##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB   For the quarterly period ended June 30, 2004  EUPA International
Corporation  Nevada
    
    88-0409450(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)
 89 N. San Gabriel Boulevard, Pasadena, California
    
    91107(Address of principal executive offices)
    
    (Zip Code)
 626-793-2688 
  Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports) Yes ý
No o, and (2) has been subject to such
filing requirements for the past 90 days Yes
ý No
o. 20,900,000 shares of common stock, par value $0.001, were outstanding as
of June 30, 2004.




---



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES INDEX PagePart I - Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Statements of Financial Position as of
June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations for the Six
Months Ended June 30, 2004 and June 30, 2003
    
    
    4Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and June 30, 2003
    
    
    5Consolidated Statements of Changes in Stockholders
Equity for the Six Months Ended June 30, 2004
and the Year Ended December 31, 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12Item 3. Controls and Procedures
    
    
    19Part II - Other InformationItem 1. Legal Proceedings
    
    
    19Item 6. Exhibits and Other Reports on Form 8-K
    
    
    19Signature
    
    
    20CertificationsExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION June 30, 2004(Unaudited)
    
    December 31, 2003ASSETSCurrent AssetsCash and cash equivalents
    
    $
    773,774
    
    
    $
    971,093Accounts receivable, net
    
    
    473,341
    
    
    
    272,680Other receivable, related parties
    
    
    15,923
    
    
    
    60,921Prepaid expenses
    
    
    7,560
    
    
    
    0Total Current Assets
    
    
    1,270,598
    
    
    
    1,304,694Fixed AssetsProperty, furniture and equipment (net)
    
    
    826,695
    
    
    
    854,768Total Fixed Assets
    
    
    826,695
    
    
    
    854,768Other AssetsIntangible assets, net
    
    
    360,438
    
    
    
    359,981Deposits
    
    
    8,370
    
    
    
    8,370Total Other Assets
    
    
    368,808
    
    
    
    368,351Total Assets
    
    $
    2,466,101
    
    
    $
    2,527,813LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable and accrued expenses
    
    $
    78,063
    
    
    $
    29,585Other payable, related parties
    
    
    125,444
    
    
    
    172,672Income taxes payable
    
    
    0
    
    
    
    84,636Total Current Liabilities
    
    
    203,507
    
    
    
    286,893Deposits payable
    
    
    4,100
    
    
    
    4,100Total Liabilities
    
    
    207,607
    
    
    
    290,993Stockholders EquityCommon stock, $.001 par value, 25,000,000
shares authorized, 20,900,000
issued and outstanding
    
    
    20,900
    
    
    
    20,900Additional paid in capital
    
    
    1,940,203
    
    
    
    1,929,203Cumulative foreign-exchange translation adjustment
    
    
    (477
    )
    
    
    1,943Retained earnings
    
    
    297,868
    
    
    
    284,774Total Stockholders Equity
    
    
    2,258,494
    
    
    
    2,236,820Total Liabilities and Stockholders Equity
    
    $
    2,466,101
    
    
    $
    2,527,813
 See Notes to Condensed Consolidated Financial Statements 3




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Fee income
    
    $
    202,453
    
    
    $
    199,891
    
    
    $
    513,366
    
    
    $
    290,000Total revenue
    
    
    202,453
    
    
    
    199,891
    
    
    
    513,366
    
    
    
    290,000Selling expense
    
    
    12,244
    
    
    
    449
    
    
    
    52,116
    
    
    
    5,984Gross profit
    
    
    190,209
    
    
    
    199,442
    
    
    
    461,250
    
    
    
    284,016General and administrative expenses
    
    
    275,417
    
    
    
    256,503
    
    
    
    558,845
    
    
    
    356,307Income (loss) from operations
    
    
    (85,208
    )
    
    
    (57,061
    )
    
    
    (97,595
    )
    
    
    (72,291
    )Other (Income) ExpenseInterest income
    
    
    (502
    )
    
    
    (1,885
    )
    
    
    (1,366
    )
    
    
    (3,408
    )Rental income
    
    
    (15,057
    )
    
    
    (14,577
    )
    
    
    (29,676
    )
    
    
    (29,037
    )Miscellaneous
    
    
    (669
    )
    
    
    (160
    )
    
    
    (769
    )
    
    
    (4,068
    )Total Other (Income) Expense
    
    
    (16,228
    )
    
    
    (16,622
    )
    
    
    (31,811
    )
    
    
    (36,513
    )Income (loss) before income taxes
    
    
    (68,980
    )
    
    
    (40,439
    )
    
    
    (65,784
    )
    
    
    (35,778
    )Provison for income taxes
    
    
    0
    
    
    
    0
    
    
    
    1,600
    
    
    
    1,600Income (loss) from continuing operations
    
    
    (68,980
    )
    
    
    (40,439
    )
    
    
    (67,384
    )
    
    
    (37,378
    )Discontinued operationsIncome from discontinued operations
    
    
    1,337
    
    
    
    5,290
    
    
    
    80,478
    
    
    
    11,914Net Income (loss)
    
    ($
    67,643
    )
    
    ($
    35,149
    )
    
    $
    13,094
    
    
    ($
    25,464
    )Net loss per share from continuing operations (basic and diluted)Basic
    
    ($
    0.003
    )
    
    ($
    0.002
    )
    
    ($
    0.003
    )
    
    ($
    0.002
    )Diluted
    
    ($
    0.003
    )
    
    ($
    0.002
    )
    
    ($
    0.003
    )
    
    ($
    0.002
    )Net income (loss) per share (basic and diluted)Basic
    
    ($
    0.003
    )
    
    ($
    0.002
    )
    
    $
    0.001
    
    
    ($
    0.001
    )Diluted
    
    ($
    0.003
    )
    
    ($
    0.002
    )
    
    $
    0.001
    
    
    ($
    0.001
    )Weighted average number of shares (see note 7)Basic
    
    
    20,900,000
    
    
    
    20,900,000
    
    
    
    20,900,000
    
    
    
    20,900,000Diluted
    
    
    20,900,000
    
    
    
    20,900,000
    
    
    
    22,650,000
    
    
    
    20,900,000
 See Notes to Condensed Consolidated Financial Statements 4




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months EndedJune 30,
    
    June 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet Income (loss)
    
    $
    13,094
    
    
    ($
    25,464
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Amortization
    
    
    15,185
    
    
    
    15,309Depreciation
    
    
    28,073
    
    
    
    28,907Stock issued for services
    
    
    11,000
    
    
    
    11,000Translation adjustments
    
    
    (2,420
    )
    
    
    294Decrease (Increase) in receivables
    
    
    (200,661
    )
    
    
    2,446,489Decrease (Increase) in other receivables
    
    
    44,998
    
    
    
    0Decrease (Increase) in prepaid expenses
    
    
    (7,560
    )
    
    
    0(Decrease) Increase in accounts payable
and accrued expenses
    
    
    48,478
    
    
    
    (5,041,988
    )(Decrease) Increase in other payable, related party
    
    
    (47,228
    )
    
    
    0(Decrease) Increase in income taxes payable
    
    
    (84,636
    )
    
    
    846Total Adjustments
    
    
    (194,771
    )
    
    
    (2,539,143
    )Net cash (used in) operations
    
    
    (181,677
    )
    
    
    (2,564,607
    )CASH FLOWS FROM INVESTING ACTIVITIESIncrease in intangible assets
    
    
    (15,642
    )
    
    
    (25,263
    )Purchase of fixed assets
    
    
    0
    
    
    
    (899
    )Net cashed (used in) investing activities
    
    
    (15,642
    )
    
    
    (26,162
    )Net change in cash and cash equivalents
    
    
    (197,319
    )
    
    
    (2,590,769
    )Cash and cash equivalents at beginning of year
    
    
    971,093
    
    
    
    3,148,655Cash and cash equivalents at end of period
    
    $
    773,774
    
    
    $
    557,886Supplemental cash flows disclosures:Income tax payments
    
    $
    10,600
    
    
    $
    800Non cash investing and financing activities:Stock issued for services
    
    $
    11,000
    
    
    $
    11,000
 See Notes to Condensed Consolidated Financial Statements 5




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY June 30, 2004(Unaudited)
    
    December 31, 2003Common stock, number of shares outstandingBalance at beginning of period
    
    
    20,900,000
    
    
    
    20,900,000Issuance of common stock
    
    
    0
    
    
    
    0Balance at end of period
    
    
    20,900,000
    
    
    
    20,900,000Common stock, par value $.001 (thousands of shares)Balance at beginning of period
    
    $
    20,900
    
    
    $
    20,900Issuance of common stock
    
    
    0
    
    
    
    0Balance at end of period
    
    
    20,900
    
    
    
    20,900Additional paid in capitalBalance at beginning of period
    
    
    1,929,203
    
    
    
    1,914,203Issuance of common stock
    
    
    0
    
    
    
    0Issuance of stock options for service
    
    
    11,000
    
    
    
    22,000Write-off of stock subscription receivable
    
    
    0
    
    
    
    (7,000
    )Balance at end of period
    
    
    1,940,203
    
    
    
    1,929,203Stock subscription receivableBalance at beginning of period
    
    
    0
    
    
    
    (7,000
    )Issuance of common stock
    
    
    0
    
    
    
    0Write-off of stock subscription receivable
    
    
    0
    
    
    
    7,000Balance at end of period
    
    
    0
    
    
    
    0Cumulative foreign-exchange translation adjustmentBalance at beginning of period
    
    
    1,943
    
    
    
    0Foreign currency translation
    
    
    (2,420
    )
    
    
    1,943Balance at end of period
    
    
    (477
    )
    
    
    1,943Retained earningsBalance at beginning of period
    
    
    284,774
    
    
    
    206,998Net income (loss)
    
    
    13,094
    
    
    
    77,776Balance at end of period
    
    
    297,868
    
    
    
    284,774Total stockholders equity at end of period
    
    $
    2,258,494
    
    
    $
    2,236,820
 See Notes to Condensed Consolidated Financial Statements 6




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2004
 (unaudited)
 Note 1  Accounting Policies Unaudited Interim Financial Information We have prepared the accompanying consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission
(the SEC) for interim financial reporting. As used herein, EUPA, the
Company, we, our, and similar terms include EUPA International
Corporation and its wholly-owned subsidiaries, unless the context indicates
otherwise. These consolidated financial statements are unaudited and, in our
opinion, include all adjustments, consisting of normal recurring adjustments
and accruals necessary for a fair presentation of the consolidated balance
sheets, operating results, and cash flows for the periods presented. Operating
results for the periods presented are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) have been omitted in accordance with the rules and
regulations of the SEC. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and
accompanying notes included in our Annual Report on Form 10-KSB for the year
ended December 31, 2003. Basis of Consolidation The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany balances and transactions
have been eliminated upon consolidation. Revenue Recognition We recognize revenue from three major sources, sales and customer support
services, patent fiduciary and administration services and research and
development services. Each of these services is provided on an on-going
contractual basis. We recognize revenues from these services at the end of
each calendar quarter for services performed during that calendar quarter. Cash and Cash Equivalents Cash equivalents are stated at cost. Our cash equivalents are highly
liquid investments readily convertible into cash with original maturities of
three months or less and time deposits with commercial banks. 7




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
 (unaudited)
 Fixed Assets Property and equipment are stated at cost less accumulated depreciation.
Expenditures for major additions and improvements are capitalized and minor
replacements, maintenance and repairs are charged to expense as incurred.
Whenever an asset is retired or disposed of, its cost and accumulated
depreciation or amortization is removed from the respective accounts and the
resulting gain or loss is credited or charged to income. Depreciation is computed using the straight-line and declining-balance
methods over the following estimated useful lives: Buildings and improvements
    
    15 to 60 yearsAutomobiles
    
    4 to 6 yearsMachinery and equipment
    
    5 to 12 yearsFurniture and Fixtures
    
    7 years
 Intangible Assets Trademarks and other intangible assets determined to have indefinite
useful lives are not amortized. We test such trademarks and other intangible
assets with indefinite useful lives for impairment annually, or more frequently
if events or circumstances indicate that an asset might be impaired.
Trademarks and other intangible assets determined to have definite lives are
amortized over their useful lives or the life of the trademark and other
intangible asset, whichever is less. Estimates The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities in the consolidated financial statements and
accompanying notes. Estimates are used for, but not limited to, depreciable
lives, receivables valuation, accrued expenses, recoverability of intangible
assets and income taxes. Actual results could differ materially from those
estimates. Concentration of Credit Risk There is concentration of credit risk in our cash equivalents and trade
accounts receivable. Our cash equivalents are concentrated in select financial
institutions and, at times, cash balances exceed the FDIC insured levels. Our
trade accounts receivable are concentrated with related parties in Asia. Stock Based Compensation We account for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, and comply with the
disclosure provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. Under APB No. 25,
compensation cost is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value of our stock
and the amount an employee must pay to acquire the stock. 8




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
 (unaudited)
 Discontinued Operations Results of discontinued operations of a segment of the business are shown
separately from continuing operations. Amounts for prior periods have also
been shown separately for comparative purposes. We have met the requirements
to classify our wholly-owned subsidiary, Union Channel Limited, a Hong Kong
corporation (Union), as discontinued operations at the end of 2003. Union
was previously included in our financial statements. During the six months
ended June 30, 2004, the income from discontinued operations was generated from
the non-operating activities of income tax refunds and interest income. Impairment of Long-Lived Assets We evaluate long-lived assets, in accordance with SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets, for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. If the estimated future cash flows, undiscounted and
without interest charges, from the use of an asset are less than the carrying
value, a write-down would be recorded to reduce the related asset to its
estimated fair value. There have been no such impairments to date. Earnings Per Share We use SFAS No. 128
Earnings Per Share for calculating the basic and diluted earnings (loss) per share. Basic earnings (loss) per share are computed by
dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock
outstanding. Diluted earnings per share are computed similar to basic earnings per share except that the denominator is
increased to include common stock equivalents as if the potential
shares of common stock had been issued. Income Taxes Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted and income is earned. The income
tax rates imposed by the taxing authorities vary. Taxable income may vary from
pre-tax income for financial accounting purposes. There is no expected
relationship between the provision for income taxes and income before income
taxes because the countries have different taxation rules, which vary not only
to nominal rates but also in terms of available deductions, credits and other
benefits. Deferred tax assets and liabilities are recognized for the
anticipated future tax effects of temporary differences between the financial
statement basis and the tax basis of the Companys assets and liabilities using
the applicable tax rates in effect at year end as prescribed by SFAS No. 109
Accounting for Income Taxes. For the six months ended June 30, 20004, a tax refund in the amount
$79,996.00, as a result of the dissolution of Union, is included in Income
from Discontinued Operations. Foreign Currency Translation As of June 30, 2004 and 2003, the accounts of Union were maintained, and
its financial statements were expressed, in Hong Kong dollars. Such financial
statements were translated into U.S. dollars in accordance with SFAS No. 52
Foreign Currency Translation, with the Hong Kong dollar as the functional
currency. According to the statement all assets and liabilities were
translated at the current exchange rate, stockholders equity accounts are
translated at the historical rates and income statement items are translated at
the average exchange rates for the period. As of June 30, 2004 and 2003, the exchange rates between the Hong Kong
dollar and the U.S. dollar were HK$1=US$0.1282 and US$0.1283 and the average
exchange rate for the three months ended June 30, 2004 and 2003 were
HK$1=US$0.12842 and US$0.12824 respectively. There is a ($477) and $294 translation adjustment recorded on the books
for June 30, 2004 and 2003. 9




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
 (unaudited)
 Note 2  Property and Equipment A summary is as follows: June 30, 2004
    
    December 31, 2003Building and improvements
    
    $
    655,688
    
    
    $
    655,688Land
    
    
    400,000
    
    
    
    400,000Machinery and equipment
    
    
    216,026
    
    
    
    216,026Automobiles
    
    
    108,067
    
    
    
    108,067Furniture and fixtures
    
    
    64,759
    
    
    
    64,7591,444,540
    
    
    
    1,444,540Less accumulated depreciation
    
    
    (617,845
    )
    
    
    (589,772
    )$
    826,695
    
    
    $
    854,768
 Note 3 Intangible Assets A summary is as follows: June 30, 2004
    
    December 31, 2003Patent and trademark costs
    
    $
    465,294
    
    
    $
    449,651Less accumulated amortization
    
    
    (104,856
    )
    
    
    (89,670
    )$
    360,438
    
    
    $
    359,981
 Note 4  Compensated Absences All full time regular covered employees are eligible for vacation with pay
according to the following schedule: After one (1) full year of continuous full
time employment five (5) days of vacation, after two (2) full years of
continuous full time employment eight (8) days of vacation, after three full
years of continuous full time employment twelve (12) days of vacation, after
four full years of continuous full time employment sixteen (16) days of
vacation, and after five full years of continuous full time employment twenty
(20) days of vacation leave. The date of employment on a full time permanent
basis will be considered the anniversary date for vacation purposes. When a
regular full time employee has completed fifty-two (52) weeks of continuous
employment he/she will be considered as having earned the aforementioned
vacation benefits. At the end of each year and at termination, employees are
paid for any accumulated annual vacation leave. As of June 30, 2004 vacation
liability exists in the amount of $10,112. 10




---



##### Table of Contents



EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
 (unaudited)
 Note 5  Concentration  Related Party Transactions The Company had three customers during the three months ended June 30,
2004. Fees charged to these customers, all related parties, were approximately
$513,366. Included in accounts receivable is $473,341 from these customers as
of June 30, 2004. Note 6  Common Stock We recognize compensation expenses for non-employee stock-based
compensation in accordance with SFAS No. 123. In December 2001, we issued a non-employee stock option
to purchase 1,000,000 shares of our common stock at an exercise price of $0.001 per share, vesting over a five year
period. This stock option was granted to a related party in exchange for the on-going provision
of consultant services and was valued using the book value approach. At the time of
grant, the book value approach best estimated the value of the services to be
provided. At the date of grant, the per unit weighted-average fair value of
unit options granted was $0.11. During the six months ended June 30, 2004 and
2003 the Company recognized consulting expenses of $11,000 under the
non-employee stock option. Note 7  Earnings Per Share We calculate basic and diluted earnings (loss) per share in accordance
with SFAS No. 128, Earnings Per Share. Basic earnings (loss) per share are
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings (loss) per share are computed similar to basic
earnings (loss) per share except that the denominator is increased to include
common stock equivalents as if the potential shares of common stock had been
issued. Stock options are stock equivalents and are assumed to be issued and
outstanding during the period. Diluted earnings (loss) per share adjust for
any changes in income and the repurchase of common shares that would have
occurred from the assumed issuance, unless such effect is anti-dilutive.
Outstanding options to purchase 1,750,000 shares of common stock for
the six
months ended June 30, 2004 were not included in the computation of diluted
earnings per share because the effect would have been anti-dilutive. 11




---



##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and Results
of Operations The following managements discussion and analysis of financial condition
and results of operations (MD&A) should be read in conjunction with the
December 31, 2003 consolidated financial statements and notes thereto (the 2003
Consolidated Financial Statements), along with the MD&A included in EUPAs
2003 Annual Report on Form 10-KSB for the period ended December 31, 2003 and
the Quarterly Report on Form 10-QSB for the period ended March 31, 2004, filed
separately with the SEC. The discussion of results, causes and trends should
not be construed to imply any conclusion that such results or trends will
necessarily continue in the future. The information contained in this MD&A, other than historical information,
contains forward looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995 that are based on managements current
expectations and assumptions. This MD&A should be read in conjunction with the
sections entitled Additional Factors That May Affect Future
Results  and
Forward-Looking Statements. Overview EUPA is a holding company that currently has one wholly-owned subsidiary,
Tsann Kuen U.S.A., an Illinois corporation (TK USA). TK USA is a service
company providing sales and customer support, product design, research and
development, and patent administration services to Tsann Kuen Enterprise Co.,
Ltd., a corporation organized and existing in the Peoples Republic of China
(TKE). TKE, which owns approximately 67% of the outstanding capital stock
of EUPA, designs, manufactures, markets and distributes small home and kitchen
appliances, motor-driven products, vacuum cleaners and consumer electronic
products under recognized brand names in the international housewares industry.
TK USA also provides sales and customer support services to the subsidiaries
of TKE, Tsann Kuen China (Shanghai) Enterprises Ltd.
(TKS), Tsann Kuen
(Zhangzhou) Enterprise Co. Ltd. (TKL) and Tsann Kuen (China) Enterprise Co.,
Ltd. (TKC), each of which are corporations organized and existing in the
Peoples Republic of China. Our primary focus is acting as the main facilitator for developing
and promoting TKEs products in the United States (U.S.).
Our activities include acting as the information center for TKE and its
products, conducting market research, designing products and enhancements,
performing research and development of products, cultivating and supporting
relationships with brand name distributors and other customers and increasing
U.S. sales. We have sales and customer support service agreements with each of TKS, TKL and
TKC. We charge each of TKS, TKL and TKC sales and customer support fees based on the fully-burdened
costs we incur in providing these services plus a mark-up. Our fully-burdened
costs include salaries and other personnel expenses, such as travel and
travel-related expenses, operating and overhead expenses, such as 12




---



##### Table of Contents



office space, administrative services, office
supplies and equipment. Our costs are allocated among TKS, TKL and TKC on a
reasonable cost allocation basis. We periodically review our fee formula with
each party to assure that it is consistent with industry standards and customs.
During the three-month period ended June 30, 2004, our mark-up was 2% for
each of TKS and TKL. There was no mark-up for TKC, as no sales and customer
support services were provided during the six-month period ended June 30,
2004. During the six-month period ended June 30, 2004, sales and customer
support fees charged to TKS and TKL were $67, 397 and $366,845, respectively.
These fees are included in accounts receivable. We carry relatively large
accounts receivable, as the customer payment period is long, approximately 90
days. We invoice each of TKE, TKS and TKL on a quarterly basis for services
provided during the preceding calendar quarter and payments are due 90 days
after receipt of the invoice. We also receive revenues for research and development services and patent
fiduciary and administration services we provide to TKE. We have a research
and development services agreement and a patent fiduciary and administration
services agreement with TKE. Fees for these services are calculated in the
same manner as fees for sales and customer support services, on our fully-burdened costs incurred in the provision of these services plus a mark-up.
During the three-month period ended June 30, 2004, our mark-up was 5% for
research and development services and 2% for patent fiduciary and
administration services. Fees charged to TKE during the six-month period
ended June 30, 2004, were $59,503 for research and development services and
$19,621 for patent fiduciary and administration services. These fees are
included in accounts receivable, having the same customer payment period as
fees for sales and customer support services. 13




---



##### Table of Contents



Results of Operations Three Months Ended June 30, 2004 Compared with Three Months Ended June 30,
2003 June 30, 2004
    
    June 30, 2003Revenue
    
    $
    202,453
    
    
    $
    199,891Selling Expense
    
    
    12,244
    
    
    
    449General Expense
    
    
    275,417
    
    
    
    256,503Income
(loss) from operations
    
    $
    (85,208
    )
    
    $
    (57,061
    )
 (BAR CHART) Revenue from Fee Income During the three months ended June 30, 2004, revenue from fee income was
$202,453, up from $199,891 in the second
quarter of 2003. The increase in fee income was attributed to the increase in
the amount of sales and customer support, research and development and patent
fiduciary administration services provided to TKE. General and Administrative Expenses General and administrative expenses were $275,417 for the three months
ended June 30, 2004 compared with the $256,503 in the
second quarter of 2003. These expenses included accounting fees,
amortization and depreciation expenses, wages and salaries and legal
professional service expenses. The increase in general and administrative
expenses was largely attributed to the increase in wages and general expenses
incurred for services provided to TKE. The loss from operations was $(85,208)
and $(57,061) for the three months ended June 30, 2004 and 2003,
respectively,
which was a result of higher general expenses relating to increased customer support services. For the three months
ended June 30, 2004 we realized a net (loss) of $(67,643) compared to a net  (loss) of $(35,149) for the three
months ended June 30, 2003. The increase in net  (loss) was a result of
increased general and administrative expenses. The net loss during the three months ended June 30,
2004 was partially offset by income from discontinued operations of $1,337. Non-operating income for the three months ended June 30, 2004 was $16,228
compared with $16,622 in the second quarter of 2003. Included in non-operating income was $502 of interest income, $15,057 of
rental income and $669 of other income for the second three months of 2004.
During the three months ended June 30, 2003, there was $1,885 of interest
income, $14,577 of rental income, and $160 of other income. There were no
income tax expenses recognized on our pre-tax income for the second quarter of the fiscal years 2004 and 2003. 14




---



##### Table of Contents



Liquidity and Capital Resources Our primary source of liquidity as of June 30, 2004 is our cash on hand.
Net cash used in operations for the six months ended June 30,
2004 was $(181,677), as compared to net cash used in operations of
$(2,564,607) during the same period in 2003. The decrease in net cash used in operating
activities was a result of discontinued operations related to Union. Our cash and cash equivalents were $773,774 and $971,093 as of June
30, 2004 and 2003, respectively. Our current assets totalled $1,270,598 and
$1,304,694 on June 30, 2004 and 2003, respectively. Our current liabilities
were $203,507 and $286,893 on June 30, 2004 and 2003, respectively. Working
capital was $1,067,091 and $1,017,801 as of June 30, 2004
and 2003, respectively. Net
cash used in investing activities totaled $(15,642), for the
six month period ended June 30, 2004, which consisted of the costs associated
with obtaining patent rights, compared with $(26,162) for the six month period ended June 30, 2003. Cash Flow Our cash needs are currently met by our cash on hand, primarily because of
the long lag time for payment of our accounts receivable. We believe we will
be able to continue to meet our anticipated working capital requirements
through a combination of cash on hand and revenues from service fees as our
accounts receivable are paid. From time to time, primarily because of our
accounts receivable lag time, our daily operations are supported by advances
from TKE. These advances are offset from our fee revenues. We believe that
our current financial resources are sufficient to finance our operations for at
least the next twelve months. Our actual working capital needs will depend
upon numerous factors, including our operating results, competition, and the
availability of monies from TKE, none of which can be predicted with certainty. Additional Factors That May Affect Future Results The following risk factors and other information included in this report
should be carefully considered. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not
presently known to us or which we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business,
financial condition, operating results, and cash flows could be materially
adversely affected. TKE Controls Our Business TKE owns more than 50% of our outstanding capital stock. As a result, TKE
is able to control our business and affairs and our board of directors. The
interests of TKE may not necessarily be consistent with the interests of our
other investors. 15




---



##### Table of Contents



We Are Dependent On TKE for Our Sales and Other Revenues and Capital
Requirements As TKE is our sole customer, any changes in its business, financial
condition or liquidity could have a material impact on our ability to operate
our business. Many of Our Employees Also Perform Services for TKE Which Could Result In
Their Attention Being Diverted From Our Business Our success will depend, to some degree, on the efforts of our employees.
Many of our officers and employees are also employed by TKE. As a result, their
full time, attention and energies are not directed exclusively to our business.
If the attention of our officers is diverted from our business, we may not be
able to realize our full potential. If We Do Not Develop and Introduce New TKE Products, Our Ability to Grow
Will Be Limited We believe that our future success will depend in part upon our ability to
continue to develop innovative designs in the products manufactured by TKE and
to develop and market new products. We may not be successful in introducing or
supplying any new products or product innovations to TKEs which will satisfy
customer needs or achieve market acceptance. The failure to develop products
and introduce them successfully and in a timely manner could harm our ability
to grow our business. A Slowdown in the Retail Industry Will Likely Have an Adverse Effect
on Our Results TKE products are ultimately sold to consumers through major retail
channels, primarily mass merchandisers, department stores, specialty stores and
mail order catalogs. Changes in general economic conditions will cause
reductions in demand among consumers and retailers. As a result, our business
and financial results will fluctuate with the financial condition of retail
customers and the retail industry. We Face Intense Competition The market segments in which we compete are intensely competitive, and we
have many competitors, including the manufacturing and retail services industries. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition, and significantly
greater financial, marketing, and other resources than we have. They may be
able to secure comparable merchandise from vendors on more favorable terms and
may be able to adopt more aggressive pricing policies. Competitors in the
manufacturing industry may be able to devote more resources to new product
introductions, features and enhancements, and research and development than we
do. Competitors in the retail industry also may be
able to devote more resources to sales and marketing than we do. 16




---



##### Table of Contents



Compliance with Governmental Regulations Could Increase Our Operating Costs
and Interfere with Our Business Efforts Most federal, state and local authorities require certification by
Underwriters Laboratory, Inc., an independent, not-for-profit corporation
engaged in the testing of products for compliance with certain public safety
standards, or other safety regulation certification prior to marketing
electrical appliances. Foreign jurisdictions also have regulatory authorities
overseeing the safety of consumer products. TKE products, or additional
electrical appliances which we may develop, may not meet the specifications
required by these authorities. A determination that our products are not in
compliance with these rules and regulations could result in the imposition of
fines or awards of damages to private litigants. We May Experience Significant Fluctuations in Our Operating Results and Rate of
Growth Due to our limited operating history, our evolving business model, and the
unpredictability of our industry, we may not be able to accurately forecast our
rate of growth. We base our current and future expense levels and our
investment plans on estimates of future net sales and rate of growth. Our
expenses and investments are to a large extent fixed. We may not be able to
adjust our spending quickly enough if our net sales fall short of our
expectations. Our revenue and operating profit growth depends on the continued growth of
demand for the products offered by TKE, and our business is affected by general
economic and business conditions throughout the world. A softening of demand,
whether caused by changes in consumer preferences or a weakening of the U.S. or
global economies, may result in decreased revenue or growth. Terrorist attacks
and armed hostilities create economic and consumer uncertainty that could
adversely affect our revenue or growth. Such events could create delays in, and
increase the cost of, product shipments, which may decrease demand. Revenue may
not be sustainable and may decrease in the future. Our sales and operating results will also fluctuate for many other
reasons, including our ability to retain and increase sales to existing
customers, attract new customers, and satisfy our customers demands; the
introduction by our competitors of products, services, or improvements; and
seasonal fluctuations in the retail industry. The Loss of Key Senior Management Personnel Could Negatively Affect Our
Business We depend on the continued services and performance of our senior
management and other key personnel. The loss of any of our executive officers
or other key employees could harm our business. 17




---



##### Table of Contents



We May Not Be Able to Adequately Protect Our Intellectual Property Rights or
May Be Accused of Infringing Intellectual Property Rights of Third Parties We regard our patents, trade secrets, proprietary technology, and similar
intellectual property as critical to our success, and we rely on patent law,
trade secret protection, and confidentiality agreements with our
employees, TKE, and other rights granted to us under international, federal and state
statutory and common law, to protect our proprietary rights. We may be unable
to prevent third parties from infringing upon or diminish the value of our
proprietary rights. Policing unauthorized use of our proprietary rights is inherently
difficult, and we may not be able to determine the existence or extent of any
such unauthorized use. The protection of our intellectual property may require
the expenditure of significant financial and managerial resources. Moreover,
we cannot be certain that the steps we take to protect our intellectual
property will adequately protect our rights or that others will not
independently develop or otherwise acquire equivalent or superior technology or
other intellectual property rights. Other parties may claim that we infringed their proprietary rights. Such
claims, whether or not meritorious, may result in the expenditure of
significant financial and managerial resources, injunctions against us or the
imposition of damages that we must pay. We may need to obtain licenses from
third parties who allege that we have infringed their rights, but such licenses
may not be available on terms acceptable to us or at all. We May Be Subject to Product Liability Claims if People or Property Are Harmed
by the Products We Sell Some of the products we sell may expose us to product liability claims
relating to personal injury, death, or property damage caused by such products,
and may require us to take actions such as product recalls. Although we
maintain liability insurance, we cannot be certain that our coverage will be
adequate for liabilities actually incurred or that insurance will continue to
be available to us on economically reasonable terms, or at all. Forward-Looking Statements This quarterly report on Form 10-QSB includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, made in this quarterly
report on Form 10-QSB are forward-looking. We use words such as anticipates,
believes, expects, future, intends, and similar expressions to identify
forward-looking statements. Forward-looking statements reflect managements
current expectations and are inherently uncertain. Actual results could differ
materially for a variety of reasons, including, among others, the rate of
growth of the economy in general, customer spending patterns, changes in
customer demand for TKEs products, effectiveness of marketing programs, our
success in designing and developing products, our research and development
costs, the length of development and product acceptance cycles, world events,
the amount that we invest in new business opportunities and the timing of those
investments, competition, the degree to which we enter into commercial
agreements and strategic transactions and maintain and develop commercial
relationships, foreign exchange risks, seasonality, international growth and
expansion and changes in laws and regulations. These risks and uncertainties,
as well as other risks and uncertainties that could cause our actual results to
differ significantly from managements expectations, are described in greater
detail in Additional Factors That May Affect Future Results, which, along with the previous
discussion, describes some, but not all, of the factors that could cause actual
results to differ significantly from managements expectations. 18




---



##### Table of Contents



Item 3.Controls and Procedures Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure
controls and procedures and internal control over financial
reporting and concluded that (i) our disclosure controls and procedures were effective as of June
30, 2004, and (ii) no change in internal control over financial reporting
occurred during the quarter ended June 30, 2004, that has
materially affected, or is reasonably likely to materially affect, such
internal control over financial reporting. 
 Part II  Other Information 
 Item 1.Legal Proceedings On
November 30, 2001, Mir Kazem Kashani filed a complaint against
TKE and certain of its affiliates, including TK USA, alleging
breach of contract and damages of approximately $10,750,000 in
connection with the sale in Iran of products by TKS. On
February 5, 2003, the court granted the defendants summary
judgment motion and entered judgment for TKE and its affiliates. On
August 22, 2003, the plaintiff filed an appeal with the Court of
Appeals of the State of California. On May 11, 2004, the Court
affirmed the judgment for TKE and its affiliates. At
the present time, the plaintiff has not sought review of the judgment
of the Court of Appeals. We are unable to anticipate whether
plaintiff will do so and, if such review is sought and granted, the
result of such review. 
 Item 6.Exhibitsand Reports On Form 8-K (a) Exhibits. 31.1
    
    Certification of the Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of the Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.32.2
    
    Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350.
 (b) Reports on Form 8-K. None. 19




---



##### Table of Contents



SIGNATURE In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. Dated: August 15, 2004 EUPA INTERNATIONAL CORPORATIONBy:
/s/ Kung-Chieh HuangName: Kung-Chieh HuangTitle: Chief Financial Officer
 20