UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from ________ to _________
Commission file number: 333-42036
Soyo Group, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 95-4502724
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1420 South Vintage Avenue, Ontario, California 91761
---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(909) 937-0778
--------------------------------------------------
Registrant's telephone number, including area code
41484 Christy Avenue, Fremont, California 94538
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(Former name, former address and former fiscal year,
if changed since last report.)
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 preceding 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). [ ]
As of September 30, 2003, the registrant had 40,000,000 shares of
common stock issued and outstanding.
Documents incorporated by reference: None.
SOYO GROUP, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2003 (Unaudited)
and December 31, 2002
Condensed Consolidated Statements of Operations (Unaudited) - Three
Months and Nine Months Ended September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements (Unaudited) -
Three Months and Nine Months Ended September 30, 2003 and 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
September 30, December 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
CURRENT
Cash and cash equivalents $ 326,657 $ 623,296
Certificate of deposit, restricted -- 1,000,000
Accounts receivable, net of
allowance for doubtful accounts
of $620,605 at September 30, 2003
and December 31, 2002 5,566,455 6,725,425
Inventories, including $3,166,827
and $9,359,190 purchased from
Soyo Computer, Inc. at September
30, 2003 and December 31, 2002,
respectively 3,634,523 12,358,255
Prepaid expenses 100,000 50,714
Income tax refund receivable 47,000 47,000
------------- -------------
9,674,635 20,804,690
------------- -------------
OTHER
Property and equipment, net of
accumulated depreciation and
amortization of $43,410 and
$31,300 at September 30, 2003 and
December 31, 2002, respectively 50,496 60,094
Deposits 75,035 50,000
------------- -------------
125,531 110,094
------------- -------------
$ 9,800,166 $ 20,914,784
============= =============
(continued)
3
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Balance Sheets (continued)
September 30, December 31,
2003 2002
------------- -------------
(Unaudited)
LIABILITIES
CURRENT
Accounts payable -
Soyo Computer, Inc. $ 5,308,826 $ 12,803,935
Other 1,600,254 4,554,820
Accrued liabilities 779,401 1,508,224
Advances from officer,
director and major
shareholder 240,000 --
Revolving note payable -- 1,200,000
Income taxes payable 90,430 --
------------- -------------
8,018,911 20,066,979
------------- -------------
NON-CURRENT
Long-term payable - Soyo
Computer, Inc. 12,000,000 12,000,000
------------- -------------
SHAREHOLDERS' DEFICIENCY
Preferred stock, $0.001 par value
Authorized - 10,000,000 shares
Issued and outstanding -
1,000,000 shares of Class A
Convertible Preferred Stock,
$1.00 per share stated
liquidation value
($1,000,000 aggregate
liquidation value) 1,000 1,000
Common stock, $0.001 par value
Authorized - 75,000,000 shares
Issued and outstanding -
40,000,000 shares 40,000 40,000
Additional paid-in capital 459,000 459,000
Accumulated deficit (10,718,745) (11,652,195)
------------- -------------
(10,218,745) (11,152,195)
------------- -------------
$ 9,800,166 $ 20,914,784
============= =============
See accompanying notes to condensed consolidated financial statements.
4
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30,
--------------------------------
2003 2002
------------- -------------
Net revenues $ 6,819,061 $ 13,625,372
Cost of revenues, including
inventories purchased from Soyo
Computer, Inc. of $3,416,840
and $11,516,460 in 2003 and
2002, respectively 5,654,659 13,485,301
------------- -------------
Gross margin 1,164,402 140,071
------------- -------------
Costs and expenses:
Sales and marketing 406,064 383,372
General and administrative 461,310 789,556
Provision for doubtful accounts -- 454,377
Depreciation and amortization 4,036 3,891
------------- -------------
Total costs and expenses 871,410 1,631,196
------------- -------------
Income (loss) from operations 292,992 (1,491,125)
------------- -------------
Other income (expense):
Interest income 1,028 404
Other income 4,155 --
Interest expense (6,823) (8,863)
------------- -------------
Other expense, net (1,640) (8,459)
------------- -------------
Income (loss) before income taxes 291,352 (1,499,584)
Provision for income taxes 25,680 --
------------- -------------
Net income (loss) $ 265,672 $ (1,499,584)
============= =============
Net income (loss) per common share -
Basic $ 0.01 $ (0.05)
============= =============
Diluted
$ 0.01 $ (0.05)
============= =============
Weighted average number of common
shares outstanding -
Basic 40,000,000 28,182,750
============= =============
Diluted 47,142,857 28,182,750
============= =============
See accompanying notes to condensed consolidated financial statements.
5
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations (Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------- -------------
Net revenues $ 23,265,523 $ 39,924,692
Cost of revenues, including
inventories purchased from Soyo
Computer, Inc. of $11,574,565
and $34,136,196 in 2003 and
2002, respectively 19,155,211 39,972,073
------------- -------------
Gross margin (deficit) 4,110,312 (47,381)
------------- -------------
Costs and expenses:
Sales and marketing 845,087 1,025,595
General and administrative 2,233,144 2,253,897
Provision for doubtful accounts -- 1,225,001
Depreciation and amortization 12,110 9,633
------------- -------------
Total costs and expenses 3,090,341 4,514,126
------------- -------------
Income (loss) from operations 1,019,971 (4,561,507)
------------- -------------
Other income (expense):
Interest income 26,252 42,204
Other income 4,155 55,225
Interest expense (26,248) (37,871)
------------- -------------
Other income, net 4,159 59,558
------------- -------------
Income (loss) before income taxes 1,024,130 (4,501,949)
Provision (benefit) for income taxes 90,680 (61,679)
------------- -------------
Net income (loss) $ 933,450 $ (4,440,270)
============= =============
Net income (loss) per common share -
Basic $ 0.02 $ (0.16)
============= =============
Diluted
$ 0.02 $ (0.16)
============= =============
Weighted average number of common
shares outstanding -
Basic 40,000,000 28,182,750
============= =============
Diluted 47,142,857 28,182,750
============= =============
See accompanying notes to condensed consolidated financial statements.
6
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 933,450 $ (4,440,270)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 12,110 9,633
Provision for doubtful
accounts -- 1,225,001
Changes in operating
assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,158,970 (17,481)
Inventories 8,723,732 4,952,799
Prepaid expenses (49,286) (17,579)
Deposits (25,035) 41,082
Increase (decrease) in:
Accounts payable -
Soyo Computer, Inc. (7,495,109) (603,364)
Accounts payable -
other (2,954,566) (1,183,031)
Accrued liabilities (728,823) 266,393
Income taxes payable 90,430 (75,044)
------------ ------------
Net cash provided by (used in)
operating activities (334,127) 158,139
------------ ------------
INVESTING ACTIVITIES
Purchase of property and
equipment (2,512) (35,052)
------------ ------------
Net cash used in investing
activities (2,512) (35,052)
------------ ------------
(continued)
7
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------ ------------
FINANCING ACTIVITIES
Advances from officer,
director and major
shareholder $ 360,000 $ --
Repayment of advances
from officer, director
and major shareholder (120,000) --
Repayment of revolving
note payable (1,200,000) --
Decrease in restricted
cash 1,000,000 --
------------ ------------
Net cash provided by
financing activities 40,000 --
------------ ------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) (296,639) 123,087
At beginning of period 623,296 168,450
------------ ------------
At end of period $ 326,657 $ 291,537
============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest $ 26,248 $ 37,871
============ ============
Cash paid for income taxes $ 1,050 $ 49,156
============ ============
See accompanying notes to condensed consolidated financial statements.
8
Soyo Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Nine Months Ended September 30, 2003 and 2002
1. Organization and Basis of Presentation
Organization - Effective October 24, 2002, Vermont Witch Hazel Company, Inc., a
Nevada corporation ("VWHC"), acquired Soyo, Inc., a Nevada corporation ("Soyo
Nevada"), from Soyo Computer, Inc., a Taiwan corporation ("Soyo Taiwan), in
exchange for the issuance of 1,000,000 shares of convertible preferred stock and
28,182,750 shares of common stock, and changed its name to Soyo Group, Inc.
("Soyo"). The 1,000,000 shares of preferred stock were issued to Soyo Taiwan and
the 28,182,750 shares of common stock were issued to certain members of Soyo
Nevada management.
Subsequent to this transaction, Soyo Taiwan maintained an equity interest in
Soyo, continues to be the primary supplier of inventory to Soyo, and was owed
$24,803,935 at December 31, 2002. In addition, there was no change in the
management of Soyo and no new capital invested, and there is a continuing family
relationship between certain members of the management of Soyo and Soyo Taiwan.
As a result, this transaction was accounted for as a recapitalization of Soyo
Nevada, pursuant to which the accounting basis of Soyo Nevada continued
unchanged subsequent to the transaction date. Accordingly, the pre-transaction
financial statements of Soyo Nevada are now the historical financial statements
of the Company.
In conjunction with this transaction, Soyo Taiwan agreed to extend the payment
date to December 31, 2005 for $12,000,000 of accounts payable, without interest.
Accordingly, $12,000,000 was reclassified from short-term payable to long-term
payable effective October 24, 2002.
Soyo Taiwan also agreed to continue to provide computer parts and components to
Soyo on an open account basis at the quantities required and on a timely basis
to enable Soyo to continue to conduct its business operations at budgeted 2003
levels, which is not less than a level consistent with the operations of Soyo
Nevada's business in 2001 and 2000. This supply commitment is effective through
December 31, 2005.
On December 9, 2002, Soyo's Board of Directors elected to change Soyo's fiscal
year end from July 31 to December 31 to conform to Soyo Nevada's fiscal year
end.
Ming Tung Chok, the Company's President, Chief Executive Officer and Director
and Nancy Chu, the Company's Chief Financial Officer, Secretary and Director,
are husband and wife. Andy Chu, the President and major shareholder of Soyo
Taiwan, is the brother of Nancy Chu.
Unless the context indicates otherwise, Soyo and its wholly-owned subsidiary,
Soyo Nevada, are referred to herein as the "Company".
Basis of Presentation - The accompanying condensed consolidated financial
statements include the accounts of Soyo and Soyo Nevada. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
9
Comments - The accompanying interim condensed consolidated financial statements
are unaudited, but in the opinion of management of the Company, contain all
adjustments, which include normal recurring adjustments, necessary to present
fairly the financial position at September 30, 2003, the results of operations
for the three months and nine months ended September 30, 2003 and 2002, and cash
flows for the nine months ended September 30, 2003 and 2002. The condensed
consolidated balance sheet as of December 31, 2002 is derived from the Company's
audited consolidated financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
condensed consolidated financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB/A for the fiscal year ended December 31,
2002, as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates primarily relate to the realizable value
of accounts receivable, vendor programs and inventories. Actual results could
differ from those estimates.
The results of operations for the three months and nine months ended September
30, 2003 is not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 2003.
Business - The Company sells computer components and peripherals to distributors
and retailers primarily in North, Central and South America, as well as certain
other locations. The Company operates in one business segment. A substantial
majority of the Company's products are purchased from Soyo Taiwan pursuant to an
exclusive distribution agreement effective through December 31, 2005, and are
sold under the "Soyo" brand.
Soyo Nevada was a wholly-owned subsidiary of Soyo Taiwan during the years ended
December 31, 2000 and 2001, and the period from January 1, 2002 through October
24, 2002.
Income (Loss) Per Share - Basic income (loss) per share is calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted income per share is calculated assuming
the issuance of common shares, if dilutive, resulting from the conversion of
preferred stock. These potentially dilutive securities were not included in the
calculation of loss per share for the three months and nine months ended
September 30, 2002 because the Company incurred a loss during such periods and
thus their effect would have been anti-dilutive. The loss per common share
calculation for the three months and nine months ended September 30, 2002
reflects the retroactive restatement of the shareholders' equity section to
reflect the October 2002 recapitalization.
As of September 30, 2003 and December 31, 2002, potentially dilutive securities
consisted of 1,000,000 shares of convertible preferred stock with a stated
liquidation value of $1.00 per share that are convertible into common stock at
the fair value of the underlying common stock. For the three months and nine
months ended September 30, 2003, 7,142,857 shares of common stock were issuable
upon conversion of the convertible preferred stock, based on the trading price
of the common stock on September 30, 2003 of $0.14 per share, which information
was utilized to calculate diluted income per share.
10
Comprehensive Income (Loss) - Since the Company did not have any items of
comprehensive income (loss) during the three months and nine months ended
September 30, 2003 and 2002, a statement of comprehensive income (loss) is not
presented.
Significant Risks and Uncertainties - The Company operates in a highly
competitive industry subject to aggressive pricing practices, pressures on gross
margins, frequent introductions of new products, short product life cycles,
rapid technological advances, continual improvement in product price/performance
characteristics, and changing consumer demand.
As a result of the dynamic nature of the business, it is possible that the
Company's estimates with respect to the realizability of inventories and
accounts receivable may be materially different from actual amounts. These
differences could result in higher than expected allowance for bad debts or
inventory reserve costs, which could have a materially adverse effect on the
Company's financial position and results of operations.
Pro Forma Financial Disclosure - Since the Company has not adopted a stock
option plan, nor has it issued any stock options, no pro forma financial
disclosure has been presented.
Reclassification - Certain amounts have been reclassified in 2002 to conform to
the presentation in 2003.
2. Advances from Officer, Director and Major Shareholder
During March 2003, Nancy Chu, the Company's Chief Financial Officer, director
and major shareholder, made short-term advances to the Company of $360,000 for
working capital purposes, of which $120,000 was repaid during September 2003.
The Company expects to repay the remainder during the three months ending
December 31, 2003.
3. Revolving Loan Agreement
The Company had a revolving loan agreement with a financial institution
providing for borrowings of up to $1,200,000, with interest at 3.75% per annum.
Borrowings under the revolving loan agreement were secured by a $1,000,000
certificate of deposit, with Soyo Taiwan guaranteeing the remaining $200,000.
The Company did not renew the revolving loan agreement when it expired in
September 2003. The proceeds from the $1,000,000 certificate of deposit were
used to repay the balance outstanding on the revolving loan agreement.
4. Significant Concentrations
a. Customers
The Company sells to both distributors and retailers. Sales through such
distribution channels are summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues
Distributors $ 1,174,315 $ 4,194,560 $ 4,202,342 $ 8,165,328
Retailers 5,644,746 9,430,812 19,063,181 31,759,364
----------- ----------- ----------- -----------
$ 6,819,061 $13,625,372 $23,265,523 $39,924,692
=========== =========== =========== ===========
11
During the three months ended September 30, 2003 and 2002, the Company offered
price protection to certain customers under specific programs aggregating
$601,564 and $187,569, respectively, which reduced net revenues and accounts
receivable accordingly. During the nine months ended September 30, 2003 and
2002, the Company offered price protection to certain customers under specific
programs aggregating $2,074,564 and $403,409, respectively, which reduced net
revenues and accounts receivable accordingly.
Information with respect to customers that accounted for 10% or more of the
Company's revenues is presented below.
During the three months ended September 30, 2003, the Company had two customers
that accounted for revenues of $1,472,178 and $1,273,130, equivalent to 21.6%
and 18.7% of net revenues, respectively. During the three months ended September
30, 2002, the Company had three customers that accounted for revenues of
$3,955,875, $1,642,923 and $1,579,670, equivalent to 29.0%, 12.1% and 11.6% of
net revenues, respectively.
During the nine months ended September 30, 2003, the Company had two customers
that accounted for revenues of $5,564,669 and $2,359,379, equivalent to 23.9%
and 10.1% of net revenues, respectively. During the nine months ended September
30, 2002, the Company had two customers that accounted for revenues of
$10,005,165 and $4,897,258, equivalent to 25.1% and 12.3% of net revenues,
respectively.
b. Geographic Segments
Financial information by geographic segments is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues
North America $ 4,706,692 $10,766,654 $18,624,355 $34,266,896
Central and
South America 655,189 952,774 2,910,104 3,219,642
Other locations 1,457,180 1,905,944 1,713,064 2,438,154
----------- ----------- ----------- -----------
$ 6,819,061 $13,625,372 $23,265,523 $39,924,692
=========== =========== =========== ===========
c. Suppliers
A substantial majority of the Company's inventories are manufactured by Soyo
Taiwan and are purchased from Soyo Taiwan or an affiliate of Soyo Taiwan on an
open account basis.
Through October 24, 2002, Soyo Nevada was a wholly-owned subsidiary of Soyo
Taiwan (Note 1). Subsequent to that date, Soyo Taiwan has continued to provide
inventory to Soyo, and has agreed to continue to provide inventory to Soyo on an
open account basis through December 31, 2005.
The following is a summary of the Company's transactions and balances with Soyo
Taiwan as of September 30, 2003 and December 31, 2002, and for the three months
and nine months ended September 30, 2003 and 2002:
12
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Purchases from
Soyo Taiwan $ 1,417,416 $ 6,762,430 $ 8,252,529 $28,951,260
Payments to
Soyo Taiwan 2,112,470 8,717,000 14,979,470 29,056,109
September 30, December 31,
2003 2002
------------- -------------
Accounts payable
to Soyo Taiwan $ 5,308,826 $ 12,803,935
Long-term payable
to Soyo Taiwan 12,000,000 12,000,000
During the nine months ended September 30, 2003, the Company received price
protection from Soyo Taiwan aggregating $435,415, which reduced inventories and
accounts payable to Soyo Taiwan accordingly. The Company did not receive any
price protection from Soyo Taiwan during the three months ended September 30,
2003, or during the three months and nine months ended September 30, 2002.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2003 contains "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, but are not limited to, statements
concerning the Company's expectations regarding its working capital
requirements, financing requirements, business prospects, and other statements
of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2003 involve known and unknown risks,
uncertainties and other factors that could cause the actual results, performance
or achievements of the Company to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Background and Overview:
The Company sells computer components and peripherals to distributors and
retailers in North, Central and South America, as well as certain other
locations. The Company operates in one business segment. A substantial majority
of the Company's products are purchased from Soyo Taiwan pursuant to an
exclusive distribution agreement effective through December 31, 2005, and are
sold under the "Soyo" brand.
Effective October 24, 2002, Vermont Witch Hazel Company, Inc., a Nevada
corporation ("VWHC"), acquired Soyo, Inc., a Nevada corporation ("Soyo Nevada"),
from Soyo Computer, Inc., a Taiwan corporation ("Soyo Taiwan), in exchange for
the issuance of 1,000,000 shares of convertible preferred stock and 28,182,750
shares of common stock, and changed its name to Soyo Group, Inc. ("Soyo"). The
1,000,000 shares of preferred stock were issued to Soyo Taiwan and the
28,182,750 shares of common stock were issued to certain members of Soyo Nevada
management. During October 2002, certain members of the management of Soyo
Nevada also separately purchased 6,026,798 shares of the 11,817,250 shares of
common stock of VWHC outstanding prior to VWHC's acquisition of Soyo Nevada, for
$300,000 in personal funds. The 6,026,798 shares represented 51% of the
outstanding shares of VWHC common stock. Accordingly, Soyo Taiwan and Soyo
Nevada management currently own 34,209,548 shares of the 40,000,000 shares of
the Company's common stock outstanding at September 30, 2003.
Subsequent to this transaction, Soyo Taiwan maintained an equity interest in
Soyo, continues to be the primary supplier of inventory to Soyo, and was owed
$24,803,935 at December 31, 2002. In addition, there was no change in the
management of Soyo and no new capital invested, and there is a continuing family
relationship between certain members of the management of Soyo and Soyo Taiwan.
As a result, for financial reporting purposes, this transaction was accounted
for as a recapitalization of Soyo Nevada, pursuant to which the accounting basis
of Soyo Nevada continued unchanged subsequent to the transaction date.
Accordingly, the pre-transaction financial statements of Soyo Nevada are now the
historical financial statements of the Company.
In conjunction with this transaction, Soyo Taiwan agreed to extend the payment
date to December 31, 2005 for $12,000,000 of accounts payable, without interest.
Accordingly, $12,000,000 was reclassified from short-term payable to long-term
payable effective October 24, 2002.
14
Soyo Taiwan also agreed to continue to provide computer parts and components to
Soyo on an open account basis at the quantities required and on a timely basis
to enable Soyo to continue to conduct its business operations at budgeted 2003
levels, which is not less than a level consistent with the operations of Soyo
Nevada's business in 2001 and 2000. This supply commitment is effective through
December 31, 2005.
On December 9, 2002, the Company's Board of Directors elected to change the
Company's fiscal year end from July 31 to December 31 to conform to Soyo
Nevada's fiscal year end.
Ming Tung Chok, the Company's President, Chief Executive Officer and Director
and Nancy Chu, the Company's Chief Financial Officer, Secretary and Director,
are husband and wife, and are the primary members of Soyo Nevada management
referred to above. Andy Chu, the President and major shareholder of Soyo Taiwan,
is the brother of Nancy Chu.
Unless the context indicates otherwise, Soyo and its wholly-owned subsidiary,
Soyo Nevada, are referred to herein as the "Company".
The Company sells to both distributors and retailers.
Sales to distributors were $1,174,315 (17.2%) during the three months ended
September 30, 2003, as compared to $4,194,560 (30.8%) for the three months ended
September 30, 2002. Sales to distributors were $4,202,342 (18.1%) during the
nine months ended September 30, 2003, as compared to $8,165,328 (20.5%) for the
nine months ended September 30, 2002.
Sales to retailers were $5,644,746 (82.8%) during the three months ended
September 30, 2003, as compared to $9,430,812 (69.2%) for the three months ended
September 30, 2002. Sales to retailers were $19,063,181 (81.9%) during the nine
months ended September 30, 2003, as compared to $31,759,364 (79.5%) for the nine
months ended September 30, 2002.
During the three months ended September 30, 2003, the Company had two customers
that accounted for revenues of $1,472,178 and $1,273,130, equivalent to 21.6%
and 18.7% of net revenues, respectively. During the three months ended September
30, 2002, the Company had three customers that accounted for revenues of
$3,955,875, $1,642,923 and $1,579,670, equivalent to 29.0%, 12.1% and 11.6% of
net revenues, respectively.
During the nine months ended September 30, 2003, the Company had two customers
that accounted for revenues of $5,564,669 and $2,359,379, equivalent to 23.9%
and 10.1% of net revenues, respectively. During the nine months ended September
30, 2002, the Company had two customers that accounted for revenues of
$10,005,165 and $4,897,258, equivalent to 25.1% and 12.3% of net revenues,
respectively.
During the three months ended September 30, 2003, revenues from North America,
Central and South America, and other locations were $4,706,692 (69.0%), $655,189
(9.6%) and $1,457,180 (21.4%), respectively. During the three months ended
September 30, 2002, revenues from North America, Central and South America, and
other locations were $10,766,654 (79.0%), $952,774 (7.0%) and $1,905,944
(14.0%), respectively.
During the nine months ended September 30, 2003, revenues from North America,
Central and South America, and other locations were $18,642,355 (80.1%),
$2,910,104 (12.5%) and $1,713,064 (7.4%), respectively. During the nine months
ended September 30, 2002, revenues from North America, Central and South
America, and other locations were $34,266,896 (85.8%), $3,219,642 (8.1%) and
$2,438,154 (6.1%), respectively.
15
Financial Outlook:
During the years ended December 31, 2000 and 2001, the Company generated sales
in excess of $62,000,000 in each such year, with gross margins ranging from 5%
to 7%. The Company incurred a net loss and a negative cash flow from operations
in each such year.
During the year ended December 31, 2002, the Company had sales of $49,664,417, a
negative net margin of $(4,003,972), and a net loss of $(10,733,459). Operations
during 2002 indicated a developing negative trend, with a negative gross margin
and an increasing net loss. During the three months ended December 31, 2002, the
Company experienced extreme pressures on its sales and gross margin as a result
of the effect of the West Coast dock strike in September and early October 2002.
The impact of the initial supply interruption, combined with the abrupt release
of large amounts of inventory, caused a short-term price war in November and
December 2002. This price war resulted in the Company having to sell inventory
at below cost. The price war abated during January 2003, and the Company's gross
margin has returned to more normal levels.
As of September 30, 2003 and December 31, 2002, the Company was reliant upon the
cash flows from its operations. The Company does not have any external sources
of liquidity, other than advances from an officer, director and major
shareholder.
Since October 24, 2002, the date that Soyo Nevada became a wholly-owned
subsidiary of VWHC, Soyo has implemented or intends to implement various
measures designed to improve its operating results, cash flows and financial
position, including the following:
- The Company has reviewed its product mix, and has revised its sales plan to
focus on higher margin products.
- The Company is attempting to expand the number and credit quality of its
customer accounts.
- The Company is attempting to arrange additional supply sources and to reduce
its reliance on inventory purchases from Soyo Taiwan.
- The Company is reviewing its management structure with a view towards
retaining additional executives with industry experience.
- The Company moved its office and warehouse operations into a larger, more
efficient facility in September 2003.
- The Company has deferred the payment of $12,000,000 of accounts payable to
Soyo Taiwan until December 31, 2005.
- The Company is attempting to increase its operating liquidity by exploring the
availability of outside debt and equity financing, to the extent such funding is
available under reasonable terms and conditions.
There can be no assurances that these measures will result in an improvement in
the Company's operations or liquidity. To the extent that the Company's
operations or liquidity does not improve, the Company may be forced to reduce
operations to a level consistent with its available working capital resources.
The Company may also have to consider a formal or informal restructuring or
reorganization.
As a result of these factors, as of December 31, 2002, the Company's independent
accountants expressed substantial doubt about the Company's ability to continue
as a going concern. The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue as a going concern,
16
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The carrying amounts of assets and liabilities
presented in the condensed consolidated financial statements do not purport to
represent the realizable or settlement values, and do not include any
adjustments that might result from the outcome of this uncertainty.
Critical Accounting Policies:
The Company prepared its condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The Company operates in a highly competitive industry subject to aggressive
pricing practices, pressures on gross margins, frequent introductions of new
products, rapid technological advances, continual improvement in product
price/performance characteristics, and changing consumer demand.
As a result of the dynamic nature of the business, it is possible that the
Company's estimates with respect to the realizability of inventories and
accounts receivable may be materially different from actual amounts. These
differences could result in higher than expected allowance for bad debts or
inventory reserve costs, which could have a materially adverse effect on the
Company's financial position and results of operations.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's condensed consolidated
financial statements.
Vendor Programs:
Funds received from vendors for price protection, product rebates, marketing and
training, product returns and promotion programs are generally recorded as
adjustments to product costs, revenue or sales and marketing expenses according
to the nature of the program. The Company records estimated reductions to
revenues for incentive offerings and promotions. Depending on market conditions,
the Company may implement actions to increase customer incentive offerings,
which may result in an incremental reduction of revenue at the time the
incentive is offered.
Accounts Receivable:
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable.
The Company records estimated reductions to revenue for incentive offerings and
promotions. Depending on market conditions, the Company may implement actions to
increase customer incentive offerings, which may result in an incremental
reduction of revenue at the time the incentive is offered.
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of outstanding
accounts receivable.
17
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined by
using the average cost method. The Company maintains a perpetual inventory
system which provides for continuous updating of average costs. The Company
evaluates the market value of its inventory components on a regular basis and
reduces the computed average cost if it exceeds the component's market value.
Inventories consist primarily of computer parts and components purchased from
Soyo Taiwan.
Income Taxes:
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. In the event the Company
was to determine that it would be able to realize its deferred tax assets in the
future in excess of its recorded amount, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to operations in the period such
determination was made.
Results of Operations:
Three Months Ended September 30, 2003 and 2002:
Net Revenues. Net revenues decreased by $6,806,311 or 50.0%, to $6,819,061 in
2003, as compared to $13,625,372 in 2002. The decrease in net revenues was a
result of a general slow-down in the market and the Company's decision to
de-emphasize sales volume and focus on the sale of higher margin products.
During the three months ended September 30, 2003 and 2002, the Company offered
price protection to certain customers under specific programs aggregating
$601,564 and $187,569, respectively, which reduced net revenues and accounts
receivable accordingly.
Gross Margin. Gross margin was $1,164,402 or 17.1% in 2003, as compared to
$140,071 or 1.0% in 2002. The Company did not record any inventory write downs
during the three months ended September 30, 2003 and 2002. Gross margin
increased in 2003 as compared to 2002 as a result of the change in product mix
to higher margin products.
Sales and Marketing Expenses. Selling and marketing expenses increased by
$22,692 or 5.9%, to $406,064 in 2003 as compared to $383,372 in 2002.
Co-operative marketing program expense was $272,859 in 2003, as compared to
$81,252 in 2002, an increase of $191,607 or 235.8%.
General and Administrative Expenses. General and administrative expenses
decreased by $328,246 or 41.6%, to $461,310 in 2003, as compared to $789,556 in
2002, primarily as a result of a reduction in various general and administrative
expense categories.
Provision for Doubtful Accounts. The Company recorded a provision for doubtful
accounts of $454,377 for the three months ended September 30, 2002. The Company
did not record a provision for doubtful accounts for the three months ended
September 30, 2003.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $4,036 in 2003, as compared to $3,891 in 2002.
Income (Loss) from Operations. Income from operations was $292,992 for the three
months ended September 30, 2003, as compared to a loss from operations of
$1,491,125 for the three months ended September 30, 2002.
Interest Expense. Interest expense decreased to $6,823 in 2003, as compared to
$8,863 in 2002, as a result of a reduction in the interest rate on the revolving
note payable.
18
Interest Income. Interest income was $1,028 in 2003, as compared to $404 in
2002.
Other Income. Other income was $4,155 in 2003. There was no other income in
2002.
Income (Loss) Before Income Taxes. Income before income taxes was $291,352 for
the three months ended September 30, 2003, as compared a loss before income
taxes of $1,499,584 for the three months ended September 30, 2002.
Provision for Income Taxes. The provision for income taxes was $25,680 in 2003.
There was no provision for income taxes in 2002.
Net Income (Loss). Net income was $265,672 for the three months ended September
30, 2003, as compared to a net loss of $1,499,584 for the three months ended
September 30, 2002.
Nine Months Ended September 30, 2003 and 2002:
Net Revenues. Net revenues decreased by $16,659,169 or 41.7%, to $23,265,523 in
2003, as compared to $39,924,692 in 2002. The decrease in net revenues was a
result of a general slow-down in the market and the Company's decision to
de-emphasize sales volume and focus on the sale of higher margin products.
During the nine months September 30, 2003 and 2002, the Company offered price
protection to certain customers under specific programs aggregating $2,074,564
and $403,409, respectively, which reduced net revenues and accounts receivable
accordingly.
Gross Margin (Deficit). Gross margin (deficit) was $4,110,312 or 17.7% in 2003,
as compared to $(47,381) or (0.1)% in 2002. During the nine months ended
September 30, 2003, the Company recorded inventory write-downs of $30,000, as
compared to $1,700,001 for the nine months ended September 30, 2002. Gross
margin increased in 2003 as compared to 2002 as a result of the change in
product mix to higher margin products and substantially reduced inventory
write-downs.
Sales and Marketing Expenses. Selling and marketing expenses decreased by
$180,508 or 17.6%, to $845,087 in 2003, as compared to $1,025,595 in 2002,
reflecting reduced vendor support programs funded by the Company, since these
programs are generally based on a percentage of revenues. The Company has also
reduced sales and marketing expenses in response to the general slow-down in the
market. Co-operative marketing program expense was $691,065 in 2003, as compared
to $444,304 in 2002, an increase of $246,761 or 55.5%.
General and Administrative Expenses. General and administrative expenses
decreased by $20,753 or 0.9%, to $2,233,144 in 2003, as compared to $2,253,897
in 2002.
Provision for Doubtful Accounts. The Company recorded a provision for doubtful
accounts of $1,225,001 for the nine months ended September 30, 2002. The Company
did not record a provision for doubtful accounts for the nine months ended
September 30, 2003.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $12,110 in 2003, as compared to $9,633 in 2002.
Income (Loss) from Operations. Income from operations was $1,019,971 for the
nine months ended September 30, 2003, as compared to a loss from operations of
$4,561,507 for the nine months ended September 30, 2002.
19
Interest Expense. Interest expense decreased to $26,248 in 2003, as compared to
$37,871 in 2002, as a result of a reduction in the interest rate on the
revolving note payable.
Interest Income. Interest income was $26,252 in 2003, as compared to $42,204 in
2002.
Other Income. Other income was $4,155 in 2003, as compared to $55,225 in 2002.
Income (Loss) Before Income Taxes. Income before income taxes was $1,024,130 for
the nine months ended September 30, 2003, as compared a loss before income taxes
of $4,501,949 for the nine months ended September 30, 2002.
Provision (Benefit) for Income Taxes. The provision for income taxes was $90,680
in 2003, as compared to a benefit from income taxes of $61,679 in 2002.
Net Income (Loss). Net income was $933,450 for the nine months ended September
30, 2003, as compared to a net loss of $4,440,270 for the nine months ended
September 30, 2002.
Financial Condition - September 30, 2003:
Liquidity and Capital Resources:
Transactions with Soyo Taiwan. Since the formation of Soyo Nevada in October
1998, the Company has relied on the financial support from Soyo Taiwan for
inventory and capital to provide the resources necessary to conduct operations.
Through October 24, 2002, Soyo Nevada was a wholly-owned subsidiary of Soyo
Taiwan. Subsequent to that date, Soyo Taiwan continues to provide inventory to
Soyo, and has agreed to continue to provide inventory to Soyo on an open account
basis through December 31, 2005.
In conjunction with the October 2002 transaction, Soyo Nevada transferred
$12,000,000 of accounts payable to Soyo Taiwan to long-term payable, without
interest, due December 31, 2005. Soyo Taiwan also agreed to continue to provide
computer parts and components to Soyo on an open account basis at the quantities
required and on a timely basis to enable Soyo to continue to conduct its
business operations at budgeted 2003 levels, which is not less than a level
consistent with the operations of Soyo Nevada's business in 2001 and 2000. This
supply commitment is effective through December 31, 2005.
During the three months ended September 30, 2003 and 2002, the Company purchased
inventory from Soyo Taiwan aggregating $1,417,416 and $6,762,430, respectively.
During the nine months ended September 30, 2003 and 2002, the Company purchased
inventory from Soyo Taiwan aggregating $8,252,529 and $28,951,260, respectively.
At September 30, 2003, the Company had short-term accounts payable to Soyo
Taiwan of $5,308,826 and a long-term payable to Soyo Taiwan of $12,000,000. At
December 31, 2002, the Company had short-term accounts payable to Soyo Taiwan of
$12,803,935 and a long-term payable to Soyo Taiwan of $12,000,000.
During the nine months ended September 30, 2003, the Company received price
protection from Soyo Taiwan aggregating $435,415. The Company did not receive
any price protection from Soyo Taiwan during the three months ended September
30, 2003, or during the three months and nine months ended September 30, 2002.
Such price protection reduced inventories and accounts payable to Soyo Taiwan
accordingly. The Company does not have any formal price protection agreement
with Soyo Taiwan. The Company periodically negotiates price protection
adjustments with Soyo Taiwan based on current market conditions.
20
Operating Activities. The Company utilized cash of $334,127 in operating
activities during the nine months ended September 30, 2003, as compared to
generating cash of $158,139 during the nine months ended September 30, 2002,
primarily as a result of cash being used to reduce operating liabilities at a
rate in excess of cash being generated from operating assets in 2003.
At September 30, 2003, the Company had cash and cash equivalents of $326,657, as
compared to $623,296 at December 31, 2002. The Company had working capital of
$1,655,724 at September 30, 2003, as compared to $737,711 at December 31, 2002,
resulting in current ratios of 1.21:1 and 1.04:1 at September 30, 2003 and
December 31, 2002, respectively.
Accounts receivable decreased to $6,187,060 at September 30, 2003, as compared
to $7,346,030 at December 31, 2002, a decrease of $1,158,970 or 15.8%, as a
result of a combination of reduced sales and increased cash collections during
the nine months ended September 30, 2003. The Company recorded a provision for
doubtful accounts of $1,225,001 for the nine months ended September 30, 2002.
The Company did not record a provision for doubtful accounts for the nine months
ended September 30, 2003.
Inventories decreased to $3,634,523 at September 30, 2003, as compared to
$12,358,255 at December 31, 2002, a decrease of $8,723,732 or 70.6%, as a result
of reduced inventory purchases during the nine months ended September 30, 2003,
reflecting decreased sales during such period and the implementation of
management's plans in 2003 to increase inventory turnover of higher margin
products. At September 30, 2003 and December 31, 2002, $3,166,827 and $9,359,190
of such inventories had been purchased from Soyo Taiwan.
Accounts payable - Soyo Computer, Inc., excluding $12,000,000 of accounts
payable for which payment has been deferred until December 31, 2005, decreased
to $5,308,826 at September 30, 2003, as compared to $12,803,935 at December 31,
2002, a decrease of $7,495,109 or 58.5%, as a result of reduced inventory
purchases, reflecting reduced sales and attempts to improve inventory turnover.
Accounts payable - other decreased to $1,600,254 at September 30, 2003, as
compared to $4,554,820 at December 31, 2002, a decrease of $2,954,566 or 64.9%,
as a result of reduced inventory purchases, reflecting reduced sales and
attempts to improve inventory turnover.
Accrued liabilities decreased to $779,401 at September 30, 2003, as compared to
$1,508,224 at December 31, 2002, a decrease of $728,823 or 48.3%.
Income taxes payable were $90,430 at September 30, 2003. The Company did not
have any income taxes payable at December 31, 2002.
Investing Activities. The Company expended $2,512 and $35,052 in 2003 and 2002,
respectively, for the purchase of property and equipment.
Financing Activities. The Company had a revolving loan agreement with a
financial institution providing for borrowings of up to $1,200,000, with
interest at 3.75% per annum. Borrowings under the revolving loan agreement were
secured by a $1,000,000 certificate of deposit, with Soyo Taiwan guaranteeing
the remaining $200,000. The Company did not renew the revolving loan agreement
when it expired in September 2003. The proceeds from the $1,000,000 certificate
of deposit were used to repay the balance outstanding on the revolving loan
agreement.
21
During March 2003, Nancy Chu, the Company's Chief Financial Officer, director
and major shareholder, made short-term advances to the Company of $360,000 for
working capital purposes, of which $120,000 was repaid during September 2003.
The Company expects to repay the remainder during the three months ending
December 31, 2003.
As of September 30, 2003, the Company did not have any capital expenditure
commitments outstanding.
Recent Accounting Pronouncements:
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The adoption of SFAS No. 145 did not have a significant effect on
the Company's financial statement presentation or disclosures.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Such costs covered by
SFAS No. 146 include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS No. 146 replaces the previous
accounting guidance provided by the EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of SFAS No. 146 did not have a significant effect on the
Company's financial statement presentation or disclosures.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Acquisitions of Financial Institutions, Except Transactions Between or
More Mutual Enterprises". The Company does not expect that SFAS No. 147 will
have any effect on its financial statement presentation or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The adoption of SFAS No. 148 did not have a significant effect on the
Company's financial statement presentation or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative and when a derivative contains a
financing component. The clarification provisions of SFAS No. 149 require that
contracts with comparable characteristics be accounted for similarly. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have a significant effect on the Company's
financial statement presentation or disclosures.
22
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, a company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN No. 45
effective January 1, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an Interpretation of ARB No. 51)" ("FIN 46"). FIN 46
requires that the primary beneficiary in a variable interest entity consolidate
the entity even if the primary beneficiary does not have a majority voting
interest. The consolidation requirements of FIN 46 are required to be
implemented for any variable interest entity created on or after January 31,
2003. In addition, FIN 46 requires disclosure of information regarding
guarantees or exposures to loss relating to any variable interest entity
existing prior to January 31, 2003 in financial statements issued after January
31, 2003. The implementation of the provisions of FIN 46 effective January 31,
2003 did not have a significant effect on the Company's consolidated financial
statement presentation or disclosures.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors as
commodity prices, equity prices, and other market changes that affect market
risk sensitive investments.
As the Company's debt obligations are primarily short-term in nature and
non-interest bearing, the Company does not have any risk from an increase in
interest rates. However, to the extent that the Company arranges new
interest-bearing borrowings in the future, an increase in current interest rates
would cause a commensurate increase in the interest expense related to such
borrowings.
The Company does not have any foreign currency risk, as its revenues and
expenses, as well as its debt obligations, are denominated and settled in United
States dollars.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to the Company's management, including its principal executive and
financial officers, as appropriate, to allow timely decisions regarding required
disclosure.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its principal executive and
financial officers, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officers concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date of
the Company's most recent evaluation.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
Three Months Ended September 30, 2003: None
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SOYO GROUP, INC.
------------------------
(Registrant)
DATE: November 13, 2003 By: /s/ MING TUNG CHOK
-----------------------
Ming Tung Chok
President and Chief
Executive Officer
DATE: November 13, 2003 By: /s/ NANCY CHU
-----------------------
Nancy Chu
Chief Financial Officer
26
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Ming Tung Chok
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Nancy Chu
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
27