FORM 10-Q
For the quarterly period ended September 30, 1998
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES EXCHANGE ACT 0F 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to ______
- --------------------------------------------------------------------------------
Commission File Number: 1-13205
KING POWER INTERNATIONAL GROUP CO., LTD.
(Exact name of registrant as specified in its charter)
Nevada 75-2641513
(State of incorporation) (IRS Employer ID number)
26th-27th Floor, Siam Tower, 989 Rama 1 Road, Patumwan, Bangkok 10330 Thailand
(Address of principal executive offices)
011 (662) 658-0090
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: November 1, 1998: 20,250,000
<PAGE>
KING POWER INTERNATIONAL GROUP CO., LTD.
Form 10-Q for the Quarter ended September 30, 1998
Table of Contents
Page
Part I - Financial Information
Item 1 Financial statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 32
Part II - Other Information
Item 1 Legal Proceeding 43
Item 2 Changes in Securities 43
Item 3 Defaults Upon Senior Securities 43
Item 4 Submission of Matters to a Vote of Securities Holders 43
Item 5 Other Information 43
Item 6 Exhibits and Reports on Form 8-K 43
2
<PAGE>
KING POWER INTERNATIONAL GROUP
CO., LTD. AND SUBSIDIARIES
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND 1998
3
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
-----------------------
Note 1997 (restated) 1998
---- ---- ----
US$ US$
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents 1,220,448 1,444,674
Trade accounts receivable 663,755 509,290
Trade accounts receivable - related companies 7 212,176 1,472,707
Management fee receivable - related companies 7 - 2,498,514
Refundable value added tax 4 1,403,977 2,919,286
Advance to related companies 7 3,436,957 12,855,024
Advance to directors 5 4,060,190 1,073,837
Merchandise inventories - net 6 20,410,291 13,578,064
Deferred income tax assets 8 - 835,702
Interest receivable - related companies 7 - 555,482
Interest receivable 171,789 173,837
Other current assets 1,109,984 819,762
---------- ----------
32,689,567 38,736,179
Investments in other companies 9 175,281 139,155
Investment in marketable securities (trading) 3 27,380 25,440
Property, plant and equipment - net 10 3,471,547 4,782,713
Restricted fixed deposits 11 8,319,314 1,196,958
Other long-term asets 909,802 126,953
---------- ----------
45,592,891 45,007,398
========== ==========
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30,
-----------------------
Note 1997 (restated) 1998
---- ---- ----
US$ US$
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank overdraft 12 1,081,426 1,316,550
Bank loan 13 6,181,146 2,656,389
Notes payable 14 3,188,256 -
Current portion of installment purchase payable 15 29,663 33,186
Current portion of long-term loan 16 7,158 1,408,236
Trade accounts payable - related companies 7 470,637 1,800,640
Trade accounts payable 7 22,250,634 8,613,228
Advance from related companies 7 1,310,407 101,574
Leasehold improvements payable 300,137 -
Accrued concession fee 7 1,565,910 9,027,244
Other current liabilities 1,199,603 3,226,197
---------- ----------
Total current liabilities 37,584,977 28,183,244
Installment purchase payable - net 15 41,633 14,404
Long-term loans - net 16 263,352 1,334,437
---------- ----------
37,889,962 29,532,085
Minority interest 1 279,699 443,830
Commitments and contigencies 18
Shareholders' Equity 17
Common stock-$0.001 par value, 1000,000,000 shares authorized
20,250,000 shares issued and outstanding at September 30,
1997 and 1998 20,250 20,250
Additional paid in capital 20,848,145 20,848,145
Deficit (12,568,528) (4,074,318)
Accumulated other comprehensive income (876,637) (1,762,594)
---------- -----------
Total shareholders' equity 7,423,230 15,031,483
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 45,592,891 45,007,398
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
(UNAUDITED)
<TABLE>
<CAPTION>
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30,
-------------------------------
Note 1997 (restated 1998
---- ---- ----
US$ US$
<S> <C> <C>
Net income attributed to common shares 2,996,069 3,555,443
Other comprehensive income, before tax:
Foreign currency translation adjustments (1,387,125) 1,711,746
Income tax expense related toitems of other
comprehensive income - -
------------- -------------
Other comprehensive income, net of tax (1,387,125) 1,711,746
------------- -------------
Comprehensive income 1,608,944 5,267,189
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
Accumu-
lated
Other
Common Stock Additional Comprehensive Retained Compre-
------------------- Paid in hensive
Note Shares Amount Capital Income Earnings Income Total
------- ---------- ------ ---------- ---------- ----------- --------- ----------
US$ US$ US$ US$ US$ US$
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 17(a)(b) 18,800,000 18,800 18,962,595 - (15,564,597) 510,488 3,927,286
Recapitalization at June 12, 1997 17(c) 1,200,000 1,200 (1,200) - - - -
Regulation S issuance at
August 18, 1997 17(d) 250,000 250 1,886,750 - - - 1,887,000
Net Income - - - 2,996,069 2,996,069 - 2,996,069
Other Comprehensive income,
net of tax Foreign currency
translation adjustment - - - (1,387,125) - (1,387,125) (1,387,125)
-----------
Comprehensive Income 1,608,944
---------- ------ ---------- =========== ---------- --------- ----------
Balance, September 30, 1997 20,250,000 20,250 20,848,145 (12,568,528) (876,637) 7,423,230
========== ====== ========== ========== ========= ==========
Balance January 1, 1998 20,250,000 20,250 20,848,145 - (7,629,761) (3,474,340) 9,764,294
Net Income - - - 3,555,443 3,555,443 - 3,555,443
Other Comprehensive income, net of
tax Foreign currency translation
adjustment - - - 1,711,746 - 1,711,746 1,711,746
----------
Comprehensive Income - - - 5,267,189
---------- ------ ---------- ========== ---------- --------- ----------
Balance, September 30, 1998 20,250,000 20,250 20,848,145 (4,074,318) (1,762,594) 15,031,483
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
(UNAUDITED)
<TABLE>
<CAPTION>
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
------------------------------------
Note 1997 (restated) 1998
---- ---- ----
US$ US$
<S> <C> <C>
Cash flows from operating activities:
Net income 2,996,069 3,555,443
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 552,723 725,987
Unrealized loss on foreign exchange from Baht devaluation 1,509,940 -
Unrealized loss on foreign exchange 1,294,434 16,718
Unrealized gain on foreign exchange - (312,772)
Deferred income tax assets - 38,763
Minority interest-income statement impact 34,904 229,660
Decrease (increase) in operting asets:
Trade accounts receivable-related companies (212,176) (870,592)
Trade accounts receivable (590,420) (73,333)
Refundable valued added tax (481,358) (1,955,758)
Advance for office and shop improvement 512,888 -
Advance to related companies (3,362,796) (10,539,078)
Advance to directors (2,184,026) 248,945
Inventories (13,657,576) (437,708)
Management fee receivable-related companies - (323,621)
Interest receivable-related companies - (453,671)
Interest receivable (171,789) 420,977
Other current assets (404,491) (358,997)
Increase (decrease) in operating liabilities:
Trade accounts payable-related companies (940,058) 1,209,782
Trade accounts payable 9,805,485 (2,093,148)
Advance from related companies 625,395 101,574
Leasehold improvements payable (157,415) -
Accrued concession fee 1,565,910 2,811,174
Other current liabilities 640,041 2,278,121
Minority interest-balance sheet impact (107,169) 43,458
------------ ------------
Net cash provided (used) by operating activities.... (2,731,485) (5,738,076)
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine months ended September 30,
------------------------------------
Note 1997 (restated) 1998
---- ---- ----
US$ US$
<S> <C> <C>
Cash flows from investing activities:
Reduction in investment in other companies 74,594 (23,382)
Reduction in investment in marketable securities 11,652 (4,275)
Purchase of fixed assets (2,273,335) (2,106,248)
Addition to long-term assets (811,562) 648,717
------------ ------------
Net cash provided (used) by investing activities (2,998,651) (1,485,188)
------------ ------------
Cash flows fromfinancing activities:
Proceeds (repayment) in bank overdraft 143,622 357,915
Proceeds (repayment) from bank loan 2,277,945 (2,110,806)
Proceeds (repayment) from notes payable 1,438,493 (423,307)
Proceeds (repayment) from installment purchase payable (47,202) 120
Proceeds (repayment) from long-term loan 270,510 2,534,008
Net proceeds from Regulation S issuance 7(d) 1,887,000 -
Translation adjustment (1,387,125) 1,711,746
------------ ------------
Net cash provided (used) by financing activities 4,583,243 2,069,676
------------ ------------
Effect of exchange rate changes on cash - 12,660
Decrease (Increase) in restricted fixed deposits 1,228,138 5,268,722
------------ ------------
Net increase in cash and cash equivalents 81,245 127,794
Cash and cash equivalents-beginning of period 1,139,203 1,316,880
------------ ------------
Cash and cash equivalents-end of period 1,220,448 1,444,674
============ ============
Supplemental cash flow information
Cash paid during the period:
Interest paid 766,953 1,321,757
Income tax paid - -
Non-cash transaction:
Common stock 1,200 -
Additional paid-in capital -1,200 -
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine months ended September 30, Three months ended September 30,
------------------------------- --------------------------------
Note 1997 (restated) 1998 1997 (restated) 1998
---- ---- ---- ---- ----
US$ US$ US$ US$
<S> <C> <C> <C> <C> <C>
Sales revenue 66,637,398 62,343,321 10,713,133 18,642,886
Cost of sales:
Cost of merchandise sold 7 26,967,490 26,267,041 3,271,997 8,445,930
Concession fee 7 24,186,095 18,491,707 4,038,198 5,239,561
-------------- -------------- -------------- --------------
Total cost of sales 51,153,585 44,758,748 7,310,195 13,685,491
-------------- -------------- -------------- --------------
Gross Profit 15,483,813 17,584,573 3,402,938 4,957,395
Operating expenses:
Selling expenses
Sales salaries and welfare 4,823,211 5,456,670 1,176,198 1,736,330
Rental and service fee and other expenses under
the concession agreement 7 1,229,201 1,697,312 248,467 635,088
Depreciation 552,723 725,987 90,467 209,678
Others 924,918 915,162 (54,131) 243,031
-------------- -------------- -------------- --------------
Subtotal 7,530,053 8,795,131 1,461,721 2,824,127
Administrative expenses 2,244,562 3,436,357 352,815 1,287,759
-------------- -------------- -------------- --------------
Total operating expenses 9,774,615 12,231,488 1,814,536 4,111,886
-------------- -------------- -------------- --------------
Income from operations 5,709,198 5,353,085 1,588,402 845,509
Other Income:
Interest income-related company 7 - 485,119 - 257,082
Interest income 1,018,562 501,179 (113,956) (190,162)
Realized gain on foreign exchange 567,406 632,234 (106,970) 42,579
Unrealized gain on foreign exchange - 312,772 - (376,151)
Management fee income 7 - 221,592 - 80,748
Other income 247,961 96,714 67,217 34,713
-------------- -------------- -------------- --------------
Total other revenues 1,833,929 2,249,610 (153,709) (151,191)
-------------- -------------- -------------- --------------
Other expenses:
Interest expenses 754,260 1,097,416 311,485 418,341
Realized loss on foreign exchange 953,520 993,793 953,520 261,323
Unrealized loss on foreign exchange
from Baht devaluation 1,509,940 - 1,509,940 -
Unrealized loss on foreign exchange 1,294,434 16,718 - (262,393)
-------------- -------------- -------------- --------------
Total other expenses 4,512,134 2,107,927 2,774,945 417,271
-------------- -------------- -------------- --------------
Net income before income tax 3,030,973 5,494,768 (1,340,252) 277,047
Income tax 8 - (1,709,665) - (123,139)
-------------- -------------- -------------- --------------
Net income before minority interest 3,030,973 3,785,103 (2,634,686) 153,908
Minority interest (34,904) (229,660) (125,128) (52,082)
-------------- -------------- -------------- --------------
Net income attributed to common shares 2,996,069 3,555,443 (2,428,877) 101,826
============== ============== ============== ==============
Weighted average number of common
shares outstanding 19,620,290 20,250,000 19,620,290 20,250,000
Basic earnings per share 0.15 0.18 (0.12) 0.01
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
King Power International Group Co., Ltd. (formerly Immune America,
Inc.) (the Company) was incorporated under the laws of the State of Nevada on
July 30, 1985 in pursuance of the research and development of nutritional
products to treat malfunctions of body caused by immune deficiencies. The
Company began having financial difficulties in early 1988, and subsequently
ceased operations and liquidated its assets in the second quarter of that year.
Since then through June 12, 1997, the management had kept the Company inactive.
The inactive Company was regarded as a development stage company.
On June 12, 1997, the Company exchanged 18,800,000 shares of its common
stock for 99.94% of issued and outstanding common shares of King Power Tax Free
Company Limited (formerly J.M.T. Group Company Limited) (KPT thereafter) and
94.95% of the issued and outstanding common shares of King Power Duty Free
Company Limited (formerly J.M.T. Duty Free Company Limited) (KPD thereafter). As
these two Thailand-based companies are active operating companies, therefore,
the Company was no longer a development stage company after June 12, 1997.
This exchange of the Company's common stock to the former KPT and KPD
shareholders resulted in those former shareholders obtaining a majority voting
interest in the Company. Generally accepted accounting principles requires that
the company whose stockholders retain the majority interest in a combined
business be treated as the acquirer for accounting purpose. Consequently, this
transaction has been accounted for as a "reverse acquisition" for financial
reporting purpose and KPT and KPD are deemed to have acquired 94% of equity
interest in the Company as of the date of acquisition. The relevant acquisition
process utilizes the capital structure of Immune Ameica, Inc. and the assets and
liabilities of KPT and KPD are recorded at historical cost.
KPT and KPD are the operating entities for financial reporting
purposes, and financial statements prior to June 12, 1997 represent KPT and
KPD's financial position and results of operations. The assets, liabilities and
results of operations of both KPT and KPD are included as of June 12, 1997.
Although KPT and KPD are deemed to be the acquiring corporations for financial
accounting and reporting purposes, the legal status of the Company as the
surviving corporation does not change.
Concurrent with the reverse acquisition, the Company changed its
corporate name from Immune America, Inc. to King Power International Group Co.,
Ltd.
11
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
King Power Duty Free Company Limited is a Thailand-based corporation
engaged in selling duty free merchandise to the traveling public under the
supervision of Thai customs in various stores located in the international
terminals of the various airports located in Thailand. KPD holds from the
Airports Authority of Thailand a non-exclusive license to operate duty free
stores for all stores of this specific nature. For the duty free store
operation, KPD is exempt from input value added tax on purchases of merchandise
and from output value added tax on sales of merchandise.
King Power Tax Free Company Limited is a Thailand-based corporation
engaged in selling various souvenirs and consumer products in the international
and domestic terminals of the various airports located within Thailand to the
general public. KPT holds the exclusive operating license granted by the
Airports Authority of Thailand for all shops of this specific nature. For the
tax free operation, KPT is subject to input value added tax on purchases of
merchandise and is exempt from output value added tax on sales of merchandise.
On October 10, 1997, the Company acquired 4,900 shares of common stock
in King Power International Group (Thailand) Company Limited ("KPG Thai"),
equivalent to 49% of the registered capital. KPG Thai was established in
Thailand on September 11, 1997 and has registered capital totaling Baht 1
million divided into 10,000 shares of common stock with Baht 100 per shares. KPT
acquired 5,093 shares of common stock in King Power International Group
(Thailand) Company Limited, equivalent to 50.93% of the registered capital.
Ultimately, the Company owns 99.93% of equity interest in King Power
International Group (Thailand) Company Limited.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America which
include the accounts of the Company and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The consolidated financial statements are presented in U.S. dollars.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Merchandise Inventory Valuation
Merchandise inventory are stated at the lower of cost or market.
Costs are determined on a weighted average basis.
12
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's
foreign subsidiaries are determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
prevailing exchange rate in effect at period end, except where there are forward
contracts, then the latter rates will be used. Contributed capital accounts are
translated using the historical rate of exchange when capital injected. Income
statement accounts are translated at the average rate of exchange during the
period. Translation adjustments arising from the use of different exchange rates
from period to period are included in the cumulative other comprehensive income
in shareholders' equity. Gains and losses resulting from foreign currency
transactions are included in operations.
The exchange rates as of September 30, 1997 and 1998 are $1 = Thai Baht
36.523 and Baht 39.308, respectively. The average rate of exchange during 1997
and 1998 are $1 = Thai Baht 34.306 and Baht 40.697, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed primarily utilizing the straight-line method over the estimated useful
lives of the assets as follows:
Estimated useful life
(in years)
---------------------
Building 20
Leasehold improvements 5, 10
Selling office equipment and fixtures 5
Vehicles 5
Maintenance, repairs and minor renewals are charged directly to
expenses as incurred. Additions and betterment to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain or
loss is included in income statement.
Use of Estimates
The preparation of financial statements in conformity with US generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the reporting
period. Among the more significant estimates included in these financial
statements are the estimated allowance for doubtful accounts receivable and the
deferred income tax asset allowance. Actual results could differ from those
estimates.
13
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interim financial information
The interim financial statements for the nine-months ended
September 30, 1997 and 1998 are unaudited. In the opinion of management, such
statements reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the results of operations for the interim
periods. The results of operations for the nine-months ended September 30, 1997
and 1998 are not necessarily indicative of the results for the entire year.
Revenue Recognition
The Company recognizes revenue from sales of merchandise at the point
of sales.
Concession Agreement
According to the concession agreement with Airport Authority of
Thailand, King Power Tax Free Co., Ltd. is required to pay concession fee,
rental and services fee, and other related expenses at the fixed charges as
defined in the agreement.
According to the concession agreement with Airport Authority of
Thailand, King Power Duty Free Co., Ltd. is required to pay concession fee at
the fixed percentage of sales but at least equal to the fixed charge as defined
in agreement, and pay rental and service fee and other related expenses at the
fixed charges as defined in the agreement.
Accounts Receivable and Concentration of Credit Risk
The Company's retail businesses are cash flow businesses. Most of
sales have taken place with cash receipts or credit card receipts. Consequently,
the Company usually does not provide any bad debt allowance for doubtful
accounts. However, the Company does review its accounts receivable from time to
time on case by case basis to determine if any bad debt allowance is necessary
at each year end. The Company maintains its cash accounts in high quality
financial institutions.
Investment in Marketable Securities
The Company accounts for investment in marketable securities as
trading category in accordance with the provisions of Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115).
Under SFAS No. 115, debt securities and equity securities that have
readily determinable fair values are to be classified in three categories.
Held to Maturity - the positive intent and ability to hold to maturity.
Amounts are reported at amortized cost and adjusted for amortization of premiums
and discounts.
14
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trading Securities - bought principally for purpose of selling them in
the near term. Amounts are reported at fair value with unrealized gains and
losses included in other income (expenses).
Available for Sale - not classified in one of the above categories.
Amounts are reported at fair value with unrealized gains and losses excluded
from other income (expenses) and reported separately as a component of
shareholders' equity.
Investments in Other Company
Investment in other companies under 20% of interest was accounted for
using the cost method. Provision for diminution in value of the investment was
included in the statement of income.
Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, notes
receivable, trade accounts payable and accrued payable are reasonable estimates
of their fair value because of the short maturity of these items. The carrying
amounts of the Company's credit facilities approximate fair value because the
interest rates on these instruments are subject to change with market interest
rates.
Income Taxes
The Company accounts for income taxes using the liability method,
which requires an entity to recognize deferred tax liabilities and assets.
Deferred income taxes are recognized based on the differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements which will result in taxable or deductible amounts in future years.
Further, the effects of enacted tax laws or rate changes are included as part of
deferred tax expenses or benefits in the period that covers the enactment date.
A valuation allowance is recognized if it is more likely than not that some
portion, or all of, a deferred tax asset will not be realized.
The Company does not provide income tax provision on unremitted
earnings of its Thailand-based subsidiaries since the Company's intention is to
reinvest these earning in their operations.
Earnings Per Share
In 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any diluted effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented and, where applicable,
restated to confirm to the requirements of SFAS No. 128.
15
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting for Stock-based Compensation
In connection with its adoption of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS
No. 123), the Company will adopt the intrinsic value method of accounting for
employee stock options and disclose the pro forma impact on net income and
earnings per share as if the fair value -based method had been applied. For
equity instruments, including stock options issued to non-employee, including
directors, the fair value of the equity instruments or the fair value of the
consideration received, whichever is more readily determinable, is used to
determine the value of services or goods received and the corresponding charge
to operations.
New Accounting Standards
In June 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statements that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise,"
establishes standards for the way that public enterprises report information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated.
Reclassification of Accounts
Certain accounts in the 1997 financial statements were reclassified to
conform with the 1998 financial statement presentation
16
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3 - INVESTMENT IN MARKETABLE SECURITIES (TRADING )
1997 1998
US$ US$
At Cost 54,760 50,880
Loss on decline in market value of investment (27,380) (25,440)
------ ------
Net investment in mutual fund 27,380 25,440
====== ======
On May 23, 1995, King Power Tax Free Co., Ltd. (KPT) acquired 200,000
investment units of Bangkok Metropolitan Fund, equivalent to 0.10% of the
registered fund. Bangkok Metropolitan Fund, a five-years closed-end mutual fund,
was established and managed by The Mutual Fund Public Company Limited, and has a
registered fund totalling Baht 2,000 million divided into 200 million investment
units with par value of Baht 10 each.
There were no additions to or dispositions of investments during the
first nine months of 1998. The difference in cost value of investment in US
dollars was due to using different exchange rates from year to year.
NOTE 4 - REFUNDABLE VALUE ADDED TAX
In the Company's Thailand-based subsidiaries, refundable value added
tax (VAT) represents, on a cumulative basis, the excess of input tax (charged by
suppliers on purchases of merchandise and services) over the output tax (charged
to customers on sales of merchandise and services). Value added tax is levied on
the value added at each stage of production and distribution including
servicing, generally at the rate of 7% and at the rate of 10% starting at August
16, 1997.
NOTE 5 - ADVANCE TO DIRECTORS
Advances to directors bears an interest at the rate of 10% per annum
and is due on demand.
NOTE 6 - MERCHANDISE INVENTORIES
Merchandise inventories are summarized as follows :
1997 1998
---- ----
US$ US$
Merchandise 20,410,291 13,578,064
Less : Provision for damaged stock - -
---------- ----------
20,410,291 13,578,064
========== ==========
17
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 - RELATED PARTY TRANSACTIONS
1997 1998
---- ----
US$ US$
<S> <C> <C>
Trade accounts receivable - related companies
King Power International Co., Ltd. (World Trade Center) - 1,301,317
Downtown D.F.S. (Thailand) Co., Ltd. 212,176 171,390
Management fee receivable - related companies
Downtown D.F.S. (Thailand) Co., Ltd. - 2,347,461
King Power International Co., Ltd. (World Trade Center) - 151,053
Advance to related companies
Forty Seven Co., Ltd. 446,794 4,844,094
King Power International Co., Ltd. (World Trade Center) 2,567,690 2,300,159
Downtown D.F.S. (Thailand) Co., Ltd. 52,022 1,280,201
King Power Duty Free (CBO) Ltd. - 1,156,439
Top China Group Co., Ltd. - 1,101,430
Grand Enterprise and Trading Limited Partnership - 935,102
Infotel Co., Ltd. 334,036 484,710
King Power on Board and Sale Services Co., Ltd. - 319,948
Lengle (Thailand) Co., Ltd. - 248,092
King Power International Advertising Co., Ltd. - 114,481
King Power Business Development Co., Ltd. 9,035 68,669
King Power Alpha on Board Sale and Services Co., Ltd. - 1,699
Thai Sky Travel and Intertrade Co., Ltd. 27,380 -
Interest receivable - related companies
Forty Seven Co., Ltd. - 209,417
King Power Duty Free (CBO) Ltd. - 93,128
King Power International Co., Ltd. (World Trade Center) - 84,044
Downtown D.F.S. (Thailand) Co., Ltd. - 48,478
Top China Group Co., Ltd. - 41,554
Infotel Co., Ltd. - 28,755
Grand Enterprise and Trading Limited Partnership - 25,172
King Power on Board and Sale Services Co., Ltd. - 15,231
Lengle (Thailand) Co., Ltd. - 7,225
King Power Business Development Co., Ltd. - 1,611
King Power International Advertising Co., Ltd. - 847
King Power Alpha on Board Sale and Services Co., Ltd. - 20
Trade accounts payable - related companies
King Power International Co., Ltd. (World Trade Center) - 1,615,830
Thai Nishigawa International co., Ltd. 46,539 99,732
Niji (Thailand) Co., Ltd. 5,063 47,144
King Power Duty Free (CBO) Ltd. - 37,934
Lengle (Thailand) Co., Ltd. 419,035 -
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 - RELATED PARTY TRANSACTIONS (Continued)
1997 1998
---- ----
US$ US$
<S> <C> <C>
Trade accounts payable
Thai Sky Travel and Intertrade Co., Ltd. - 356
Accrued concession fee
Airports Authority of Thailand - 2,447,359
Advance from related companies
King Power Duty Free (CBO) Ltd. - 101,574
King Power International Co., Ltd. (World Trade Center) 1,180,352 -
Top China Group Co., Ltd. 82,140 -
Grand Enterprise and Trading Limited Partnership 47,915 -
Management fee income
King Power International Co., Ltd. (World Trade Center) - 221,592
Interest income - related companies
Forty Seven Co., Ltd. - 202,270
King Power Duty Free (CBO) Ltd. - 89,950
Downtown D.F.S. (Thailand) Co., Ltd. - 46,823
Top China Group Co., Ltd. - 40,136
King Power International Co., Ltd. (World Trade Center) - 29,771
Infotel Co., Ltd. - 27,774
Grand Enterprise and Trading Limited Partnership - 24,313
King Power on Board and Sale Services Co., Ltd. - 14,710
Lengle (Thailand) Co., Ltd. - 6,978
King Power Business Development Co., Ltd. - 1,556
King Power International Advertising Co., Ltd. - 818
King Power Alpha on Board Sale and Services Co., Ltd. - 20
Sales
Downtown D.F.S. (Thailand) Co., Ltd. 181,477 -
King Power International Co., Ltd. (World Trade Center) - 382,089
Lengle (Thailand) Co., Ltd. - 41,511
Purchases
Lengle (Thailand) Co., Ltd. 529,429 -
Thai Nishigawa International Co., Ltd. 183,331 270,092
Niji (Thailand) Co., Ltd. 44,973 166,243
King Power Duty Free (CBO) Ltd. - 53,189
Thai Sky Travel and Intertrade Co., Ltd. - 53,134
Concession fee
Airports Authority of Thailand 6,473,107 5,661,512
Rental, service fee and other expenses under the concession agreement
Airports Authority of Thailand 577,864 503,113
Advances to related companies represent advances for operating funds.
Such advances bear interest rate at the rate of 10% per annum and are due on
demand.
</TABLE>
19
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 - DEFERRED INCOME TAX ASSETS
In Thailand, business enterprises are subject to corporate income tax
on their book profits after adjustments made for tax purposes. Provisions for
bad debts or inventory obsolescence are not deductible until bad debt or
inventory obsolescence actually takes place. The Thailand corporate income tax
is levied at the flat rate of 30%. However, the net operating loss can be
carried forward and utilized within five years. Accordingly, the income tax
benefit using the average exchange rate for income statement account and the
deferred income tax asset using current exchange rate for balance sheet account
have been determined as follows :
<TABLE>
1997 1998
---- ----
US$ US$
<S> <C> <C>
Statement of income
Current income tax (1,054,291) (1,738,689)
Deferred income tax assets
- Temporary differences 14,851 -
- Net operating loss carry-forward 3,398,829 29,024
--------- ----------
3,413,680 29,024
Less : Valuation allowance (2,359,389) -
Income tax benefit 1,054,291 29,024
--------- ----------
Net income tax benefit (corporate income tax) - (1,709,665)
========= ==========
Balance sheet
Deferred income tax assets on January 1, - 874,465
Adjusted exchange rate to exchange rate on September 30, - 176,615
- 1,051,080
--------- ----------
Recognition of deferred income tax assets on
- Temporary difference 14,851 -
- Net operating loss carry - forward 3,398,829 292,310
- Net effect of exchange rate adjusted from average
rate to exchange rate on September 30, (207,216) 10,330
Utilised deferred income tax assets on
- Net operating loss carry - forward (990,294) (308,519)
- Temporary differences - (209,499)
---------- ----------
Deferred income tax assets on September 30, 2,216,170 835,702
---------- ----------
Net Deferred income assets on September 30 composed of
- Temporary differences 13,949 18,205
- Net operating loss carry - forward 2,202,221 817,497
2,216,170 835,702
Less : Valuation allowance (2,216,170) -
----------- ----------
Total - 835,702
----------- ----------
</TABLE>
20
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result, the effective income tax rate for the subsidiaries is
different from the standard income tax rate. The following reconciliation shows
the differences between the effective and standard rates.
<TABLE>
1997 1998
---- ----
<S> <C> <C>
Standard income tax rate (34.78%) (31.64%)
Recognition of temporary differences 0.48% -
Recognition of net operating loss carry-forward 112.14% 0.53%
Less : Valuation allowance (77.84%) -
Income tax benefit 34.78% 0.53%
--------- --------
Effective income tax rate - (31.11%)
========== ========
</TABLE>
In 1997, KPT anticipated that the effective income tax rate at the end
of the year 1997 would be zero, therefore, no provision for corporate income tax
was made in the first nine months of financial year 1997. As a result, the
standard income tax rate for 1997 was reduced from 30% to 34.78%.
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to or decline
in the net deferred tax assets and liabilities and their approximate tax effects
are as follows :
<TABLE>
1997 1998
---- ----
US$ US$
<S> <C> <C>
Temporary differences on January 1, on
- Provision on damaged stock - 223,124
- Provision for devaluation of investment - 41,042
Deferred income tax asset - temporary differences - 264,166
Adjusted exchange rate to exchange rate on September 30,
- Provision on damaged stock - (30,797)
- Provision for devaluation of investment - (5,665)
Recognition of temporary difference on
- Provision for devaluation of investment 13,949 -
Utilised of temporary difference on
- Provision on damaged stock - (192,327)
- Provision for devaluation of investment - (17,172)
Net temporary difference on September 30, on
- Provision on damaged stock - -
- Provision on devaluation of investment 13,949 18,205
Deferred income tax asset - temporary differences 13,949 18,205
====== =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Also, the net operating losses carry-forward amounts give rise to or
decline in the deferred income tax assets and their approximate effects are as
follows :
As at September 30, 1997
------------------------
Taxable Taxable loss
loss/(profit) Loss used available for future use
Year Subsidiaries incurred 1996 1997 at September 30, 1997
---- ------------ ------------- ---- ---- ------------------------
<S> <C> <C> <C>
US$ US$ US$ US$
1992 KPT 5,138 (5,138) - -
1993 KPT 4,942,045 (1,813,611) (2,736,661) 391,773
1994 KPT 5,088,231 - - 5,088,231
1995 KPT 1,860,731 - - 1,860,731
1996 KPT (1,818,749) - - -
KPD 564,320 - (564,320) -
1997 KPT (2,736,661) - - -
KPD (617,255) - - -
------------ ------------ ---------
(1,818,749) (3,300,981) 7,340,735
=========== =========== =========
Deferred income tax asset
- usage of operating loss carry-forward (990,294)
=======
- net operating loss carry-forward 2,202,221
=========
As at September 30, 1998
------------------------
Taxable Taxable loss
loss/(profit) Loss used available for future
Year Subsidiaries incurred 1996 1997 1998 use at September 30, 1998
---- ------------ ------------- ---- ---- ---- -------------------------
US$ US$ US$ US$ US$
1992 KPT 4,774 (4,774) - - -
1993 KPT 4,591,897 (1,685,115) (2,906,782) - -
1994 KPT 4,727,726 - (4,640,266) - 87,460
1995 KPT 1,728,897 - - - 1,728,897
1996 KPT (1,689,889) - - -
KPD 524,337 - - (524,337) -
1997 KPT (7,547,048) - - - -
KPD 403,892 - - (403,892) -
KPG - Thai 100,166 - - (100,166) -
1998 KPT 908,632 - - - 908,632
KPD (6,093,100) - - - -
KPG - Thai (117,627) - - - -
---------- ---------- ---------- ---------
(1,689,889) (7,547,048) (1,028,395) 2,724,989
========== ========== ========== =========
Deferred income tax asset
- usage of operating loss carry - forward (308,519)
=======
- net operating loss carry-forward 817,497
=======
</TABLE>
22
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No valuation allowance has been provided at September 30, 1998 as the
Company has determined that it is more likely than not to realize these deferred
income tax assets.
The difference in net operating loss carry-forward amount in US
dollars from 1997 to 1998 was due to using different exchange rates from year to
year.
NOTE 9 - INVESTMENTS IN OTHER COMPANIES
<TABLE>
1997
-------------------------------------------------------------
Provision for devaluation Net investments
Cost of investment in other companies
--------- -------------------------- ------------------
US$ US$ US$
<S> <C> <C> <C>
International Tourism Promotion
Co., Ltd. 164,280 16,706 147,574
Top Trade Overseas Promotion
Co., Ltd. 27,380 1,865 25,515
Global Capital Group Co., Ltd. 2,738 546 2,192
------- ------- --------
Total 194,398 19,117 175,281
======= ======= ========
1998
-------------------------------------------------------------
Provision for devaluation Net investments
Cost of investment in other companies
--------- ------------------------- ------------------
US$ US$ US$
International Tourism Promotion
Co., Ltd. 152,641 15,522 137,119
Top Trade Overseas Promotion
Co., Ltd. 25,440 25,440 -
Global Capital Group Co., Ltd. 2,544 508 2,036
-------- ------- --------
Total 180,625 41,470 139,155
======== ======= ========
</TABLE>
There were no changes related to the investment in these three entities
during the first nine months of 1998. The difference in cost value of investment
in US dollars was due to using different exchange rates from year to year.
23
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
King Power Tax Free Co., Ltd. (KPT) acquired 60,000 shares of common
stock in International Tourism Promotion Co., Ltd., on July 5, 1995 an
equivalent to 10% of the registered capital. International Tourism Promotion
Co., Ltd. was established in Thailand on October 14, 1993, and has registered
capital totaling Baht 60 million divided into 600,000 shares of common stock
with Baht 100 per share. International Tourism Promotion Co., Ltd. suffered a
loss of Baht 534,069 in 1995 and Baht 76,057 in December, 1996, respectively.
The amount of loss was determined to be equal to the decline in the net
realizable value of the investment and has been reflected in the statement of
income for the years ended December 31, 1995 and 1996, respectively. In 1997 and
1998, no additional provision for devaluation of investment was made as there
were no 1997 and 1998 financial statements available.
King Power Tax Free Co., Ltd. (KPT) acquired 10,000 shares of common
stock in Top Trade Overseas Promotion Co., Ltd., on October 18, 1994 an
equivalent to 10% of the registered capital. Top Trade Overseas Promotion Co.,
Ltd. was established in Thailand on July 13, 1994, and has a registered capital
totaling Baht 10 million divided into 100,000 shares of common stock with Baht
100 per share. Top Trade Overseas Promotion Co., Ltd. suffered a loss of Baht
68,125 in 1994. The amount of loss was determined to be equal to the decline in
the net realizable value of the investment and has been reflected in the
statement of income for the year ended December 31, 1994. As for the year ended
December 31, 1995 and 1996, no additional provision for devaluation of
investment was made as there was no 1995 and 1996 financial statements
available. A reserve was established in 1997 to cover the full amount of this
investment.
King Power Tax Free Co., Ltd. (KPT) acquired 10,000 shares of common
stock in Global Capital Group Co., Ltd., on July 20, 1995 an equivalent to 1% of
the registered capital. Global Capital Group Co., Ltd. was established in
Thailand on June 14, 1994, and has a registered capital totaling Baht 10 million
divided into 1,000,000 shares of common stock with Baht 10 per share. Global
Capital Group Co., Ltd. suffered a loss of Baht 19,955 in 1995. The amount of
loss was determined to be equal to the decline in the net realizable value of
the investment and has been reflected in the statement of Income for the year
ended December 31, 1995. In 1996, 1997 and 1998, no additional provision for
devaluation of investment was made as there were no 1996, 1997 and 1998
financial statements available.
24
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT - NET
1997 1998
US$ US$
Land 144,566 134,324
Building 141,490 131,465
Leasehold improvements 2,458,954 4,212,997
Selling office equipment and fixtures 1,159,220 1,525,096
Vehicles 380,355 457,158
---------- -----------
Total acquisition cost 4,284,585 6,461,040
Less: accumulated depreciation (813,038) (1,678,327)
----------- -----------
Net book value 3,471,547 4,782,713
========== ==========
NOTE 11 - RESTRICTED FIXED DEPOSITS
The Company's Thailand-based subsidiaries made restricted fixed
deposits as guarantee with a commercial bank for bank credit facilities of
subsidiaries and a related company (Bank overdraft, Letter of Credit, Trust
receipt) and for the issuance of letter of guarantee required under an agreement
with the Airports Authority of Thailand which granted King Power Tax Free Co.,
Ltd. for the exclusive operating license and King Power Duty Free Co., Ltd. for
non-exclusive operating license to sell merchandise and souvenirs, and to rent
the commercial space to carry out such activities in the International Airport
of Thailand. Such fixed deposits are term deposits (ranging from 3 months to 12
months) with the bank which bear interest at the rate of 15% per annum.
NOTE 12 - BANK OVERDRAFT
King Power Duty Free Co., Ltd. obtained from a commercial bank an
overdraft facility of Baht 25 million which bears interest at the Bank's MOR
plus 1% per annum, and is guaranteed by a director of King Power Duty Free Co.,
Ltd. and the pledged fixed deposit. For the nine months ended September 30,
1997, the average rate of MOR (Minimum Overdraft Rate) was 16.50% to 21% per
annum and for the nine months ended September 30, 1998, the MOR was 19% to 21%
per annum.
25
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 - BANK LOAN
1997 1998
---- ----
US$ US$
Trust receipt 3,990,746 2,656,389
Short-term loan 2,190,400 -
--------- ---------
Total 6,181,146 2,656,389
========= =========
Trust receipt incurred by King Power Duty Free Co., Ltd. (KPD) bears
interest at the rates of 9% to 10.5% in 1997 and 7% to 18% in 1998 and is
guaranteed by the aforementioned fixed deposit and two directors of KPD together
with a related company.
King Power Tax Free Co., Ltd. (KPT) has a short-term loan with a local
bank for Baht 100 million which bears interest at the Bank's MLR plus 1.5% per
annum. The repayment schedule is by ten installments of Baht 10 million,
starting from November, 1996.
The short-term loan is guaranteed by two directors of KPT together with a
related company.
For the nine months ended September 30, 1997, the average rate of MLR
(Minimum Loan Rate), was 15% per annum.
NOTE 14 - NOTES PAYABLE
At September 30, 1997 King Power Tax Free Co., Ltd. (KPT) and King
Power Duty Free Co., Ltd. (KPD) issued a 30-day promissory note payable to a
local commercial bank, which bears interest at rates varying from 15% per annum
and 21.75% per annum, respectively.
NOTE 15 - INSTALLMENT PURCHASE PAYABLE - NET
Installment purchase payable incurred from the purchase of a vehicle of
King Power International Group (Thailand) Co., Ltd. (KPG - Thai) and from the
purchase of seven vehicles of King Power Duty Free Co., Ltd. (KPD).
For KPG - Thai, repayment periods are 24 monthly installments of Baht
18,427 per payment including interest at the rate of 10.25% per annum.
26
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For KPD, repayment periods are 36 monthly installments of Baht 13,269
per payment including interest at the rate of 9% per annum for each of seven
vehicles, respectively.
<TABLE>
1997 1998
---- ----
<S> <C> <C>
US$ US$
Installment purchase payable 71,296 47,590
Less : Current portion of installment purchase payable (29,663) (33,186)
------ ------
Installment purchase payable - net 41,633 14,404
====== ======
NOTE 16 - LONG-TERM LOAN - NET
1997 1998
US$ US$
Long-term loan 270,510 2,742,673
Less : Current portion of long-term loan (7,158) (1,408,236)
------- ---------
Long-term loan - net 263,352 1,334,437
======= =========
</TABLE>
In 1997 King Power Duty Free Co., Ltd. (KPD ) obtained a long-term loan
from a local financial institution of Baht 10 million which bears an interest
rate of 13.5% per annum. The repayment is made by the monthly installments of
Baht 129,840 per payment (including interest), starting from March 4, 1997. The
long-term loan is collateralized by KPD's properties and guaranteed by a
director of KPD.
On July 1998, such loan amount has been revised to Baht 9.9 million
which bears an interest rate of 17.25% per annum. The monthly installment has
been revised to Baht 146,590 per payment (including interest).
On July 1998 King Power Duty Free Co., Ltd. (KPD) obtained another
long-term loan from a local bank of Baht 98 million which bears an interest rate
of 21.25% per annum. The repayment is made by the monthly installments of Baht
7.5 million per payment (including interest) starting from January 1999. The
long-term loan is collateralized by directors of KPD.
NOTE 17 - SHAREHOLDERS' EQUITY
(a) Per the reverse acquisition agreement, the shareholders of two
Thailand-based companies together received a total of 18,800,000 shares of
common stock of KPG (Formerly Immune America, Inc.) which represented 94% equity
interest as of the date the reverse acquisition agreement was effective.
Therefore, the 18,800,000 shares were assumed to be issued and outstanding as of
January 1, 1996 for the purpose of presenting comparative financial statements.
27
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b) Per reverse acquisition agreement, 752,000 shares out of the total
18,800,000 shares were put in escrow subject to certain requirements including
that the Company shall have financial statements prepared in accordance with
U.S. GAAP and shall have reached certain criteria of financial performance as of
December 31, 1997. If as of December 31, 1997, the Company failed to satisfy any
of these conditions the 752,000 shares were to be released to a financial
consultant which was also a party to the reverse acquisition agreement. During
the first quarter of 1998 these shares were released from escrow and issued to
the financial consultant.
(c) Per the reverse acquisition agreement, the remaining equity
interest were represented by 1,200,000 shares of common stock as of June 12,
1997 when the reverse acquisition was effective. These 1,200,000 shares of
common stock were represented by the following components:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
----------------------------------------------------------------------------------
Beginning Balance at 12/31/96 275,316 275 151,186 (143,833) (6,000) 1,628
Form S-8 issuance at 5/5/97 924,684 925 69,717 70,642
Reissuing of treasury stock 6,000 6,000
Net loss at 6/12/997 (78,270) (78,270)
----------------------------------------------------------------------------------
Total shareholders' equity 1,200,000 1,200 220,903 (222,103) 0 0
==================================================================================
</TABLE>
(d) On August 18, 1997, the Company issued 250,000 shares of its common
stock to two foreign entities, 125,000 shares each, at a price of US$ 8.00 per
share with net proceeds of US$ 1,887,000. Both entities are located in Taipei,
Taiwan, Republic of China. 125,000 shares were placed in escrow until May 1,
1998, subject to an additional payment by the purchasers of US$4.00 per share on
all 250,000 shares issued or US$ 1,000,000, in the event that the earnings per
share for the Company for the calendar year ended December 31, 1997 exceeded a
certain amount per share. If the earnings per share for fiscal year 1997 were
below the specified goal, then the shares under escrow were to be released to
the purchasers without further consideration. These shares have been released
from escrow without the payment of additional consideration. No underwriter or
placement agent was used. The issuance was conducted pursuant to Regulation S
promulgated under the United States Securities Act of 1933, as amended.
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES
In order to obtain the necessary rights to operate at the international and
domestic airports in Thailand, King Power Tax Free Co., Ltd. and King Power Duty
Free Co., Ltd. entered into various agreements with the Airports Authority of
Thailand to operate at the international and domestic airports and to rent
office space.
28
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Both of KPD and KPT are required to pay concession fee, rental and
service fees, property tax, and other expenses under the aforementioned
agreements with the Airports Authority of Thailand. A summary of the concession
and rental fees payable for the remaining periods of the agreements are as
follows:
<TABLE>
<S> <C> <C>
King Power Tax Free Co., Ltd. King Power Duty Free Co., Ltd.
------------------------------------- -----------------------------------------
Rental and Service Rental and Service
Year Concession fee and other expense Concession fee and other expenses
- ----- -------------- ------------------ -------------- ------------------
(US$ in Million) (US$ in Million)
1998 3.88 0.15 4.30 0.22
1999 16.13 0.60 17.81 0.87
2000 17.01 0.60 18.44 0.87
2001 18.06 0.60 19.08 0.87
2002 19.21 0.60 - -
Lease commitments
As of September 30, 1998, King Power International Group (Thailand)
Company Limited. (KPG Thailand) has a leasing commitment under a non-cancelable
operating lease agreement in excess of one year as follows:
Rental Charges Service Fee
-------------- -----------
US$ US$
1998 30,814 39,975
1999 123,255 159,212
2000 102,713 133,249
</TABLE>
Letter of bank guarantee
As of September 30, 1998, King Power Tax Free Co., Ltd. and King Power
Duty Free Co., Ltd. were contingently liable for bank guarantees totalling US$
16.57 million issued in favour of the Excise Department and the Airports
Authority of Thailand as a performance bond.
Unused letter of credits
As of September 30, 1998, King Power Duty Free Co., Ltd. has the unused
letters of credit amounting to US$ 1.42 million.
29
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Installment Purchase Obligation
1997 1998
---- ----
<S> <C> <C>
US$ US$
1997 17,822 -
1998 26,365 9,757
1999 26,365 33,981
2000 744 3,852
------- ---------
Total 71,296 47,590
====== ======
Long-term Loan Installment Payments
1997 1998
---- ----
US$ US$
1997 2,369 -
1998 7,398 190
1999 8,445 1,931,756
2000 9,641 563,788
2001 11,006 1,702
2002 12,564 2,020
Thereafter 219,087 243,217
------- ---------
Total 270,510 2,742,673
======= =========
</TABLE>
<TABLE>
NOTE 19 - SEGMENT FINANCIAL INFORMATION
For the nine months ended September 30, 1997
---------------------------------------------------------------------------
Duty Free Tax Free All Adjustments
Retail Retail Other and Eliminations Consolidated
----------- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
US$ US$ US$ US$ US$
Segment Information
Revenue from external customers 40,401,612 26,235,786 - - 66,637,398
Intersegment revenue - - - - -
Cost of merchandise sold 16,661,862 10,305,628 - - 26,967,490
Concession fees 12,052,080 12,134,015 - - 24,186,095
Gross profit 11,687,671 3,796,142 - - 15,483,813
Interest income 393,486 625,076 - - 1,018,562
Interest expenses 376,842 377,418 - - 754,260
Segment net income (loss) 657,144 2,864,015 2,996,068 (3,486,254) 3,030,973
Segment total assets 32,856,073 15,052,300 8,114,655 (10,430,137) 45,592,891
Expenditures for segment assets 2,465,104 297,297 - - 2,762,401
30
<PAGE>
(UNAUDITED)
KING POWER INTERNATIONAL GROUP CO., LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long - Lived
Revenue Assets
----------- ------------
US$ US$
Geographical Information
Bangkok 65,180,954 4,150,613
Northern Thailand region 1,057,049 79,320
Southern Thailand region 399,395 54,652
---------- ---------
Total 66,637,398 4,284,585
========== =========
For the nine months ended September 30, 1998
---------------------------------------------------------------------------
Duty Free Tax Free All Adjustments
Retail Retail Other and Eliminations Consolidated
----------- ---------- ----------- ---------------- -------------
US$ US$ US$ US$ US$
Segment Information
Revenue from external customers 36,933,173 25,410,148 - - 62,343,321
Intersegment revenue 439,876 71,294 - (511,170) -
Cost of merchandise sold 16,605,394 9,661,647 - 26,267,041
Concession fees 7,655,479 10,836,228 - - 18,491,707
Gross profit 13,040,881 4,543,692 - - 17,584,573
Management fee income - - 1,153,037 (931,445) 221,592
Interest income 869,595 189,492 49,069 (121,858) 986,298
Interest expenses 791,305 315,000 113,239 (122,128) 1,097,416
Segment net income (loss) 4,553,046 (575,634) 3,806,418 (3,998,727) 3,785,103
Segment total assets 29,637,102 16,219,373 17,558,862 (18,571,400) 44,843,937
Expenditures for segment assets 970,171 169,895 526,637 - 1,666,703
Long - Lived
Revenue Assets
---------- ------------
US$ US$
Geographical Information
Bangkok 60,615,643 6,242,412
Northern Thailand region 1,404,441 92,021
Southern Thailand region 323,237 51,817
---------- ---------
Total 62,343,321 6,386,250
========== =========
</TABLE>
31
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
(1) Caution Regarding Forward-Looking Information
This report contains certain forward-looking statements and information relating
to the Company that is based on the beliefs of the Company or management as well
as assumptions made by and information currently available to the Company or
management. When used in this document, the words "anticipate", "believe",
"estimate", "expect", and "intend" and similar expressions, as they relate to
the Company or its management, are intended to identify forward-looking
statements. Such statements reflect the current view of the Company regarding
future events and are subject to certain risks, uncertainties and assumptions,
including the risks and uncertainties noted. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. In each instance, forward-looking
information should be considered in light of the accompanying meaningful
cautionary statements herein.
(2) Effects on the Change in Foreign Currency Exchange System
Effects on the Change in Foreign Currency Exchange System
On July 2, 1997, the Thai Government announced that the Thai Baht would
thereafter be converted to a "Managed Float" system for the relationship of the
Baht to other international currencies. This change had an immediate impact on
the Company's operations and the results of its operations. However, the
Company's financial results thus far in 1998 have improved measured by earnings
per share both in Baht and US dollar with an increase of 20% for the nine months
ended September 30, 1998 compared to the same period in 1997. This was
attributed by the significant increase in sales in Baht and the improvement in
cost control. Management anticipates stability in exchange rate together with
increase in sales and further reduction in cost will reflect the financial
reporting positively in the remaining Quarter of 1998.
The Company's subsidiaries conduct their business with selling and purchase
prices based on Thai Baht, US Dollars, and other currencies. Sales are made both
in Thai Baht and other currencies, but eventually will be converted into Thai
Baht. Accordingly, the Company bears foreign currency transaction risks between
the date of purchase of goods for resale and the ultimate payment of the goods
in the appropriate negotiated currency. However, the Company tries to minimize
such risks by entering into hedging contracts and partially holding US dollar
currency generated from sales.
King Power Duty Free Company Limited (KPD) reported a financial gain of $4.6
million for the nine months ended September 30, 1998 compared to $3.0 million
for the same period in 1997. The increase is mainly due to KPD's ability to
attract more buyers via stores expansion together with its unique store
decoration, capable sales force, and customized merchandise selection.
32
<PAGE>
King Power Tax Free Company Limited (KPT) has been selling goods at prices based
upon the US Dollar since its inception. Further, KPT deals in predominately
Thailand produced goods whereby all purchases are settled in Thai Baht.
Therefore, the devaluation of the Thai Baht had minimal effect on the settlement
of open trade payables of KPT. Accordingly, the devaluation had an opposite
economic impact on the operations of KPT whereby the Thai Baht devaluation
increased the overall profitability of this subsidiary. However, KPT's financial
results for the nine months ended September 30, 1998 was recorded at a loss of
US$(0.6) million when compared to the same period last year of US$2.9 million.
This loss is mainly attributed by the fact that KPT's concession fee is based
upon fixed amount, therefore, with the aggressive stores expansion during the
past years and the sales volume that has yet fully materialized from such
expansion caused KPT to record such loss. However, with the usual high season
for tourists approaching, Management anticipates that sales will increase
significantly which should result to an improvement in KPT's financial results
in the fourth quarter of this year.
King Power International Group (Thailand) Company Limited (KPG Thai) was
incorporated on September 11, 1997 as a cost center for the Company and its
affiliates to provide management services for, and to disburse mainly management
charges and rental expenses among the various subsidiaries and affiliates of the
Company. In KPG Thai's Statement of Earnings for the nine months ended September
30, 1998, this company reported net income of US$108,553; it has management fee
income of US$1,153,037; depreciation of US$71,543; administrative expenses of
US$908,604; other income of US$1,238; interest expense of US$60,516; and income
tax benefit of US$(5,059). All transactions were recorded in Thai Baht and were
converted into US Dollars using an average exchange rate of Baht 40.697 to US$1.
The overall effect of the Thai Baht devaluation was an increase in the
attractiveness of Thailand as a tourist destination. This increase in tourists
had a direct impact on increasing the Company's sales in the post-devaluation
time period.
Due to the economic crisis in Thailand and elsewhere in the Region that effects
the currency fluctuation, to account for such impact, the Company has separately
presented the following items in its statement of income for the quarterly ended
September 30, 1998:
Realized gain on foreign exchange $0.6 million
Realized loss on foreign exchange $1.0 million
Unrealized gain on foreign exchange $0.3 million
Unrealized loss on foreign exchange $16,718
The calculation of unrealized foreign exchange gain of $0.3 million and
unrealized foreign exchange loss of $16,718 is shown in charts labeled A and B,
respectively.
33
<PAGE>
CHART A
The calculation of unrealized gain on foreign exchange of US$312,772.43 was
calculated on accumulated basis with quarterly adjustment on financial
obligations, receivable and cash on hand in foreign currency as show below:
Account payable in foreign currence as of 09/30/98
- --------------------------------------------------------------------------------
Currency Amount Exchange Rate Total
09/30/98 Baht
- --------------------------------------------------------------------------------
Swiss Franc 563,888.05 28.5758 16,113,552.14
German Deutschmark 32,541.70 23.6658 770,125.36
French Franc 749,437.80 7.0661 5,295,602.44
Hong Kong Dollar 3,331,725.08 5.1114 17,029,779.57
Italian Lire 51,035,500.00 0.0242 1,235,059.10
British Pound Sterling 48,831.75 67.6099 3,301,509.73
Singapore Dollar 155,750.10 23.5803 3,672,634.08
US Dollar 1,402,664.75 39,4737 55,368,367.54
- --------------------------------------------------------------------------------
Total 102,786,629.97
BALANCE PER GENERAL LEDGER 111,218,390.88
Unrealized gain on accounts payable in foreign currency 8,431,760.91
Loan from bank (Trust receipt) in foreign currency as of 09/30/98
- --------------------------------------------------------------------------------
Currency Amount Exchange Rate Total
09/30/98 Baht
- --------------------------------------------------------------------------------
German Deutschmark 191,174.20 23.6658 4,524,290.38
Hong Kong Dollar 2,352,876.60 5.1114 12,026,493.45
Italian Lire 280,768,000.00 0.0242 6,794,585.60
Singapore Dollar 76,998.60 23.5803 1,815,650.09
US Dollar 1,062,669.93 39.4737 41,947,514.02
Swiss Franc 43,425.00 28.5757 1,240,904.12
French Franc 95,117.00 7.0661 672,106.23
Japanese Yen 3,292,720.00 0.2929 964,434.40
- --------------------------------------------------------------------------------
Total 69,985,978.28
BALANCE PER GENERAL LEDGER 72,808,605.63
Unrealized gain on Trust Receipt in foreign currency 2,822,627.35
Unrealized gain on account receivable as at 09/30/98
- --------------------------------------------------------------------------------
Currency Amount Exchange Rate Total
09/30/98 Baht
- --------------------------------------------------------------------------------
Swiss Franc 37,144.14 28.1074 1,044,025.20
British Pound Sterling 17,081.95 66.6817 1,139,053.47
- --------------------------------------------------------------------------------
Total 2,183,078.67
BALANCE PER GENERAL LEDGER 1,904,185.89
Unrealized gain from account receivable in foreign currency 278,892.78
34
<PAGE>
Unrealized gain on Cash on hand as at 09/30/98
- --------------------------------------------------------------------------------
Currency Amount Exchange Rate Total
09/30/98 Baht
- --------------------------------------------------------------------------------
US Dollar 156,867.54 39.0921 6,132,281.56
British Pound Sterling 15,616.94 66.6817 1,041,364.11
German Deutschmark 4,010.00 23.3127 93,483.93
Singapore Dollar 5,249.00 23.0054 120,755.34
Malaysian Ringgit 3,395.00 10.1291 34,388.29
Hong Kong Dollar 179,967.60 5.0334 905,848.92
Japanese Yen 17,927,214.00 0.2880 5,162,284.69
China Renminbi Yuan 41,297.00 4.5972 189,850.57
Korean Won 657,000.00 0.0284 18,658.80
French Franc 4,100.00 6.9440 28,470.40
Swiss Franc 300.00 28.1074 8,432.22
Australian Dollar 9,917.00 23.1390 229,469.46
Taiwanese Dollar 50,700.00 1.1314 57,361.98
- --------------------------------------------------------------------------------
Total 14,022,650.27
BALANCE PER GENERAL LEDGER 12,827,031.69
Unrealized gain on cash in hand in foreign currency 1,195,618.58
Unrealized gain on accounts payable in foreign currency 8,434,760.91
Unrealized gain on Trust Receipt in foreign currency 2,822,627.35
Unrealized gain from account receivable in foreign currency 278,892.78
Net Unrealized gain on exchange rate as at 09/30/98 12,728,899.62
US$312,772.43 (US$=Baht 40.697
35
<PAGE>
CHART B
The calculation of unrealized loss on foreign exchange of US$ 16,717.90 was
calculated on accumulated basis with quarterly adjustment on financial
receivable and cash on hand in foreign currency as shown below:
- --------------------------------------------------------------------------------
Currency Amount Exchange Rate Total
09/30/98 Baht
- --------------------------------------------------------------------------------
US Dollar 148,144.69 39.0921 5,791,287.04
British Pound Sterling 2,871.98 66.6817 191,508.51
German Deutschmark 2,510.00 23.3127 58,514.88
Singapore Dollar 3,166.00 23.0054 72,835.10
Malaysian Ringgit 562.00 10.1291 5,692.55
Hong Kong Dollar 72,820.00 5.0334 366,532.19
Japanese Yen 10,771,160.00 0.287958 3,101,641.69
Swiss Franc 360.00 28.1074 10,118.66
French Franc 3,800.00 6.9440 26,387.20
Korean Won 874,000.00 0.0284 24,821.60
Netherland Guilder 120.00 20.6664 2,479.97
China Renminbi Yuan 21,915.00 4.5972 100,747.64
Canadian Dollar 30.00 25.7366 772.10
Australian Dollar 10,002.63 23.1890 231,950.99
Taiwanese Dollar 26,150.00 1.1314 29,586.11
- --------------------------------------------------------------------------------
Total 10,014,876.22
BALANCE PER GENERAL LEDGER 09/30/98 10,695,244.41
Unrealized loss from cash in hand in foreign currency (680,368.19)
Net Unrealized exchange loss as of 09/30/98 (680,368.19)
US$(16,717.90)
36
<PAGE>
(3) Results of operations, comparing nine months ended September 30, 1998 and
1997
KPD began retail operations in 1997 and the revenue of this subsidiary is a
direct result of the increase in the number of tourists coming to Thailand as a
result of the social and government stability, the Thai Baht devaluation and its
fully functional retail stores. Further growth was experienced in general
merchandise sales at the KPT stores in Thailand airports, similarly due to an
increase in tourism traffic. Management anticipates that Thailand will continue
to be an attractive tourist destination during future periods and will expand as
a focal point for air travel throughout Asia.
Sales revenue for the nine months ended September 30, 1998 was approximately
$62.3 million as compared to approximately $66.6 million for 1997. This decrease
is directly attributable to the devaluation of Baht that took place during the
last half of 1997. The overall sales revenue in Thai Baht increased over 11.90%
from Baht 2,286.0 million for the nine months ended September 30,1997 to Baht
2,558.0 million for the same period in 1998. However, the average exchange rate
of Baht 40.697 to 1 was used to convert the 1998 figure into US Dollar, compared
to the average exchange rate of Baht 34.306 for 1997. Further, commencing in the
last half of 1997, the Thai Government began the "Amazing Thailand" marketing
campaign for the 1998-1999 time period to coincide with various events occurring
in Thailand or other countries located near Thailand. This marketing campaign is
international in scope and directly targeted to attract additional new and
repeat visitors to Thailand. The Company expects that this promotional campaign
will continue to directly impact the Company's operations in a positive manner
during and subsequent to this time period.
The cost of merchandise sold for the nine months ended September 30, 1998 and
1997 was approximately $26.3 million and $27.0 million, respectively. The
principal factor causing this decrease is directly related to the average
exchange rate that is used to compare the two periods partially offset by the
increased sales volume. In Baht, the cost of merchandise sold increased from
Baht 925.1 million for the nine months ended September 30, 1997 to Baht 1,089.8
million for the same period this year or an increase of 17.8%. This increase is
due to the expansion of the KPD subsidiary and a larger number of customers at
the KPT stores for consumer goods. In addition, KPT's concession agreement to
maintain its locations within the Thai airports requires payments based upon
fixed amounts. Due to the higher sales volume, comparing the time period ended
September 30, 1997 to the time period ended September 30, 1998, the ratio of
Company's concession fee to sales revenue dropped from approximately 36.30% in
1997 to approximately 29.66% in 1998. The reasons for this decrease is an
increase in sales volume together with the fact that starting March 19, 1998 the
Thai Customs Department removed the additional customs duty of 15% on gross
sales, which it had previously imposed on KPD. KPD expects this favorable
treatment to continue indefinitely. Management anticipates that the positive
effect of this change in the customs duty will be realized more completely
during the remainder of 1998 when the usual high season for tourists occurs and
sales increase substantially.
Direct selling expenses, excluding depreciation and others, also reflect the
commencement of KPD's business and the increase in traffic at KPT's stores.
These expenses were approximately $6.05 million for the nine months ended
September 30, 1997 and approximately $7.2 million for the same period in 1998.
In terms of percentage of sales, 1997 expenses were approximately 9.08% of sales
37
<PAGE>
and 1998 expenses were approximately 11.48% of sales. Management has made a
commitment to improve this ratio by improving the effectiveness and efficiency
of the Company's sales force that should result from additional training and
management supervision.
Administrative expenses for the nine months ended September 30, 1998 and 1997
were approximately $3.4 million and $2.2 million, respectively. As a percentage
of total sales, these expenses were approximately 5.51% and 3.37%, respectively.
Administrative expenses have grown due to the growth in the Company's business.
Management has designated these expenses for constant monitoring in order to
control their levels in relation to the Company's size, sales volume and
operational necessity.
Net income for the nine months ended September 30, 1998 was approximately $3.6
million, or $0.18 per share (basic), and approximately $3.0 million, or $0.15
per share (basic), for the nine months ended September 30, 1997. The increase is
mainly caused by a significant increase in sales in Baht and the effect of the
Baht devaluation in July 2, 1997 which had caused an exchange loss of $(2.5)
million in the Third Quarter last year.
The ratio of inventory divided by revenue for the nine months ended September
30, 1998 and 1997 was approximately 21.78% and 30.63%, respectively. This
significant decrease is a result of commencement of operation by the Company's
new stores, including Harrods (Knightsbridge) that has begun to utilize the
inventory build-up that occurred during previous periods.
(4) Results of operations, comparing three months ended September 30, 1998 and
1997
Sales revenue for the three months ended September 30, 1998 was approximately
$18.6 million as compared to approximately $10.7 million for 1997. This increase
is directly attributable to the Company's stores expansion and the increase in
tourists into Thailand due to the "Amazing Thailand" campaign and the social and
government stability that makes Thailand more attractive to tourists than other
tourist promoted countries in the region.
The cost of merchandise sold for the three months ended September 30, 1998 and
1997 was approximately $8.4 million and $3.3 million, respectively. This
increase is due to the expansion of the KPD subsidiary and a larger number of
customers at the KPT stores for consumer goods. In addition, KPT's concession
agreement to maintain its locations within the Thai airports requires payments
based upon fixed amount. Due to the higher sales volume, comparing the three
months ended September 30, 1997 to the three months ended September 30, 1998,
the ratio of Company's concession fee to sales revenue dropped from
approximately 37.69% in 1997 to approximately 28.10% in 1998. The reasons for
this decrease is an increase in sales volume together with the fact that the
additional custom duty of 15% on gross sales previously imposed on KPD was
exempted by the Customs Department starting March 19, 1998 and continuing
indefinitely. Management anticipates the positive effect of this exemption will
be realized more favorably during the remaining quarter of 1998 when the normal
high sales season occurs.
Direct selling expenses, excluding depreciation and others were approximately
$1.4 million for the three months ended September 30, 1997 and approximately
$2.4 million for the same period in 1998. In terms of percentage of sales, 1997
38
<PAGE>
expenses were approximately 13.31% of sales and 1998 expenses were approximately
12.72% of sales. Direct selling expenses have declined due to the increase in
sales. Furthermore, management has made a commitment to improve this ratio
further by improving the effectiveness and efficiency of the Company's sales
force that should result from additional training and management supervision.
Administrative expenses for the three months ended September 30, 1998 and 1997
were approximately $1.3 million and $0.4 million, respectively. As a percentage
of total sales, these expenses were approximately 6.91% and 3.29%, respectively.
Administrative expenses have grown due to the growth in the Company's business.
Management has designated these expenses for constant monitoring in order to
control their levels in relation to the Company's size, sales volume and
operational necessity.
Net income for the three months ended September 30, 1998 was approximately $0.1
million, or $0.01 per share (basic), and a loss of approximately $(2.4) million,
or $(0.12) per share (basic), for the three months ended September 30, 1997. The
improvement is mainly caused by a significant increase in sales and the effect
of the Baht devaluation in July 2, 1997 which had caused an exchange loss of
$(2.5) million in the Third Quarter last year.
(5) Liquidity and Capital Resources
For the quarters ended September 30, 1998 and 1997, the Company had working
capital of approximately $10.6 million and $(4.9 million), respectively. The
improvement in this figure is due to its receivables in most categories have
grown in parallel to its business expansion. Due to Asia economic crisis Thai
banks (that are the main credit sources of the Company), have either reduced or
maintained trading credit lines given to the Company. This causes the Company to
use its internal cash to service the expansion. Although the Thai Government
continues to strictly follow the conditions set forth by the International
Monetary Fund (IMF) in exchange for its bail-out package of US$17 billion
together with the Government's Announcement on August 15, 1998 of its complete
financial reform package for Thai banks, management anticipates that these will
eventually result in increased liquidity so the banks can start injecting loans
to business operators. The effect of this will enhance the Company to be able to
expand its inventory availability to support greater demand. The Company carried
negative cash flows from operations of approximately $(5.7) million during the
nine months of 1998 as compared to $(2.7) million during the same period of
1997. This increase is mainly due to the advances to related companies for the
purpose of pilot projects for future expansion. Management is trying to minimize
such exposure by trying to find ways for these related companies to either pay
down such loans or to acquire profitable related companies to be part of KPG
directly.
Management is currently engaged in corporate restructuring process in order to
ultimately enhance profitability of the Company by way of investing in
profitable related companies as mentioned, downsizing and eventually closing
down operations that do not generate satisfactory results, and incorporating new
potential projects into the Company or its subsidiaries. To achieve this
process, management is currently interviewing various financial advisors to
facilitate such tasks and provide appropriate recommendations.
39
<PAGE>
(6) Monetary Assets and Liabilities Denominated in Thai Baht
As of September 30, 1998 the amount of monetary assets and liabilities which are
denominated in Thai Baht are as follows:
TYPE OF MONETARY ASSET US DOLLARS
Cash and equivalents 824,436
Accounts Receivable
Trade 453,753
Related Parties 1,472,707
Refundable value-added-tax 2,919,286
Related companies 13,907,366
Directors 1,044,837
Management fee income 2,347,461
Inventories 13,578,064
Deferred income tax assets 835,702
Other current assets 979,968
Restricted deposit 1,196,958
Other non-current assets 5,074,261
TYPE OF MONETARY LIABILITY
Bank overdraft 1,316,550
Bank loan 1,893,170
Notes payable -
Current portion of installment purchase payable 47,590
Current portion of long-term loan 1,408,236
Accounts Payable
Unrelated parties 5,978,325
Related parties 1,902,214
Other accrued liabilities
Concession fees 9,027,244
Other 3,165,350
Installment purchase payable - net 14,404
Long-term loan - net 1,334,437
40
<PAGE>
(7) Year 2000 effect
The present computer system does not support beyond the year 2000. Due to the
expansion of the business and the necessity to operate more efficiently, the
management has decided to change the system to fully support the integration of
all systems and all subsidiaries in order to generate centralized management
report for a more effective control of the business. The system is scheduled to
be implement during the second quarter of 1999. It is estimated that the cost of
this new computer system will be approximately US$750,000.
(8) New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued Statements of
Financial Accounting Standards that may affect the Company's financial
statements as follows:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of the standards, management has
been unable to fully evaluate the impact, if any, that standards may have on
future financial statement disclosures. However, the Company does not anticipate
a material impact from this change in presentation of its consolidated financial
statements upon adoption of these standards.
41
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
42
<PAGE>
Part II-Other Information
Item 1- Legal Proceedings
None
Item 2- Changes in Securities
None
Item 3- Defaults upon Senior Securities
None
Item 4- Submission of Matters to a Vote of Security Holders
None
Item 5- Other Information
None
Item 6- Exhibits and Reports on Form 8-K
None
43
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned who are duly
authorized.
KING POWER INTERNATIONAL GROUP CO., LTD.
By: /s/ Vichai Raksriaksorn
----------------------------------------------------------
Vichai Raksriaksorn, President and Chief Executive Officer
By: /s/ Viratana Suntaranond
-------------------------------------------------
Viratana Suntaranond, Chief Financial Officer
44
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains Summary Financial Information extracted from Balance
Sheet at 09/30/98, Statement of Operations at 09/30/98
</LEGEND>
<CIK> 0000787690
<NAME> KING POWER INTERNATIONAL GROUP CO., LTD.
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