UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-24999
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LOTUS PACIFIC, INC
(Exact name of registrant as specified in its charter)
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Delaware
(State of Organization)
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52-1947160
(I.R.S. Employer Identification Number)
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200 Centennial Avenue, Suite 201, Piscataway, New Jersey 08854
(Address of principal executive offices)
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(732) 885-1750
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act during the
preceding 12 months (or for such shorter period than 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the shares of Common Stock held by non-
affiliates of the Registrant was approximately $405 million as of September 28,
1999 (based on the closing price for the Common Stock on the OTC Bulletin Board
on that date). For purposes of this computation, shares held by affiliates
and by directors and officers of the Registrant have been excluded. Such
exclusion of shares held by directors and officers is not intended, nor shall
it be deemed, to be an admission that such persons are affiliates of the
Registrant.
As of September 28, 1999, there was 64,544,474 shares of the Registrant's
Common Stock, par value $0.001 per share, outstanding.
LOTUS PACIFIC, INC.
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1999
TABLE OF CONTENTS
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 10. Directors and Executive officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationship and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Part I
ITEM 1. BUSINESS
GENERAL
Lotus Pacific, Inc. (the "Company" or "Registrant") is an Internet technology
and services company. Through its subsidiaries, Regent Electronics Corp.
("Regent"), TurboNet Communications ("TurboNet"), and Arescom Inc. ("Arescom),
the Company develops and markets a broad range of Internet-related products
and services in the United States and international markets. The Company's
products include TeleWeb systems, WonderTV/TeleWeb set-top boxes, cable modems,
cable modem chips, routers, cable data bridges and ISDN remote managing
software. The Company's Common Stock is currently traded on the OTC Bulletin
Board under the symbol "LPFC".
The Company was incorporated under the laws of the State of Delaware on
June 25, 1985 as Quatech, Inc. to raise capital, investigate, and acquire
suitable assets or properties. In April 1987, the Company completed a public
offering of securities registered on Form S-18 with the Securities and Exchange
Commission. In June 1993, the Company disposed all of its interests in other
entities and ceased to have any business operations.
In September 1994, the Company was reorganized and changed its name to Lotus
Pacific, Inc. In January 1997, pursuant to a decision made by the shareholders,
the Board of the Company adopted a resolution to change all the board members
and officers of the Company. The Company then set up two wholly owned
subsidiaries, Regent Electronics Corp., registered in the State of Delaware
and Richtime Far East Ltd. in Hong Kong. In February 1998, the Company set up
a new wholly owned subsidiary, LPF International corp. ("LPF"). LPF was
incorporated in the State of Delaware and operated in New York, NY. Richtime
Far East Ltd. was then merged into LPF to be an indirect subsidiary of the
Company.
In June 1997, the Company, through its subsidiary Regent Electronics Corp.,
acquired Amiga-based multimedia technology and its related assets and rights
from Rightiming Electronics Corp. for an aggregate consideration of $5 million
in cash plus 8 million shares of common stock of Regent Electronics Corp.
The acquired assets included all Amiga-Commodore's patents, licenses,
trademarks, and copyrights that were to be registered and used in China,
Taiwan, Hong Kong, Macao, and the bordering countries between China and the
former Soviet Union.
In order to concentrate on its Internet-related products and services, on
September 30, 1998, the Company sold all of its ownership interest in LPF and
Richtime, including all assets and liabilities, to Clarinet Overseas Ltd., for
an aggregated consideration of $2.5 million in cash.
On February 12, 1999, the Company signed agreements to acquire 100% equity
interest in each of the following two brokerage firms: US Securities & Futures
Corp. ("USSF"), New York, NY and Professional Market Brokerage, Inc. ("PMB"),
Chicago, IL. Both USSF and PMB are registered with Commodity Futures Trading
Commission ("CFTC") as Futures Commission Merchant ("FCM") and are members of
the National Futures Association ("NFA"). The acquisitions were consummated
on March 1, 1999 and February 25, 1999, respectively.
The purpose of the acquisitions of USSF and PMB was to integrate the Company's
own Internet access devices (WonderTV set-top box) with much-demanded online
trading services. The integration would allow the Company to provide its own
end-user set-top boxes to its online trading customers and to constantly
upgrade and enhance its hardware and software in response to market conditions
and customer needs.
On March 15, 1999, the Company entered into an Acquisition Agreement to acquire
a majority of equity interest of TurboNet Communications, a premier developer of
advanced digital communications products for the cable and satellite industries
in San Diego, California ("TurboNet"). Under the terms of the Acquisition
Agreement, the Company issued $80 million of worth of its restricted stock
shares in exchange for 81% of TurboNet's equity. The Company also agreed to
provide TurboNet with $20 million of cash as working capital. TurboNet agreed
that the Company's common shares issued to TurboNet's shareholders shall be
restricted from being sold, in whole or in part, until TurboNet's annual gross
revenue has exceeded $30 million with pretax annual net income of not less than
$6 million.
TurboNet designs, develops and markets telecommunications products to cable
operators, network service providers, and communications network users in the
United States and Asian countries. Its primary products include cable modem
chipsets, MCNS compliant cable modems and MCNS cable data bridges.
On March 15, the Company entered into an agreement with Arescom Inc., a
Fremont, California corporation ("Arescom"). Under the terms of the agreement,
the Company issued $30 million of worth of its restricted shares to acquire
81% of Arescom's equity. The Company also agreed to provide Arescom with $10
million of cash as working capital. All shareholders of Arescom agreed that all
the Company's common shares issued to them shall be restricted from being sold
until Arescom has reached a target of annual sales of $15 million and annual
net income before income tax of not less than $3 million.
Founded in the Silicon Valley of California, Arescom designs, manufactures
and markets a broad range of high quality remote access products, such as
routers and remote managing software, and other inter-networking equipment
under the PSTN, ISDN, xDSL and Ethernet environments for Internet Service
Providers (ISPs), resellers, and system integrators in North America market.
On June 28, 1999, the Company transferred all its ownership interests in each
of U.S. Securities & Futures Corp. and Professional Market Brokerage, Inc. to
USS Online Inc., the Company's newly created entity, to run those two financial
service subsidiaries. The Company also approved the USS Online's Employee
Incentive and Management Compensation Plan, whereby 5 million shares of capital
stock of USS Online, Inc. were issued to its employees and senior executive
officers. As a result of said Plan, the Company's ownership in USS Online was
reduced from 100% to approximately 44%. The Company also approves that USS
Online Inc. grants options to the Company's common stock holders of record as
of August 30, 1999, on a pro rata basis, to purchase 32,272,237 shares of its
common stock at $0.01 per share upon its completion of an initial public
offering. The Option experies two (2) years after the completion of the
initial offering of USS Online Inc.
On April 22, 1999, the Company registered a new subsidiary, Lotus World, Inc.,
in the State of Delaware. Lotus World provides online shopping and online
auction services to multinational clients.
On September 1, 1999, the Company formed a joint venture, TCL International,
Inc., with TCL Holdings (BVI) Ltd., a company headquartered in Hong Kong. The
Company and TCL Holdings (BVI) each owns 50% share of the joint venture. The
joint venture was created to develop, to manufacture, to market information
technology products, and to utilize such products to provide Internet and
other network services in China. TCL Holdings (BVI) Ltd. is a subsidiary of
TCL Group, China's fifth largest electronics group with 1998 revenue of
RMB 9.8 billion (US $1.2 billion).
PRODUCTS AND SERVICES
As of the date hereof, three subsidiaries of the Company: Regent Electronics
Corp., TurboNet Communications, and Arescom Inc., have their own products.
Regent Electronics Corp.
Regent designs, develops, provides and markets Internet-related products and
services to electronics manufacturers, commercial cable-TV networks, hotels,
and general individual customers. Its principal products are TeleWeb systems
and WonderTV/TeleWeb set-top boxes.
WonderTV A9000 Set-Top Box
The WonderTV A9000 set-top box is an Internet access device for the U.S market.
It enables users to dial the Internet via regular phone line. Customers can use
their home television as the monitor to browse the Internet. The WonderTV A9000
has a built-in modem and comes with a remote keyboard and a remote control.
Besides household usage, the WonderTV A9000 can also be used in hotel rooms
and in educational facilities. The WonderTV's unique functionality and easy
- -to-use attributes, open the door for those who have little computer experience
to go online, to trade online and to entertain online. The Company is planning
to add more features in the box, such as pay-per-view, real-time stock and
commodity trading, and home shopping.
TeleWeb Systems
The TeleWeb system is an electronic system that collects, processes, and stores
a huge amount of information in a storage center, and then broadcasts the
stored information directly to home users via a cable TV network. Unlike
conventional Internet Service Providers (ISP), the Company's TeleWeb system
does not require users to have a computer or to worry about telephone charges.
By paying a small monthly fee, users can receive a variety of information,
such as business, finance, politics, education, tourism, culture,entertainment,
weather and shopping information. The TeleWeb System compiles all the
information from the Internet and other sources, then categorizes the retrieved
information into channels. The Company's TeleWeb systems are mainly targeted
for the Chinese market.
WonderTV A9000C Cable Modem Set-Top Box
The WonderTV A9000C is a DOCSIS 1.0 compliant cable modem set-top box. The
A9000C offers users access to the Internet via cable at speeds up to 50 times
faster than a regular modem telephone connection. With a regular TV set as a
monitor, the A9000C has a full service Internet browser, multi-media features
and multi-language capability.
TeleWeb A9000 Set-Top Box
The TeleWeb A9000 is a user-end box functioned as a terminal to connect TV
and the Internet in the Company's TeleWeb System. Using the TeleWeb A9000,
users can get on-line via TV cable and receive TeleWeb broadcasting
information. Based on users' preferences, the TeleWeb A9000 will automatically
filter and download the data. Its purpose is not only to offer a whole
solution to low-end customers and high-end information distributors, but also
to simplify its use with hit-and-go functionality for non-professionals with
varied backgrounds. TeleWeb A9000 set-top boxes are mainly targeted at the
Chinese market.
There are many advantages for consumers and operators to use the TeleWeb
system and its TeleWeb set-top boxes in the Chinese market. The advantages
include: (1) access to Internet data independent of ISP and local phone
charges; (2) utilizing existing networks with no new infrastructure investments
needed; (3) information access controlled easily by operators or by government
agencies (a very important factor for the Chinese markets and for other Asian
countries); and (4) NTSC and PAL TV system compatible.
Supported by its TeleWeb system and TeleWeb set-top boxes, the Company is able
to compile and broadcast information to the Chinese cable-TV subscribers. The
Company is currently negotiating with several government-run cable TV operators
in China to install its TeleWeb system and distribute TeleWeb set-top boxes to
cable TV subscribers.
TurboNet Communications
TurboNet designs, develops and markets telecommunications products to cable
operators, network service providers, and communications network users. Its
principal products include cable modems, cable modem chips and cable modem
accessories.
MCNS Cable Network Module
Cable modems is a new technology offering high-speed Internet access. It
connects a personal computer to the cable network and promise connection speeds
up to 30Mbps. With cable modem services, subscribers share an Internet feed
with all other subscribers in their region. The modems can be sold separately
or packaged into set-top boxes. The Company's MCNS Cable Network Module
("TurboPort cable modem") presents a new standard in data over cable modems,
which permits an extraordinary level of home access to online services for the
home subscribers with broadband data rates over conventional CATV HFC networks.
It offers high speed data transfers for advanced interactive video, high
performance links for IP traffic, and low latency capability. MCNS compliance
assures performance and interoperability with multiple vendors CMTS equipment.
The downstream modulation provides the industry-accepted 64-QAM as well as the
extension to 256-QAM to offer greater efficiencies in bandwidth utilization of
the HFC infrastructure. The upstream modulation utilizes a burst QPSK or QAM-16
modulation with pre-equalization to maintain a robust link.
The OEM cable modem the Company manufactured for Toshiba has been certified
for retail sale by Cable Television Laboratories, Inc. (Cablelabs) in
Louisville, Colorado. It was the first of two DOCSIS cable modems certified
by CableLabs.
MCNS Cable Data Bridge
Cable data bridge is a cable data networking device that offers system
operators to seamlessly hook a managed network interface from a router or
wide area network (WAN) to the broadband CATV network for distribution of
Ethernet traffic to the cable modems in end-users' home or offices. Cable
data bridge is less costly and faster than a router, but also less
intelligent. They are typically chosen for use in small network environments.
The Company's MCNS-compliant Cable Data Bridge permits system operators to
offer unparalleled packet data performance using a standard that is accepted
and supported by most the world's large system operators, CableLabs, and major
cable data equipment vendors. The flexible architecture allows an upgrade path
as new standards, system features, and quality of services arise, while
minimizing additional capital outlays for the operators.
The downstream modulation of the Company's MCNS Cable Data Bridge provides the
industry-accepted 64-QAM format as well as the 256-QAM format, so that it is
able to offer even greater efficiencies in bandwidth utilization of the HFC
infrastructure. This modulation in inter-operable with the IEEE 802.14
standards and can be readily adapted for systems requiring DAVIC, DVB, or
ITU-T J.83 Annex A and C coding. The upstream modulation utilizes a burst
QPSK or QAM-16 modulation with pre-equalization to maintain a robust link.
The burst demodulation can be configured to meet the MCNS, IEEE 802.14, and
DAVIC standards.
Arescom
Arescom designs, manufactures and markets a broad range of high quality
remote access products, such as routers and remote managing software, and
other inter-networking equipment under analog, ADSL, PSTN, ISDN, xDSL and
Ethernet environments for Internet Service Providers (ISPs), resellers, and
system integrators.
ROUTERS
Routers are advanced interconnection devices that provide links between local
area networks (LANs) that use different protocols. After evaluating and
compensating for such factors as network congestion and the distance between
a transmission's source and destination, they pick the best path for moving
a packet of information closer to its destination. Routers are more reliable
and secure than bridges, and also more expensive. Consequently, routers are
generally used in larger multi-protocol networks. The Company offers a variety
of backbone and remote routers for small-to-medium-sized businesses to
facilitate enterprise internetworking under analog, PSTN, ISDN, xDSL, ADSL and
Ethernet environments. With the router, an unlimited number of Ethernet local
area network users can access a Wide Area Network (WAN) via a single ISDN line.
The Company's router products include NetDSL ADSL router, Apex 1100, Apex
1100-2p (both for US market), NetLinker7x (for European and Asian markets),
EZ Rider Pro and NetLink 7x ISDN BRI Router-Hub. These ISDN BRI access routers
(bridge, router, terminal adapter, and Internet gateway) offers small offices
and home business interoffice and Internet connectivity via an ISDN BRI line
with high-speed and shared access to the Wide Area Network.
The Company is the first and the only router manufacturer that offers five
methods of router configuration and management as standard on router products.
Based on its stringent testing, MindSpring's ISDN Compatibility Lab has
included the Company's Asex 1100 in MindSpring's Dedicated Access Program
for businesses.
ANALOG ROUTERS AND xDSL ROUTERS
Targeted at small office/home office (SOHO) and corporate telecommuters, the
Company's Internet access router-hub (EZ Rider Pro and NetLink 7x ISDN BRI
Router-Hub) allows unlimited users in a home or office to share a single IP
address from a standard dial-up account with a 10 or 100 MB Ethernet LAN to
access the Internet. With a 56K analog modem, EZ Rider Pro offers primary dial
out and extra backup to ensure no downtime if the Cable or ADSL line fails,
and NetLink 7x comes equipped with an IP router, a 7-port Ethernet hub and
an ISDN interface.
ISDN REMOTE MANAGING SOFTWARE
Remote managing software is widely used by network managers and Internet
service providers (ISPs) to install, monitor, troubleshoot, and maintain ISDN
connections. The Company's Remote Manager software ("Remote Manager") is an
"1-Click" solution for MIS managers, resellers, and ISP technical support, and
no IP address is needed. It supports 16 Connection Profiles providing a
flexible array of dial-in and dial-out combinations, caller ID (block) to
prevent unwanted solicitors, faxes and errant dial-ins, while checking SPID
registration automatically. The Remote Manager's comprehensive diagnostic
capabilities allows network managers and ISPs to resolve connectivity conflict
problems rapidly by using an intuitive GUI interface or command line
administration via the telenet or the local console. Because the Company's
remote managing software is able to set up client ISDN routers in minutes,
rather than three to five hours they were accustomed to, this software is
recommended by their clients nationally.
MANUFACTURING
The Company primarily positions itself as a leading provider and developer
of Internet products and services. It does not maintain manufacturing
facilities, instead, it contracts a few manufacturers in Taiwan and China
for the purpose of production. To date, the Company has not experienced any
material difficulties or delay in the manufacture and assembly of the products
or significant returns due to product defects.
The Company has good relationships with a number of industry partners that
range from telephone switching companies, Internet service providers, resellers
of computers and network solutions, to electronics manufacturers, channel
partners-VAR's, and system integrators.
SALES, DISTRIBUTION AND SIGNIFICANT CUSTOMERS
The Company sells its Internet products mainly through direct wholesalers,
OEM relationships, strategic alliances, distributors, and VAR's to the United
States and to international markets, such as China, Taiwan and Hong Kong. For
the year ended June 30, 1999, the Company had four customers with billings in
excess of 10% of the Company's total revenues. Of the total revenue, Allwell
Technologies Corp. accounted for $12.8 million (30.2%), Shanghai Hong Sheng
Development Corp. $6.9 million (16.3%), Tianshi Investment Corp. $6.0 million
(14.2%), and Toshiba Corp. $3.8 million (8.8%).
The purchasing behavior of the Company's largest customers has been
characterized by the a small number of larger purchase orders. These orders
typically involve longer negotiating cycles. Although the Company believes that
its relations with these customers are good, the Company does not have written
agreements for ongoing and continued sales with specified minimum quantities.
As a result, there are no assurances of continued sales with these customers.
On the other hand, TurboNet has recently started full production of its cable
modems. Such sales should reduce any adverse affect caused by reduction in
orders from the Company's previous large customers.
The Company is currently working to diversify its customer base and find new
customers in all the industries it markets to.
RESEARCH AND DEVELOPMENT
The Company's business is characterized by the introduction of new products
through a research and development program. Approximately 68 people are
engaged in the Company's research and development activities. Research and
development expenditures for the year ended June 30, 1999 were $2.2 million,
compared to $4.4 million and $0.1million for the years ended June 30, 1998 and
1997, respectively. The Company's research and development expenditures reflect
its continued development of WonderTV and TeleWeb set-top boxes, cable modems
and advanced network routers.
The Company's research and development efforts employ a standard development
process to guide product development through stages of product concept, market
requirements analysis, product definition, design specification, coding,
testing and release. These efforts also focus on identifying, developing and
integrating leading technologies into our products to better meet customer
needs.
COMPETITION
As the Company enters the market for Internet related products, it expects
to experience significant competition from both existing competitors and
additional companies that may enter this market. Some of these companies have
greater technical, marketing, manufacturing, and financial resources than the
Company. The Company's ability to anticipate technological changes and
introduce enhanced products on a timely basis will be a significant factor in
the Company's ability to expand and remain competitive.
The markets for the Company's products are highly competitive and are
characterized by rapid technological advances, frequent new product
introductions, evolving industry standards, and competitive pricing. The
Company believes that it enjoys a strong competitive position because of its
large market base, its strong relationships with the major resellers in China,
its technological leadership and new product development capabilities. There
can be no assurance, however, that competitors will not be able to develop
systems, set-top boxes, cable modems, and routers compatible with, or that are
alternatives to, the Company's proprietary technology or systems, or that the
Company will be able to introduce new products and technologies on a timely
basis.
PATENTS, TRADEMARKS AND LICENSES
Patent protection is considered, in the aggregate, to be of material
importance in the Company's marketing of its Internet products in international
markets. The Company is pursuing patent applications in certain foreign
countries. There can be no assurance that any of the Company's currently
pending patent applications or future applications will be granted in full or
in part or that claims allowed will be sufficiently broad to protect the
Company's technology. The Company currently holds all rights, title, and
interest in and to the trademarks, copyrights, patent license of Amiga-
Commodore for registration and use in the People's Republic of China, Taiwan,
Hong Kong, Macao and the Asian bordering countries between the People's
Republic of China and the former Soviet Union.
EMPLOYEES
The Company and its subsidiaries have 120 full-time employees worldwide.
The Company also employs independent contractors and other temporary employees
in its software development programs. None of the Company's employees is
represented by a labor union. The Company believes that its relations with
its employees are satisfactory.
ITEM 2. PROPERTIES
Substantially all offices of the Company are located in leased premises.
The Company's principal office, including Regent's offices and R&D facility, is
located at 200 Centennial Avenue, Piscataway, New Jersey and consist of
approximately 9,400 square feet under a lease that expires in June 4, 2002.
The other two subsidiaries of the Company are located in San Diego, CA
(13,013 SF) and Fremont, CA (11,435 SF).
The following table summarizes the lease agreements held by the Company and
its subsidiaries relating to offices and other facilities:
Location Lease Term Commence Date Expiration Date
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Piscataway 5 years June 5, 1997 June 4, 2002
New Jersey
Middlesex Annual June 5, 1998 Renewable
New Jersey Renewable
San Diego 5 years July 30, 1997 July 31, 2002
California
Fremont 5 years March 30, 1997 March 31, 2002
California
Regent Electronics Corp. also has leases covering technical support and
marketing/sales office spaces in Shanghai, China.
All leased space is considered to be adequate for the operations of the
Company, and no difficulties are foreseen in meeting any future space
requirements.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, there is no pending, or, to the best knowledge of
the Company, threatened litigation that would have material impact on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on December 2, 1998,
the following proposals were adopted by a majority margin: (i) To elect members
of the Board of Directors to hold office until the next annual meeting of
shareholders and until their successors are elected and qualified; and (ii)
To ratify Schiffman Hughes Brown as the Company's independent auditors for the
fiscal year ending June 30, 1999.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
Part II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock, par value $0.001, has been traded on the OTC
Electronic Bulletin Board under the symbol "LPFC" since December 1, 1994,
and there are currently nine (9) market makers for the stock of the Company.
The following table sets forth the high and low closing prices of the Company's
Common Stock as reported on the OTC Bulletin Board from January 1997 through
September 28, 1999. These price quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
Quarter Ended High Low
------------------------- -------- -------
1997
March 31, 1997 ................ $2.50 $0.13
June 30, 1997 ................. $4.50 $1.50
September 30, 1997 ............ $7.00 $2.38
December 31, 1997 ............. $7.25 $4.75
1998
March 31, 1998 ................ $7.63 $5.63
June 30, 1998 ................. $10.13 $6.00
September 30, 1998 ............ $11.13 $8.50
December 31, 1998 ............. $11.50 $6.75
1999
March 31, 1999 ................. $7.50 $6.13
June 30, 1999 ............... $11.00 $6.44
July 1, 1999 through
September 28, 1999 ............. $15.00 $10.50
Number of Registered Holders
The number of registered holders of the Company's Common Stock as of
September 14, 1999 was about 521, and the Company believes that there are
a greater number of beneficial owners of shares of its Common Stock.
Dividends
The Company has not declared or paid any cash dividends on its Common Stock
for the past five years. The Company currently anticipates that it will
retain all available funds for use in the operation and expansion of its
business, and no cash dividend are expected to be paid on the Common Stock in
the foreseeable future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenue and cash flow needed to
declare cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
The Company believes that the transactions set forth below were exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), by reason of Section 4(2) of the Securities Act. In connection with
each of these transactions, the shares were sold to a limited number of
institutional and accredited individual investors. All the investors were
provided opportunities to get access to all relevant information regarding the
Company and they were represented to the Company that they were "sophisticated"
investors. They were also represented to the Company that the shares they
purchased were for investment purposes only and not with the view of the
distribution thereof. Restrictive legends were placed on all the stock
certificates issued.
On February 8, 1998, the Company entered into a stock subscription agreement
with H & Q Asia Pacific Ltd. and its affiliate Asia Pacific Growth
Fund II, L.P. (collectively "H&Q"). Under the terms of the agreement, H&Q
invested $6 million to acquire 1,500,000 shares of Preferred Stock of Regent
Electronics Corp., a subsidiary of the Company. H&Q's acquisition represented
approximately 5.5% of equity interest of Regent Electronics Corp. Regent also
issued Stock Warrants to H&Q for subscription of $6 million worth of Regent's
common shares. Pursuant to the Agreement, the Regent shares held by H&Q may be
converted, subject to certain conditions, into the Common Stock shares of the
Company.
On February 12, 1999, the Company entered into a Share Purchase and Exchange
Agreement with Mr. Stefan H. Benger, the sole shareholder of Professional
Market Brokerage, Inc. ("PMB"). Under the terms of the agreement, the Company
issued 500,000 shares of its common stock to Mr. Stefan Benger as part of the
consideration for the Company's acquisition of PMB's equity interest.
On February 15, 1999, the Company entered into a Share Purchase and Exchange
Agreement with Travelway International Inc. to acquire 100% of US Securities
& Futures Corp.'s ownership interest. Under the terms of the agreement, the
Company issued 500,000 shares of its Common Stock to Travelway International
Inc. as part of its consideration for the acquisition of USSF.
On March 15, 1999, the Company entered into an Acquisition Agreement with
TurboNet Communications ("TurboNet"), a California corporation, to acquire 81%
of TurboNet's equity interest in stock with value of $80 million. Under the
terms of the agreement, the Company, on April 5, 1999, issued 11,091,396 shares
of its restricted common stock to 45 shareholders of TurboNet. The TurboNet's
existing shareholders agreed that the shares so issued by the Company are
prohibited from being sold, in whole or in part, until TurboNet's annual gross
revenue exceeds $30 million with annual pretax net profit of not less than
$6 million.
On March 15, 1999, the Company entered into a Share Exchange Agreement with
Arescom Inc. ("Arescom"), a Fremont, California, corporation, whereby the
Company will issue $30 million worth of restricted shares to acquire an 81%
equity interest in Arescom. Arescom's existing shareholders agreed not to sell
the shares so issued until Arescom's annual gross revenue exceeds $15 million
with annual pretax net profit of not less than $3 million. 4,159,274 shares of
the Company's common stock were issued to 35 shareholders of Arescom on June 8,
1999.
For the year ended June 30, 1999, the Company issued a total of 384,500 shares
of its Common Stock in private placements to six accredited investors for an
aggregate consideration of $2,164,750.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
"Consolidated Statements of Operations Data" and "Consolidated Balance Sheet
Data" are derived from the consolidated financial statements of the Company
and its subsidiaries, which financial statements have been audited by Schiffman
Hughes Brown, the Company's independent public accountants, to the extent
indicated in their report included elsewhere herein.
The selected consolidated financial data set forth below is qualified in its
entirely by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", the
Consolidated Financial Statements, the notes thereto and the other financial
information included elsewhere in this report.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSAND, EXCEPT PER SHARE DATA)
--------------------------------------------------------
FISCAL YEARS ENDED JUNE 30
--------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Sales ............................. $ 42,383 $ 6,155 --- --- ---
Cost of sales ..................... 37,711 3,408 --- --- ---
--------- -------- ------- ------- --------
Gross profit ...................... 4,671 2,747 --- --- ---
Royalty income ................... 124 1,800 --- --- ---
Operating Expenses
General and administrative........ 12,458 3,678 $ 224 $ 18 $ 17
Research and Development ......... 2,215 4,372 104 --- ---
--------- -------- ------- -------- -------
Total operating expenses ....... 14,674 8,050 328 18 17
Operating income (loss)............ (9,878) (3,503) (328) (18) (17)
Other income (expenses), net....... 66 (10) 413 40 3
Net income (loss) before income
Taxes, minority interest in income
Of consolidated subsidiary and
Discontinued operations............. (9,812) (3,513) 85 22 (14)
--------- --------- ------- ------- -------
Income tax expense (benefit)........ --- (81) 124 --- ---
Minority interest in loss of
Consolidated subsidiaries ......... 409 218 82 --- ---
(Loss) income from discontinued
operations ........................ (53) 566 178 --- ---
Loss on sale of subsidiaries........ (591) --- --- --- ---
Net income (loss) .................. $(10,047) $(2,649) $ 221 $ 22 $ (14)
========== ========= ======== ======== =======
Net income (loss) per share
Basic ........................... $(0.20) $(0.06) $0.01 $0.00 $0.00
Diluted .......................... $(0.20) $(0.06) $0.00 $0.00 $0.00
Weighted average
shares outstanding ............... 49,499 44,421 29,238 26,799 26,860
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED
BALANCE SHEET DATA:
Cash and cash equivalents .......... $ 30,779 $ 3,263 $ 357 $ 213 $ 221
Working capital .................... 10,143 8,171 1,052 213 221
Total assets ....................... 200,759 45,455 8,404 385 221
Long-term obligation ............... --- --- --- --- ---
Total shareholders' equity ......... $ 138,406 $ 35,875 $ 5,917 $ 385 $ 217
========= ======== ======= ======= ======
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
General
Lotus Pacific, Inc. (the "Company" or "Registrant") is an Internet technology
and services company that, through its subsidiaries Regent Electronics Corp.
("Regent"), TurboNet Communications ("TurboNet"), and Arescom Inc. ("Arescom),
develops and markets a broad range of Internet-related products and services in
the United States and international markets. The Company's products include
TeleWeb systems, TeleWeb set-top boxes, WonderTV set-top boxes, Internet
routers, cable modems and cable modem chips.
The Company's consolidated financial statements and notes to the consolidated
financial statements ("Notes"), include elsewhere in this Form 10-K, should be
read as an integral part of the following management's discussion.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
Sales
During the fiscal 1999, the Company generated its revenue primarily from the
sale of its TeleWeb A9000 set-top boxes, chips, cable modems and routers. In
1999, the sales of the Company increased 590% to $42.4 million from $6.2
million in fiscal 1998. The increase in sales was primarily due to sales of
Regent's newly introduced TeleWeb A9000 set-top box and the sales of cable
modems and routers from TurboNet Communications and Arescom Inc., two acquired
subsidiaries of the Company in 1999.
Of the Company's total sales in fiscal 1999, Regent contributed $32.5 million,
approximately 77% of the Company's total sales, largely from sales of TeleWeb
set-top box ($10.9 million) and chipsets ($19.9 million). In order to
manufacture the Company's TeleWeb broadcasting systems and TeleWeb/WonderTV
set-top boxes, the manufacturer need dedicated chips and the accompanying
software; therefore, the Company also sold chips to those companies that
assemble and market the set-top boxes.
In fiscal 1999, the Company's sales revenue from TurboNet's cable modem was
$3.8 million, approximately 9% of the Company's total sales. All TurboNet's
sales were from orders of Toshiba Corp. The sales from Arescom's router was
$151,942, approximately 0.4% of the Company's total sales.
For the fiscal 1999, the Company had royalty revenue of $124,125, compared to
$1.8 million in 1998. The royalty revenue was from non-refundable, one-time
fees that permitted the third parties to market and distribute the Company's
products in China. The royalty income will be insignificant moving forward as
the Company is discontinuing the practice of charging third parties a royalty
fee.
Discontinued Operations
On September 30, 1998, the Company sold all of its textile and apparel business
(LPF International Corp. and Richtime Far East, Ltd.) to an unrelated third
party for $2.5 million in cash in order to concentrate on its Internet-related
products and services. In fiscal 1999, the Company had an operating loss of
$53,017 from discontinued operations. The Company also recorded a loss of
$590,641 on the dispositions of discontinued operations. The Company's 1998
and 1997 financial statements have been restated to include the subsidiaries as
discontinued operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel
costs, including all compensation and employee benefits, and support costs
including utilities, insurance, travel, communications, office rental expenses,
depreciation and amortization expenses and all costs associated with a
reporting company. Selling, general and administrative expenses increased $8.8
million, about 239%, to $12.5 million in fiscal 1999 from $3.7 million in
fiscal 1998. The increase in selling, general and administrative was mainly due
to the following two causes:
(1) $5.8 million of goodwill amortization expenses. In 1999, the Company
acquired controlling interest in four companies: TurboNet Communications,
Arescom Inc., US Securities & Futures Corp., and Professional Market Brokerage
Inc. In connection with these acquisitions, the Company had a total of $115.3
million of goodwill, which were amortized on a straight-line basis over
10 years. Of the total selling, general and administrative expenses, goodwill
amortization expenses accounted for approximately 46.6%.
(2) As mentioned above, the Company acquired controlling interest in four
companies in fiscal 1999. While the results of operations of US Securities
& Futures Corp. and Professional Market Brokerage, Inc. were not consolidated
with the Company, the additional selling, general and administrative expenses
incurred at TurboNet and Arescom were a significant share of the increased
expenses.
Research and Development Expense
Research and development expenses consist of the costs associated with the
design and testing of new technologies and products. These costs relate
primarily to the costs of materials, personnel, and engineer design, and R&D
related consulting fees. For the year ended June 30, 1999, the Company spent
$2.2 million in research and development, approximately 15% of the Company's
total operating expenses, compared with $4.4 million, about 54% of the total
operating expenses in fiscal 1998. R&D expenses have decreased as the Company
has completed its initial stage of R&D projects in the TeleWeb set-top box
project.
Net Income (Loss)
As a result of the factors discussed above, the Company's operating loss
increased to $10 million in fiscal 1999 from $2.7 million in 1998. For the year
ended June 30, 1999, the Company had net loss of $0.20 per diluted share,
compared with $0.06 in fiscal 1998. Excluding the $5.8 million of goodwill
amortization expenses, the Company had an operating loss of $4.2 million in
fiscal 1999.
Income Taxes
The Company had no income tax obligation in fiscal 1999. Although there is
no assurance that future operations will produce taxable earnings, its loss
in this year may be utilized to offset future earnings.
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
Sales
In 1998 the Company generated its revenue largely from the sale of its
TeleWeb set-top chips. The Company's revenues increased to $6.2 million in
fiscal 1998 from zero in fiscal 1997. The increase in revenue was due to
sales of TeleWeb chips from Regent Electronics Corp., a subsidiary of the
Company. Regent was set up in the early 1997 and had no operations until
April of 1997 and, consequently, the Company had no sales revenue in fiscal
1997.
The Company's TeleWeb broadcasting systems and TeleWeb/WonderTV set-top boxes
were developed by Regent, and then contracted to electronics manufacturers for
the purpose of production. In order to manufacture the Company's TeleWeb
set-top boxes, the manufactures had to purchase the dedicated chips. Therefore,
the Company also sold chips to those companies that assemble and market the
set-top boxes. The sale of TeleWeb chips in 1998 was $6.2 million,
approximately 77% of the Company's total operating revenue.
For fiscal year 1998, the Company had royalty revenue of 1.8 million, about
22.6% of the Company's total operating revenue. The royalty revenue was from
non-refundable, one-time fees that permitted the third parties to market and
distribute the Company's products in China.
Discontinued Operations
On September 30, 1998, the Company sold all of its textile and apparel business
(LPF International Corp. and Richtime Far East, Ltd.) to an unrelated third
party for $2.5 million in cash in order to concentrate its efforts on Internet-
related products and services. In fiscal 1998, the Company had operating income
of $565,916 from discontinued operations. The Company's 1998 and 1997 financial
statements have been restated to include the subsidiaries as discontinued
operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel
costs, including all compensation and employee benefits, and support costs
including utilities, insurance, travel, communications, office rents,
depreciation and amortization expenses and all costs associated with a
reporting company. Selling, general and administrative expenses increased
$3.5 million, about 14 times, to $3.7 million in fiscal 1998 from $223,911
in fiscal 1997. The primary reason for the increase was due to the Company's
not fully operating until April 1997. Accordingly, the Company's expenses
on office rent, selling, travel, consulting, legal and accounting expenses
significantly increased in fiscal 1998.
Of the total selling, general and administrative expenses, approximately
36%, i.e., $1.4 million, were goodwill amortization expenses. The Company
acquired an additional 17% of equity interest in Regent Electronics Corp. on
September 18, 1997. The excess of acquisition cost over the net assets
acquired (approximately $28.5 million) was amortization as goodwill on the
straight-line basis over 20 years.
Research and Development Expense
Research and development expenses consist of the costs associated with the
design and testing of new technologies and products. These costs relate
primarily to the costs of materials, personnel, and engineering designing,
and R&D related consulting fees. For the year ended June 30, 1998, the Company
spent $4.4 million in research and development, approximately 52% of the
Company's total operating expenses, compared with $103,870, about 28% of the
total operating expenses in fiscal 1997. The significant increase in research
and development expenses was primarily a result of developing the TeleWeb
broadcasting system and TeleWeb/WonderTV set-top boxes. The Company's software
development costs are recorded in accordance with Statement of Financial
Accounting Standards No. 86. To date, the Company has expensed all of its
internal software development.
Net Income (Loss)
As a result of the factors discussed above, the Company's operating income
decreased from $221,133 of net income in fiscal 1997 to $2.7 million of loss
in fiscal 1998. For the year ended June 30, 1998, the Company has net loss of
$0.06 per diluted share, compared with zero in fiscal 1997.
Income Taxes
The Company's loss in fiscal 1998 may be used to offset future earnings,
although there is no assurance that future operations will produce taxable
earnings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's liquid assets, consisting of cash and cash
equivalents, total $30.8 million, compared to $3.3 million and $357,212 at
June 30, 1998 and 1997, respectively.
Net cash used by operating activities was $18.8 million in fiscal 1999,
compared with $868,063 of net cash provided by operating activities in 1998.
The increase in net cash used in 1999 was primarily due to the increase in
accounts receivable ($14.0 million), inventories ($5.0 million), and goodwill
amortization ($4.5 million). The Company's investing activities used $747,500
of cash in 1999, mainly for the acquisition of affiliates (US Securities &
Futures Corp. and Professional Market Brokerage Inc.). The sale of
discontinued operations provided the Company with $2.5 million of proceeds,
and the Company also used $507,500 for the purchase of property and equipment.
In fiscal 1999, cash flow from financing activities was $47.1 million. Of
the total net cash provided by financing activities, $44.7 million was
investment deposits from investors that were negotiating with the Company
to purchase stock of the Company and the Company's subsidiaries (The
negotiations has not been finalized as of the report date). For the year
ended June 30, 1999, the Company issued a total of 384,500 shares of its
Common Stock in private placements to six accredited investors for an
aggregate consideration of $2,164,750. At June 30, 1999, the Company had
65,044,474 shares of Common Stock with par value $.001 per share and 4,300
shares of Class A Preferred Stock issued and outstanding.
In March 1999 the Company acquired 81% equity interest in both TurboNet
Communications and Arescom Inc. Under the terms of the acquisitions, the
Company agreed to provide TurboNet with $20 million and Arescom with $10
million of cash as working capital. The delivery schedule will be based on
the financial needs of TurboNet and Arescom.
Since 1997, the Company has financed a portion of its operations and
expenditures through the sale of its capital stock. On February 8, 1998,
H&Q 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.
For the year ended June 30, 1999, the Company issued a total of 384,500
shares of its common Stock in private placements to six accredited investors
for an aggregate consideration of $2,164,750.
The Company believes that the existing cash and cash equivalents together
with funds generated from operations will be sufficient to meet its operating
requirements for 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.
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
has made every efforts to minimize the impact of the Year 2000 date change on
the Company's products, information technology systems, facilities and
production infrastructure. 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.
All critical aspects of the Company's Year 2000 compliance program are
expected to be completed by the end of the third quarter 1999. The Company
will continue to assess and test newly engaged suppliers and their products
for Year 2000 compliance as part of the Company's normal business operations
and 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Effective for fiscal 1998, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," and, as permitted by this standard, will
continue to apply the recognition and measurement principles of Accounting
Principles Board Opinion No. 25 to its stock options. This statement requires
footnotes disclosure of the pro forma impact on net income and earnings per
share of the compensation cost that would have been recognized if the fair
value of all stock-based awards were recorded in the income statement.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which simplifies the standards for computing EPS
previously found in Accounting Principles Board Opinion No. 15 and makes
them comparable to international EPS standards. The Statement is effective
for financial statements issued for periods ending after December 15, 1997.
The Company adopted its requirements in connection with its annual reporting
for the years ended June 30, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued two
SFASs: SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
As specified by these statements, the Company will apply these statements
beginning in fiscal 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, including related disclosures about products and services,
geographic areas and major customers, and required selected information
about operating segments in interim financial statements. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. The Company
has adpoted SFAS No. 131.
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative and Hedging Activities", was issued, which
establishes accounting and reporting standards for derivative instruments
and hedging activities, which requires for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be measured at fair value and recognized in the balance sheet as
either assets or liabilities. The Company expects the impact of SFAS 133 on
its future earnings and financial position is not material (see Item. 7A:
"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
adopted the provisions of this SOP on July 1, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 (such as
investments) are not material.
ITEM 8. FINANCIAL STATEMENTS
See ITEM 14 (a) for an index to the audited consolidated financial statements
and supplementary financial information that are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE
The Company appointed the accounting firm of Schiffman, Hughes & Brown to
serve as the independent auditors of its year-end financial statements
starting from its fiscal year of 1995. To the best knowledge of the current
management, the Company did not use an auditor for its fiscal year prior
to 1995 and therefore had no auditors.
The Company has no disagreement with accounting and financial disclosure.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's directors, executive officers and their respective ages and
positions as of September 28, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Date Appointed Position
- ------------------------ --------- ---------------- -------------------
<S> <C> <C> <C>
James Yao ................. 46 Jan. 1997 Chairman & Director
Jeremy Wang (1) (2) ....... 45 March 1999 President & Director
David Li ...... ........... 35 Sept. 1999 Chief Financial Officer
Huaya Lu Tung ............. 46 March 1999 Treasurer
David Leung ............... 55 Jan. 1997 Vice President & Director
James Liu ................. 45 Jan. 1997 Vice President & Director
Thomas V. White ........... 47 March 1999 Vice President
Stefan H. Benger .......... 32 March 1999 Vice President
Harold Tuan ............... 45 April 1999 Vice President
Max Lu .................... 45 April 1999 Vice President
De-Liang Wang ............. 42 March 1999 Vice President
Richard Ho ................ 45 March 1999 Vice President
C. Jeffrey Gull ........... 36 March 1999 Vice President
Simon Gu (1) (2)........... 44 Sept. 1997 Director
Johnson Chang (1) (2)...... 45 March 1999 Director
Gary Huang ................ 43 Jan. 1997 Secretary & Director
- -----------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee
</TABLE>
The following are biographies of the Company's executive officers and directors
for the past five years.
JAMES YAO has been Chairman of the Company's Board of Directors since January
1997. Previously he served as President of the Company until March 1999. He has
over 15 years of business experience in multinational companies as well as new
ventures in textile and apparel industry, most recently with Yao Investment
Corp. and Lotus International Holdings Corp., where he served as Chairman.
Mr. Yao graduated from Miya Gawa University in Tokyo, Japan.
JEREMY H.WANG has been President of the company since March 1999. He was
elected as a Director of the Company in 1997. In the past fifteen years,
Mr. Wang worked for Bell Laboratories and AT&T, and has been an independent
consultant in the telecommunications industry. He has extensive experiences
in the communications system development and product /project management.
Mr. Wang has an MS in Engineering from University of Virginia, and an MS in
Computer Science from New Jersey Institute of Technology.
DAVID LI has been appointed as Chief Financial Officer since September 1999.
Mr. Li's professional experiences include CFO at US Business Network,
investment banking at Donaldson, Lufkin and Jenrette advising clients on
corporate financing and mergers & acquisitions, and investment management
at Walden Group responsible for venture capital investments. He also worked
as a management consultant at Booz Allen & Hamilton and McKinsey serving
both multinational and Asian clients. Mr. Li received his MBA from the Wharton
School at the University of Pennsylvania and MA from Columbia University.
HUAYA LU TUNG has been the Company's Treasurer since March 1999. Currently she
serves as Chairman of U.S. Securities & Futures Corp. Previously she worked
for AT&T for six years. Mrs. Tung received her bachelor degree from East
Stroudsburg University and her MA degree from University of Rochester.
DAVID LEUNG has been a Director and Vice President of the Company since
January 1997. Previously he served as General Manager of Shenzhen New
Technology Development Co., Ltd. in Shenzhen, China. He is a director of Lotus
International Holdings Corp. He was employed as a research fellow with
Electronics Research Institute in Guangzhou, China under Academia Sinica from
1984 to 1992. Mr. Leung had a BS degree from Beijing Institute of Technology.
JAMES LIU has been a Director and Vice President of the Company since January
1997. Prior to his joining the Company, Mr. Liu served as President of JBL
International Inc., an apparel agent in New York, NY, that contracts apparel
orders and transfers finished goods between wholesalers and apparel
manufacturers. He is a director of Lotus International Holdings Corp. From
1983 to 1990, he was a manager in charge of international trade in Jiangsu
Provincial Government of the People's Republic of China. He graduated with
a BA degree from Nanjing University, China.
HAROLD TUAN was appointed as Vice President of the Company and Board
Director of TurboNet Communications in April 1999. Mr. Tuan has over 20 years
of research and development experience in digital TV system, Data-Over-Cable
System, Signal Processing and Communication Systems. Mr. Tuan is the founder
of TurboNet Communications and currently serves as its President.
MAX LU was appointed as Vice President of the Company and Board Director
of Arescom Inc. in April 1999. Mr. Lu has more than 11-year management,
marketing and engineering experiences in computer and communication industries.
Mr. Lu was the Vice President of Engineering and marketing at CNet. He had led
CNet to become the technology leader in Taiwan and to go public in December of
1995. Before CNet, Mr. Lu was the founder and Vice President of Lanwan
Technologies in San Jose, California. His engineering experience includes
working for Cisco, Hughes, ERSO, and NEOTECH from 1983 to 1991. Mr. Lu
currently serves as President of Arescom, Inc.
THOMAS V. WHITE has been appointed as Vice President of the Company since
March 1999. He has over 20 years of experience in a management and sales
enhancing the overall productivity of the full-service brokerage operations.
Before joining Lotus Pacific, Mr. White is President of U.S. Securities and
Futures Corp. He has been a senior executive in many companies in the financial
trading industry. Previously he was senior vice president of American Futures
Group and Index Futures Group. Mr. White holds a BA degree in Business
Administration and Quantitative Analysis from Bernard Baruch College.
STEFAN H. BENGER has been appointed as Vice President of the Company since
March 1999. Mr. Benger has been the CEO and Chairman of Professional Market
Brokerage, Inc. ("PMB") since 1995. Under Mr. Benger's leadership, PMB
becomes a leading FCM with a reputation to be one of the most advanced futures
trading firms in the global marketplace. Before founding PMB, Mr. Benger was
president of WB Werbeagentur Stefan Benger GmbH and trading director at Futures
& Options GmbH. Having experience in Europe and the United States, he is very
familiar with the international aspects of trading various financial products,
exchange and over-the-counter securities. He is a frequent speaker at various
industry associations and conferences. His professional expertise is frequently
quoted in industry publications.
DE-LIANG WANG has been appointed as Vice President of the Company since March
1999. After receiving his MS degree in Electrical Engineering and Mechanical
Engineering from the University of Texas at Austin, Mr. Wang served as a senior
hardware engineer at AT&T Bell Laboratories. He has extensive experience in
leading major system design projects.
RICHARD HO has been appointed as Vice President of the Company since March
1999. Prior to his joining the Company, Mr. Ho was President of Rightiming
Electronics Corp. He has many years of experience in corporate administration
and planning. Mr. Ho received his B.A in International Business in 1986 in
China.
C. JEFFREY GULL has been appointed as Vice President of the Company since
March 1999. He began with the company on January 1, 1999. Prior to joining the
company, he was the director of Asia Development for Nu Skin International,
Inc. Mr. Gull spent over 8 years with Nu Skin working with New Market
Development and Operations for their Asia Pacific region. He has also worked
in the financial and computer software industries with Dean Witter and Clyde
Digital. Mr. Gull has a B.S. in business finance from Brigham Young University.
SIMON GU has been a director since September 1997. Mr. Gu has more than twelve
years of experience in electronics and computer industries, and has been a
senior computer engineer at AT&T since 1990. He held several senior technology
positions at US Army Armament Research, Development and Engineering Center and
Information Department of Town & County International, Inc. from 1987 to 1990.
Mr. Gu holds a Master of Sciences in computer sciences from Polytechnic
University of New York and a BS in computer sciences at Kean College of New
Jersey.
JOHNSON CHANG has been selected as director of the Company since March 1999.
He has many years of experience in corporate management and international
trade. He was Deputy General Manager of Minmetals International Trading Co,
a Chinese governmental corporation; and had been served as president of
Minmetals U.K. Ltd., president of Chi Mei Corporation (USA), and president
of Harmony Corp. Mr. Chang served as a board member at several domestic and
international corporations.
GARY HUANG has been Corporate Secretary of the Company since January 1997.
Prior to joining the Company, Mr. Huang served as Senior Accountant /
Financial Analyst at Rightiming Electronics Corp. with responsibilities in
accounting, financial reporting and treasury functions. He holds an MBA in
finance from University of New Haven and an MA in Economics from Yale
University.
All directors hold office for their elected term or until their successors
are duly elected and qualified. Should a director be disqualified or unable
to serve as a director, the vacancy so arising may be filled by the Board of
Directors for the un-expired portion of his term. All officers serve at the
discretion of the Board of Directors. There are no family relationships among
the members of the Board of Directors or any executive officers of the
Company.
Committees and Board Compensation
The Board of Directors conducts its business through meetings of the Board
of Directors and through its committees. In accordance with the By-laws of
the Company, the Board of Directors has established an Audit Committee and
a Compensation Committee.
Audit Committee
The Audit Committee acts on behalf of the Board of Directors with respect to
the Company's financial statements, record-keeping, auditing practices and
matters relating to the Company's independent public accountants, including
recommending to the Board of Directors the firm to be engaged as its
independent public accountants for the next fiscal year; reviewing with the
Company's independent public accountants the scope and results of the audit
and any related management letter; consulting with the independent public
accountants and management with regard to the Company's accounting methods
and adequacy of its internal accounting controls; approving the professional
services rendered by the independent public accountants; and reviewing the
independence of the independent public accountants. The Audit Committee
consists of Messrs. Jeremy Wang, Simon Gu and Johnson Chang.
Compensation Committee
The Compensation Committee reviews and makes recommendations to the Board
of Directors the appropriate compensation of directors and executive officers
of the Company. The Compensation Committee consists of Messrs. Jeremy Wang,
Simon Gu and Johnson Chang.
Involvement in Certain Legal Proceedings
None of the officers or directors has been involved in any material legal
proceedings that occurred within the last five years of any type as described
in Section 401(f) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information concerning
the total compensation of the Company's executive officers for services
rendered in all capacities to the Company for the last three fiscal years
ended June 30.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
----------------------------------- ----------------------------------------------
Restricted Securities
Names and Principle Other Annual Stock Underlying LTIP All Other
Position Year Salary ($) Bonus ($) Compensation Award Options/SAR Payouts Compensation
- -------------------- --------- ------------ --------- ------------ ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Yao .......... 1999 68,000 --- --- --- --- --- ---
Chairman 1998 68,000 --- --- --- --- --- ---
1997 18,000 --- --- --- 180,000 --- ---
Jeremy Wang *....... 1999 120,000 --- --- --- --- --- ---
President 1998 N/A --- --- --- --- --- ---
1997 N/A --- --- --- 180,000 --- ---
C. Jeffrey Gull*. ... 1999 80,000 --- --- --- --- --- ---
Vice President 1998 N/A --- --- --- --- --- ---
1997 N/A --- --- --- --- --- ---
De-liang Wang*....... 1999 80,000 --- --- --- --- --- ---
Vice President 1998 40,000 --- --- --- --- --- ---
1996 N/A --- --- --- --- --- ---
David Li*............ 1999 80,000 --- --- --- --- --- ---
Chief Financial 1998 N/A --- --- --- --- --- ---
Officer 1997 N/A --- --- --- --- --- ---
- ------------------------------------------------
</TABLE>
* Messrs. Jeremy Wang, C. Jeffrey Gull and De-liang Wang were appointed in the
second half of fiscal 1999. David Li was appointed in September 1999. The
salaries indicated above are their initial annual base salary.
Each of the options issued above is currently exercisable at an exercise price
of $6.00 per share and shall be expired on May 15 and May 30, 2002. As of
September 28, 1999, no stock options have been exercised.
There are no reportable transactions between Lotus Pacific, Inc. and Lotus
International Holdings Corp., Yao Investment Corp., Rightiming Electronics
Corp., Evolving Investments Ltd. other than disclosure as shareholders.
Directors' Compensation
Directors are not paid a fee for attending Board of Directors or committee
meetings, but are reimbursed for their travel expenses to and from the meetings
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
The following table sets forth certain information known by the Company
regarding the beneficial ownership of the Company's Common Stock as of
September 28, 1999, by (i) each person who is known by the Company to own
beneficially more than 5% of the Company's outstanding Common Stock; (ii)
each of the Company's officers and directors, and (iii) directors and officers
of the Company as a group.
FIVE PERCENT (5%) SHAREHOLDERS
NO. OF SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED OF CLASS
- ----------------------------- --------------- ----------
TCL Industries Holdings (HK) Ltd. 9,606,671 12.7%
13/F, TCL Tower
8 Tai Chung Road
Tsuen Wan, Hong Kong
Lotus International Holdings Corp. 8,079,199 10.6%
200 Centennial Avenue, Suite 201
Piscataway, NJ 08854
Yao Investment Corp. 8,000,000 10.5%
200 Centennial Avenue, Suite 201
Piscataway, NJ 08854
Rightiming Electronics Corp. 6,000,000 7.9%
P.O. Box 186
Piscataway, NJ 08855-0186
The percentages indicated are based on the Company's outstanding Stock Options
and Warrants exercisable as of September 28, 1999 and 64,544,474 shares of
Common Stock issued and outstanding as of September 28, 1999.
As of September 28, 1999, there were 64,544,474 shares of the Company's Common
Stock and 4,300 shares of Series A Preferred Stock issued and outstanding.
Each share of Common Stock is entitled to one vote per share.
All issued and outstanding 4,300 shares of Preferred Class A Stock of the
Company are owned by Lotus International Holdings Corp.
The following table shows the amount of common shares of the Company the
directors and executive officers of the Company own individually and as a
group as of September 28, 1999. The majority of these shares are restricted
under Rule 144 of the SEC.
Name of Shares of
Beneficial Owner* Common Stock
------------------- ----------------
Harold Tuan 862,156
Max Lu 238,620
Stefan H. Benger 500,000
De-Liang Wang 50,000
Jeffrey Gull 5,500
All directors and
executive officers
as a group
(5 persons) 1,656,276
- ------------------------------
* "Beneficial ownership" has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934.
James Yao, Chairman of the Board of the Company and James Liu, Vice President
of the Company, are two majority shareholders of Lotus International Holdings
Corp., and both of them serve on the Board of that entity.
James Yao owns Yao Investment Corp., and Robert Wang and John Wang are
principal shareholders of Rightiming Electronics Corp.
In addition to the shares of Common Stock and Series A Preferred Stock issued
and outstanding, the Company also issued 1,090,000 shares of Stock Option in
May 1997 to certain Directors and officers of the Company as part of their
compensation. All options are exercisable at $6.00 per share and will expire
in May 2002.
The following table sets forth the certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock Options as
of September 28, 1999. A total of 1,090,000 shares of Common Stock Options
were issued and outstanding as of September 28, 1999.
BENEFICIAL OWNERS NO. OF SHARES
----------------------- ---------------
James Yao, Chairman of the Board 180,000
Jeremy Wang, President & Director 180,000
David Leung, Vice President & Director 500,000
James Liu, Vice President & Director 180,000
Cheng Wang, Former Director 50,000
All directors and executive officers
As a group 1,090,000
In May 1997, the Company issued 8,000,000 shares of redeemable Common Stock
Warrants to Evolving Investments Limited, a New Jersey corporation. Each
share of the warrants entitles the holder to purchase a share of the Company's
Common Stock at $3.00 per share, void after May 5, 2002.
There are no arrangements including pledges by any person of the Company,
which may result in a change in control of the Company at a subsequent date.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
For the fiscal year ended June 30, 1999, there was no related transactions.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements and Reports of Schiffman Hughes Brown,
Independent Auditors
Report of Schiffman Hughes Brown, Independent Auditors
Audited Consolidated Balance Sheet as June 30, 1999 and 1998
Audited Consolidated Statements of Operations - for the Fiscal
Years ended June 30, 1999, 1998 and 1997
Audited Consolidated Statements of Shareholders' Equity - for the
Fiscal Years Ended June 30, 1999, 1998 and 1997
Audited Consolidated Statements of Cash Flows - for the Fiscal Years
Ended June 30, 1999, 1998 and 1997
Notes to Audited Consolidated Financial Statements
2. Financial Statement Schedule
3. Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended
(Exhibit 3.1 to General Form for Registration of Securities on
Form 10/A, filed June 17, 1999)
3.2 Certificate of Incorporation of the Registrant, as amended
(Exhibit 3.1 to General Form for Registration of Securities on
Form 10, filed October 27, 1998)
27.1 Financial Data Schedule
(b) Reports on form 8-K
(1) The Company filed a report on Form 8-K dated October 14, 1998,
wherein it reported that the Company sold its wholly owned
subsidiary, LPF International Corp., to Clarinet Overseas Ltd.
(2) The Company filed a report on Form 8-K dated February 12, 1999,
wherein it reported that the Company signed agreements to acquire
100% of equity interests of US Securities & Futures Corp. and
Professional Market Brokerage, Inc., respectively.
(3) The Company filed a report on Form 8-K dated March 16, 1999, wherein
it reported that the Company signed agreements to acquire 81% of
equity interests of TurboNet Communications and Arescom Inc.,
respectively.
(4) The Company filed a report on Form 8-K dated March 19, 1999, wherein
it reported that the Company appointed additional executive officers
and elected a new director.
(5) The Company filed a report on Form 8-K/A dated April 6, 1999,
wherein it reported that the Company amends its previously report
that filed on October 14, 1998.
(6) The Company filed a report on Form 8-K dated April 6, 1999, wherein
it reported that the Company issued a total of 15,250,667 shares of
its common stock in connection with its acquisitions of 81% of
equity interests in each of TurboNet Communications and Arescom, Inc.
(7) The Company filed a report on Form 8-K dated April 23, 1999, wherein
it reported that the Company appointed its senior officers and board
members.
(8) The Company filed a report on Form 8-K dated July 12, 1999, wherein
it reported that the Company transferred all of its ownership
interest in each of US Securities & Futures Corp. and Professional
Market Brokerage, Inc. to USS Online, Inc., a newly established
subsidiary to run the two financial service subsidiaries. The
management of USS Online will own 56% of USS Online.
(9) The Company filed a report on Form 8-K dated September 2, 1999,
wherein it reported that (i) a major shareholder of the Registrant
transferred one million shares of the Registrant's common stock to
Luks Industrial Co., Ltd, a Hong Kong company, and (ii) TCL
Industries Holdings (HK) Ltd. acquired 9,606,671 shares (15%) of
the Registrant's common stock from certain shareholders of the
Registrant, and (iii) the Registrant and TCL Holdings (BVI) Ltd.
set up a joint venture.
(10) The Company filed a report on Form 8-K dated September 9, 1999,
wherein it reported that the Company appointed new Chief Financial
Officer and the resignation of Mr. John O. Hing.
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant had duly caused this registration statement to be signed
on its behalf by the undersigned, thereto duly authorized.
Date: September 29, 1999 Lotus Pacific, Inc.
By: /s/ James Yao
--------------------------------
James Yao, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act 1934, this report
has been signed below by the following persons on behalf of the registrants
and in capacities and on the dates indicated.
/s/ Jeremy Wang
---------------------------------- Date: September 29, 1999
Jeremy Wang, President & Director
/s/ David Li
---------------------------------- Date: September 29, 1999
David Li, Chief Financial Officer
/s/ David Leung
----------------------------------- Date: September 28, 1999
David Leung, Vice President & Director
/s/ James Liu
----------------------------------- Date: September 28, 1999
James Liu, Vice President & Director
/s/ Johnson Chang
----------------------------------- Date: September 28, 1999
Johnson Chang, Director
/s/ Simon Gu
------------------------------------ Date: September 28, 1999
Simon Gu, Director
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Lotus Pacific, Inc. and Subsidiaries
We have audited the accompanying balance sheets of Lotus Pacific, Inc. and
Subsidiaries as of June 30, 1999 and 1998 and the related statements of
operations, stockholders' equity, and cash flows for the years ended June 30,
1999, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lotus Pacific, Inc. and
Subsidiaries as of June 30, 1999 and 1998, and the results of its operations
and its cash flows for the years ended June 30, 1999, 1998 and 1997 in
conformity with generally accepted accounting principles.
Schiffman Hughes Brown
Blue Bell, Pennsylvania
September 22, 1999
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ -------------
<S> <C> <C>
Current Assets:
Cash ............................. $ 30,779,486 $ 3,262,929
Accounts receivable .............. 27,655,975 7,157,831
Inventory......................... 4,972,965 ---
Other............................. 574,985 760,295
------------ -----------
Total current assets............. 63,983,411 11,181,055
Property and equipment:
Furniture and office equipment.... 1,534,033 93,666
Equipment......................... 1,540,221 1,541,231
Leasehold improvements............ 29,836 75,612
----------- -----------
3,104,090 1,710,509
Less: accumulated depreciation.... 1,235,567 349,460
----------- -----------
1,868,523 1,361,049
Other assets:
Cash surrender value of life insurance. 17,436
Intangible asset, net of accumulated
amortization of $713,355 and $370,477
in 1999 and 1998, respectively... 5,098,604 5,439,523
Goodwill, net of accumulated
amortization of $6,570,838 in 1999 and
$1,067,544 in 1998................ 128,157,062 27,400,414
Deposits.......................... 180,454 72,792
Investment in affiliate........... 1,453,928 ---
---------- -----------
134,907,484 32,912,729
$200,759,418 $45,454,833
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,950,281 $ 2,968,434
Loans payable..................... 195,565 ---
Investment deposits............... 44,695,000 ---
Income taxes payable.............. --- 42,110
------------ -----------
Total current liabilities....... 53,840,846 3,010,544
Minority interest in subsidiary.... 8,512,221 6,569,544
Commitments (Note 11)
Stockholders' equity:
Common stock...................... 64,544 47,387
Preferred stock, Series A......... 4 4
Common stock warrants (Note 8).... 80,000 80,000
Additional paid-in capital........ 151,270,218 38,708,698
Accumulated deficit............... (13,008,415) (2,961,344)
------------ -----------
138,406,351 35,874,745
$200,759,418 $ 45,454,833
============ ============
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
---------- ------------ ---------
<S> <C> <C> <C>
Sales.......................... $ 42,382,795 $ 6,154,935 $ ---
Cost of sales.................. 37,711,338 3,408,377 ---
------------ ----------- --------
Gross profit................... 4,671,457 2,746,558 ---
Royalty income................. 124,125 1,800,000 ---
Operating expenses
Selling, general and
administrative expenses...... 12,458,335 3,677,934 223,911
Research and development...... 2,215,455 4,371,990 103,870
------------ ----------- ---------
14,673,790 8,049,924 327,781
Operating loss................. (9,878,208) (3,503,366) (327,781)
Other income (expense):
Interest income............... 58,932 36,302 13,880
Interest expense.............. --- (46,259) ---
Gain on sale of investment.... --- --- 398,805
Other income.................. 8,750 --- ---
Foreign exchange gain (loss).. (1,487) 99 144
----------- ---------- ----------
66,195 (9,858) 412,829
Net income (loss) before income taxes,
minority interest in income of
consolidated subsidiary and
discontinued operations....... (9,812,013) (3,513,224) 85,048
Income tax expense (benefit)... --- (80,714) 123,842
Minority interest in loss of
consolidated subsidiaries..... 408,600 217,729 82,185
(Loss) income from discontinued
operations.................... (53,017) 565,916 177,742
Loss on sale of subsidiaries... (590,641) --- ---
---------- ---------- ---------
Net income (loss).............. $(10,047,071) $(2,648,865) $ 221,133
Earnings (loss) per share
Basic ........................ $ (.20) $ (.06) $ .01
Diluted....................... $ (.20) $ (.06) $ .00
Weighted average shares........ 49,498,519 44,421,334 29,238,081
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
Common Preferred Common Additional
Shares Shares Stock Paid-in
Outstanding Outstanding Warrants Amount Capital Deficit Total
-------------- ------------ ------------ --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 30, 1996...... 26,937,054 4,300 --- $ 26,941 $ 892,148 $ (533,612) $ 385,477
Issuance of
common stock....... 13,800,000 --- --- 13,800 5,296,200 --- 5,310,000
Net income for
the year ended
June 30, 1997...... --- --- --- --- --- 221,133 221,133
------------ ---------- ------------ ---------- ----------- ----------- ---------
Balance,
June 30, 1997...... 40,737,054 4,300 --- 40,741 6,188,348 (312,479) 5,916,610
Issuance of
common stock....... 536,000 --- --- 536 2,071,464 --- 2,072,000
Issuance of common
stock for services. 113,750 --- --- 114 454,886 --- 455,000
Issuance of
common stock
for purchase
of subsidiary...... 6,000,000 --- --- 6,000 29,994,000 --- 30,000,000
Issuance of common
stock warrants..... --- --- 8,000,000 80,000 --- --- 80,000
Net loss for the
year ended
June 30, 1998 --- --- --- --- --- (2,648,865) (2,648,865)
---------- ---------- --------- --------- ----------- ------------ -----------
Balance,
June 30, 1998...... 47,386,804 4,300 8,000,000 127,391 38,708,698 (2,961,344) 35,874,745
Issuance of
common stock....... 384,500 --- --- 384 2,164,366 --- 2,164,750
Issuance of common
stock for services. 22,500 --- --- 23 134,977 --- 135,000
Issuance of
common stock
for purchase of
subsidiaries....... 16,750,670 --- --- 16,750 121,976,999 --- 121,993,749
Stock dividend...... --- --- --- --- (11,714,822) --- (11,714,822)
Net loss for the
year ended
June 30, 1999...... --- --- --- --- --- (10,047,071) (10,047,071)
----------- --------- ----------- ---------- ----------- ------------ ------------
64,544,474 4,300 8,000,000 $ 144,548 $151,270,218 $(13,008,415) $138,406,351
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
----------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ (10,047,071) $ (2,648,865) $ 221,133
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............ 6,243,655 1,731,903 55,734
Common stock issued for services......... 135,000 455,000 ---
(Gain) loss on sale of investment........ 590,641 (398,805) ---
Stock of affiliate issued for services... 1,815,000 --- ---
Changes in assets and liabilities:
Increase in accounts receivable.......... (20,498,144) (6,465,616) (692,215)
Increase in inventory.................... (4,972,965) --- ---
(Increase) decrease in other
current assets......................... 185,310 (757,941) (2,354)
Increase in deposit...................... (107,662) (71,092) (1,700)
Increase in cash surrender value......... (17,436) --- ---
Increase (decrease) in accounts payable
and accrued expenses................... 5,981,847 2,922,185 46,249
Increase (decrease) in income taxes payable (42,110) (81,282) 123,392
Increase in minority interest in subsidiary 1,942,677 5,783,771 2,317,815
------------- ------------- -----------
Net cash provided by
(used in) operating activities......... (18,791,258) 868,063 1,669,249
Cash flows from investing activities:
Purchase of property and equipment........ (507,500) (114,346) (1,596,319)
Purchase of intangible asset.............. --- --- (5,810,000)
Purchase of affiliates................... (2,740,000) --- ---
Proceeds from sale of investment.......... 2,500,000 --- 571,200
------------ ------------- -----------
Net cash used in investing activities...... (747,500) (114,346) (6,835,119)
Cash flows from financing activities:
Issuance of common stock.................. 2,164,750 2,072,000 5,310,000
Issuance of common stock warrants......... 80,000 --- ---
Increase in investment deposits........... 44,695,000 --- ---
Increase in loans payable................. 195,565 --- ---
------------- -------------- -------------
Net cash provided by financing activities.. 47,055,315 2,152,000 5,310,000
Net increase in cash....................... 27,516,557 2,905,717 144,130
Cash, beginning............................ 3,262,929 357,212 213,082
Cash, ending............................... $ 30,779,486 $ 3,262,929 $ 357,212
Supplemental disclosure of cash flow information:
Cash paid for interest.................... $ 59,845 --- ---
Cash paid for taxes....................... $ 1,400 $ 500 $ 150
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for services..... $ 135,000 $ 455,000 ---
Issuance of common stock for
purchase of subsidiaries................ $ 121,355,709 $30,000,000 ---
The accompanying notes are an integral part of these financial statements
</TABLE>
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998 AND 1997
1. Description of Business:
Lotus Pacific, Inc. is an Internet technology and services company. Through
its subsidiaries, the Company develops and markets a broad range of Internet-
related products and services in the United States and international markets.
The Company's products include TeleWeb systems, WonderTV/TeleWeb set-top boxes,
cable modems, cable modem chips, routers, cable data bridges and ISDN remote
managing software.
Summary of Significant Accounting Policies:
Basis of presentation:
The consolidated financial statements include all significant majority-owned
subsidiaries and affiliated company in which Lotus' controlling interest is
expected to be temporary, is accounted for using the equity method. Use of
estimates and assumptions as determined by management is required in the
preparation of consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates and assumptions.
Cash equivalents:
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and original maturities of three months or
less at the date of acquisition.
Accounts receivable:
The allowance for doubtful accounts is based on management's evaluation of
outstanding accounts receivable at the end of the year. No allowance for
doubtful accounts has been provided, since management believes all accounts
are collectable.
Inventories:
Inventories are stated at the lower of cost (first in, first out) or market
(net realizable value). Given the volatility of the market for the Company's
products, the Company makes inventory write-downs for potentially excess and
obsolete inventory based on backlog and forecast demand. However, such backlog
and forecast demand is subject to revisions, cancellations, and rescheduling.
Actual demand will inevitably differ from such backlog and forecast demand,
and such differences may be material to the financial statements. Inventories
consist of principally of finished goods.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
2. Summary of Significant Accounting Policies (continued):
Currency translation:
Lotus translates the assets and liabilities of international non-U.S.
functional currency subsidiaries into dollars at the rates of exchange in
effect at the end of the period. Revenues and expenses are translated using
rates that approximate those in effect during the period. Gains and losses
from currency translation are included in stockholders' equity in the
consolidated balance sheets. Currency transaction gains or losses are
recognized in current operations and have not been significant to the Company's
operating results in any period.
Revenue and income recognition:
Lotus generally recognizes revenues from hardware sales at the time of shipment
and estimated product returns. When significant obligations remain after
products are delivered, revenue is only recognized after such obligations are
fulfilled.
Advertising costs:
Advertising costs are charged to expense when incurred. Advertising expenses
were $133,065, $45,082 and $1,000 for fiscal years 1999, 1998 and 1997,
respectively.
Goodwill:
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible assets of businesses acquired. Goodwill is
amortized on a straight-line basis over 10 years. Periodically, the Company
reviews the recoverability of goodwill.
In management's opinion, no material impairment exists at June 30, 1999.
Amortization expense was $5,805,441 in 1999, $1,067,544 in 1998 and $-0-
in 1997.
Equipment and depreciation:
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over their estimated useful lives ranging from 3 to
7 years. Depreciation expense for the years ended June 30, 1999, 1998 and
1997 was $397,787, $322,594 and $27,254, respectively.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
2. Summary of Significant Accounting Policies (continued):
Intangible asset:
Intangible asset consists of the acquisition of patents by the Company in June,
1997. The patents are carried at cost and amortized over the useful life of
17 years. Amortization expense for fiscal 1999, 1998 and 1997 was $341,765,
$341,765 and $28,480, respectively.
Research and development:
Research and development costs consist of expenditures incurred by the Company
during the course of planned search and investigation aimed at the discovery of
new knowledge which will be used to develop and improve its Internet access
product. The Company expenses all such research and development costs as they
are incurred.
Earnings per common share:
In 1997, the Financial Accounting Standards Board issued Financial Accounting
Standards No. 128 (FAS 128), "Earnings Per Share" which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike basic earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Dilutive earnings per share is very similar to the previously
reported fully diluted earnings per share. The Company adopted FAS 128 in
the second quarter of fiscal 1998. Share and per share amounts for all periods
presented have been restated to comply with FAS 128.
1999 1998 1997
----------- ----------- ------------
Net income (loss)............ $(10,047,071) $(2,648,865) $ 221,133
Shares used to compute net
income per common share..... 49,498,519 44,421,334 29,238,081
Shares used to compute net
income per common
share-diluted............... 57,498,519 50,374,256 39,328,081
Net income per common
share-basic................ $(.20) $(.06) $.01
Net income per common
share-diluted.............. $(.20) $(.06) $.00
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
3. Issuance of stock:
During the year ended June 30, 1999, the Company issued an aggregate of
17,157,670 shares of its common stock. 384,500 shares of common stock were
issued for cash consideration of $2,164,750, 22,500 shares of common stock
were issued for consulting services, and 16,750,670 shares of common stock
were issued to purchase four new subsidiaries.
During the year ended June 30, 1998, the Company issued an aggregate of
6,649,750 shares of its common stock. 536,000 shares of common stock were
issued for cash consideration of $2,072,000, 113,750 shares of common stock
were issued for consulting services, and 6,000,000 shares of common stock were
issued to purchase an additional 17% interest in Regent Electronics Corp.
During the year ended June 30, 1997, the Company issued 13,800,000 shares of
its common stock for aggregate cash consideration of $5,310,000.
4. Acquisitions:
Fiscal 1999:
During fiscal 1999, the Company acquired controlling interest in four
companies. The aggregate consideration for all transactions was approximately
$2,740,000 in cash and 16,750,670 shares of common stock. The acquisitions
are as follows:
TurboNet Communications:
On March 31, 1999 the Company acquired 81% of TurboNet Communications
outstanding common stock by exchanging 11,091,396 shares of its common stock
valued at $7.21 per share. The Company's stock is restricted and cannot be
sold until TurboNet achieves sales of $30 million and net income before income
taxes of $6 million. TurboNet manufactures and sells cable modems. During the
three months ended June 30, 1999 all of TurboNet's sales were to one customer,
and its finished goods were supplied by two manufacturers. The excess of the
purchase price and related costs over the value assigned to the net tangible
assets acquired was $78,190,640.
Arescom, Inc.:
On March 31, 1999 the Company acquired 81% of Arescom, Inc.'s outstanding
common stock by exchanging 4,159,274 shares of its common stock valued at $7.21
per share. The Company's stock is restricted and cannot be sold until Arescom
achieves sales of $15 million and net income before income taxes of $3 million.
Arescom manufactures and sells routers. The excess of the purchase price and
related costs over the value assigned to the net tangible assets acquired was
$28,069,302.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
4. Acquisitions (continued):
Professional Market Brokerage, Inc.:
On February 23, 1999 the Company acquired all of the outstanding securities of
Professional Market Brokerage, Inc. (PMB) for $240,000 in cash and 500,000
shares of the Company's common stock valued at $7.0625 per share. The common
stock is restricted with a three year holding period. PMB is engaged in the
futures and options brokerage industry. The excess of the purchase price and
related costs over the value assigned to the net tangible assets acquired was
$3,114,769. (See Note 15)
U.S. Securities and Futures Corp.
On February 23, 1999 the Company acquired all of the outstanding securities
of U.S. Securities and Futures Corp. (USSF) for $2.5 million in cash and
500,000 shares of the Company's common stock valued at $7.0625 per share.
USSF is engaged in the futures and options brokerage industry. The excess of
the purchase price and related costs over the value assigned to the net
tangible assets acquired was $5,949,675. (See Note 15)
Fiscal 1998:
Regent Electronics Corp.:
In April and May, 1997, the Company acquired 70% of the common stock of Regent
Electronics Corp. for $5,388,000. In September, 1997, the Company purchased an
additional 17% of the common stock of Regent Electronics Corp. through the
issuance of 6,000,000 shares of common stock. Regent Electronics Corp. was
incorporated to manufacture electronic Internet access software equipment to be
marketed and sold in the Far East. The accounts of Regent Electronics Corp.
are consolidated with the parent's (Lotus Pacific, Inc.) accounts.
LPF International Corp.:
In March, 1998, the Company formed LPF International Corp. for $1,300,000.
LPF International Corp. was incorporated to be a broker in the worldwide
textile and apparel business. The accounts of LPF International Corp. are
consolidated with the parent's (Lotus Pacific, Inc.) accounts.
Fiscal 1997:
Richtime Far East Ltd.:
In April, 1997, the Company formed Richtime Far East, Ltd. (a Hong Kong
corporation) with an investment of $600,000. Richtime Far East, Ltd. operates
as a broker in the worldwide textile and apparel business. The accounts of
Richtime Far East, Ltd. are consolidated with the parent's (Lotus Pacific,
Inc.) accounts.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998 AND 1997
4. Acquisitions (continued):
The following unaudited pro forma information represents the results of
operations of the Company as if the acquisitions had taken place on July 1,
1996. These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on the date
indicated, or which may result in the future.
The figures include amortization of goodwill as if the acquisitions had
taken place on July 1, 1996, and amounted to $13,774,937, $11,693,538 and
$10,625,994 in 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- -----------
<S> <C> <C> <C>
Sales....................... $44,208,167 $ 7,503,873 $ 1,464,915
Cost of sales............... 39,971,665 3,633,768 1,172,596
----------- ---------- ----------
Gross profit................ 4,236,502 3,870,105 292,319
Royalty income (Note 12).... 124,125 1,800,000 ---
Operating expenses:
Selling, general &
administrative expenses... 24,573,118 19,616,285 12,820,200
Research and development... 2,204,255 6,541,012 107,939
----------- ---------- ----------
26,777,373 26,157,297 12,928,139
Operating loss.............. (22,416,746) (20,487,192) (12,635,820)
Other income (expense):
Interest income............ 93,386 153,045 123,931
Interest expense........... --- (2,910) (4,708)
Gain on sale of investment. --- --- 398,805
Other income............... 64,310 81,887 21,599
Foreign exchange gain (loss) (366) (1,022) (1,507)
------------ ------------ -----------
157,330 231,000 538,120
Net income (loss) before income taxes,
minority interest in income of
consolidated subsidiary and
discontinued operations.... (22,259,416) (20,256,192) (12,097,700)
Income tax expense
(benefit) (Note 6)........ --- (122,024) 125,441
Minority interest in loss of
consolidated subsidiaries.. 1,656,460 1,372,105 378,275
Net income (loss)........... $(20,602,956) $(18,762,063) $(11,844,866)
============== ============= =============
Earnings (loss) per share:
Basic..................... $ (.42) $ (.42) $ (.41)
</TABLE>
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
5. Dispositions:
Fiscal Year 1999:
LPF International Corp. and Richtime Far East, Ltd.:
On September 30, 1998 the Company sold LPF International Corp. and Richtime
Far East Ltd. to an unrelated third party for $2,500,000. The Company recorded
a loss in the amount of $590,641on the dispositions and recorded the activity
of the two subsidiaries as discontinued operations. The 1998 and 1997 financial
statements have been restated to include the subsidiaries as discontinued
operations.
Fiscal Year 1997:
Shanghai Union Auto Bicycle Co., Ltd.:
On September 25, 1995 the Company exchanged 560,000 shares of its common stock
for a seventy percent equity interest in Shanghai Union (Shanghai Union) Auto
Bicycle Co., Ltd. in Shanghai Peoples Republic in China. At September 25,
1995 Shanghai Union had stockholders' equity of $204,721, 70% thereof was
$143,305.
On June 28, 1996 the Company exchanged its investment in Shanghai Union for 5%
of the outstanding common stock of Rightiming Electronics Corp. (Rightiming).
Rightiming was incorporated on January 4, 1996 to design and manufacture
electronic software and other products to be marketed in the Far East. Five
percent of Rightiming's stockholders' equity was $268,018 upon the date of
acquisition. The Company recorded its investment in Rightiming at the value
of its investment in Shanghai Union, on the date of the exchange, $172,395.
On May 6, 1997, the Company sold its 5% interest in Rightiming Electronics
Corp. for $571,200 and reported a gain of $398,805.
6. Income Taxes:
The Company and its subsidiaries do not file a consolidated federal income
tax return. Income taxes for the year ended June 30, consisted of the
following:
1999 1998 1997
---------- --------- ----------
Current:
Federal $ 0 $ (61,917) $ 92,120
State 0 (18,797) 31,722
---------- ---------- ---------
$ 0 $ (80,714) $ 123,842
The Company and its subsidiaries did not have any deferred tax items.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
7. Financial Instrument:
Cash accounts are secured by the Federal Deposit Insurance Corporation up to
$100,000. At June 30, 1999, 1998 and 1997, the uninsured balance was
$30,197,000, $2,743,480 and $56,199, respectively.
8. Capital Stock:
Common stock - $.001 par value, 100,000,000 shares authorized, 64,545,314,
47,387,644 and 40,737,894 shares issued and outstanding in 1999, 1998 and
1997, respectively.
Preferred stock, Series A - $.001 par value, 100,000 shares authorized, 4,300
shares issued and outstanding in 1999, 1998 and 1997, respectively
Common stock warrants - 8,000,000 warrants issued and outstanding in 1999 and
1998. Each warrant entitles the holder to purchase one share of the Company's
common stock at $3 per share. The warrants expire May 5, 2002.
9. Significant Customers:
For the year ended June 30, 1999, the Company and its subsidiaries had four
customers with billings in excess of 10% of total revenues. Of the total
revenue, Shanghai Hong Sheng Development Corp. accounted for $6,927,002
(16.3%), Allwell Technology $12,800,000 (30.2%), Taianshi Investment
Consulting, Inc. $6,000,000 (14.2%), and Tashiba Corp. $3,745,000 (8.8%).
For the year ended June 30,1998, the Company's subsidiaries had four customers
with billings in excess of 10% of total revenues. Of the total revenue,
Shanghai Hong Sheng Development Corp. accounted for $4,840,000 (26.2%), Full
Chance China Ltd. $2,749,000 (14.9%), and D&T Corp. $1,815,000 (9.8%).
10. Stock Options:
In May, 1997, the Company granted 1,090,000 options to certain officers, key
employees and/or consultants to the Company. Exercise price on the options is
$6.00 per common share, are 100% vested and expire five years from grant date.
All issuances were granted at the fair market value of the Company's common
stock at time of grant. As of June 30, 1999, 1998 and 1997, no options have
been exercised.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
10. Stock Options (continued):
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation which permits the use of the
intrinsic value method described in APB Opinion No. 25, Accounting for Stock
Issued to Employees, and requires the Company to disclose the pro forma
effects of accounting for stock-based compensation using the fair value method
as described in the optional accounting requirements of SFAS No. 123. As
permitted by SFAS No. 123, the Company will continue to account for stock-based
compensation under APB Opinion No. 25, under which the Company has recognized
no compensation expense.
Had compensation cost for the Company's stock options been determined based on
the fair value of the Company's common stock at the dates of awards under the
fair value method of SFAS No. 123, the Company's net income and net income per
common share would have been reduced to the pro forma amounts indicated below.
1999 1998
---------- -----------
Net income (loss):
As reported..................... $(10,047,071) $(2,648,865)
Pro forma....................... $(10,047,071) $(2,648,865)
Net income (loss) per common share:
As reported.................... $(0.20) $(0.06)
Pro forma...................... $(0.20) $(0.06)
Significant assumptions used to calculate the above fair value of the awards
are as follows:
Risk free interest rates of return 6.00%
Expected option life 60 months
Expected dividends $-0-
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
11. Commitments
The Company and its subsidiaries lease office space and equipment under
noncancelable lease agreements expiring at various dates through June 30, 2002
and provide, among other things, for minimum annual rentals, exclusive of
additional rentals which may be required for increases in certain operating
expenses and taxes. The minimum annual commitments, including estimated
additional rentals based on actual amounts paid during 1999, are as follows:
Years Ending June 30, Amount
--------------------- -------------
2000 $387,702
2001 399,027
2002 264,820
2003 69,925
Rent expense for the period to June 30, 1999 was $483,017.
12. Subsidiary Companies' Financial Information:
In 1999, the Company has two subsidiaries which account for more than twenty
percent of revenue and/or assets, Regent Electronics Corp. and Turbonet
Communications. In 1998 and 1997, Regent Electronics Corp. accounted for more
than twenty percent of the revenues and assets.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
12. Subsidiary Companies' Financial Information (continued):
Condensed financial information for Regent Electronics Corp.
at June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
BALANCE SHEETS
ASSETS
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Current assets............. $28,835,371 $ 7,232,436 $ 205,035
Property and equipment..... 962,011 1,281,029 1,564,334
Other assets............... 5,121,765 5,461,930 5,783,220
----------- ------------ -----------
$34,919,147 $13,975,395 $7,552,589
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities........ $23,167,208 $ 2,134,683 $ 38,539
Stockholders' deficit:
Common stock.............. 26,000 26,000 26,000
Preferred stock........... 1,500 1,500 ---
Stock warrants............ 1,500 1,500 ---
Additional paid-in capital 13,760,500 13,760,500 7,762,000
Accumulated deficit....... (2,037,561) (1,948,788) (273,950)
----------- ------------- -----------
11,751,939 11,840,712 7,514,050
$34,919,147 $13,975,395 $7,552,589
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
Sales...................... $ 32,485,165 $ 6,155,000 ---
Cost of sales.............. (29,171,209) (3,408,500) ---
Interest income............ 27,850 30,535 $ 2,563
Royalty income............. 124,125 1,800,000 ---
Operating costs and expenses (3,554,704) (6,251,873) (276,513)
------------ ------------ ---------
Net loss................... $ (88,773) $(1,674,838) $ (273,950)
============ ============ ===========
STATEMENTS OF CASH FLOWS
Cash flows provided
by operating activities... $ 3,911,697 $(3,914,716) $ (235,411)
Cash flows used
in investing activities... (5,660) (38,083) (7,347,554)
Cash flows from
financing activities...... --- 6,436,500 7,788,000
----------- ------------ -----------
Net increase in cash........ $ 3,906,037 $2,483,701 $ 205,035
=========== =========== ==========
</TABLE>
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
12. Subsidiary Companies' Financial Information (continued):
Condensed financial information for Turbonet Communications at June 30, 1999:
BALANCE SHEET
ASSETS
Current assets............. $ 5,644,228
Property and equipment..... 411,925
--------------
$ 6,056,153
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities....... $ 3,057,380
Stockholders' deficit:
Common stock............. 4,167
Preferred stock.......... 8,450,000
Accumulated deficit...... (5,455,394)
-----------
2,998,773
$ 6,056,153
===========
STATEMENT OF OPERATIONS
Sales..................... $ 3,745,688
Cost of sales............. (2,910,723)
Interest income........... 16,035
Other loss................ (1,487)
Operating costs and expenses (1,558,497)
-----------
Net loss.................. $ (708,984)
STATEMENT OF CASH FLOWS
Cash flows provided
by operating activities... $ 400,364
Cash flows used in
investing activities...... (190,673)
Cash flows from
financing activities...... 1,470,000
----------
Net increase in cash........ $1,679,691
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
13. Segment and Related Information:
In 1999, the Company and its subsidiaries have been aggregated into one
reportable segment: computer and internet products. In 1998, the reportable
segments were computer and internet related products and textiles. The textile
segment was sold in 1999 and reported as discontinued operations. In 1997,
the Company did not have sales.
The following table presents revenues by country based upon location of the
sale:
1999 1998 1997
--------- --------- ---------
China........ $34,569,315 $2,314,935 $ 0
United States $ 7,813,480 $3,840,000 $ 0
14. Minority Interest in Subsidiaries:
Two of the Company's subsidiaries have convertible preferred stock outstanding.
The convertible preferred stock is convertible on a one-to-one basis into the
subsidiaries' common stock which can be converted on a one-to-one basis into
Lotus Pacific's common stock at the option of the holder at any time. The
outstanding preferred shares are as follows:
Shares
------------------------
1999 1998
------------ ----------
Regent:
Preferred Shares............. 1,500,000 1,500,000
Turbonet Communications:
Preferred Series A........... 2,300,000 ---
Preferred Series B........... 250,000 ---
Preferred Series C........... 800,000 ---
---------- ---------
Total preferred shares......... 4,850,000 1,500,000
15. Partial Spin Off of Brokerage Industry Subsidiaries:
In June 1999, Lotus formed USS Online, Inc. and Professional Market
Brokerage, Inc. (PMB) (Note 4) and U.S. Securities and Futures Corp. (USSF)
(Note 4) were merged into USS Online, Inc. On June 28,1999, USS Online, Inc.
issued 4,000,000 shares of its common stock to Lotus Pacific, options to
purchase 5,000,000 shares of its common stock at $.10 per share to its
management and options to purchase 32,272,237 shares of its common stock at
$.01 per share to Lotus Pacific's shareholders of record on August 30, 1999.
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 AND 1997
16. Partial Spin Off of Brokerage Industry Subsidiaries (continued):
Lotus's total investment in PMB and USSF was $14,983,750 and the partial
spin off was accounted for as follows: dividend $11,714,822; compensation
$1,815,000; and investment in USS Online $1,453,928. The dividend was recorded
as a reduction of additional paid-in capital.
The two brokerage companies were acquired as part of management's plan to
offer the brokerage customers on-line services. Management believed that these
services would be provided in part with its Internet technology and computer
related products.
Subsequent to the acquisitions, management determined that the two brokerage
companies would not significantly contribute to the organization and began to
divest of its investment in the brokerage companies.
17. Investment Deposits:
At June 30, 1999 Lotus had received $44,695,000 from investors that were
negotiating with the Company to purchase stock of the Company and the Company's
subsidiaries. The negotiations had not been finalized as of the report date.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF LOTUS PACIFIC,INC. AND ITS SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 AND ARE QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 30,779,486 3,262,929
<SECURITIES> 0 0
<RECEIVABLES> 27,655,975 7,157,831
<ALLOWANCES> 0 0
<INVENTORY> 4,972,965 0
<CURRENT-ASSETS> 63,983,411 11,181,055
<PP&E> 3,104,090 1,710,509
<DEPRECIATION> 1,235,567 349,460
<TOTAL-ASSETS> 200,759,418 45,454,833
<CURRENT-LIABILITIES> 53,840,846 3,010,544
<BONDS> 0 0
0 0
4 4
<COMMON> 64,544 47,387
<OTHER-SE> 80,000 80,000
<TOTAL-LIABILITY-AND-EQUITY> 200,759,418 200,759,418
<SALES> 42,382,795 6,154,935
<TOTAL-REVENUES> 42,574,602 7,991,336
<CGS> 37,711,338 3,408,377
<TOTAL-COSTS> 52,385,128 11,458,301
<OTHER-EXPENSES> 1,487 46,259
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 46,259
<INCOME-PRETAX> (9,812,013) (3,513,224)
<INCOME-TAX> 0 (80,714)
<INCOME-CONTINUING> (9,812,013) (3,432,510)
<DISCONTINUED> (643,658) 565,916
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,047,071) (2,648,865)
<EPS-BASIC> (0.20) (0.06)
<EPS-DILUTED> (0.20) (0.06)
</TABLE>
