UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(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
Condensed Consolidated Balance Sheets as of March 31, 1999
(unauduited) and June 30, 1998 (audited)
Condensed Consolidated Statements of Operations (unaudited) for the
Three and Nine Months Ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine Months ended March 31, 1999 and 1998
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
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
ASSETS (Unaudited)
--------------- --------------
<S> <C> <C>
Cash & cash equivalent ..................... $ 1,446 $ 3,193
Accounts Receivable ......................... 8,428 4,980
Notes Receivable ............................ 4,000 ---
Inventories (note 5)......................... 3,766 ---
Other current assets ........................ 188 832
Property and Equipment (including
leasehold improvement ) (note 6) ............. 1,727 1,359
Assets of financial business (note 4) ........ 47,583 ---
Investments .................................. 1,173 600
Intangible Assets ......... .................. 4,915 5,440
Goodwill of acquired business (note 3)........ 104,283 ---
---------- ----------
Total Assets................................ $ 177,509 $ 16,404
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Account Payable .............................. $ 8,433 $ 1,756
Loans Payable ................................ --- 120
Other accrued expenses ....................... 297 138
Liabilities of financial business (note 4) ... 41,983 ---
---------- ---------
50,713 2,013
Minority interest in equity of
consolidated subsidiaries ................... 7,177 6,570
Stockholders' Equity
Preferred Stock, Class A, $.001 par value,
4,300 shares authorized; 4,300 shares issued
and outstanding .............................. --- ---
Common Stock, $.001 par value, 80 million shares
authorized, 63,784,470 shares issued and
outstanding .................................. 64 47
Stock Warrants ............................... 80 80
Additional paid-in capital ................... 118,765 10,241
Retained earnings ............................ 709 (2,547)
---------- ----------
Total Stockholders' Equity ................. 119,618 7,821
Total Liabilities &
Stockholders' Equity ....................... $ 177,509 $ 16,404
=========== ===========
</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 $ 19,031 $ 1,887
Royalty income ....................... --- --- 124 1,800
Revenue from financial
Business ............................ 4,744 --- 4,744 ----
-------- -------- --------- --------
Total revenue ..................... 14,928 1,887 23,999 3,687
Cost and Expenses
Cost of goods sold ................... 9,514 1,803 16,741 1,803
Cost of financial services sold ...... 3,725 --- 3,725 ---
Selling, general & admin.............. 1,899 702 2,975 2,964
Depreciation & amortization........... 168 165 502 325
Research & Development ............... 364 1,748 1,413 2,015
-------- -------- -------- --------
Total cost and expenses............ 15,668 4,418 25,356 7,107
Operating Loss ........................ (740) (2,531) (1,457) (3,421)
Other income (Expenses)
Interest Income ...................... 1 10 14 12
Income from continuing
Operations .......................... (739) (2,521) (1,443) (3,409)
-------- --------- --------- --------
Discontinued operations
Gain on disposal of discontinued LPF.. --- --- 100 ---
Net Income before income taxes
and minority interests ............... (739) (2,521) (1,343) (3,409)
Income tax benefit .................... 18 --- 18 ---
Minority interest of income
Consolidated Subsidiaries............. (5) (296) (72) (356)
Net income (loss)...................... (717) (2,224) (1,253) (3,053)
====== ======= ======= =======
Earnings Per Share
Basic ............................... $(0.01) $(0.05) $(0.03) $(0.07)
Diluted ............................. $(0.01) $(0.05) $(0.03) $(0.07)
Weighted Average Shares................ 47,499 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
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income ....................................... $ (1,253) $ (3,053)
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation & amortization ..................... 502 325
Common stock issued for service ................. 135 ---
Minority interest ............................... 2,419 1,220
Changes in assets & liabilities:
Increase in accounts receivable.................. (2,875) (3,296)
Increase in notes receivable .................... (4,000) ---
Increase in inventories ......................... (3,766) (599)
Increase in accounts payable .................... 6,837 1,839
--------- --------
Net cash used in operating activities ............ (2,001) (3,565)
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:
Proceeds from loan payable ...................... --- 120
Payment of loan payable ......................... (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 .................. (1,747) 4,622
Cash, beginning .................................. 3,193 269
Cash, ending ..................................... $ 1,446 $ 4,890
========= ========
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for service ............. $ 135
Issuance of common stock
for business acquisitions........................ $ 17,063
</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, WebTV 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 Annual Report on Form 10-K/A filed on April 6, 1999 for the year
ended June 30, 1998.
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 its wholly 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 (CONTINUED)
NOTE 3 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).
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.
The acquisitions of USSF and PMB were accounted for as pooling of interests.
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. On
March 31, 1999, the acquisitions were consummated.
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.
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. Toshiba Corporation of Japan is one
of TurboNet's shareholders and partners.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (CONTINUED)
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.
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 were recorded as goodwill of acquired businesses and is being
amortized ratably over forty years. Since the acquisitions were consummated on
March 31, 1999, the last day for the quarter ended March 31, 1999, no goodwill
had been amortized in this period.
For the quarter ended March 31, 1999, the Company's results of operations
included the results of USSF and PMB beginning on January 1, 1999. The results
of operations of TurboNet and Arescom were not included.
NOTE 4 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 (CONTINUED)
The results of operations of the Company's financial business for the quarter
ended March 31, 1999 are summarized below (in thousands).
Revenues
Commissions .............................. $ 4,880
Trading profit (loss) .................... (612)
Other .................................... 476
---------
Total revenue........................... 4,744
Cost and expenses
Commissions .............................. 3,725
General and admin......................... 1,571
----------
Total cost and expenses................. 5,296
Income (loss) before income taxes ......... (552)
Income taxes (benefit) .................... (18)
Net income (loss) ......................... (534)
=========
NOTE 5 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 (CONTINUED)
NOTE 6 Property and Equipment
Property and equipment was comprised of the following:
At
---------------------------
(Dollars in thousands) 3/31/99 6/30/98
------------ ------------
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
NOTE 5 Discontinued Operations
On September 30, 1998, the Company sold all of its ownership in LPF
International Corp. and Richtime Far East Ltd., including all assets and all
liabilities, to Clarinet Overseas Ltd. for an aggregate consideration of
$2,500,000. The Company had $100,000 of capital gains.
NOTE 6 Capital Stock
The following table summarized the Company's common stock activity during the
first nine months of fiscal 1999:
Common Stock
(100,000,000 shares authorized)
--------------------------------
Issued Outstanding
------------- ----------------
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
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (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, WebTV 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
those 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. On
March 31, 1999, the acquisitions were consummated.
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 of
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 TurboNet
and Arescom. The excess of the purchase prices over the fair values of net
assets acquired were recorded as goodwill of acquired businesses and is being
amortized ratably over forty years. Since the acquisitions were consummated on
March 31, 1999, the last day for the quarter ended March 31, 1999, no goodwill
had been amortized in this period.
For the quarter ended March 31, 1999, the Company's results of operations
included the results of Regent, USSF and PMB. The results of operations of
TurboNet and Arescom were not included.
RESULTS OF OPERATIONS
For the quarter ended March 31, 1999, the Company's results of operations
included the results of Regent, USSF and PMB. The results of operations of
TurboNet and Arescom were not included, since the Company's acquisitions of
TurboNet and Arescom were consummated on the last day of this quarter, and
those acquisitions were accounted for purchase methods.
REVENUES
For the quarter ended March 31, 1999, the Company's revenue increased 690% to
$14.9 million, compared with $1.89 million in the quarter ended March 31,
1998. Of the total revenues for the quarter ended March 31, 1999, $10.2
million, approximately 68% of the 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 $4.7 million, about 32%, of revenue to the
Company. On a year to date basis, the Company's revenue increased 550% to
$24.0 million from $3.69 million of the prior year.
During this quarter, the Company also acquired 81% of equity interest of
Turbonet Communications and Arescom Inc., respectively. Those acquisitions
were accounted for purchase method. Because the transactions were consummated
on the last day of the quarter, March 31, 1999, their results of operations
were not consolidated in the Company's statements of operations for the
quarter ended March 31, 1999.
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 $13.24 million, compared with $1.8 million in the
prior year. This increase was primarily because of significantly increased
business activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of 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 $1.20
million, or 70%, to $1.90 million from $0.7 million in the prior year. The
increase was primarily because of the expenses incurred in the Company's newly
acquired financial business.
RESEARCH AND DEVELOPMENT
For the quarter ended March 31, 1999, research and development expenses
decreased to $364,000, compared with $1.75 million for the quarter ended
March 31, 1998. For the nine months ended March 31, 1999, the R&D expense of
the Company decreased 30% to $1.41 million over the same period of the prior
year. The decrease in research and development expenses was primarily due to
reducing outsourcing consulting expenses.
NET INCOME (LOSS)
For the quarter ended March 31, the Company had net loss of $717,000, compared
with $$2.22 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 700%, and cost and expenses increased 255%. On a year
to date basis, net loss decreased to $1.25 million of loss from $3.05 million
of loss for the same period of the prior year. For the first nine months of
fiscal 1999, the Company's diluted earning per shares was $0.03 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 $1.45 million, compared with $3.19 million at June 30, 1998.
The decrease was primarily a result of cash flow used in operating activities,
payment of loan and business acquisitions.
Net cash used by operating activities was $2.0 million for the first nine
months of fiscal 1999 compared with $3.6 million for the first nine months of
fiscal 1998. For the first nine months ended March 31, 1999, the Company's
accounts receivable, notes receivable and inventories increased approximately
$6.7 million, and accounts payable increased by $5 million, compared to the
corresponding numbers of the prior year. The Company's investing activities
used $490,000 of cash for the first nine months ended March 31, 1999, which
included $2.5 million used in acquisition of USSF and $240,000 in PMB. At the
same time, there was $2.5 million of cash provided from the sale of the
Company's LPF International business. Cash provided from financing activities
was $744,750 in the first nine months of fiscal 1999 as compared with $7.26
million for the same period of the prior year. For the nine months ended
March 31, 1999, the Company issued 124,500 shares of its common stock for
$864,750 of cash in private placements.
The Company has no long-term debt and has trade credits available from many
corporations with each credit line up to $50,000, net 30 days. As to date, the
Company has no material commitment 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. 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 not paid cash dividends on its common stock and on its Class
A preferred stock.
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 purchase to four acquisition agreements in exchange for:
(1) 100% of the outstanding capital shares of U.S. Securities & Futures Corp.
(500,000 shares issued);
(2) 100% of the outstanding capital shares of Professional Market Brokerage,
Inc. (500,000 shares issued);
(3) 81% of the outstanding capital shares of TurboNet Communications
(11,091,393 shares issued); and
(4) 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: May 28, 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: May 28, 1999 By: /S/ John O. Hing
-------------------------------------
John O. Hing, Chief Financial Officer
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This schedule contains summary financial information extracted from the
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
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<INCOME-PRETAX> (1,343)
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