SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
Commission file number 000-26539
EUPA International Corporation
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 88-0409450
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(State or other jurisdiction of incorporation (IRS Employer Identification Number)
or organization)
89 N. San Gabriel Boulevard, Pasadena, California 91107
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(Address of principal executive offices) (Zip Code)
626-793-2688
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) Yes [X] No [ ], and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
As of May 14, 2004, the issuer had outstanding 20,900,000 shares of its
Common Stock, $0.001 par value.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited financial statements of EUPA International Corporation
and its subsidiaries, Tsann Kuen U.S.A. Inc. and Union Channel Ltd.
(collectively, the "Company" and sometimes as "we", "us" or "EUPA"), as at and
for the period ending March 31, 2004 were prepared by management and commence on
the following page. In the opinion of management the financial statements fairly
present the financial condition of the Company.
2
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2004
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
TABLE OF CONTENTS
Consolidated Statements of Financial Position F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flow F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Notes to Consolidated Financial Statements F-6
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
March 31, 2004
(Unaudited) December 31,2003
----------- ----------------
Current Assets
Cash and cash equivalents $ 934,537 $ 971,093
Accounts receivable, net 311,087 272,680
Other receivable, related parties 15,976 60,921
Prepaid expenses 4,360 0
----------- -----------
Total Current Assets 1,265,960 1,304,694
----------- -----------
Fixed Assets
Property, furniture and equipment (net) 841,002 854,768
----------- -----------
Total Fixed Assets 841,002 854,768
----------- -----------
Other Assets
Intangible assets, net 356,359 359,981
Deposits 8,370 8,370
----------- -----------
Total Other Assets 364,729 368,351
----------- -----------
Total Assets $ 2,471,691 $ 2,527,813
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 26,127 $ 29,585
Other payable, related parties 141,756 172,672
Income taxes payable 0 84,636
----------- -----------
Total Current Liabilities 167,883 286,893
Deposits payable 4,100 4,100
----------- -----------
Total Liabilities 171,983 290,993
----------- -----------
Stockholders' Equity
Common stock, $.001 par value, 25,000,000
shares authorized, 20,900,000
issued and outstanding 20,900 20,900
Additional paid in capital 1,934,703 1,929,203
Cumulative foreign-exchange translation adjustment (21,406) 1,943
Retained earnings 365,511 284,774
----------- -----------
Total Stockholders' Equity 2,299,708 2,236,820
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,471,691 $ 2,527,813
=========== ===========
F-1
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------------
March 31, March 31,
2004 2003
------------ ------------
Fee Income $ 310,913 $ 90,109
------------ ------------
Total revenue 310,913 90,109
Selling Expense 39,872 5,535
------------ ------------
Gross profit 271,041 84,574
General and administrative expenses 283,428 99,804
------------ ------------
Income (loss) from operations (12,387) (15,230)
------------ ------------
Other (Income) Expense
Interest income (864) (1,523)
Rental income (14,619) (14,460)
Other Income (100) (3,908)
------------ ------------
Total Other (Income) Expense (15,583) (19,891)
------------ ------------
Income before income taxes 3,196 4,661
Provision for income taxes 1,600 1,600
------------ ------------
Income (loss) from continuing operations 1,596 3,061
------------ ------------
Discontinued operations
Income from discontinued operations 79,141 6,624
------------ ------------
Net Income $ 80,737 $ 9,685
============ ============
Net loss per share from continuing operations (basic and diluted)
Basic $ 0.000 $ 0.000
Diluted $ 0.000 $ 0.000
Net loss per share (basic and diluted)
Basic $ 0.004 $ 0.000
Diluted $ 0.004 $ 0.000
Weighted average number of shares
Basic 20,900,000 20,900,000
Diluted 22,650,000 22,650,000
F-2
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, March 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 80,737 $ 9,685
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and Amortization 21,451 21,197
Stock issued for services 5,500 5,500
Decrease (Increase) in accounts receivables (38,407) 190,314
Decrease (Increase) in other receivables, related party 44,945 0
Decrease (Increase) in prepaid expenses (4,360) 0
(Decrease) Increase in accounts payable
and accrued expenses (3,458) 210,441
(Decrease) Increase in accounts payable
and accrued expenses, related party 0 (409,496)
(Decrease) Increase in other payable, related party (30,916) 0
(Decrease) Increase in income taxes payable (84,636) 792
----------- -----------
Total Adjustments (89,881) 18,748
----------- -----------
Net cash provided by (used in) operations (9,144) 28,433
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in intangible assets (4,063) (3,904)
----------- -----------
Net cash used in investing activities (4,063) (3,904)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of stock 0 0
----------- -----------
Net cash provided by financing activities 0 0
----------- -----------
Effect of exchange rate on cash (23,349) 0
----------- -----------
Net change in cash and cash equivalents (36,556) 24,529
Cash and cash equivalents at beginning of period 971,093 3,148,655
----------- -----------
Cash and cash equivalents at end of period $ 934,537 $ 3,173,184
=========== ===========
Supplemental cash flows disclosures:
Income tax payments $ 10,600 $ 0
=========== ===========
Non cash investing and financing activities:
Stock issued for services $ 5,500 $ 5,500
=========== ===========
F-3
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
March 31,
2004
(Unaudited) December 31, 2003
----------- -----------------
Common stock, number of shares outstanding
Balance at beginning of period 20,900,000 20,900,000
Issuance of common stock 0 0
------------ ------------
Balance at end of period 20,900,000 20,900,000
============ ============
Common stock, par value $.001 (thousands of shares)
Balance at beginning of period $ 20,900 $ 20,900
Issuance of common stock 0 0
------------ ------------
Balance at end of period 20,900 20,900
Additional paid in capital
Balance at beginning of period 1,929,203 1,914,203
Issuance of common stock 0 0
Issuance of stock options for service 5,500 22,000
Write-off of stock subscription receivable 0 (7,000)
------------ ------------
Balance at end of period 1,934,703 1,929,203
Stock subscription receivable
Balance at beginning of period 0 (7,000)
Issuance of common stock 0 0
Write-off of stock subscription receivable 0 7,000
------------ ------------
Balance at end of period 0 0
------------ ------------
Cumulative foreign-exchange translation adjustment
Balance at beginning of period 1,943 0
Foreign currency translation (23,349) 1,943
------------ ------------
Balance at end of period (21,406) 1,943
------------ ------------
Retained earnings
Balance at beginning of period 284,774 206,998
Net income (loss) 80,737 77,776
------------ ------------
Balance at end of period 365,511 284,774
------------ ------------
Total stockholders' equity at end of period $ 2,299,708 $ 2,236,820
============ ============
F-4
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 - NATURE OF OPERATIONS
EUPA International Corporation (EUPA), was incorporated on September 8, 1998
under the laws of the state of Nevada. Tsann Kuen U.S.A. (TK USA) was
incorporated under the laws of the state of Illinois in June 1990. Union Channel
Limited (Union) was incorporated in Hong Kong on September 28, 2001 and
commenced operations during the quarter ended March 31, 2002. TK USA and Union
are owned 100% by EUPA, collectively the three corporations are referred to as
the "Company".
On October 23, 2001, TK USA became a wholly owned subsidiary of EUPA through a
transaction accounted for as a reverse merger. In the transaction, EUPA acquired
all of the issued and outstanding capital stock of TK USA from Tsann Kuen
Enterprise Company, Ltd. (TKE) pursuant to an Exchange Agreement dated October
10, 2001 by TKE, TK USA and EUPA. Pursuant to the Exchange Agreement, TK USA
became a wholly owned subsidiary of EUPA and, in exchange for the TK USA shares,
EUPA issued 12,000,000 shares of its common stock to TKE, representing sixty
percent (60%) of the issued and outstanding capital stock of EUPA at that time.
Prior to the transaction, EUPA had nominal business activity. This activity is
not material to the historical financial statements of TK USA, and therefore pro
forma operating results as if the acquisition had taken place at the beginning
of the periods presented have not been presented. For accounting purposes, TK
USA has been treated as the acquirer and, accordingly, TK USA is presented as
the continuing entity, and the historical financial statements are those of TK
USA.
TK USA is the United States market research, design, supply and sales arm of
TKE. TKE is a worldwide leader for more than 20 years in the manufacture and
design of home appliance and consumer electronic products for international
brand name distributors.
Union was established to become the leading outsource supplier for TKE in Asia
and Europe. The activities of Union were discontinued in the third quarter of
2002 and the Company has filed all necessary dissolution paperwork as of
December 31, 2003 and is pending approval from all various authorities.
TKE products are sold in over 80 countries around the world. Its major products
are: small appliances including irons, coffee makers, grills, and food
processors; medium size appliances which include microwave ovens,
electromagnetic ovens, electric cookers and vacuum cleaners.
F-5
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information - The accompanying financial statements
have been prepared by EUPA International Corporation, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") Form 10-QSB
and Item 310 of regulation S-B, and generally accepted accounting principles for
interim financial reporting. These financial statements are unaudited and, in
the opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary for a fair presentation of the
statement of financial position, operations, and cash flows for the periods
presented. Operating results for the three months ended March 31, 2004 and 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004, or any future period, due to seasonal and other
factors. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
policies have been omitted in accordance with the rules and regulations of the
SEC. These financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes, included in the
Company's Annual Report for the year ended December 31, 2003.
Basis of Consolidation - The consolidated financial statements for 2004 and 2003
include the accounts of EUPA and its wholly owned subsidiaries, TK USA and Union
Channel. All references herein to the Company included the consolidated results.
All significant intercompany accounts and transactions have been eliminated upon
consolidation.
Revenue Recognition - Sales service fees and research and development fees are
recognized as the related services are provided.
Cash and Cash Equivalents - Cash equivalents are stated at cost. Cash
equivalents are highly liquid investments readily convertible into cash with an
original maturity of three months or less and consist of time deposits with
commercial banks.
Allowance for Doubtful Accounts - The Company establishes an allowance for
doubtful accounts on a case-by-case basis when it believes the required payment
of specific amounts owed is unlikely to occur after a review of historical
collection experience, subsequent collections and management's evaluation of
existing economic conditions.
F-6
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fixed Assets - Property and equipment are stated at cost less accumulated
depreciation. Expenditures for major additions and improvements are capitalized
and minor replacements, maintenance and repairs are charged to expense as
incurred. Whenever an asset is retired or disposed of, its cost and accumulated
depreciation or amortization is removed from the respective accounts and the
resulting gain or loss is credited or charged to income.
Depreciation is computed using the straight-line and declining-balance methods
over the following estimated useful lives:
Buildings and improvements 15 to 60 years
Automobiles 4 to 6 years
Machinery and equipment 5 to 12 years
Furniture and Fixtures 7 years
Intangible Assets - Costs associated with patents and trademarks are capitalized
and amortized using the straight-line method over fifteen years.
Contingencies - Certain conditions may exist as of the date the financial
statements are issued, which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur. The
Company's management and legal counsel assess such contingent liabilities, and
such assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company's legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought.
If the assessment of a contingency indicates that it is probable that a material
loss has been incurred and the amount of the liability can be estimated, then
the estimated liability would be accrued in the Company's financial statements.
If the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally not
disclosed unless they involve guarantees, in which case the guarantee would be
disclosed. As of March 31, 2004 and the date of our report, management has
informed us that there are no matters that warrant disclosure in the financial
statements.
F-7
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include collectibility of accounts receivable, accounts payable, sales
returns and recoverability of long-term assets.
Concentration of Credit Risk - Financial instruments, which subject the Company
to credit risk, consist primarily of cash equivalents and trade accounts
receivable arising from its normal business activities. The Company places its
cash in what it believes to be credit-worthy financial institutions, however,
cash balances have exceeded the FDIC insured levels at various times during the
year. Concentration of credit risk with respect to trade accounts receivable is
primarily from related parties located in Asia. The Company actively evaluates
the creditworthiness of the customers with which it conducts business through
credit approvals, credit limits and monitoring procedures.
Stock Based Compensation - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based
Compensation." Under APB 25, compensation cost is recognized over the vesting
period based on the difference, if any, on the date of grant between the fair
value of the Company's stock and the amount that an employee must pay to acquire
the stock.
Discontinued Operations - Results of discontinued operations of a segment of the
business are shown separately from continuing operations. Amounts for prior
periods have shown have also been shown separately for comparative purposes.
Impairment of Long-Lived Assets - On January 1, 2002 the Company adopted SFAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The
Company evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. If the estimated future cash flows (undiscounted and without
interest charges) from the use of an asset are less than the carrying value, a
write-down would be recorded to reduce the related asset to its estimated fair
value. There have been no such impairments to date.
F-8
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share - The Company uses SFAS No. 128, "Earnings Per Share", for
calculating the basic and diluted earnings (loss) per share. Basic earnings
(loss) per share are computed by dividing net income (loss) attributable to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share are computed similar to basic earnings per share
except that the denominator is increased to include common stock equivalents as
if the potential common shares had been issued.
Income Taxes - Income taxes have been provided based upon the tax laws and rates
in the countries in which operations are conducted and income is earned. The
income tax rates imposed by the taxing authorities vary. Taxable income may vary
from pre-tax income for financial accounting purposes. There is no expected
relationship between the provision for income taxes and income before income
taxes because the countries have different taxation rules, which vary not only
to nominal rates but also in terms of available deductions, credits and other
benefits. Deferred tax assets and liabilities are recognized for the anticipated
future tax effects of temporary differences between the financial statement
basis and the tax basis of the Company's assets and liabilities using the
applicable tax rates in effect at year end as prescribed by SFAS 109 "Accounting
for Income Taxes".
Translation Adjustments - As of March 31, 2004 and 2003, the accounts of Union
Channel were maintained, and its financial statements were expressed, in Hong
Kong dollars. Such financial statements were translated into U.S. dollars in
accordance with SFAS 52 "Foreign Currency Translation", with the Hong Kong
dollar as the functional currency. According to the statement all assets and
liabilities were translated at the current exchange rate, stockholder's equity
accounts are translated at the historical rates and income statement items are
translated at the average exchange rates for the period.
As of March 31, 2004 and 2003, the exchange rates between the Hong Kong dollar
and the U.S. dollar was HK$1=US$0.12830 and US$0.128213 and the average exchange
rate for the three months ended March 31, 2004 and 2003 was HK$1=US$0.12859 and
US$0.12813 respectively. There is a ($21,406) and $0 translation adjustment
recorded on the books for March 31, 2004 and 2003.
New Accounting Pronouncements - In July 2001, the FASB issued SFAS 141 "Business
Combinations". SFAS 141 requires that all business combinations initiated or
completed after June 30, 2001 be accounted for using the purchase method of
accounting. The statement provides for recognition and measurement of intangible
assets separate from goodwill. The Company adopted SFAS 141 as of July 1, 2001.
The adoption of the new statement had no effect on the consolidated results of
operations or financial position of the Company.
F-9
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets".
Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed at least annually for impairment. The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to Goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to and has adopted SFAS
142 effective January 1, 2002. The adoption of this pronouncement did not have a
material effect to the Company's consolidated financial position or results of
operations.
In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS supersedes SFAS 121 and the accounting and
reporting provisions of APB 30. SFAS 144 provides guidance for determining
whether long-lived assets should be tested for impairment and specific criteria
for classifying assets to be disposed of as held for sale. The statement is
effective for fiscal years beginning after December 15, 2001, and the Company
has adopted the statement as of January 1, 2002. Management does not expect the
adoption of this statement to have a material effect on the Company's
consolidated financial position or results of operations.
The Company accounts for employee stock options in accordance with APB No. 25
"Accounting for Stock Issued to Employees". Under APB 25, the Company recognizes
no compensation expense related to employee stock options, as no options are
granted at a price below market price on the date of grant.
In 1996, SFAS No 123", became effective for the Company. SFAS No. 123, which
prescribes the recognition of compensation expense based on the fair value of
options on the grant date, allows companies to continue applying APB 25 if
certain pro forma disclosures are made assuming hypothetical fair value method,
for which the Company uses the Black-Scholes option-pricing model. For
non-employee stock based compensation the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based awards the value is
based on the market value for the stock on the date of grant and if the stock
has restrictions as to transferability a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model where applicable, or alternatively a book value approach.
During the three months ended March 31, 2004 and 2003, the company recognized
consulting expenses of $5,500 for the granting of stock options to
non-employees.
F-10
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 3 - COMPENSATED ABSENCES
All full time regular covered employees are eligible for vacation with pay
according to the following schedule: After one (1) full year of continuous full
time employment five (5) days of vacation, after two (2) full years of
continuous full time employment eight (8) days of vacation, after three full
years of continuous full time employment twelve (12) days vacation, after four
full years of continuous full time employment sixteen (16) days vacation, and
after five full years of continuous full time employment twenty (20) days
vacation leave. The date of employment on a full time permanent basis will be
considered the anniversary date for vacation purposes. When a regular full time
employee has completed fifty-two (52) weeks of continuous employment he/she will
be considered as having earned the aforementioned vacation benefits. At the end
of each year and at termination, employees are paid for any accumulated annual
vacation leave. As of March 31, 2004 vacation liability exists in the amount of
$3,731.
NOTE 4 - CONCENTRATION - RELATED PARTY TRANSACTIONS
The Company had four customers during the three months ended March 31, 2004.
Fees charged to these customers, all related parties, were approximately
$310,913. Included in accounts receivable is $311,087 from these customers as of
March 31, 2004.
NOTE 5 - COMMON STOCK
In December 2001, the Company issued an option to purchase 1,000,000 shares of
the Company's stock at an exercise price of $0.001, vesting over a period of
five years. The options were issued in exchange for future ongoing marketing
services to be rendered to the Company by a related company. The per unit
weighted-average fair value of unit options granted was $0.11 at the date of
grant using a book value approach. The book value approach best estimated the
value of the services to be provided. During the three months ended March 31,
2004 and 2003 the Company recognized consulting expenses of $5,500 for the
granting of stock options to non-employees.
F-11
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 6 - COMMITMENTS
Tsann Kuen Enterprises Co., Ltd. (TKE) - TK USA signed an agreement with TKE in
2003 to provide R&D Services on a project by project basis, and other services
as requested by TKE. The term of the agreement is from January 1, 2003 to
December 31, 2003 with automatic annual renewal unless written notice is
provided. As compensation for the services to be provided by TK USA hereunder,
TKE shall pay to TK USA a service fee commensurate to the value of the service
provided. The parties agree that value is to be calculated as being equal to the
fully burdened costs incurred by TK USA in providing such services to TKE, plus
a markup. For the three months ended March 31, 2004, actual markup rate was 5%
and actual amount billed was $34,278.
Tsann Kuen Enterprises Co., Ltd. (TKE) - TK USA signed an agreement with
TKE in 2003 to provide Fiduciary and Patent Administration services to TKE. TKE
will use TKE USA as their patent holder to enhance their ability to protect
their patents since the patents held by TKE USA are subject to the laws of the
United States. The term of the agreement is from January 1, 2003 to December 31,
2003 with automatic annual renewal unless written notice is provided. As
compensation for the services to be provided by TK USA hereunder, TKE shall pay
to TK USA a service fee commensurate to the value of the service provided. The
parties agree that value is to be calculated as being equal to the fully
burdened costs incurred by TK USA in providing such services to TKE, plus a
markup. For the three months ended March 31, 2004, actual markup rate was 2% and
actual amount billed was $6,610.
Tsann Kuen China (Zhanghou) Enterprises Ltd. (TKL) - TK USA signed an
agreement with TKL in 2003 to provide Sales and Customer Support for TKL's
customers in the United States. The term of the agreement is from January 1,
2003 to December 31, 2003 with automatic annual renewal unless written notice is
provided. As compensation for the services to be provided by TK USA hereunder,
TKL shall pay to TK USA a service fee commensurate to the value of the service
provided. The parties agree that value is to be calculated as being equal to the
fully burdened costs incurred by TK USA in providing such services to TKE, plus
a markup. For the three months ended March 31, 2004, actual markup rate was 2%
and actual amount billed was $226,249.
F-12
EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 6 - COMMITMENTS(Continued)
Tsann Kuen China (Shanghai) Enterprises Ltd. (TKS) - TK USA signed an
agreement with TKS in 2003 to provide Sales and Customer Support for TKS's
customers in the United States. The term of the agreement is from January 1,
2003 to December 31, 2003 with automatic annual renewal unless written notice is
provided. As compensation for the services to be provided by TK USA hereunder,
TKS shall pay to TK USA a service fee commensurate to the value of the service
provided. The parties agree that value is to be calculated as being equal to the
fully burdened costs incurred by TK USA in providing such services to TKS, plus
a markup. For the three months ended March 31, 2004, actual markup rate was 2%
and actual billed was $42,408.
Tsann Kuen (China) Enterprises Co. Ltd. (TKC) - TK USA, signed an
agreement with TKC in 2003 to provide Sales and Customer Support for TKC's
customers in the United States. The term of the agreement is from January 1,
2003 to December 31, 2003 with automatic annual renewal unless written notice is
provided. As compensation for the services to be provided by TK USA hereunder,
TKC shall pay to TK USA a service fee commensurate to the value of the service
provided. The parties agree that value is to be calculated as being equal to the
fully burdened costs incurred by TK USA in providing such services to TKC, plus
a markup. For the three months ended March 31, 2004, no service was provided.
F-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION
The information contained in this Item 2, Management's Discussion and
Analysis or Plan of Operation, contains "forward looking statements" within the
meaning of Section 27A of the Securities Act 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Actual results may
materially differ from those projected in the forward-looking statements as a
result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual future
results will not be different from the expectations expressed in this report.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. The discussion should
be read in conjunction with the Company's audited consolidated financial
statements for the fiscal year ended December 31, 2003 and notes thereto.
EUPA International Corporation was incorporated on September 8, 1998
under the laws of the State of Nevada. TK USA was incorporated under the laws of
the State of Illinois in June 1990. On October 23, 2001, TK USA became a wholly
owned subsidiary of EUPA through a transaction accounted for as a reverse
merger. In the transaction, EUPA acquired all of the issued and outstanding
capital stock of TK USA from Tsann Kuen Enterprise Co., Ltd. ("TKE") pursuant to
an Exchange Agreement dated as of October 10, 2001 by and among TKE, TK USA and
EUPA (the "Exchange Agreement"). Pursuant to the Exchange Agreement, TK USA
became a wholly owned subsidiary of EUPA and, in exchange for the TK USA shares,
EUPA issued 12,000,000 shares of its common stock to TKE, representing 60% of
the issued and outstanding capital stock of EUPA at that time. Prior to the
merger, EUPA had nominal business activity. This activity is not material to the
historical financial statements of TK USA, and therefore pro forma operating
results as if the acquisition had taken place at the beginning of the periods
presented have not been presented. For accounting purposes, TK USA has been
treated as the acquirer and, accordingly, TK USA is presented as the continuing
entity, and the historical financial statements are those of TK USA through the
date of the Exchange Agreement. From the date of the Exchange Agreement forward,
the activity of EUPA includes its parent level expenses and the operations of
its two wholly owned subsidiaries, TK USA and Union Channel Limited.
EUPA commenced operations in Asia during the March 31, 2002 quarter
through Union Channel Limited. Union Channel was incorporated in Hong Kong in
January 2002. Union Channel was formed to be the leading supplier of TKE
products in Asia and Europe. However, Union Channel was not intended to have
independent operations. All of its purchases were made from TKE and all of its
sales were made to TKC China, an operating subsidiary of TKE.
However, after two quarters of operation, management determined that
Union Channel could not efficiently operate in Asia and Europe because it did
not have the requisite human resources and customer support, and to put this
infrastructure in place would not be cost-efficient. As a result, management
terminated Union Channel's operation in the third quarter of 2002 so that EUPA
could focus on searching for more profitable business opportunities in the
United States or internationally. The Company has filed all necessary
dissolution paperwork as of December 31, 2003.
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To partially offset the effect of the discontinuation of the Union
Channel's operations, management has determined to accelerate its plan to derive
revenues from EUPA's research and development activities. EUPA's TK USA
subsidiary devotes significant time and resources to the design and development
of small appliances. Some of TKE's products are the result of TK USA's design
efforts. Beginning in 2003, pursuant to an agreement with TKE and other related
parties, TK USA began to receive fees for customer service, research and design
fee and patent administration service fee. Fees will be commensurate to the
value of the service provided. The parties agree that value is to be calculated
as being equal to the fully burdened costs incurred by TK USA in providing such
services, plus a reasonable markup.
RESULTS OF OPERATIONS
The consolidated financial statements for the three months ended March
31, 2004 and 2003 include the accounts of EUPA and its wholly owned
subsidiaries, TK USA and Union Channel.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003
REVENUE. During the three months ended March 31, 2004, operating
revenues were $310,913, up from $90,109 in the comparable period in fiscal year
2003. The reason of increase in revenue is largely attributed to the increase in
the amount of services provided to TKE and other related parties for customer
service, research and design fee and patent royalties pursuant to their service
agreements. All of the revenues during the first quarter were generated from
customer service, R & D and patent management fees.
OPERATING EXPENSES. Operating expenses, consisting of general and
administrative expenses were $283,428 for the three months ended March 31, 2004
compared with the $99,804 in the same period fiscal year 2003. The items
included accounting fees, amortization and depreciation expenses, wages and
salaries and legal professional service expenses. The reason of increase in
operating expenses is largely attributed to the increase in wages and general
operating expenses incurred for services provided to TKE and other related
parties. The loss from operations was $(12,387) and $(15,230) for the three
months ended March 31, 2004 and 2003, respectively.
Net Income (Loss): For the three months ended March 31, 2004 the
Company realized a net profit of $80,737, compared to net profit of $9,685 for
the three months ended March 31, 2003. The net profit was a result of income for
discontinued operations from Union Channel for $79,141 in 2004 as compare to
$6,624 in 2003. Non-operating income for the three months ended March 31, 2004
was $15,583 compared with $19,891 in the same period for the year 2003. Included
in non-operating income was $864 of interest income, $14,619 of rental income
and $100 of other income for the first three months of 2004. During the three
months ended March 31, 2003, there was $1,523 of interest income, $14,460 of
rental income, and $3,908 of other income. The income taxes for the first
quarter of the fiscal years 2004 and 2003 were both $1,600.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $934,537 and $3,173,184 as of March 31,
2004 and 2003, respectively. The Company's current assets totalled $1,265,960
and $6,093,352 on March 31, 2004 and 2003, respectively. The Company's current
liabilities were $167,883 and $5,154,855 on March 31, 2004 and 2003,
respectively. Working capital was $1,098,077 and $938,497 as of March 31, 2004
and 2003, respectively. Therefore, the Company is confident that its short-term
financial needs will be met by
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maintaining the adequate working capital. During the three months ended March
31, 2004, net cash used in operating activities was $(9,144). This represents a
decrease from $28,433 of net cash provided by operating activities during the
same period in 2003. The net cash change was $(36,556) and $24,529 for the first
quarter of 2004 and 2003, respectively.
CAPITAL EXPENDITURES. Total capital expenditures for the three months
ended March 31, 2004 and 2003 were $4,063 and $3,904, respectively.
Working Capital Requirements. Cash needs of the Company are currently
met by the Company's operations. The Company believes it will be able to
generate revenues from the design fee and future royalties to provide the
necessary cash flow to meet anticipated working capital requirements. From time
to time, the Company's daily operation is supported by advances from TKE if EUPA
temporarily encounters money shortage. The loans are repaid from EUPA's revenue.
Therefore, the management believes that its current financial resources are
sufficient to finance its operations for TK USA and obligations for the long and
short terms. The Company believes that its product design fees and ongoing
royalties with TKE will provide adequate working capital for the expenses for
its operations. However, the Company's actual working capital needs for the long
and short term will depend upon numerous factors, including the Company's
operating results, competition, and the availability of existing credit
facilities for TKE, none of which can be predicted with certainty.
SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Notes to the Consolidated Financial Statements contain a summary of EUPA
International, Inc.'s significant accounting policies, including a discussion of
recently issued accounting pronouncements. Certain of these policies as well as
estimates made by management are considered to be important to the portrayal of
the Company's financial condition, since they require management to make
difficult, complex or subjective judgments and estimates, some of which may
relate to matters that are inherently uncertain. Additional information about
these policies can be found in Note 2 to the Consolidated Financial Statements.
Management has discussed each of these significant accounting policies and
related estimates with the Audit Committee of the Board of Directors.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides an allowance for loss on receivables based on a review of
the current status of existing receivables, historical collections experience,
subsequent collections and management's evaluation of the effect of existing
economic conditions. This process is subject to numerous estimates and judgments
by management. Changes in these estimates could have a direct impact on the
allowance itself, net income of the Company and management's future credit
process.
Management periodically reviews its collection activity and updates its
estimates of the allowance based on current and future expected activity and
customer base.
RECOVERABILITY OF INTANGIBLE ASSETS
Effective January 1, 2002 our Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets". The adoption of
SFAS No. 142 was required in accordance with accounting principles generally
accepted in the United States of America. Such statement required an initial
impairment assessment involving a comparison of the fair value of goodwill,
trademarks and other intangible assets to current carrying value.
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SFAS No. 142 classifies intangibles into three categories: (1) intangible assets
with definite lives subject to amortization; (2) intangible assets with
indefinite lives not subject to amortization; (3) goodwill. For intangible
assets with definite lives, tests for impairment must be performed if conditions
exist that indicate the carrying value may not be recoverable.
Our trademarks and patents that are determined to have definite lives are
amortized over their useful lives. In accordance with SFAS No. 142, if
conditions exist that indicate the carrying value may not be recoverable; we
review such trademarks and patents with definite lives for impairment to ensure
they are appropriately valued. Such conditions may include an economic downturn
in a market or a change in the assessment of future operations.
Management estimates the future cash flows expected to result from the use of
its trademarks and patents and, if applicable, the eventual disposition of the
assets. The key variables that management must estimate include, among other
items, sales volume, royalty income, market conditions, related party
relationships and capital spending. Significant management judgment is involved
in estimating these variables, and they include inherent uncertainties.
Management periodically evaluates and updates the estimates based on the
conditions that influence these variables. If such assets are considered
impaired, they are written down to fair value as appropriate.
FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS AND FINANCIAL CONDITIONS
Investing in the Company's securities involves a high degree of risk.
In addition to the other information contained in this annual report, including
the reports the Company incorporates by reference, you should consider the
following factors before investing in the Company's securities.
TKE CONTROLS THE COMPANY'S BUSINESS.
TKE owns more than 50% of the Company's outstanding capital stock. As
a result, TKE will be able to control the Company's business and affairs,
including the composition of the Company's board of directors or authorizing
corporate transactions such as mergers or sales of the Company's assets.
However, the interests of TKE may not be consistent with the interests of the
Company's other investors since it could take action that may not be in the best
interests of the Company's other investors.
WE ARE DEPENDENT ON TKE FOR THE COMPANY'S PRODUCT SUPPLY, SALES AND CAPITAL
REQUIREMENTS.
TKE is the major manufacturer of the products the Company supplies and
the major customer for the Company's design services. As a result, any change in
the cost of manufacturing these products will have a material adverse impact on
the Company's profit margins.
In addition to the Company's operational dependence on TKE, the
Company does not currently have an independent source of capital or lines of
credit. All of the Company's operations will initially be funded by TKE.
Accordingly, any change in TKE's financial condition or liquidity could have an
impact on the Company's ability to operate the Company's business.
MANY OF THE COMPANY'S EMPLOYEES WILL ALSO PERFORM SERVICES FOR TKE WHICH COULD
RESULT IN THEIR ATTENTION BEING DIVERTED FROM THE COMPANY'S BUSINESS.
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Our success will depend, to some degree, on the efforts of the
Company's employees. Many of the Company's officers and employees will also be
employed by TKE. As a result, their full time, attention and energies will not
be directed to the Company's business. If the attention of the Company's
officers is diverted from the Company's business, the Company may not be able to
realize the full potential of the Company's business opportunities.
IF WE DO NOT DEVELOP AND INTRODUCE NEW TKE PRODUCTS, THE COMPANY'S ABILITY TO
GROW THE COMPANY'S BUSINESS WILL BE LIMITED.
The Company believes that its future success will depend in part upon
the Company's ability to continue to develop innovative designs in the products
manufactured by TKE and to develop and market new products for which the Company
will derive revenue and ongoing royalty income from patents used on those
products. The Company may not be successful in introducing or supplying any new
products or product innovations to TKE's existing products which satisfy
customer needs or achieve market acceptance. The failure to develop products and
introduce them successfully and in a timely manner would harm the Company's
ability to grow the Company's business.
A SLOWDOWN IN THE RETAIL INDUSTRY WILL LIKELY HAVE AN ADVERSE EFFECT ON THE
COMPANY'S RESULTS.
The products that the Company supplies are ultimately sold to
consumers through major retail channels, primarily mass merchandisers,
department stores, specialty stores and mail order catalogs. Changes in general
economic conditions will cause reductions in demand among consumers and
retailers for the kind of products the Company supplies. As a result, the
Company's business and financial results will fluctuate with the financial
condition of the Company's retail customers and the retail industry.
THE COMPETITIVE NATURE OF THE SMALL APPLIANCE INDUSTRY MAY CREATE PRICE
PRESSURES ON US.
The small household appliance industry is highly competitive and the
Company's ability to succeed is based upon the Company's and TKE's ability to
compete effectively. The Company believes that competition is based upon several
factors, including price, product features and enhancements, new product
introductions and customer delivery needs.
The current general slowdown in the retail sector has resulted in, and
the Company expects it to continue to result in, additional pricing pressures on
the Company's customers and, as a result, upon the Company. The Company competes
with many manufacturing companies, some of which have substantially greater
facilities, personnel, financial and other resources than the Company has.
Significant new competitors or increased competition from existing competitors
may adversely affect the Company's business, financial condition and results of
operations.
IF ANY OF THE PRODUCTS WE SUPPLY INFRINGE ON THE RIGHTS OF OTHERS, WE COULD
SUFFER SIGNIFICANT FINANCIAL LOSS.
The Company and TKE hold numerous patents on the products that the
Company supplies and these proprietary rights are essential to the Company's
business. The Company's patents could be challenged by others or invalidated
through administrative process or litigation. This process could be
7
costly and time consuming and would divert the attention of management and key
personnel from other business issues. If any of the Company's patents are
successfully challenged, we could be required to pay a significant damage award
and could no longer supply these products. This would have an impact on both the
Company's sales and costs.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS COULD INCREASE THE COMPANY'S OPERATING
COSTS AND INTERFERE WITH THE COMPANY'S BUSINESS EFFORT.
Most federal, state and local authorities require certification by
Underwriters Laboratory, Inc., an independent, not-for-profit corporation
engaged in the testing of products for compliance with certain public safety
standards, or other safety regulation certification prior to marketing
electrical appliances. Foreign jurisdictions also have regulatory authorities
overseeing the safety of consumer products. TKE products, or additional
electrical appliances which may be developed by the Company or TKE, may not meet
the specifications required by these authorities. A determination that the
Company's products are not in compliance with these rules and regulations could
result in the imposition of fines or an award of damages to private litigants.
ITEM 3. CONTROLS AND PROCEDURES.
CONTROLS AND PROCEDURES
The Company's senior management is responsible for establishing and
maintaining a system of disclosure controls and procedures (as defined in Rule
13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the "Exchange
Act")) designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company
carried out an evaluation, with the participation of the Chief Executive Officer
and Chief Financial Officer, as well as other key members of the Company's
management, of the effectiveness of the Company's disclosure and procedures as
of the end of the period covered by this report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective, as of the end of
the period covered by this report, to provide reasonable assurance that
information required to be disclosed in the Company's reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
No change occurred in the Company's internal controls concerning
financial reporting during the first quarter of 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
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PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
(a) Stockholder Communications.
Any stockholder or other interested party who desires to communicate with the
Company's Board of Directors or any other members of the of the Board of
Directors may do so by writing to the Chairman of the Board of Directors at 89
N. San Gabriel Boulevard, Pasadena, California 91107, who shall determine, in
his discretion, considering the identity of the submitting stockholder and the
materiality and appropriateness of the communication, whether, and to whom
within the Company, to forward the communication.
(b) Financial Expert.
The Board of Directors does not have a Financial Expert, but rather relies on
the knowledge of the members of the Board of Directors, the officers of the
Company, and its outside accountants.
(c) Stockholder Nominations.
The Board of Directors does not have a standing Nominating Committee. The Board
of Directors does not currently have a process for security holders to recommend
nominees to the Board of Directors. The Board intends to consider such a process
at its next meeting of the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Tsan-Kun Wu pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Kung-Chieh Huang pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 2004
EUPA INTERNATIONAL CORPORATION
By:/s/ Kung-Chieh Huang
---------------------------------
Name: Kung-Chieh Huang
Title: Chief Financial Officer
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