mr. Chiu’s withdrawals. The Company’s
record books do not reflect that the Board of Directors was aware of the
withdrawals or ever approved them, as loans or otherwise.
The
withdrawn funds were not reported in the Company’s financial reports or detected
because Mr. Chiu repaid the amounts withdrawn just prior to the end of its
quarterly reporting periods in 2004 and 2005, then
re-withdrew the funds during the next reporting period.
The
Company’s current Chairman of the Board, Mr. Gene S.Y. Pai, and Chief Executive
Officer, Mr. Min-Tan Yang, were informed by Mr. Chiu soon after they assumed
their positions in November 2005 that there had been a practice of commingling
his personal funds with Company funds. Upon
learning of this practice, they instructed Mr. Chiu to terminate any personal
use or appropriation of Company funds. In addition, to minimize the impact
of
the withdrawals
on the
financial condition of the Company, Mr. Pai and Mr. Yang had a verbal
understanding with the Company that funds owed by the Company to Mr. Pai and
Mr.
Yang might be used to pay off the outstanding amounts owed by Mr. Chiu to the
Company as a result of such withdrawals. To help the new management team to
better understand the financial conditions of the Company, Messrs. Pai and
Yang,
started an investigation into the Company’s accounts and financial activities
for calendar year 2005 and learned that the withdrawals by Mr. Chiu over 2004
and 2005 were extensive.
The
Company has been able to establish that during 2004, the highest recorded sum
owed to the Company at any point in time by Mr. Chiu was $328,546. Mr. Chiu
repaid all amounts withdrawn before December 31, 2004. However, he initiated
further withdrawals on January 13, 2005. During 2005, the highest recorded
sum
owed to the Company at any point in time was $648,115. (All references to
currency in this disclosure have been translated from New Taiwan dollars to
U.S.
dollars based on an exchange rate of US$1.00 = NT$33.42.)
Pursuant
to the verbal understanding reached among the Company and Messrs. Pai, Yang
and
Chiu, a three-way transaction will be entered into whereby Messrs. Pai and
Yang
will pay off Mr. Chiu’s debt to the Company by canceling Company debt to them in
the same amount. The transaction will be documented in a loan
settlement agreement
pursuant
to which Messrs. Pai and Yang will forgive debt owed to them by the Company in
the amount of $553,561, in exchange for the Company’s forgiveness of Mr. Chiu’s
debt to the Company of the same amount which was the amount outstanding as
of
the end of 2005. At the same time Messrs. Pai and Yang will take a promissory
note from Mr. Chiu in the same amount. The Company has determined for accounting
purposes only to treat the withdrawals and subsequent repayments as loans.
The
Company has not released any potential claims against Mr. Chiu.
As
a
result of such inappropriate activity, Mr. Chiu has resigned from his positions
as the CFO and Director of the Company. Despite the extent of his inappropriate
activity, the Company has determined that, at least in the short term, it is
in
the best interest of the Company not to terminate Mr.
Chiu’s employment with the Company. Because of Mr. Chiu’s expert knowledge of
the Company’s operations, products and market in China, he will be retained as
the Chairman of the Company’s PRC operations. Mr. Chiu
will not
have access to Company funds or authority over Company’s accounting or financing
matters.
Mr.
Chiu’s situation manifests a weakness in the Company’s accounting controls and
procedures, which the Company is addressing. Since 2003, the Company has been
in
the process of assessing and improving its financial controls. It engaged
another major accounting firm in 2004 to make recommendations in this regard.
In
addition, the Company began implementing a comprehensive ERP system that would
improve the Company’s internal controls. However, the system is not scheduled to
be fully on-line until October 2006. The
Company believes that full implementation of its new ERP System will prevent
misappropriation of funds by Company employees because the ERP system will
perform the following functions:
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Maintain
detailed records and produce comprehensive financial statements on
a
periodical basis allowing management to review and detect irregular
financial activities.
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Place
different check-points on the progression of ordinary monetary activities
of the business.
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Delineate
individual unit/departmental responsibilities and effectively separate
respective departmental transactions so as to avoid intentional
misappropriation of funds from taking
place.
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In
addition to implementing a new ERP system, to further strengthen the Company’s
internal controls, the following additional procedures have been
implemented:
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All
departments requesting funds must obtain written approval from the
Chief
Executive Officer or the Chairman of the Board before the accounting
department may commence processing payments.
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All
fund transfer applications must be approved by the applicable department
supervisor before the application may be processed. No one can authorize
their own application. This is applicable to all staff including staff
at
the managerial level.
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Fund
transfer applications in the PRC must additionally be approved by the
headquarters in Taiwan.
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All
fund transfer applications must be accompanied by supporting
documentation, such as a copy of the relevant contract or copy of relevant
invoice or stock pre-payment statement.
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Stock
purchases require the approval of the supervisor/manager of the relevant
department as well as the accounts department and a stock receipt and
suppliers’ certification must be provided. Finally the application must be
approved by the Chairman of the Board before funds may be
released.
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All
pre-payments must be tracked by the fund applicant and the payments
must
be cleared within the month of payment or in accordance with the date
stipulated in the relevant contract.
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The
Company believes that implementation of all of the foregoing procedures will
significantly strengthen the Company’s financial controls, with one beneficial
result being that unfortunate instances such as the one reported in this
disclosure will be prevented.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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KID
CASTLE
EDUCATIONAL CORPORATION |
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| Date:
June
16, 2006 |
By: |
/s/ Min-Tan
Yang |
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Name:
Min-Tan Yang
Title:
Chief Executive Officer
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