UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-24999
LOTUS PACIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Organization)
52-1947160
(I.R.S. Employer Identification Number)
200 Centennial Avenue, Suite 201, Piscataway, New Jersey 08854
(Address of principal executive offices)
(732) 885-1750
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes X No _____ (2) Yes X No _____
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 31, 1999:
Class Number of Shares
Common Stock 63,784,470
Par Value $.001 Per Share
LOTUS PACIFIC, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
(1) Condensed Consolidated Balance Sheets as of March 31, 1999
(unauduited) and June 30, 1998
(2) Condensed Consolidated Statements of Operations (unaudited) for the
Three and Nine Months Ended March 31, 1999 and 1998
(3) Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine Months ended March 31, 1999 and 1998
(4) Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
----------------- ----------------
ASSETS
<S> <C> <C>
Cash & cash equivalent .................... $ 1,446 $ 3,263
Accounts Receivable ........................ 8,428 7,158
Notes Receivable ........................... 4,000 ---
Inventories (note 6)........................ 3,766 ---
Other current assets ....................... 187 833
Property and Equipment (including
Leasehold improvement) (note 7) ............ 1,727 1,361
Assets of financial business (note 5) ...... 47,583 ---
Investments ................................ 1,172 ---
Intangible Assets, net... .................. 4,915 5,440
Goodwill of acquired business (note 4)...... 135,768 27,400
--------- ----------
Total Assets ............................ $ 208,990 $ 45,455
========= ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts Payable ........................... $ 8,433 $ 2,752
Refundable deposit.......................... --- 120
Other accrued expenses ..................... 297 139
---------- ---------
8,730 3,011
Liabilities of financial business (note 5) .. 41,983 ---
Minority interest in equity of
consolidated subsidiaries ................. 7,177 6,569
Stockholders' Equity
Preferred Stock, Class A, $.001 par value,
4,300 shares authorized; 4,300 shares issued
and outstanding ........................... --- ---
Common Stock, $.001 par value, 100 million
shares authorized, 63,784,470 shares issued
and outstanding ........................... 64 47
Stock Warrants ............................. 80 80
Additional paid-in capital ................. 154,560 38,709
Accumulated deficit ........................ (3,604) (2,961)
------------ ------------
Total Stockholders' Equity ............... 151,100 35,875
Total Liabilities &
Stockholders' Equity ...................... $ 208,990 $ 45,455
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March. 31 March 31
1999 1998 1999 1998
----------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues
Sales revenue ......................... $ 10,184 $ 1,887 $ 21,925 $ 6,795
Royalty income ........................ --- --- 124 1,800
Revenue from financial
Business ............................. 1,581 --- 1,581 ---
-------- -------- ------- --------
Total revenue ...................... 11,765 1,887 23,630 8,595
Costs and Expenses
Cost of goods sold .................... 9,514 1,868 19,496 6,273
Cost of financial services sold ....... 1,241 --- 1,241 ---
Selling, general & admin............... 851 482 1,678 1,790
Research and development .............. 364 1,894 1,620 3,018
Depre. & amortization.................. 168 166 502 497
Goodwill amortization.... ............. 373 356 1,085 810
-------- -------- -------- --------
Total costs and expenses............ 12,511 4,766 25,623 12,389
Operating Loss ......................... (746) (2,879) (1,993) (3,793)
Interest Income ........................ 1 10 14 14
Income from continuing
Operations ............................ (745) (2,869) (1,978) (3,780)
-------- --------- -------- --------
Discontinued operations
Gain on disposal of LPF,
net of income taxes.................. --- --- 100 ---
Net Income before income taxes
and minority interests ................ (745) (2,869) (1,878) (3,780)
Income tax benefit ..................... 18 --- 18 ---
Minority interest of income
Consolidated Subsidiaries.............. (5) (294) (46) (352)
Net income (loss)....................... $ (722) $ (2,575) $ (1,814) $ (3,428)
========= ========== ========= =========
Earnings Per Share
Basic ............................... $(0.01) $(0.05) $(0.04) $(0.07)
Diluted ............................. $(0.01) $(0.05) $(0.04) $(0.07)
Weighted Average Shares................. 55,659 47,016 48,034 46,829
</TABLE>
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31
--------------------------
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ........................................... $ (1,814) $ (3,428)
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation & amortization ......................... 502 497
Goodwill amortization ............................... 1,085 810
Equity in earnings of unconsolidated subsidiaries ... 166 ---
Gain on sale of investment .......................... (100) ---
Common stock issued for service ..................... 135 ---
Changes in assets & liabilities:
Increase in accounts receivable...................... (1,270) (2,640)
Increase in notes receivable ........................ (4,000) ---
Increase in inventories ............................. (3,766) (1,273)
Decrease in other current assets .................... 646 ---
Increase in accounts payable ........................ 5,840 2,652
Increase (decrease) in minority interest ............ 505 (264)
---------- ----------
Net cash used in operating activities ................ (2,071) (3,646)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment ............................... --- (7)
Proceeds from sale of investment .................... 2,500 ---
Business acquisitions................................ (2,990) ---
----------- ---------
Net cash used in investing activities................. (490) (7)
CASH FLOW FROM FINANCING ACTIVITIES:
Refundable deposit................................... --- 120
Return of refundable deposit......................... (120) ---
Issuance of common stock ............................ 865 2,072
Issuance of preferred stock ......................... --- 6,000
Issuance of warrants ................................ --- 2
----------- ---------
Net cash provided by financing activities............. 745 8,194
Net increase (decrease) in cash ...................... (1,817) 4,540
Cash, beginning ...................................... 3,263 357
Cash, ending ......................................... $ 1,446 $ 4,898
========== =========
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for service ................. $ 135
Issuance of common stock
for business acquisitions........................... $ 117,063
</TABLE>
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
NOTE 1 General
Lotus Pacific, Inc. (the "Company") is an Internet technology and services
company that, through its five subsidiaries, develops and markets Internet-
related products and services in the United States and international markets.
The Company operates in two segments: (1) the development and marketing of the
Internet-related products and services. Its products include TeleWeb systems,
TeleWeb set-top boxes, WonderTV set-top boxes, Internet routers, cable modems
and cable modem chips; and (2) on-line trading and brokerage services. Regent
Electronics Corp., TurboNet Communications, Arescom Inc are the Company's
three subsidiaries that engaged in the business of the Internet-related
products and services. U.S. Securities & Futures Corp., and Professional
Market Brokerage, Inc. are engaged in the business of online trading and
brokerage services.
NOTE 2 Basis of Presentation
The accompanying condensed quarterly financial statements represent the
consolidation of Lotus Pacific, Inc. and all companies that it directly
controls through majority ownership. Those financial statements were prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the financial statements and notes included in the
Company's Registration Statement on Form 10/A filed on June 17, 1999.
The condensed consolidated quarterly financial statements are unaudited. Those
statements include all adjustments (consisting of normal accruals) considered
necessary by management to present a fair statement of the results of
operations, financial position and cash flows. The results reported in these
condensed consolidated financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire year.
The accompanying financial statements include the accounts of Lotus Pacific,
Inc. and its five subsidiaries: 87.3% owned Regent Electronics Corp., 81% owned
TurboNet Communications, 81% owned Arescom Inc., 100% owned US Securities &
Futures Corp, and 100% owned Professional Market Brokerage, Inc. The non-owned
portions of the Company's subsidiaries appear as minority interest in
subsidiaries on the balance sheet in accordance with generally accepted
accounting principles. All intercompany transactions have been eliminated in
consolidation.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)(CONTINUED)
NOTE 3 RESTATEMENT
Pursuant to the comments of the Securities and Exchange Commission, the Company
has restated its previously reported financial results for 1997 and 1998.
Unaudited quarterly financial data for fiscal 1998 and the first three quarters
of 1999 have also been restated. All information presented in this Report on
Form 10-Q/A includes all such restatements.
There were three transactions that have been restated: (1) On September 18,
1997, the Company issued 6 million shares of its common stock to Rightiming
Electronics Corp. in exchange for 6 million shares of common stock of Regent
Electronics Corp., a subsidiary of the Company. The acquisition of Regent's
equity was then valued at $1,532,042 on the basis of Regent's book value at
that time, and this transaction was now revised using the fair value of
consideration given, which in this case is the $5 per share of the Company's
common stock as traded on the OTC Bulletin Board; (2) In March 1997, Richtime
Far East Ltd. was created by the Company, as a wholly-owned subsidiary, to
engage in garment and textile import-export business. This Hong Kong-based
operation was previously not consolidated with the Company. The Company has
revised its treatment and Richtime's operating results has been consolidated
with the Company; and (3) the Company's acquisitions of US Securities & Futures
Corp. and Professional Market Brokerage, Inc. in February and March 1999,
respectively, were previously accounted for pooling of interest method on its
Form 10-Q for the quarter ended March 31, 1999. The Company has restated those
acquisitions by using purchase method accounting. The excess of acquisition
cost over the net assets acquired has been amortized on the straight-line basis
over 20 years.
Certain general and administrative expenses were also adjusted. The Company
previously reported the salaries for R&D personnel and R&D related consulting
expenses, for the quarters before June 30, 1998, as selling, general and
administrative expenses. These R&D related expenses are now presented as
R&D expenses.
A summary of the effects of the restatements as of and for the three and nine
months ended March 31, 1999 and 1998 follows (in thousands, except per share
data):
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ----------------------
March. 31, 1999 March 31, 1999
------------------------ ----------------------
Previously As Previously As
Reported Restated Reported Restated
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Sales revenue ........................... $ 10,184 $ 10,184 $ 19,031 $ 21,925
Royalty income .......................... --- --- 124 124
Revenue from financial
Business ............................... 4,744 1,581 4,744 1,581
---------- --------- ---------- ---------
Total revenue ......................... 14,928 11,765 23,999 23,630
Costs and Expenses
Cost of goods sold ...................... 9,514 9,514 16,741 19,496
Cost of financial services sold ......... 3,725 1,241 3,725 1241
Selling, general & admin................. 1,899 851 2,975 1,678
Research and development ................ 364 364 1,413 1,620
Depre. & amortization.................... 168 168 502 502
Goodwill amortization.... ............... --- 373 --- 1,085
----------- ---------- ---------- ----------
Total costs and expenses................ 15,668 12,511 25,356 25,623
Operating Loss ........................... (740) (746) (1,457) (1,993)
Interest Income .......................... 1 1 14 14
Income from continuing
Operations .............................. (739) (745) (1,443) (1,978)
---------- ---------- ---------- ---------
Discontinued operations
Gain on disposal of LPF,
net of income taxes..................... --- --- 100 100
Net Income before income taxes
and minority interests .................. (739) (745) (1,343) (1,878)
Income tax benefit ....................... 18 18 18 18
Minority interest of income
Consolidated Subsidiaries................ (5) (5) (72) (46)
Net income (loss)......................... $ (717) $ (722) $(1,253) $ (1,814)
========= ========= ========== =========
Earnings Per Share
Basic .................................. $(0.01) $(0.01) $(0.03) $(0.04)
Diluted ................................ $(0.01) $(0.01) $(0.03) $(0.04)
Weighted Average Shares................... 47,499 55,656 48,034 48,034
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
March. 31, 1998 March 31, 1998
------------------------- ------------------------
Previously As Previously As
Reported Restated Reported Restated
-------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Sales revenue ......................... $ 1,887 $ 1,887 $ 1,887 $ 6,795
Royalty income ........................ --- --- 1,800 1,800
----------- ---------- --------- ---------
Total revenue ....................... 1,887 1,887 3,687 8,595
Costs and Expenses
Cost of goods sold ................... 1,803 1,868 1,803 6,273
Selling, general & admin.............. 702 482 2,964 1,790
Research and development ............. 1,748 1,894 2,015 3,018
Depre. & amortization................. 165 166 325 497
Goodwill amortization.... ............ --- 356 --- 810
----------- --------- ---------- ---------
Total costs and expenses............. 4,418 4,766 7,107 12,389
Operating Loss ........................ (2,531) (2,879) (3,421) (3,793)
Interest Income ....................... 10 10 12 14
Income from continuing
Operations .......................... (2,521) (2,869) (3,409) (3,780)
----------- ----------- --------- ---------
Net Income before income taxes
and minority interests .............. (2,521) (2,869) (3,409) (3,780)
Minority interest of income
Consolidated Subsidiaries............. (296) (294) (356) (352)
Net income (loss)...................... $ (2,224) $ (2,575) $ (3,053) $(3,428)
========= ========== ========== =========
Earnings Per Share
Basic ............................... $(0.05) $(0.05) $(0.07) $(0.07)
Diluted ............................. $(0.05) $(0.05) $(0.07) $(0.07)
Weighted Average Shares................ 47,016 47,016 46,829 46,829
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
------------------------------------------------
AS OF MARCH 31, 1999 AS OF JUNE 30, 1998
(UNAUDITED)
------------------------- -----------------------
Previously As Previously As
Reported Restated Reported Restated
------------ ------------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash & cash equivalent ................ $ 1,446 $ 1,446 $ 3,193 $ 3,263
Accounts Receivable .................... 8,428 8,428 4,980 7,158
Notes Receivable ....................... 4,000 4,000 --- ---
Inventories (note 6).................... 3,766 3,766 --- ---
Other current assets ................... 188 187 832 833
Property and Equipment (including
Leasehold improvement) (note 7) ........ 1,727 1,727 1,359 1,361
Assets of financial business (note 5) .. 47,583 47,583 --- ---
Investments ............................ 1,173 1,172 600 ---
Intangible Assets, net... .............. 4,915 4,915 5,440 5,440
Goodwill of acquired business (note 4).. 104,283 135,768 --- 27,400
---------- ---------- --------- ---------
Total Assets ........................... $ 177,509 $ 208,990 $ 16,404 $ 45,455
========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts Payable ....................... $ 8,433 $ 8,433 $ 1,756 $ 2,752
Refundable deposit...................... --- --- 120 120
Other accrued expenses ................. 297 297 138 139
---------- ---------- --------- ---------
8,730 8,730 2,013 3,011
Liabilities of financial business (note 5) 4,1983 41,983 --- ---
Minority interest in equity of
consolidated subsidiaries ............. 7,177 7,177 6,570 6,569
Stockholders' Equity
Preferred Stock, Class A, $.001 par value,
4,300 shares authorized; 4,300 shares issued
and outstanding ...................... --- --- --- ---
Common Stock, $.001 par value, 100 million shares
authorized, 63,784,470 shares issued and
outstanding ........................... 64 64 47 47
Stock Warrants ......................... 80 80 80 80
Additional paid-in capital ............. 118,765 154,560 10,241 38,709
Accumulated deficit .................... 709 (3,604) (2,547) (2,961)
---------- ----------- ---------- ---------
Total Stockholders' Equity.............. 119,618 151,100 7,821 35,875
Total Liabilities &
Stockholders' Equity .................. $ 177,509 $208,990 $ 16,404 $ 45,455
=========== ========== ========== ==========
</TABLE>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)(CONTINUED)
NOTE 4 Business Acquisitions
On February 25, 1999 and March 1, 1999, the previously announced acquisition of
Professional Market Brokerage, Inc. (PMB) of Chicago, IL., and US Securities
& Futures Corp. ("USSF") of New York, NY were completed, respectively. After
those acquisitions, the company owns 100% of both USSF and PMB. Owners of USSF
shares received acquisition consideration of approximately $6.03 million,
consisting of $2.5 million in cash and the remainder in stock (500,000 shares
at the closing price of $7.0625/share). The shareholder of PMB received
acquisition consideration of approximately $3.77 million, consisting of
$240,000 in cash and $3.53 million in stock (500,000 shares based on the
closing price of $7.0625/share). The Acquisitions of USSF and PMB have been
accounted for by the purchase method of accounting and, accordingly, the
results of operations of USSF and PMB for the period from February 25, 1999 to
March 31, 1999 (PMB), and for the period from March 1, 1999 to March 31, 1999
(USSF), respectively, are included in the accompanying consolidated financial
statements.
The purchase prices were allocated to the assets acquired based on their
estimated fair values. The excess of the purchase price over the fair value of
the net assets acquired (goodwill) was approximately $4.20 million ($2.39
million for PMB and $1.81 million for USSF) and is being amortized on a
straight-line basis over 20 years.
USSF is a full service brokerage firm with its headquarters on Wall Street in
New York, NY. With over 15 branches worldwide, USSF, registered with the
Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant
(FCM), offers online securities trading services and other financial and
brokerage services to individuals and institutions all around the world.
PMB is a Chicago-based financial trading firm that provides online trading
services from its advanced Internet-based system to self-directed, broker-
assisted, individuals, money managers, commodity trading advisers, or
introducing brokers. PMB is also registered as a FCM.
On March 16, 1999, the Company announced that it had signed acquisition
agreements with TurboNet Communications ("TurboNet") and Arescom Inc.
("Arescom") to acquire each of their 81% of equity interests, respectively.
The acquisitions were consummated on March 31,1999.
Under the terms of the agreement with TurboNet, shareholders of TurboNet
received total consideration of $80 million in stock (11,091,393 shares
based on the closing price of $7.2128 per share). Pursuant to the agreement,
the shares so issued were prohibited from being sold until TurboNet's annual
gross revenue exceeds $30 million with a before-tax annual net profit of not
less than $6 million.
Under the terms of the agreement with Arescom, shareholders of Arescom received
total consideration of $30 million in stock (4,159,273 shares based on the
closing price of $7.2128 per share). Pursuant to the agreement, the shares so
issued may not be sold until Arescom's annual gross revenue exceeds $15 million
with a before-tax annual net profit of not less than $3 million.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED) (CONTINUED)
The purchase method was used to account for each of acquisitions of TurboNet
and Arescom. The excess of the purchase prices over the fair values of net
assets acquired (approximately $105.37 million) were recorded as goodwill of
acquired businesses and is being amortized on a straight-line basis over 20
years. Since the acquisitions were consummated on March 31, 1999, the last day
for the quarter ended March 31, 1999, the results of their operation were not
included in the accompanying consolidated quarterly financial statements.
TurboNet, a San Diego, California, corporation, is a premier developer of
advanced cable modem technologies and products, including DOCSIS compliant
cable modem chipsets, TurboPort-MCNS cable network module, MCNS cable data
bridge, and internal and external cable modems. TurboNet also provides cable
modems and infrastructure on an OEM basis.
Arescom, a Fremont, California, corporation, designs, manufactures and markets
a complete line of inter-networking router equipment for PSTN, ISDN, xDSL and
Ethernet environments. It provides users with a broad range of remote access
products that integrate voice and data along with Intelligent GUI and 100%
remote management tools for easy set-up and network management. Arescom has
established partners and channels throughout the world to develop and market
its router products for vertical and mass communication markets. Its customers
include ISPs, re-sellers and system integrators in North America. Arescom's
worldwide partners include Telecom Device of Japan, NST of China, EuroBizz of
Germany, Viking Telecom of Sweden, Exer Datacom of France, Dakel Information
of Spain, and PcExpress of Italy.
NOTE 5 Financial Business
Assets and liabilities of Lotus Pacific's financial business as of March 31,
1999 are summarized below (in thousands).
Assets
Cash and cash equivalent ...................... $ 1,031
Receivables ................................... 2,972
Short-term investments ........................ 11,759
Segregated funds .............................. 31,046
Other assets .................................. 775
---------
$ 47,583
Liabilities
Commission payables ........................... $ 3,401
Payable to customers .......................... 37,460
Other payables ................................ 412
Long-term liabilities ......................... 710
---------
$ 41,983
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)(CONTINUED)
The results of operations of the Company's financial business for the period
from February 25, 1999 (PMB), and for the period from March 1, 1999 (USSF),
respectively, to March 31, 1999 are summarized below (in thousands).
Revenues
Commissions .................................. $ 1,627
Trading profit (loss) ........................ (204)
Other ........................................ 158
-------
Total revenue .............................. 1,581
Costs and expenses
Commissions .................................. 1,242
General and admin............................. 523
-------
Total costs and expenses ................... 1,765
Income (loss) before income taxes ............. (184)
Income taxes benefit.. ........................ 18
Net loss ........... .......................... $ (166)
========
NOTE 6 Inventories
As of March 31, 1999, inventories consisted of the following:
(Dollars in thousands)
Raw materials ............................. $ 1,879
Work in process ............................ 1,331
Finished goods ............................. 556
---------
$ 3,766
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)(CONTINUED)
NOTE 7 Property and Equipment
Property and equipment was comprised of the following:
<TABLE>
<CAPTION>
At
-------------------------
(Dollars in thousands) 3/31/99 6/30/98
------------ ---------
<S> <C> <C>
Furniture and office equipment ................. $ 342 $ 90
R&D equipment .................................. 1,978 1,541
Leasehold improvements ......................... 1 76
----------- ----------
2,321 1,707
Less: accumulated depreciation ................. 594 348
----------- ----------
$ 1,727 $ 1,359
</TABLE>
NOTE 8 Discontinued Operations
On September 30, 1998, the Company completes the sale of its 100%-owned LPF
International Corp. subsidiary (including Richtime Far East Ltd.) for $2.5
million in cash. The Company recorded an after tax gain on the sale of $100,000
in the first quarter of fiscal 1999. The LPF's results of operations has been
classified as discontinued operations and prior periods have been restated.
NOTE 9 Capital Stock
The following table summarized the Company's common stock activity during the
first nine months of fiscal 1999:
<TABLE>
<CAPTION>
Common Stock
(100,000,000 shares authorized)
-------------------------------
Issued Outstanding
------------- ---------------
<S> <C> <C>
Balance at June 31, 1998 ...................... 47,386,804 47,387,644
Common stock issued in connection
With acquisitions of business................. 16,250,666 16,250,666
Common stock issued in
private Placements ........................... 124,500 124,500
Common stock issued for services .............. 22,500 22,500
------------- -------------
Balance at March 31, 1999 ..................... 63,784,470 63,784,470
</TABLE>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)(CONTINUED)
Common stock - $.001 par value, 100,000,000 shares authorized, 63,784,470
shares issued and outstanding as of March 31, 1999.
Preferred stock - $.001 par value, 10,000,000 shares authorized, no shares
issued and outstanding as of March 31, 1999.
Preferred stock, Class A - $.001 par value, 4,300 shares authorized, 4,300
shares issued and outstanding as of March 31, 1999.
Common stock warrant - 8,000,000 warrants issued and outstanding. Each warrant
entitled the holder to purchase one share of the Company's common stock at
$3.00 per share. These warrants expire May 5, 2002. As of March 31, 1999, no
warrants have been exercised.
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 should be read in conjunction with the Company's
Consolidated Financial Statements as of March 31, 1999 included herein this
10-Q Report.
GENERAL
Lotus Pacific is an Internet technology and services company that, through its
five subsidiaries, develops and markets Internet-related products and services
in the United States and international markets.
The Company currently operates in two segments: (1) the development and
marketing of the Internet-related products and services. Its products include
TeleWeb systems, TeleWeb set-top boxes, WonderTV set-top boxes, Internet
routers, cable modems and cable modem chips; and (2) on-line trading and
brokerage services. Regent Electronics Corp., TurboNet Communications, and
Arescom Inc are the Company's three subsidiaries engaged in the business of
the Internet-related products and services. U.S. Securities & Futures Corp.,
and Professional Market Brokerage, Inc. are engaged in the business of online
trading and brokerage services.
On February 25, 1999 and March 1, 1999, the previously announced acquisition
of Professional Market Brokerage, Inc. (PMB) of Chicago, IL., and US Securities
& Futures Corp. ("USSF") of New York, NY were completed, respectively. After
the acquisitions, the company owns 100% of both USSF and PMB.
USSF is a full service brokerage firm with its headquarters on Wall Street in
New York, NY. With over 15 branches worldwide, USSF, registered with the
Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant
(FCM), offers online securities trading service and other financial and
brokerage services to individuals and institutions all around the world.
PMB is a Chicago-based financial trading firm that provides online trading
services from its advanced Internet-based system to self-directed, broker-
assisted, individuals, money managers, commodity trading advisers, or
introducing brokers. PMB is also registered as a FCM.
On March 16, 1999, the Company announced that it had signed acquisition
agreements with TurboNet Communications ("TurboNet") and Arescom Inc.
("Arescom") to acquire their 81% of equity interests, respectively. The
acquisitions were consummated on March 31, 1999.
TurboNet, a San Diego, CA based premier developer of advanced cable modem
technologies and products, including DOCSIS compliant cable modem chipsets,
TurboPort-MCNS cable network module, MCNS cable data bridge, and internal and
external cable modems. TurboNet also provides cable modems and infrastructure
on an OEM basis. Toshiba Corporation of Japan is one of TurboNet's shareholders
and partners.
Arescom, a Fremont, California, corporation, designs, manufactures and markets
a complete line of inter-networking router equipment for PSTN, ISDN, xDSL and
Ethernet environments. It provides users with a broad range of remote access
products that integrate voice and data along with Intelligent GUI and 100%
remote management tools for easy set-up and network management. Arescom has
established partners and channels throughout the world to develop and market
its router products for vertical and mass communication markets. Its customers
include ISPs, re-sellers and system integrators in North America. Arescom's
worldwide partners include Telecom Device of Japan, NST of China, EuroBizz o
Germany, Viking Telecom of Sweden, Exer Datacom of France, Dakel Information
of Spain, and PcExpress of Italy.
The purchase method was used to account for each of acquisitions of USSF, PMB,
TurboNet and Arescom. The excess of the purchase prices over the fair values of
net assets acquired (in a total of approximately $109.6 million) were recorded
as goodwill of acquired businesses and is being amortized on a straight-line
basis over 20 years.
RESULTS OF OPERATIONS
The acquisition of PMB was consummated on February 25, 1999, USSF on March 1,
1999, TurboNet and Arescom on March 31, 1999, respectively. Accordingly, for
the quarter ended March 31, 1999, the Company's results of operations included
the results of Regent, USSF (from March 1, 1999 to March 31, 1999) and PMB
(from February 25, 1999 to March 31, 1999). Since the acquisitions of TurboNet
and Arescom were consummated on the last day of this quarter and those
acquisitions were accounted for purchase method, the results of operations of
TurboNet and Arescom were not included.
REVENUES
For the quarter ended March 31, 1999, the Company's revenue increased 523% to
$11.8 million, compared with $1.9 million in the quarter ended March 31, 1998.
Of the total revenues for the quarter ended March 31, 1999, $10.2 million,
approximately 86.6% of the Company's total revenue, was derived from Regent
Electronics Corp., mostly due to its sale of newly released WonderTV set-top
boxes. For the quarter ended March 31, 1999, the Company's two financial
subsidiaries, US Securities and Futures Corp. and Professional Market
Brokerage, Inc. contributed $1.58 million, about 13.4%, of revenue to the
Company. For the nine months ended March 31, 1999, the Company's revenue
increased 175% to $23.6 million from $8.60 million of the prior year.
The results of operations of the Company's newly acquired subsidiaries, USSF,
PMB, TurboNet and Arescom, will be fully consolidated with the Company's
financial statements for the quarter beginning April 1, 1999.
DISCONTINUED OPERATIONS
In order to concentrate on its Internet-related products and services, on
September 30, 1998, the Company sold all of its textile and apparel business
(LPF International Corp. and Richtime Far East, Ltd.) to Clarinet Overseas Ltd.
for an aggregation consideration of $2.5 million in cash. The Company had
$100,000 of gain from sale of LPF and Richtime. Since then, the Company had no
revenue from textile and apparel business.
The Company's sales from its textile and apparel business for the nine months
ended September 30, 1998 was $5.64 million, approximately 40% of the Company's
total revenue.
COST OF REVENUES
Cost of revenues consists mainly of purchases and commissions paid to brokers
and clearing firms. For the quarter ended March 31, 1999, the Company's cost of
revenues increased to $10.8 million, compared with $1.9 million in the prior
year. This increase was primarily because of increased business activities and
the commissions paid to brokers and clearing firms by USSF and PMB, the
Company's two newly acquired subsidiaries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of selling,
general and administrative expenses, such as travel, selling, communications,
employee benefits, management, administrative and office rents. For the quarter
ended March 31, 1999, selling, general and administrative expenses increased
$369,000, or 76%, to $851,000 from $482,000 during the same period of the last
year. The increase was primarily because of the expenses incurred in the
Company's newly acquired financial businesses.
RESEARCH AND DEVELOPMENT
For the quarter ended March 31, 1999, research and development expenses
decreased to $364,000, compared with $1.9 million for the quarter ended
March 31, 1998. For the nine months ended March 31, 1999, the R&D expense of
the Company decreased 78% to $1.62 million during the same period of the last
year. The decrease in research and development expenses was primarily because
a number of R&D projects were completed, as well as outsourcing consulting
expenses have been reduced.
GOODWILL AMORTIZATION
The Company has accumulated approximately of $138.0 million of goodwill from
acquisitions of business since September 1997. The goodwill is to be amortized
on the straight-line basis over 20 years. For the quarter ended March 31, 1999,
the Company's goodwill amortization was $373,000, compared with $356,000 for
the quarter ended March 31, 1998. For the nine months ended March 31, 1999,
goodwill amortization was $1.10 million, about 5% of the Company's total cost
and expenses. Beginning from April 1, 1999, goodwill amortization is expected
to increase significantly when an additional $109.6 million of goodwill is
going to be fully amortized.
NET INCOME (LOSS)
For the quarter ended March 31, the Company had net loss of $722,000, compared
with $2.6 million of net loss for the same period of the prior year. The
decrease in net loss was mainly due to the fact that, compared to the prior
year, revenues increased 523%, and at the same time, cost and expenses
increased only 163%. On a year to date basis, net loss decreased to $1.82
million of loss from $3.43 million of loss for the same period of the last
year. For the first nine months of fiscal 1999, the Company's diluted earning
per shares was $0.04 of loss compared with $0.07 of loss for the same period
of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's liquid assets, consisting of cash and cash
equivalents, total $1.44 million, compared to $3.26 million and $357,212 at
June 30, 1998 and 1997, respectively.
Net cash used by operating activities was $2.1 million for the first nine
months of fiscal 1999, compared with $3.6 million of net cash used by operating
activities during the first nine months of fiscal 1998. The decrease was a
combination of the increases in accounts receivable, inventories, notes
receivable, accounts payable and goodwill amortization. The Company's investing
activities used $490,000 of cash for the nine months ended March 31, 1999,
primarily due to acquisition of business ($2.5 million for USSF and $240,000
for PMB), as well as $2.5 million of proceeds from sale of the Company's equity
in LPF and Richtime Far East. For the first nine months of fiscal 1999, cash
flow from financing activities was $745,000, which were from issuing 124,500
shares of the Company's common stock, as compared to $8.19 million provided by
financing activities for the first nine months of fiscal 1998, which were
primarily from the equity investment by Hambrecht & Quist Asia Pacific Ltd.
As of March 31, 1999, the Company had 63,784,470 shares of Common Stock with
par value $.001 per share and 4,300 shares of Class A Preferred Stock issued
and outstanding.
For the quarter ended March 31, 1999, the Company issued a total of 16,250,666
shares of its common stock to acquire businesses. Please see Note 3: Business
Acquisition for more detail information ("Notes to Interim Consolidated
Financial Statements for the Quarter Ended March 31, 1999").
Since 1997, the Company has financed a portion of its operations and
expenditures through the sale of its capital stock. On February 8, 1998,
Hambrecht & Quist Asia Pacific Ltd. and its affiliate Asia Pacific Growth
Fund II, L.P. (collectively "H&Q") invested $6 million to acquire 1,500,000
shares of Preferred Stock of Regent Electronics Corp. H&Q's acquisition
represented approximately 5.45% of Regent's equity interest. Pursuant to the
agreement, subject to certain conditions, the Regent shares held by H&Q may
be converted into Common Shares of the Company after January 1, 2000. During
the period of July 1, 1997 through March 31, 1999, the Company sold 660,500
shares of the Common Stock to eleven accredited investors for an aggregate
consideration of $2,936,750.
As to date, the Company has no material commitments for capital expenditures.
The Company believes that the anticipated funds from operations and the
existing cash and cash equivalents will be sufficient to meet its cash
requirements for at least the next twelve months. Although the Company's
operating activities may generate cash to cover its operating costs, the
Company's continuing operating and investing activities may require the
Company to obtain additional sources of financing, either from the secondary
offerings or from private placements. There can be no assurance that any
necessary additional financing will be available to the Company on commercially
reasonable terms, if at all.
The Company has no long-term debt and has trade credits available from its
suppliers with each credit line up to $50,000, net 30 days.
YEAR 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by "Year 2000" issue, which has arisen because many existing
computer programs and chip-based embedded technology systems may recognize a
date using "00" as the year 1900 rather than year 2000. This could result in
a system failure or miscalculations which may cause disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has assembled a team of internal staff to oversee the matter and
is underway in completing its Year 2000 assessment. Internally, the Company
has upgraded its business system to address the Year 2000 issue. Externally,
the Company has surveyed and will continue to survey its suppliers, financial
institutions, and other organizations to ensure that those parties have
appropriate plans to be "Year 2000 Compliant." Costs incurred to date and
estimated costs to complete the Company's Year 2000 compliance efforts are not
expected to be material.
The Company has substantially completed many procedures to test and replace
existing computer systems. Additionally, the Company continues to assess and
test newly engaged suppliers and their products for Year 2000 compliance as
part of the Company's normal business operations. The Company will continue
to monitor its Year 2000 Compliance program, address any material issues, and
develop contingency plan as it deems appropriate.
The failure to identify or correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain business activities or
operations such as the Company's ability to service its customers. Such
failures could materially and adversely affect the Company's results of
operations, liquidity, and financial condition. The Company's Year 2000
assessment process is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of its material suppliers and customers.
NEW ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative and Hedging Activities", was issued. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company expects the impact of
SFAS 133 on its future earnings and financial position are not material (see
Item. 3 "Quantitative and Qualitative Disclosure about Market Risk").
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities", was issued. This SOP provides guidance on the financial
reporting of start-up and organization costs and requires that these costs be
expensed as incurred. The provisions of SOP 98-5 are effective for financial
statements for fiscal years beginning after December 15, 1998, although early
adoption is allowed. The adoption of SOP 98-5 is not expected to have a
material impact on the Company's financial statements. The Company will adopt
the provisions of this SOP on July 1, 1999.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", were
issued. SFAS No. 130 establishes standards for reporting comprehensive income
and its components with the same prominence as other financial statements. The
Company adopted SFAS No. 130 on October 1, 1998; However, the Company does not
have any items of comprehensive income in the period presented. SFAS No. 131
establishes standards for reporting information about operating segments in
annual and interim financial statements, although this statement need not be
applied to interim financial statements in the initial year of its application.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
The Company will adopt its requirements in connection with its annual reporting
for the year ending June 30, 1999.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments are not material.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
During the quarter, the Company issued an aggregate of 16,250,666 of its common
shares in connection with the business acquisitions:
(1) Acquisition of 100% of the outstanding capital shares of U.S. Securities
& Futures Corp. (500,000 shares issued);
(2) Acquisition of 100% of the outstanding capital shares of Professional
Market Brokerage, Inc. (500,000 shares issued);
(3) Acquisition of 81% of the outstanding capital shares of TurboNet
Communications (11,091,393 shares issued); and
(4) Acquisition of 81% of the outstanding capital shares of Arescom Inc
(4,159,273 shares issued).
Pursuant to the agreement with the shareholders of TurboNet Communication, the
shares so issued were prohibited from being sold until TurboNet's annual gross
revenue exceeds $30 million with a before-tax annual net profit of not less
than $6 million.
Pursuant to the agreement with the shareholders of Arescom Inc, the shares so
issued may not be sold until Arescom's annual gross revenue exceeds $15 million
with a before-tax annual net profit of not less than $3 million.
Pursuant to the shareholder of agreement with Professional Market Brokerage,
Inc. the shares so issued shall maintain a holding period of three years.
Item 3. Defaults by the Registrants on its Senior Securities
None
Item 4. Submission of Matters to A Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
On February 12, 1999, the Company filed a Form 8-K to report the Company's
acquisitions of US Securities and Futures Corp. and Professional Market
Brokerage, Inc.
On March 16, 1999, the Company filed a Form 8-K to report the Company's
acquisitions of 81% of equity interests of TurboNet Communications and Arescom
Inc. in two stock transactions, respectively.
On March 19, 1999, the Company filed a Form 8-K to report to appoint new senior
officers and a new independent director.
On April 6, 1999, the Company filed a Form 8-K/A to amend its previously report
that filed on October 14, 1998.
On April 23, 1999, the Company filed a Form 8-K to report to appoint new senior
officers and board members.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LOTUS PACIFIC, INC.
Date: June 17, 1999 By: /S/ Jeremy Wang
----------------------------
Jeremy Wang, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
registrant and in capacities and on the dates indicated.
Date: June 17, 1999 By: /S/ John O. Hing
------------------------------------
John O. Hing, Chief Financial Officer
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