10-Q 1 kpg10q063003.txt FORM 10-Q -------------------------------------------------------------------------------- For the quarterly period ended June 30, 2003 (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) 25th-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: August 4, 2003: 20,250,000 KING POWER INTERNATIONAL GROUP CO., LTD. Form 10-Q for the Quarterly ended June 30, 2003 Table of Contents Page Part I - Financial Information Item 1 Financial statements 3 Item 2 Management's Discussion and Analysis or Plan of Operation 23 Item 4 Controls and Procedures 39 Part II - Other Information Item 1 Legal Proceeding 29 Item 2 Changes in Securities 29 Item 3 Defaults Upon Senior Securities 29 Item 4 Submission of Matters to a Vote of Securities Holders 29 Item 5 Other Information 30 Item 6 Exhibits and Reports on Form 8-K 30 2 Part I - Financial Information Item I - Financial Statement Independent Accountants' Review Report The Board of Directors and Shareholders King Power International Group Co., Ltd. and Subsidiaries We have reviewed the consolidated balance sheet of King Power International Group Co., Ltd. and Subsidiaries (a Nevada Corporation) as of June 30, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity and cash flows for the three months and six months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of King Power International Group Co., Ltd. and Subsidiaries A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principals. /s/ Smith, Gray, Boyer & Daniell PLLC SMITH, GRAY, BOYER & DANIELL A Professional Limited Liability Company Dallas, Texas August 14, 2003 3

See accountants' review report The accompanying footnotes are an integral part of these financial statements 4

See accountants' review report The accompanying footnotes are an integral part of these financial statements 5

See accountants' review report The accompanying footnotes are an integral part of these financial statements 6

See accountants' review report The accompanying footnotes are an integral part of these financial statements 7

See accountants' review report The accompanying footnotes are an integral part of these financial statements 8

See accountants' review report The accompanying footnotes are an integral part of these financial statements 9

See accountants' review report The accompanying footnotes are an integral part of these financial statements 10 KING POWER INTERNATIONAL GROUP CO., LTD AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002 See Accountants' Review Report 1. BASIS OF PRESENTATION King Power International Group Co., Ltd. (formerly Immune America, Inc.) (herein the "Company") was incorporated under the laws of the State of Nevada on July 30, 1985. On June 12, 1997, the Company exchanged 18,800,000 shares of its common stock for 99.94% of the issued and outstanding common shares of King Power Tax Free Company Limited [(formerly J.M.T. Group Company Limited)-KPT thereafter] and 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]. 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 require that the company whose stockholders retain the majority interest in a combined business be treated as the acquirer for accounting purposes. Consequently, this transaction was accounted for as a "reverse acquisition" for financial reporting purposes and KPT and KPD were deemed to have acquired 94% of equity interest in the Company as of the date of acquisition. The relevant acquisition process utilized the capital structure of Immune America, Inc., and the assets and liabilities of KPT and KPD were recorded at historical cost. Concurrent with the reverse acquisition, the Company changed its corporate name from Immune America, Inc. to King Power International Group Co., Ltd. KPD is a Thailand-based corporation engaged in selling duty free merchandise to the traveling public under the supervision of Thai customs, in stores located in the international terminals of the various airports located in Thailand. KPD holds from the Airports of Thailand Public Company Limited (AOT), (previously named "Airports Authority of Thailand" (AAT)) a non- exclusive license to operate duty free stores for all stores of this specific nature. Prior to January 1, 2002, KPD was one of two operators to operate duty free stores of this specific nature (see Note 7). For the duty free store operation, KPD is exempt from input value added tax on purchases of import merchandise and from output value added tax on sales of merchandise. KPT is a Thailand-based corporation engaged in selling various souvenirs and consumer products to the general public in the international and domestic terminals of Bangkok and Phuket airports located throughout Thailand. KPT holds the operating license granted by the AOT 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 for shops within Bangkok International Airport's departure halls. 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 share. On the same date, KPT acquired 5,093 shares of common stock in KPG Thai, equivalent to 50.93% of the registered capital. Ultimately, the Company owns 99.93% of equity interest in KPG Thai. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements, which include the accounts of the Company and its subsidiaries, are prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in other companies under 20% of interest are accounted for using the cost method. At June 30, 2003 and December 31, 2002, these investments have been written down due to an assumed permanent impairment of their value. 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 Inventories - Merchandise inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis. Provision for Doubtful Accounts - Estimated collection losses of the Company are provided for based on the Company's collection experience together with a review of the financial position of each debtor. Where the Company determines reserves are necessary, it will provide a provision for the total receivable and accrued interest outstanding. Marketable Securities - Securities held for trading are marked to market at year-end with the resulting gain or loss being included in current income. 11 KING POWER INTERNATIONAL GROUP CO., LTD AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002 See Accountants' Review Report Foreign Currency Translation and Transactions - The financial position and results of operations of the Company's foreign subsidiaries are determined using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the prevailing exchange rates in effect at each period end. Contributed capital accounts are translated using the historical rate of exchange when capital was injected. Income statement accounts are translated at the average rate of exchange during the year. Translation adjustments arising from the use of different exchange rates from period to period are included in the cumulative translation adjustment account in shareholders' equity. Gains and losses resulting from foreign currency transactions are included in operations. Gains or losses on foreign exchange transactions are recognized as incurred in the consolidated statements of income. Differences between the forward rate and the spot rate in forward exchange contracts are amortized as revenue and expense over the period of the contract. The exchange rates at June 30, 2003, and December 31, 2002, were $1 = Baht 42.047 and Baht 43.240, respectively. The average exchange rates for the six months ended June 30, 2003 and 2002, were $1= Baht 42.5986, Baht 43.2317, respectively. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Maintenance, repairs and minor renewals are charged directly to expense as incurred. Depreciation is computed by using the straight-line method over the estimated useful lives of the assets as follows: Buildings 20 Years Leasehold improvements Term of lease Selling office equipment and fixtures 5 Years Vehicles 5 Years Store Pre-Opening Costs - Store pre-opening costs are expensed as incurred. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Revenue Recognition - The Company recognizes revenue from sales of merchandise at the point of sale. Concession Fees - According to the concession agreement with the AOT, KPT is required to pay concession fees, rental and services fees, and other related expenses at a fixed monthly rate as defined in the concession agreement. According to the concession agreement with the AOT, KPD is required to pay concession fees at a fixed percentage of sales, greater than or equal to the fixed charges as defined in the concession agreement, and pay rental and service fee and other related expenses. Concentrations of Credit Risk - The Company's retail businesses are cash flow businesses. Most sales take place with cash receipts or credit card payments. The Company maintains its cash accounts with various financial institutions. In Thailand, such accounts are insured for the full amount of their value by the Thai government. U.S. bank deposits are within Federal insurance limits. In addition, see Note 11 with respect to loans and advances to directors and affiliated companies. Fair Value of Financial Instruments - The carrying amount of cash, trade accounts receivable, notes receivable, trade accounts payable, and accrued payables 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 fluctuate with market interest rates. Income Taxes - The Company accounts for income taxes using the liability method, which requires an entity to recognize the deferred tax liabilities and assets. Deferred income taxes are recognized based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, that 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 expense 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. 12 KING POWER INTERNATIONAL GROUP CO., LTD AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002 See Accountants' Review Report The Company does not provide for United States income taxes on unrepatriated earnings of its Thailand-based subsidiaries since the Company's intention is to reinvest these earnings in their operations and the amount of such taxes has not been determined. Earnings Per Share - Basic earnings per share has been computed based on the average number of common shares outstanding for the period. There are no potentially dilutive securities outstanding. Reclassification - Certain amounts in the 2002 financial statements and related footnotes have been reclassified to conform to the 2003 presentation. 3. RESTRICTED FIXED DEPOSITS June 30, 2003 December 31, 2002 ----------------- ----------------- Restricted fixed deposits $ 20,507,516 $ 19,729,589 Interest rates 0.75% - 2.50% 0.75% - 3.00% As of June 30, 2003, and December 31, 2002, the restricted fixed deposits with maturities from three to twelve months were pledged as collateral to a commercial bank for bank credit facilities of subsidiaries. As these are current obligations of the Company, the deposits are shown as current assets. 4. REFUNDABLE VALUE ADDED TAX For 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% effective August 16, 1999. 5. PROPERTY, PLANT AND EQUIPMENT, NET June 30, 2003 December 31, 2002 ----------------- ----------------- Land $ 625,015 $ 607,770 Building 391,138 380,346 Leasehold improvements 8,841,807 7,613,367 Office equipment and fixtures 3,534,932 3,475,607 Vehicles 1,221,947 1,045,927 Work in progress 43,045 109,351 ----------------- ----------------- Total cost 14,657,884 13,232,368 Less: accumulated depreciation (7,786,110) (6,857,436) ----------------- ----------------- Net book value $ 6,871,774 $ 6,374,932 ================= ================= 6. BANK OVERDRAFT AND LOANS FROM BANKS June 30, 2003 December 31, 2002 ----------------- ----------------- Bank overdraft $ 1,650,249 0 Trust receipts 3,592,830 $ 542,594 Short-term loan 16,410,208 16,651,249 ----------------- ----------------- $ 21,653,287 $ 17,193,843 ================= ================= As of June 30, 2003, and December 31, 2002, the Company has an overdraft facility with commercial banks in Thailand totaling Baht 75.74 million ($ 1,801,318) and Baht 75.74 million ($ 1,751,619), respectively, bearing interest at the Minimum Overdraft Rate ("MOR") plus 1.00% - 1.50% per annum. For the six months ended June 30, 2003, the average rate of MOR was 5.75% -6.50% per annum, and for the year ended December 31, 2002, the average rate MOR was 6.50% - 7.75%per annum, respectively. Available lines of credit for the bank overdrafts are guaranteed by certain directors and collateralized by fixed deposits (see Note 3). As of June 30, 2003, and December 31, 2002, trust receipts incurred by KPD and KPT bear interest at the rates varying from 2.85% - 7.13%and 6.00% - 7.75% per annum, respectively, and are collateralized by fixed deposits, KPD's land, and guaranteed by two directors of KPD, together with a related company. As of June 30, 2003, and December 31, 2002, the Company has short-term loans with various commercial banks in Thailand, bearing interest at rates of 3.60% - 4.60% and 2.25% - 5.65%per annum, respectively. 13

7. CONCESSION FEES In order to obtain the necessary rights to operate at the international and domestic airports in Thailand, the Company has entered into various agreements with the AOT and the Customs Department of Thailand, which included the right to rent office space. Under the aforementioned agreements with the AOT and the Customs Department of Thailand, both KPD and KPT are required to pay concession fees, rental fees, service fees, property tax, and other expenses, and to pledge cash or obtain a local commercial bank letter of guarantee, as collateral. Accrued concession fees to the AOT were $4,472,881 and $4,864,882 as of June 30, 2003, and December 31, 2002, respectively. Concession fee expense for the six months ended June 30, 2003 and 2002, was $17,082,675 and $15,917,472, respectively. A summary of the concession and rental fees payable and the value of collateral for the remaining period of the agreement (as amended) are as follows (see Notes 11 and 12):

On March 20, 2001, the AOT awarded the Company a contract, beginning January 1, 2002, to operate the duty free retail space as the only operator in Thailand's International airports. Coupled with the extension of its other concession, the Company is positioned as the principal operator of tax free and duty free stores in Thailand. 14 KING POWER INTERNATIONAL GROUP CO., LTD AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002 See Accountants' Review Report 8. LONG-TERM LOANS, NET Long-term liabilities as of June 30, 2003, and December 31, 2002, consist of the following: June 30, 2003 December 31, 2002 ----------------- ----------------- Long-term loans $ 26,165,957 $ 13,900,906 Installment purchase payable 39,275 44,221 ----------------- ----------------- 26,205,232 13,945,127 Less: current portion of long-term debt (17,159) (36,926) ----------------- ----------------- Total $ 26,188,073 $ 13,908,201 ================= ================= As of June 30, 2003 and December 31, 2002, long-term loans consist of loans from banks carrying interest rates of 4.00% - 6.62% and 3.60% - 7.25% per annum, respectively. The long-term loans are secured by the Company's land and building and guaranteed by a director of the Company (see Note 6). Long term loans as of June 30, 2003, and December 31, 2002, are due as follows: June 30, 2003 December 31, 2002 ----------------- ----------------- Installment purchase obligation 2003 $ 6,202 $ 12,060 2004 12,402 12,060 2005 12,402 12,060 2006 8,269 8,041 ----------------- ----------------- Total $ 39,275 $ 44,221 ================= ================= Long-term loan installment payments 2003 $ 4,756 $ 24,866 2004 11,891,455 11,563,367 2005 14,269,746 2,312,673 ----------------- ----------------- Total $ 26,165,957 $ 13,900,906 ================= ================= 9. SHAREHOLDERS'EQUITY (a) Per the reverse acquisition agreement, the two Thailand-based companies together received a total of 18,800,000 shares of common stock of Immune America, Inc., which represented 94% of 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. (b) Per the 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 who 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, 1,200,000 shares of common stock as of June 12, 1997, when the reverse acquisition was effective, represented the other 4% of equity interest. These 1,200,000 shares of common stock were represented by the following components: 15

(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 $8.00 per share with net of proceeds of $1,887,000. Both entities are located in Taipei, Taiwan, Republic of China. One half of these shares (125,000) were placed in escrow until May 1, 1998, subject to an additional payment by the purchaser of $4.00 per share on all 250,000 shares issued or ($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 further consideration. No underwriter or placement agent was used. The issuance was conducted pursuant to Regulation S promulgated under the United State Securities Act of 1933, as amended. (e) Dividend Declaration and Legal Reserve At its ordinary shareholders' meeting held on August 1, 2001, KPD passed a resolution to pay a dividend at the rate of Baht 40 per share for a total of Baht 80,000,000 ($1.8 million), based on the results of its operations for 1999. Further, in accordance with Thai law, a legal reserve was created, equal to 5% of the total net profit for the year on which the dividend is based. The 5% net profit reserve is required by Thai law each time a dividend is declared; until such reserve reaches 10% of the Company's authorized share capital. 10. INCOME TAX The Company accounts for income taxes using the liability method, which requires an entity to recognize the 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 that 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 expense 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 provision for income taxes consists of the following: June 30,2003 June 30,2002 ------------ ------------ Current income tax (payable) United States $ -- $ -- Foreign (491,162) (4,067,303) ------------ ------------ (491,162) (4,067,303) Deferred income tax United States $ -- $ -- Foreign (415,543) (322,776) ------------ ------------ (415,543) (322,776) ------------ ------------ Net income tax expense $ (906,705) $ (4,390,079) ============ ============ Pre-tax income for foreign companies for the quarters ended June 30, 2003, was $2,948,792 Current taxes payable are included in current liabilities. 16 KING POWER INTERNATIONAL GROUP CO., LTD AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002 See Accountants' Review Report The components of deferred income tax assets and liabilities were: June 30, 2003 December 31, 2002 ----------------- ----------------- Net operating loss carry forward 1,005,563 519,372 ----------------- ----------------- 4,940,536 4,286,352 Less: valuation allowance (779,968) (541,327) ----------------- ----------------- Deferred income tax assets $ 4,160,568 $ 3,745,025 ================= ================= 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. For the six months ends June 30, 2003 2002 ----------------------------------- Standard income tax rate 35.00% 35.00% Foreign tax rate difference (6.47%) (5.20%) Less: valuation allowance 10.18% 1.38% ----------------------------------- Effective income tax rate 38.71% 31.18% =================================== As of June 30, 2003, and December 31, 2002, the Company has deferred income tax assets relating to net operating loss carry forwards for income tax purposes of $1,005,563 and $519,372, respectively, which expire in years 2003 through 2017. A valuation allowance on the United States loss carry forward has been provided, as the Company has determined that it is more likely than not that this deferred income tax asset will not be realized. 17

Additionally, the AOT owns 5% of KPD common shares. As of June 30, 2003, and December 31, 2002, KPD has accrued concession fees amounting to $3,614,997 and $4,864,882, respectively. 19 KING POWER INTERNATIONAL GROUP CO., LTD AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002 See Accountants' Review Report Effective July 1, 2001, KPD and KPT increased the interest rate charged for new loans to related companies from a range of 2.00%-2.50% to 3.56% - 3.74%, reflecting the increase in borrowing costs to KPD and KPT. The new rates apply to total loans outstanding of each related company that borrowed additional funds from KPD or KPT after July 1, 2001. For related companies that did not require additional loans from KPD and KPT, the interest rate charged to them did not change. During the six months ended June 30, 2003 and 2002, the Company had operating transactions with related parties and directors as follows (in $000s): For the six months ended June 30, 2003 2002 --------------- --------------- Related Companies Sales $ 1,205 $ 389 Interest income 281 648 Management fee income 190 262 Purchases 31,807 4,142 Concession fees 11,410 11,229 Purchases - assets -- 9 Services $ 1,900 $ 191 Directors Interest and income $ -- $ -- 12. COMMITMENTS AND CONTINGENT LIABILITIES (see also Note 7) Lease commitments As of June 30, 2003, KPD and KPT had leasing commitments for office space under non-cancelable operating lease agreements expiring in 2003. The obligations of the subsidiaries under these lease agreements are set forth as follows: KPT KPD --------------- --------------- 2003 $ 14,983 $ 143,489 Letters of guarantee As of June 30, 2003, and December 31, 2002, KPT and KPD were contingently liable for bank guarantees totaling $23.20 million and $21.17 million, respectively, issued in favor of the AOT as a performance bond. Unused letters of credit As of June 30, 2003, and December 31, 2002, KPD and KPT have unused letters of credit totaling $0.18 and $0.98 million, respectively. Land Acquisition On June 17, 2002, KPD contracted to acquire two tracts of land for a total price of 311.34 million Baht ($7.40 million at June 30, 2003 exchange rates). As of June 30, 2003 the Company has paid in full (99 million Baht or $2.35 million), for the purchase of the first tract of land and 42.47 million Baht ($1.01 million) of the 212.34 million Baht purchase price of the second tract of land. The total $3.36 million in deposits are included in Investments and Other Assets in the accompanying balance sheet. Beginning one year from date of contract, interest begins to accrue at the MLR currently in effect. Under the terms of the contract, the remaining balance in the amount of 169.87 million Baht ($4.04 million) will be paid within 730 days of the effective date of the contract. Furthermore, if KPD fails to complete the payments, all amounts deposited by KPD will be forfeited. If the seller cannot complete the transfer of the land, all amounts deposited will be refunded. Loan Commitments KPD is a co-maker and cross guarantor of a credit facility with one of its affiliates. At June 30, 2003, and December 31, 2002, the affiliate had made no borrowings on this facility. 20

22 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (1) Caution Regarding Forward-Looking Information This quarter 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 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. 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. 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. In accordance with generally accepted accounting principles, the Company has separately presented the following items in its statement of income for the quarter ended June 30, 2003: Loss on foreign exchange, net $(116,249) The calculation of loss on foreign exchange, net of $(116,249) is shown in charts labeled A and B, respectively. 23

NET FOR UNREALIZED GAIN / (LOSS) EXCHANGE OF 30/06/03 -----------------------------------------------------

(3) Results of operations, comparing six months ended June 30, 2003 and 2002 Sales revenue for the six months ended June 30, 2003, was approximately $84.5 million compared to approximately $84.3 million for 2002. The increase should have been much greater, however, due to the adverse impact of the spreading of Severe Acute Respiratory Syndrome (SARS) disease, the number of travelers traveling through BIA has dropped significantly during the months of April - June, 2003, with a decrease of 39.41% from the same period last year or from the months of January - June, 2003, with a decrease of 17.87% from the same period last year. The Company's balance sheet strength and sound cash position provide it with the capacity to manage through this downturn. As of the filing date, the SARS epidemic has subsided and the traveling recession appears to be neutralized beginning in the month of July, 2003. Management will continue to monitor sales and adjust Company operations to market conditions . The cost of merchandise sold for the six months ended June 30, 2003 and 2002, was approximately $45.9 million and $40.5 million, respectively. The principal factor causing this increase is directly related to the increase in merchandise sold, however, at a higher discount rate to attract sales during the SARS outbreak. The ratio of the concession fees paid to the AOT, comparing the six months ended June 30, 2003, to the same period in 2002, increased from 18.87% in 2002 to 20.22% in 2003. This increase is due to the concession fee structure of KPT being based on fixed amount with additional annual increment. The volume of sales generated from KPT for the six months ended June 30, 2003, particularly due to the SARS outbreak, has not kept up with such increment thus causing the increase in the ratio of the concession fees paid to the AOT. Management anticipates that a possible reduction in the ratio of these fees may result from a return to normal travel during the 2nd half of the fiscal year. 26 Selling and administrative expenses were approximately $19.2 million for the six months ended June 30, 2003, and approximately $14.3 million for the same period in 2002. In terms of percentage of sales, 2003 expenses were approximately 22.67% of sales and 2002 expenses were approximately 16.96% of sales. The expenditure increases result from a variety of factors: additional rent expense on the expanded sales areas in the various airports and amortization of the leasehold improvements made to those sales areas. The unfavorable change in the ratios is caused by both the increase in expenditures and the tightened margins due to the sales discounting discussed above. During to the SARS outbreak, the Management implemented several drastic measures to minimize expenditures including proportionate mandatory leave without-pay among executives, forced vacation for staffs, etc. Net income for the six months ended June 30, 2003, was approximately $1.3 million, or $0.06 per share (basic), and approximately $9.2 million, or $0.46 per share (basic), for the six months ended June 30, 2002. The ratio of inventory divided by revenue for the six months ended June 30, 2003 and 2002, was approximately 45.90% and 41.64%, respectively. This increase is caused by the pre-committed larger volume of merchandised orders required by the Company's suppliers for their financial viability to support the new and improved lines of products developed and initiated by the Company. (4) Results of operations, comparing three months ended June 30, 2003 and 2002 Sales revenue for the three months ended June 30, 2003, was approximately $30 million compared to approximately $39.8 million for 2002. The decrease was due to the adverse impact of the spreading of SARS disease, the number of travelers traveling through BIA has dropped significantly as stated above. The cost of merchandise sold for the three months ended June 30, 2003, and 2002, was approximately $17.1 million and $19.7 million, respectively. The principal factor causing this decrease was directly related to the decrease in merchandise sold during the SARS outbreak. The ratio of the concession fees paid to the AOT, comparing the three months ended June 30, 2003, to the same period in 2002, increased from 18.98% in 2002 to 23.83% in 2003. This increase is due to concession fee structure of KPT is being based on fixed amount with an additional annual increment as stated above with which KPT's sales volume has not kept up. Selling and administrative expenses were approximately $9.9 million for the three months ended June 30, 2003, and approximately $7.7 million for the same period in 2002. In terms of percentage of sales, 2003 expenses were approximately 33.05% of sales and 2002 expenses were approximately 19.30% of sales. The expenditure increases result from a variety of factors as stated above. 27 Net loss for the three months ended June 30, 2003, was approximately $3.1 million, or $0.15 per share (basic), and net income approximately $3.2 million, or $0.16 per share (basic), for the three months ended June 30, 2002. (5) Liquidity and Capital Resources For the quarter ended June 30, 2003, and the year ended December 31, 2002, the Company had working capital of approximately $42.9 million and $28.1 million, respectively. The improvement in this figure was due to the Company's ability to replacing part of current liabilities with long-term loans. The Company experienced a negative cash flow from operations of approximately $0.4 million at June 30, 2003, compared to a positive cash flow of $1.8 million during the same period of 2002. This decrease is due to the meaningful reduction in accrued liabilities. (6) Monetary Assets and Liabilities Denominated in Thai Baht As of June 30, 2003, 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 8,782,203 Trade Accounts Receivable 260,329 Refundable value-added-tax 946,501 Advance to related companies 7,756,600 Deferred income tax assets 4,160,568 Restricted deposit 20,507,516 Other current assets 2,496,348 Other non-current assets 4,855,961 TYPE OF MONETARY LIABILITY US DOLLARS Bank overdraft & loan 18,117,173 Current portion of long-term debt 17,159 Accounts Payable 6,044,526 Concession fees 4,472,881 Other current liabilities 4,896,049 Long-term loan - net 26,188,072 28 (7) Recently Issued Accounting Principles New Accounting Standards Not Yet Adopted - NONE Item 4 - Controls and Procedures Within ninety days prior to the date of this report, our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures, which have been designed so that the information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. We have made no significant changes in our internal controls or in other factors that could significantly affect our internal controls since the date of that evaluation. Part II - Other Information Item 1- Legal Proceedings On May 16, 2003, KPG entered into a stipulation of settlement with the plaintiffs of the three putative class action lawsuits filed against the Company and its directors. The lawsuits have been consolidated into the first filed lawsuit for purposes of the settlement. Under the stipulation of settlement, the class members who hold King Power's common shares immediately prior to the effective time of the merger and do not request exclusion from the class, will, subject to the terms and conditions of the settlement, be entitled to receive a portion of the settlement fund of U.S.$1.7 million, less certain related expenses and the representative plaintiffs' attorney fees. In addition, King Power will cause the class members to be paid U.S.$3.27 per share in accordance with the procedures set forth in the plan of merger. The effectiveness of the settlement and payment of the settlement fund will be conditioned upon, among other things, the approval of the settlement by the Clark County District Court, Nevada and the consummation of the merger. Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders in July, 2003. The following seven persons were elected as Directors to serve for a year. NAME VOTES FOR VOTES AGAINST Vichai Raksriaksorn 19,760,582 95 Viratana Suntaranond 19,760,582 95 Aimon Raksriaksorn 19,760,582 95 Suwan Panyapas 19,757,582 3,095 Dharmnoon Prachuabmoh 19,757,582 3,095 Chulchit Bunyaketu 19,760,582 95 Preeyaporn Thavornun 19,757,582 3,095 29 Item 5 - Other Information King Power entered into an amended and restated agreement and plan of merger on May 16, 2003 that provides for it to be taken private by shareholders Vichai Raksriaksorn, Viratana Suntaranond, Aimon Raksriaksorn and Niphon Raksriaksorn (collectively, the "Controlling Shareholders") and several other shareholders who together with the Controlling Shareholders hold approximately 88.6% of the King Power's common shares (collectively, together with the Controlling Shareholders, the "Majority Shareholders"). The plan of merger provides for the merger of King Power with and into KP (Thailand) Company Limited ("Newco"), with Newco as the corporation surviving the merger. Immediately prior to the effective time of the merger, Newco will be held by the Majority Shareholders. As a result of the merger, each common share that is not held by Newco or a Majority Shareholder will be converted into the right to receive U.S.$3.27 in cash, without interest. King Power's obligation to effect the merger is subject to certain conditions, including the approval by the Nevada court of the stipulation of settlement dated May 16, 2003 in a manner satisfactory to King Power. Item 6 - Exhibits and Reports on Form 8-K Exhibit 31.1 Section 302 Certification Exhibit 31.2 Section 302 Certification Exhibit 32.1 Section 906 Certification Exhibit 32.2 Section 906 Certification Exhibit 10.1 Agreement and Plan of Merger dated as of October 29, 2001, as Amended and Restarted as of May 16, 2003 (Incorporated by reference to Appendix C of the Company's preliminary Information Statement on Schedule 14C filed on August 12, 2003) Exhibit 10.2 Stipulation of Settlement dated May 16, 2003 (Incorporated by reference to Exhibit 99. (d) (2) of Amendment No. 1 to Schedule 13E-3 filed on June 18, 2003) Report on Form 8-K On May 16, 2003, King Power International Group Co., Ltd. issued a press release announcing that its Board of Directors has approved a merger transaction in which the Company will be taken private. The Company also announced that it has entered into a Stipulation of Settlement to settle three related class action lawsuits pending against the Company and the members of its Board of Directors. 30 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, Chairman and Chief Executive Officer August 14th, 200 By: /s/ Viratana Suntaranond --------------------------------------------------------- Viratana Suntaranond, Chief Financial Officer August 14th, 2003 31

KING POWER INTERNATIONAL GROUP CO LTD 10-Q