UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
Amendment No. 2
(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
LOTUS PACIFIC, INC
(Exact name of registrant as specified in its charter)
Delaware
(State of Organization)
52-1947160
(I.R.S. Employer Identification Number)
200 Centennial Avenue, Suite 201, Piscataway, New Jersey 08854
(Address of principal executive offices)
(732) 885-1750
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.001 per share
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.
(1) Yes X No (2) 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. ( )
As of March 22, 2000, the aggregate market value of the shares of Common
Stock (based on the last sale price of the Common Stock on the OTC Bulletin
Board on that date) held by non-affiliates of the Registrant was approximately
$450 million.
As of March 22, 2000, there were 64,344,474 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.
---------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
None
LOTUS PACIFIC, INC.
INDEX
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
Summary
Lotus Pacific, Inc. ("LPFC") is a holding company focused on investing in and
managing, developing and operating a network of subsidiaries which develop and
/or supply products or services that use or support Internet technology. As a
player in today's Internet revolution, LPFC and its subsidiaries (the
"Company") are capitalizing on the abundance of opportunities in this fast-
growing marketplace. LPFC traces its roots as a holding company to 1997 when it
acquired a controlling interest in technology-based Regent Electronics
Corporation ("REC"). It has subsequently pursued its strategy of investing in
Internet-related companies by acquiring majority interests in TurboNet
Communications ("TurboNet"), Arescom Inc. ("Arescom"), and Lotus World, Inc.
("Lotus World"). The Company today is engaged in the development, manufacture
and distribution of devices used in supplying high-speed Internet access,
including cable modem and Digital Subscriber Line ("DSL") devices and Internet
set-top boxes, and in providing private label online auction services.
LPFC was incorporated under the laws of the State of Delaware on June 25, 1985
as Quatech, Inc. In September 1994, LPFC reorganized and changed its name to
Lotus Pacific, Inc.
Recent Developments
In order to concentrate on its Internet-related products and services, on
September 30, 1998, the Company sold all of its textile and apparel business
(LPF International Corp. and Richtime Far East, Ltd.) to an unrelated purchaser
for an aggregate of $2.5 million in cash.
On February 23, 1999, LPFC acquired all of the outstanding stock of US
Securities & Futures Corp. ("USSF"), a New York-based securities firm which
offers online securities trading and other financial and brokerage services,
and Professional Market Brokerage, Inc. ("PMB"), a Chicago-based financial
trading firm that provides online trading services from an advanced Internet-
based system. Total consideration in the two transactions consisted of $2.74
million in cash and 1,000,000 shares of LPFC's Common Stock. Subsequent to the
acquisitions, LPFC determined that the acquired entities would not
significantly benefit from association with LPFC's Internet technology and
resources and began to seek methods to divest itself of control and reduce its
investment in them. To facilitate a disposition, on June 28, 1999, LPFC
transferred ownership of both entities to USS Online, Inc., which was newly-
formed by LPFC for this purpose.
On March 31, 1999, LPFC acquired 81% of the capital stock of TurboNet, a
developer of advanced digital communications products for the cable and
satellite industries, for $80 million of LPFC's Common Stock. LPFC also
agreed to provide TurboNet with $20 million in working capital. TurboNet, based
in San Diego, California, designs, develops and markets telecommunications
products to cable operators, network service providers and communications
network users in the United States and East Asia. The acquisition is expected
to enable the Company to expand its product line and customer base.
On March 31, 1999, LPFC acquired 81% of the capital stock of Arescom, based
in Fremont, California, for $30 million of LPFC's Common Stock. LPFC also
agreed to provide Arescom with $10 million in working capital. 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 for the PSTN, ISDN, xDSL and Ethernet environments. Its
principal customers are Internet service providers (ISPs), resellers, and
system integrators in North America.
On April 22, 1999, LPFC organized Lotus World to offer AuctionLive, an online
auction service, to international clients.
On September 1, 1999, LPFC entered into a 50-50 joint venture with TCL
Holdings (BVI) Ltd., to develop, manufacture and market Internet and network
products and services in The Peoples Republic of China ("PRC"). TCL Holdings
(BVI) is a subsidiary of TCL Group, one of PRC's largest electronics
manufacturers.
Strategy
LPFC's strategy for growth is threefold:
First, LPFC seeks to develop new and enhanced products and services through
research and development programs. 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 $0.1 million for the years ended June 30, 1998 and 1997,
respectively;
Second, LPFC has increased its product line and customer base through
acquisition of businesses which provide Internet-related products and services
and are believed to benefit from association with the Company's Internet
technology and resources; and
Third, LPFC intends to increase its customer base by developing joint ventures
and strategic alliances with leading electronics and technology businesses
in PRC.
A number of the Company's products, such as its TeleWeb cable system and
TeleWeb A9000 set-top boxes have been designed primarily for PRC markets. These
products (1) provide access to Internet data independent of ISP and local phone
charges; (2) utilize existing networks without the need for new infrastructure
investments; (3) provide for information access control by operators or by
government agencies (which is an important factor for PRC markets and for other
Asian countries); and (4) are NTSC and PAL TV system compatible.
The Company is currently negotiating with several government-run cable TV
operators in PRC to install its TeleWeb system and distribute TeleWeb set-top
boxes to cable TV subscribers.
Sales and Markets
Markets
The Company sells its products in the United States and abroad, primarily
through direct wholesalers, relationships with original equipment manufacturers
("OEM"), strategic alliances and distributors. In the year ended June 30, 1999
("Fiscal 1999"), approximately 18% of the Company's consolidated sales were
made to customers in the United States and approximately 82% of the Company's
consolidated sales were made to customers in PRC.
Customers
During Fiscal 1999, sales to each of four of the Company's customers accounted
for more than 8% of the Company's total revenues, and the combined sale to all
four of these customers accounted for approximately 71% of the Company's total
revenues. The consolidated sales to these four, Allwell Technologies Corp.,
Shanghai Hong Sheng Development Corp., Tianshi Investment Corp. and Toshiba
Corp., amounted to approximately $12.8 million (30.2%), $6.9 million (16.3%),
$6.0 million (14.2%), and $3.8 million (8.8%), respectively.
These four customers typically purchased products from the Company pursuant to
a few large purchase orders. The Company does not have written agreements for
ongoing and continued sales with specified minimum quantities. As a result,
although the Company believes that its relations with these customers are good,
there are no assurances of continued sales to these customers. The loss of any
of these customers, in management's opinion, could have a material adverse
impact on the Company.
The Company is currently working to diversify its customer base. It recently
started full production of cable modems and believes that sales of such modems
should help cushion any adverse affect caused by reduction in orders from the
Company's four largest customers.
Products
REC Products. REC designs, develops, manufactures (through subcontractors) and
markets Internet-related products and services to electronics manufacturers,
commercial cable-TV networks, hotels, and individual customers. Its principal
products are TeleWeb systems and WonderTV/TeleWeb set-top boxes.
TurboNet Products. 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.
Arescom Products. 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 ISPs, resellers, and system integrators.
Lotus World Services. Lotus World will offer AuctionLive, a private label
hosted online auction site to international clients. AuctionLive has a
language-independent architecture, which allows businesses to auction their
products in almost any language.
Manufacturing
The Company does not maintain its own manufacturing facilities but instead
contracts with several manufacturers in Taiwan and PRC to supply its products.
To date, the Company has not experienced any material difficulties or delays
in the manufacture and assembly of the products or significant returns due
to product defects.
Trademarks and Patents
The Company currently holds trademarks, copyrights and patent licenses of
Amiga-Commodore in PRC, Taiwan, Hong Kong, Macao and the bordering countries
between PRC and the former Soviet Union.
Employees
As of June 30, 1999, the Company had approximately 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. To date the Company has not had any of its
operations interrupted due to labor disputes, and it considers its working
relationship with employees and workers to be good.
Risk Factors
Dependence on Third Party Manufacturers
The Company does not maintain manufacturing facilities and contracts with third
party manufacturers in Taiwan and PRC for the supply of its products. 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. In the event that any of such third party manufacturers were unable
to manufacture the Company's products, the Company believes that alternative
manufacturing arrangements could be established without material interruption
in production of its products.
Backlog
The Company's general practice is to contract with third party manufacturers
to fill orders within delivery dates required by customers, with some
adjustments based on the Company's anticipation of demand. Substantially all
of the Company's products are produced in accordance with specifications and
production schedules determined by the Company based on orders placed by its
primary customers. The amount of unfilled orders at a particular time is
affected by a number of factors, including availability of finished inventory,
manufacturing and assembly capabilities of third party manufacturers and
product shipments. Accordingly, backlog from period to period is not
necessarily meaningful and may not be indicative of actual shipments to be
made to customers in any period.
Dependence on Key Personnel
LPFC and each of its subsidiaries are run by a small number of key
management personnel, the loss of certain of whom could have a material
adverse impact on the Company. The Company believes that its future success
will depend in large part on its continued ability to attract and retain
highly-skilled and qualified personnel.
Dependence on Certain Customers
The loss by the Company of any of its four largest customers could have a
material adverse impact on its revenues and potential profits. See "Customers".
Competition
The Internet-related products industry is highly competitive and is
characterized by rapid technological advances, frequent new product
introductions, evolving industry standards and competitive pricing. As a
developer and supplier of Internet-related products and services, the Company
encounters substantial competition from a number of firms, many of which have
longer operating histories, immensely greater financial resources, established
markets and more extensive facilities. New companies are entering this market
constantly.
The Company's ability to anticipate technological changes and introduce
enhanced products on a timely basis will be a significant factor in its ability
to expand and remain competitive. The Company believes that it enjoys a
strong competitive position because of its strong relationships with the major
resellers in PRC and its technological and new product development
capabilities. There can be no assurance, however, that competitors will not be
able to develop products compatible with, or as 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.
Considerations Relating to the Company's Business Outside of the United States
The Company conducts a substantial portion of its sales activities in PRC. It
purchases all of its products from manufacturers in PRC (including Hong Kong
and Macao) and Taiwan.
Importation of Products and Tax Considerations. The importation of the
Company's products into the United States and other jurisdictions in which
the products are sold is subject to numerous risks including non-Company
related labor strikes, shipping delays, fluctuation in currency exchange rates
and import duties. There can be no assurance that the United States, PRC,
Taiwan or other countries will not impose trade restrictions in the future
which could adversely affect the Company's operations. The United States duty
on imported products of the type that the Company sells from countries of
origin which enjoy United States normal trading relations ("NTR") status
(formerly known as "most favored nation status") range from 3% to 4%. There
are currently no United States import quotas on the type of products
manufactured and distributed by the Company. NTR status entitles imports from
PRC to enter the United States subject to the same rate of duty which applies
to imports from other NTR countries. PRC's current NTR status was renewed on
July 22, 1998, with such status to be reviewed annually. The President may
recommend that NTR status for PRC be extended for successive 12-month periods,
but the Company can give no assurances or make any predictions as to what
actions the President may take regarding PRC's NTR status.
As a result of trade disputes between the United States and PRC, the United
States Trade Representative ("USTR") has published lists of products imported
from PRC that are potentially subject to increased tariffs in the event the
trade dispute is not resolved. At the present time, there are no pending
trade disputes in connection with which such lists have been published. The
United States has published such a list, which did not include products of the
type imported by the Company, in connection with a dispute over intellectual
property rights protection in PRC, but the two sides settled that dispute on
February 26, 1995 by reaching a comprehensive agreement designed to ensure
greater protection for U.S. intellectual property in PRC. The United States
revisited the intellectual property rights issue in 1996, publishing a proposed
retaliation list which focused on PRC textile exports, before reaching an
accord on June 17, 1996, to strengthen enforcement of the 1995 agreement.
In addition, the United States is currently monitoring various PRC practices
including trade, investment and government procurement, as well as PRC's
compliance with various multilateral and bilateral agreements. The Company
cannot predict whether the United States will take future trade actions
against PRC that may result in increased tariffs against PRC products
including products imported by the Company.
PRC is currently engaged in talks concerning its possible accession to the
World Trade Organization ("WTO"). Successful conclusion of these talks could
result in the application of comprehensive rules to the PRC's trade with other
WTO members, including the United States. However, the Company cannot predict
when such talks may conclude, or when such rules may come into effect.
Furthermore, PRC accession to the WTO would not necessarily eliminate the need
for successive yearly determinations by the United States regarding PRC's NTR
status.
The Company believes that so far there is no applicable restrictions of sales
or technology transfer related to the Company's products.
PRC Taxes and Import/Export Duties. The Company has never paid any income or
turnover tax to PRC on account of its business activities in PRC. Existing PRC
statutes can be construed as providing for a minimum of 10% to 15% income tax
and a 3% turnover tax on the Company's business activities; however, PRC has
never attempted to enforce such statutes. The Company has been advised that
PRC's State Tax Bureau is reviewing the applicability of those statutes to
processing activities similar to those engaged in by the Company, but it has
not yet announced any final decisions as to the taxability of such activities.
After consultation with its tax advisors, the Company believes that any tax
exposure it may have on account of its operations in PRC will not be material
to its financial condition. The Company does not pay import/export duties to
PRC, but, as with any tax, there can be no assurance that the Company will not
be required to pay such duties in the future.
Risk of Expropriation and Restrictions. There is a risk of expropriation of
the Company's assets by PRC and the imposition of restrictions or embargoes on
the export of finished products, or the import of components and materials used
in the Company's PRC operations. Although the total value of Company's assets
in PRC is not material, the amount of Company assets in PRC may increase as
operations in that country continue to grow. If the Company were required to
relocate and could not remove the assets it owns or leases in PRC, the cost of
replacement of such assets would be immaterial to the Company's financials.
Interruptions as a Result of Political Events. There can be no assurance that
political events (such as the Tiananmen Square incident in PRC in June 1989)
will not occur in PRC in the future or that hostilities or economic conflict
between PRC and Taiwan will not occur, and, if they do occur, that they will
not result in material interruption of the Company's manufacturing or other
operations.
Forward-Looking Statements
The statements contained in this report that are not historical facts are
"forward-looking statements" (as that term is defined in Section 21E of the
Securities Exchange Act of 1934) which can be identified by the use of
forward-looking terminology such as; "estimates," "projects," "anticipates,"
"expects," "intends," "believes," or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. The Company's actual results could differ
materially from those anticipated in such forward-looking statements.
Management cautions the reader that these forward-looking statements, such as
statements regarding development of the Company's business, the Company's
anticipated capital expenditures and other statements contained in this report
regarding matters that are not historical facts are only estimates or
predictions. No assurance can be given that future results will be achieved;
actual events or results may differ materially as a result of risks facing
the Company or actual results differing from the assumptions underlying such
statements. In particular, expected revenues could be adversely affected by
production difficulties or economic conditions adversely affecting the market
for the Company's products.
ITEM 2. PROPERTIES
United States. The Company's principal office is located at 200 Centennial
Avenue, Piscataway, New Jersey and consists of approximately 9,400 square feet
under a lease that expires in June 4, 2002. REC's offices and its research and
development facility are located at the Company's principal office. TurboNet
and Arescom lease office space in San Diego, California (13,013 square feet)
and Fremont, California (11,435 square feet) respectively.
The following table summarizes the Company's leases for offices and other
facilities in the United States:
Location Lease Term Commence Date Expiration Date
- -------------- -------------- ---------------- --------------------
Piscataway 5 years June 5, 1997 June 4, 2002
New Jersey
Middlesex Annual June 5, 1999 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
Other Jurisdictions. REC also leases technical support and marketing/sales
office spaces in Shanghai, PRC.
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
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 1999.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
LPFC's common stock, par value $0.001 per share ("Common Stock"), has been
traded on the OTC Bulletin Board under the symbol "LPFC" since December 1,
1994. The approximate high and low closing prices of the Common Stock tabulated
below are as reported on the OTC Bulletin Board and represent inter-dealer
quotations which do not include retail mark-ups, mark-downs or commissions.
They do not necessarily represent actual transactions. As of March 22, 2000,
there were 64,344,474 shares of Common Stock issued and outstanding, held by
approximately 500 record holders. LPFC believes that there are a greater
number of beneficial owners of Common Stock.
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
September 30, 1999..... $15.00 $11.00
December 31, 1999...... $11.00 $ 9.00
LPFC has not paid any cash dividends on its Common Stock for the past five
years and has no present intention to pay cash dividends.
Recent Sales of Unregistered Securities
LPFC believes that the transactions set forth below were exempt from
registration under Section 4(2) of the Securities Act. In each transaction, the
shares were sold to a limited number of institutional and individual investors
who were provided with access to all relevant information regarding the
Company. Each investor represented to LPFC that the shares purchased were
acquired for investment and would not be resold except in compliance with the
Securities Act. Restrictive legends were placed on all the stock certificates
issued.
On February 8, 1998, H&Q Asia Pacific Ltd. and its affiliate Asia Pacific
Growth Fund II, L.P. (collectively "H&Q") purchased 1.5 million shares of
preferred stock of REC (approximately 5.5% of REC's capital stock) and warrants
to purchase $6 million of REC's common stock. The REC stock held by H&Q may
be converted, subject to certain conditions, into Common Stock of LPFC.
On February 12, 1999, LPFC issued 500,000 shares of its Common Stock to
Mr. Stefan H. Benger, the sole shareholder of PMB, as part of the consideration
for LPFC's acquisition of PMB.
On February 15, 1999, LPFC issued 500,000 shares of its Common Stock to
Travelway International Inc. ("Travelway"), the sole shareholder of USSF, as
part of the consideration for LPFC's acquisition of USSF.
As of March 31, 1999, LPFC issued 11,091,396 shares of its Common Stock to 45
shareholders of TurboNet in exchange for 81% of the outstanding common stock
of TurboNet. The LPFC Common Stock may not be resold, in whole or in part,
until TurboNet's annual gross revenues exceed $30 million with annual pretax
net profit of not less than $6 million.
As of March 31, 1999, LPFC issued 4,159,274 shares of its Common Stock to 35
shareholders of Arescom in exchange for 81% of the outstanding common stock of
Arescom. The LPFC Common Stock may not be resold, in whole or in part, until
Arescom's annual gross revenues exceed $15 million with annual pretax net
profit of not less than $3 million.
During Fiscal 1999, LPFC sold a total of 384,500 additional shares of its
Common Stock to six accredited investors for aggregate consideration of
$2,164,750. LPFC also issued 22,500 shares of Common Stock for consulting
services.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
related notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
---------------------------------------------
FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- ---------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
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..... 10,643 3,678 224 18 17
Research and Development....... 2,215 4,372 104 --- ---
------- --------- -------- --------- -------
Total operating expenses....... 12,859 8,050 328 18 17
Operating income (loss)........ (8,063) (3,503) (328) (18) (17)
Other income (expenses), net... 1,142 (10) 413 40 3
Net income (loss) before income
taxes, minority interest, interest
in income of consolidated subsidiary
and discontinued operations.... (6,922) (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).............. $(7,157) $(2,649) $ 221 $ 22 $ (14)
========= ========= ========= ======== ========
Net income (loss) per share
Basic....................... $(0.15) $(0.06) $ 0.01 $0.00 $0.00
Diluted .................... $(0.15) $(0.06) $ 0.00 $0.00 $0.00
Weighted average
shares outstanding............ 49,032 44,421 29,238 26,799 26,860
AT JUNE 30
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- --------- -------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...... $30,799 $ 3,263 $ 357 $ 213 $ 221
Working capital................ 10,143 8,171 1,052 213 221
Total assets................... 207,763 45,455 8,404 385 221
Long-term obligations.......... --- --- --- --- ---
Total shareholders' equity..... $145,410 $ 35,875 $ 5,917 $ 385 $ 217
========== ========== ========= ========= ========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
BUSINESS ACQUISITIONS
The Company completed the following transactions during the fiscal year ended
June 30, 1999 ("Fiscal 1999").
On February 23, 1999, LPFC acquired all of the outstanding securities of
Professional Market Brokerage, Inc. (PMB) for $240,000 in cash and 500,000
shares of LPFC'S Common Stock valued at the market price of $7.0625 per share
at the time of the acquisition. The excess of the purchase price and related
costs over the value assigned to the net tangible assets acquired was
$3,114,769. Subsequent to the date of acquisition, as required by the terms of
the acquisition, LPFC invested an additional $3,518,750 of its Common Stock
in PMB.
On February 23, 1999, LPFC 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 LPFC's Common Stock valued at the market price of $7.0625 per share at the
time of the acquisition. The excess of the purchase price and related costs
over the value assigned to the net tangible assets acquired was $5,949,675.
Subsequent to the date of acquisition, as required by the terms of the
acquisition, LPFC invested an additional $250,000 in USSF.
On March 31, 1999, LPFC acquired 81% of TurboNet's outstanding common stock in
exchange for $80 million of LPFC's Common Stock valued at the market price of
$7.21 per share at the time of the acquisition. The excess of the purchase
price and related costs over the value assigned to the net tangible assets
acquired was $78,190,640.
On March 31, 1999, LPFC acquired 81% of the Arescom's outstanding common stock
in exchange for $30 million of LPFC's Common Stock valued at the market price
of $7.21 per share at the time of the acquisition . The excess of the purchase
price and related costs over the value assigned to the net tangible assets
acquired was $28,069,302.
On April 22, 1999, LPFC organized Lotus World to offer AuctionLive, an online
auction service, to multinational clients.
Subsequent to the acquisitions of PMB and USSF, LPFC determined that the
acquired entities would not significantly benefit from association with the
Company's Internet technology and resources and began to seek methods to divest
itself of control and reduce its investment in them. To facilitate a
disposition, on June 28, 1999, LPFC transferred ownership of both entities to
USS Online, Inc., a wholly-owned subsidiary which was organized by LPFC for
this purpose.
On September 1, 1999, LPFC entered into a 50-50 joint venture with TCL Holdings
(BVI) Ltd., to develop, manufacture and market Internet and network products
and services in PRC. TCL Holdings (BVI) is a subsidiary of TCL Group, one of
China's largest electronics manufacturers.
Fiscal 1998:
In April and May 1997, LPFC acquired 70% of the common stock of Regent
Electronics Corp. for $5,388,000. In September 1997, LPFC purchased an
additional 17% of the common stock of REC in exchange for 6,000,000 shares of
LPFC's Common Stock valued at the market price of $5.00 per share at the time
of the exchange. REC 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 LPFC'S accounts.
In March 1998, LPFC organized and invested $1.3 million in LPF International
Corp. to operate as a broker in the worldwide textile and apparel business.
LPF International Corp. was sold on September 30, 1998.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
Revenues. Total revenues for Fiscal 1999 increased by $34.6 million or 434% to
$42.5 million compared to revenues of $7.9 million for the fiscal year ended
June 30, 1998 ("Fiscal 1998"). The increase in revenues resulted primarily
from sales of REC's newly introduced TeleWeb A9000 set-top box and the sales
of cable modems and routers by TurboNet and Arescom, subsidiaries acquired by
LPFC in the third quarter of Fiscal 1999.
In Fiscal 1999, REC's revenues amounted to $32.6 million (approximately 76.7%)
of the Company's total revenues, LPFC's revenue amounted to $6 million
(approximately 14.1%) of the Company's revenue, TurboNet's cable revenues
amounted to $3.75 million (approximately 8.8%) of the Company's total revenues
and Arescom's revenues amounted to $151,942 (approximately 0.4%) of the
Company's total revenues. The Company also had royalty revenue of $124,125
(approximately 0.4%) in Fiscal 1999, compared to $1.8 million in Fiscal 1998.
The royalty revenue was from non-refundable, one-time fees that permitted third
parties to market and distribute the Company's products in the PRC. The Company
expects that royalty income will be insignificant in the future since the
Company is discontinuing the practice of charging third parties such royalty
fees.
Discontinued Operations. On September 30, 1998, LPFC sold all of its textile
and apparel businesses (LPF International Corp. and Richtime Far East, Ltd.) to
an unrelated third party for $2.5 million in cash in order to concentrate on
Internet-related products and services. In Fiscal 1999, the Company had an
operating loss of $53,017 from discontinued operations and also recorded a loss
of $590,641 on sale of subsidiaries. The Company's 1998 and 1997 financial
statements have been restated to reflect the textile and apparel businesses as
discontinued operations.
Operating Expenses. Operating expenses, consisting of selling, general and
administrative expenses, increased by $6.9 million or 189%, to $10.6 million
in Fiscal 1999, compared to operating expenses of $3.7 million in Fiscal 1998.
The increase is primarily attributable to (1) goodwill amortization expenses of
$5.8 million, or 54.7% of the total operating expenses in connection with the
acquisition by the Company of controlling interests in TurboNet, Arescom, USSF
and PMB and (2) operating expenses of TurboNet and Arescom, which were acquired
in Fiscal 1999.
Research and Development Expense. For Fiscal 1999, research and development
expenses decreased by $2.2 million, or 49%, to $2.2 million compared to
research and development expenses of $4.4 million in Fiscal 1998. The decrease
is primarily attributable to completion of the initial stage of development of
the TeleWeb set-top box project.
Net Income (Loss). As a result of the factors discussed above, the Company's
net loss increased by $4.5 million to $7.2 million, or $0.15 per diluted share,
in Fiscal 1999 compared to a net loss of $2.6 million, or $0.06 per diluted
share, in Fiscal 1998. Excluding goodwill amortization expenses, the Company
had a net loss of $1.35 million in Fiscal 1999, or $0.03 per diluted share.
Income Taxes. The Company's loss in Fiscal 1999 may be used to offset future
earnings, although there is no assurance that future operations will produce
taxable earnings. Net operating loss carryforwards cannot be used to offset
certain alternative minimum tax elements under the Internal Revenue Code.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues for Fiscal 1998 increased $8.0 million compared to
revenues of zero for the fiscal year ended June 30, 1997 ("Fiscal 1997") as
restated to reflect the textile and apparel businesses as discontinued
operations. Revenues for Fiscal 1998 were attributable primarily to
commencement of operations of REC in April 1997.
In Fiscal 1998, REC's revenues amounted to $6.2 million (approximately 77.5%
of the Company's total revenues). Royalty revenue (attributable to a non-
recurring lump-sum royalty payment) amounted to $1.8 million (approximately
22.5% of the Company's total revenues).
Operating Expenses. Operating expenses, consisting of selling, general and
administrative expenses, increased by $3.45 million or 1,540% to $3.68 million
in Fiscal 1998 compared to operating expenses of $223,911 in Fiscal 1997. The
increase is primarily attributable to (1) commencement of operations of REC in
April 1997 and (2) goodwill amortization expenses of $1.07 million or 13% of
the total operating expenses, attributable to the acquisition by the Company of
an additional 17% interest in REC in September, 1997.
Research and Development Expense. For Fiscal 1998, research and development
expenses increased by $4.27 million to $4.37 million compared to research and
development expenses of $103,870 in Fiscal 1997. The increase is primarily
attributable to the institution of a program to develop the TeleWeb system and
TeleWeb/WonderTV set-top boxes.
Net Income (Loss). As a result of the factors discussed above, the Company had
a net loss of $2.65 million, or $0.06 per diluted share, in Fiscal 1998,
compared to net income of $221,133 in Fiscal 1997.
Income Taxes. As of June 30, 1998, the Company had net operating loss
carryforwards for U.S. tax purposes of approximately $6.8 million. Net
operating loss carryforwards cannot be used to offset certain alternative
minimum tax elements under the Internal Revenue Code.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $10.1 million, compared
to $8.17 million and $1.05 million at June 30, 1998 and 1997, respectively.
Net cash used by operating activities totaled $18.8 million in Fiscal 1999.
This amount reflected the increase in accounts receivable ($20.5 million),
inventories ($5.0 million), depreciation and goodwill amortization
($4.5 million), resulting from acquisitions in Fiscal 1999 and the substantial
increase in REC's business during Fiscal 1999 as compared to its first full
year of operations in Fiscal 1998. Net cash provided by operating activities
for Fiscal 1998 totaled $868,063. The sale of discontinued operations provided
the Company with $2.5 million of proceeds in Fiscal 1999.
The Company's principal funding source has been and is expected to continue to
be private sales of stock of LPFC and certain subsidiaries. In Fiscal 1999,
cash flow from financing activities totaled $2.4 million, net of deposits of
$44.7 million which had been received as of June 30, 1999 in connection with a
proposed sale of stock but were subsequently refunded.
The Company believes that its existing cash and cash equivalents together with
funds generated from pending sales of stock of certain subsidiaries and from
operations will be sufficient to meet its working capital requirements for the
next 12 months. However, the Company's continuing operating and investing
activities may require the Company to obtain additional sources of financing.
There can be no assurance that any necessary additional financing will be
available to the Company on commercially reasonable terms, if at all.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have date-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. To date, the Company has not
experienced any significant Year 2000 problems.
The Company has established a program to minimize the impact of the Year 2000
date change on the Company's products, information technology systems,
facilities and production infrastructure. The Company has already substantially
upgraded its internal systems to address the Year 2000 issue. The Company has
also contacted and will continue to contact its suppliers, financial
institutions, and other organizations to ensure that those parties will be Year
2000 Compliant.
As of December 31, 1999, the Company had completed its Year 2000 compliance
program. In connection with this program, the Company incurred internal costs
consisting of employee time and external costs consisting of outside consultant
fees, none of which were material in amount.
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share", issued by the Financial Accounting Standards Board, is effective
for earnings per share calculations and disclosures for periods ending after
December 15, 1997, including interim periods, and requires restatement of all
prior period earnings per share data that is presented. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share,"
and provides reporting standards for calculating "Basic" and "Diluted" earnings
per share. The Company does not believe the adoption of SFAS No. 128 will have
a material impact on its earnings per share computations.
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income" issued by the Financial Accounting Standards
Board, which is effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting comprehensive income and its components
with the same prominence as other financial statements. The Company does not
believe that the adoption of SFAS No. 130 will have a material impact, since
the Company does not have any items of comprehensive income in the periods
presented.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related Information", issued
by the Financial Accounting Standards Board, which is effective for fiscal
years beginning after December 15, 1997, 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.
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative and Hedging Activities", issued by the Financial
Accounting Standards Board, which is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not believe the adoption of SFAS No. 133 will have a material
impact on its future earnings computations. See Item. 7A: "Quantitative and
Qualitative Disclosure about Market Risk"
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities", which is effective for fiscal years beginning after December 15,
1998, established standards for reporting of start-up and organization costs
and requires that such costs be expensed as incurred. The Company does not
believe the adoption of the SOP will have a material impact on the Company's
financial statements.
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 is not material.
Item 8. Financial Statements
The information required by this Item 8 is included separately in this report.
Item 9. Changes in and Disagreements with Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
LPFC's directors and executive officers and their respective ages and positions
as of June 30, 1999 and as of March 22, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Date Appointed Position
- -------------------- -------- ------------------- ---------------------
<S> <C> <C> <C>
James Yao........... 47 Jan. 1997 Chairman
Jeremy Wang ........ 45 March 1999 President & Director
David Li ........... 35 July 1999 Chief Financial Officer
David Leung......... 55 Jan. 1997 Vice President & Director
James Liu........... 46 Jan. 1997 Vice President & Director
Thomas V. White..... 47 March 1999 Vice President
Stefan H. Benger.... 33 March 1999 Vice President
Harold Tuan......... 46 March 1999 Vice President
Max Lu.............. 46 March 1999 Vice President
De-Liang Wang....... 43 March 1999 Vice President
Richard Ho.......... 45 March 1999 Vice President
C. Jeffrey Gull..... 36 March 1999 Vice President
Simon Gu............ 45 Sept. 1997 Director
Johnson Chang....... 46 March 1999 Director
Gary Huang.......... 45 Jan. 1997 Secretary & Director
Huaya Lu Tung* ..... 46 March 1999 Treasurer
* Ms. Tung served as an officer during Fiscal 1999 and resigned from her
position on February 7, 2000.
</TABLE>
JAMES YAO has been Chairman of LPFC's Board of Directors since January 1997.
He also served as President of LPFC from December 1996 until March 1999. He
has over 16 years of business experience in multinational companies, most
recently with Yao Investment Corp. from January 1999 to the present and Lotus
International Holdings Corp., where he served as President since December 1996.
JEREMY WANG was appointed President of LPFC in March 1999. He was elected as
a Director of LPFC in 1997. Prior to joining LPFC, Mr. Wang worked for AT&T
from September 1991 to March 1999.
DAVID LI has been Chief Financial Officer of LPFC since July 1999. Mr. Li was
Chief Financial Officer at US Business Network from January 1999 to July 1999.
Prior to that time, he advised investment banking clients in corporate
financings and mergers and acquisitions at Donaldson, Lufkin and Jenrette from
March 1997 to January 1998, and managed venture capital investments at Walden
Group from January 1995 to September 1997.
DAVID LEUNG has been a Director and Vice President of LPFC since January 1997.
Prior to joining LPFC, he served as General Manager of Shenzhen New Technology
Development Co., Ltd. in Shenzhen, China from January 1993 to March 1995. He
is a director of Lotus International Holdings Corp. since 1997.
JAMES LIU has been a Director and Vice President of LPFC since January 1997.
Prior to joining LPFC, Mr. Liu served as President of JBL International Inc.,
an apparel agent in New York, from January 1996 to the present. He has also
been a director of Lotus International Holdings Corp. since 1997.
THOMAS V. WHITE has been a Vice President of LPFC since March 1999. Before
joining LPFC, Mr. White was President of USSF from December 1995 to March 1999.
Since the acquisition of USSF by LPFC, Mr. White has also been President of
USSF.
STEFAN H. BENGER has been a Vice President of LPFC since March 1999. Mr. Benger
has been the Chief Executive Officer and Chairman of PMB since November 1995
and following the acquisition of PMB by LPFC he has continued to serve as
President of PMB.
HAROLD TUAN was appointed as Vice President of LPFC and a director of TurboNet
Communications in March 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 founded TurboNet in February
1996 and currently serves as its President.
MAX LU was appointed as Vice President of LPFC in March 1999 and a director of
Arescom in January 1996. Mr. Lu has more than 11 years of experience in
management, marketing and engineering in the computer and communications
industry. Prior to joining LPFC, Mr. Lu began for Arescom in January 1996 and
continues to do so to the present. Mr. Lu currently serves as President of
Arescom.
DE-LIANG WANG has been a Vice President of LPFC since March 1999. Prior to that
time, Mr. Wang was employed as a senior hardware engineer at AT&T Bell
Laboratories from May 1990 to Dec. 1995.
RICHARD HO has been a Vice President of LPFC since March 1999. Prior to joining
LPFC, Mr. Ho was President of Rightiming Electronics Corp. from January 1996 to
March 1999.
C. JEFFREY GULL has been a Vice President of LPFC since March 1999. Prior to
joining LPFC he was the director for Asia Development for Nu Skin
International, Inc. for 9 years.
SIMON GU has been a director since September 1997. Mr. Gu has been a senior
computer engineer at AT&T from January 1996 to the present. Mr. Gu is not
standing for reelection to the Board of Directors.
JOHNSON CHANG has been a director of LPFC since March 1999. Prior to that
time, he was General Manager of Shanghai Harmony from January 1996 to December
1998.
GARY HUANG has been Secretary of LPFC since January 1997 and Treasurer since
March 2000. Prior to joining the Company, Mr. Huang served as Senior Accountant
/Financial Analyst at Rightiming Electronics Corp. from January 1996 to January
1997.
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 unexpired portion of his term. All officers serve at the
discretion of the Board of Directors. None of the members of the Board of
Directors or executive officers of LPFC are related to one another.
Meetings and Committees
In Fiscal 1999, the Board of Directors held nine meetings. The Board has an
Audit Committee and a Compensation Committee.
The Audit Committee, consisting of Jeremy Wang, Simon Gu and Johnson Chang,
reviews and reports to the Board with respect to various auditing and
accounting matters including recommendations to the Board as to the selection
of the Company's independent auditors, the scope of audit procedures, general
accounting policy matters and the performance of the Company's independent
auditors. The Audit Committee held six meetings in Fiscal 1999.
The Compensation Committee, consisting of Jeremy Wang, Simon Gu and Johnson
Chang, reviews and reports to the Board of Directors with respect to
compensation of directors and executive officers of LPFC. The Compensation
Committee held two meetings in Fiscal 1999.
Involvement in Certain Legal Proceedings
None of the directors or executive officers has been involved in any material
legal proceedings that have material impact on the Company and that occurred
within the last five years of any type described in Item 401(f) of
Regulation S-K.
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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires LPFC's directors,
its executive officers and persons who own more than ten percent of LPFC's
Common Stock to file reports regarding their share ownership and any subsequent
changes in that ownership with the Securities and Exchange Commission and with
LPFC. As of March 22, 2000, none of such individuals and ten percent holders
had filed the required reports and LPFC was attempting to assist such
individuals promptly.
Item 11. Executive Compensation
The following Summary Compensation Table sets forth information concerning the
total compensation of LPFC's executive officers for services rendered in all
capacities to the Company for the last three fiscal years ended June 30, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
----------------------------------------------- ----------------------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary ($) Bonus ($) Compensation Award Options/SAR(1) 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 (2).... 1999 120,000 --- --- --- --- --- ---
President 1998 N/A --- --- --- --- --- ---
1997 N/A --- --- --- 180,000 --- ---
C. Jeffrey Gull(2). 1999 80,000 --- --- --- --- --- ---
Vice President
De-liang Wang (2).. 1999 80,000 --- --- --- --- --- ---
Vice President
David Li (2)....... 1999 80,000 --- --- --- --- --- ---
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Each of the outstanding options is currently exercisable at $6.00 per
share and expires on May 15 or May 30, 2002.
(2) Messrs. Jeremy Wang, C. Jeffrey Gull and De-liang Wang were appointed in
March 1999. David Li was appointed in July 1999. The salaries indicated are
their initial annual base salaries.
Option Exercises in Fiscal 1999
None.
Reportable Transactions. There were no reportable transactions between the
Company and Lotus International Holdings Corp., Yao Investment Corp.,
Rightiming Electronics Corp., and Evolving Investments Ltd. during Fiscal
1999.
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 LPFC's Common Stock as of March 22,
2000 by (i) those persons or groups known by the Company to beneficially own
more than 5% of LPFC's outstanding Common Stock, (ii) each of LPFC's officers
and directors, and (iii) directors and officers of LPFC as a group.
<TABLE>
<CAPTION>
(A) Name and Address of Number of Shares
Beneficial Owner Beneficially Owned (1)(12) Percentage of Class (1)
- --------------------------------- ----------------------------- ----------------------
<S> <C> <C>
TCL Industries Holdings (HK) Ltd. (2) 9,606,671 13.1%
13/F, TCL Tower
8 Tai Chung Road
Tsuen Wan, Hong Kong
Evolving Investments Limited 8,000,000 10.9%
25 G Block 10 Locwood Ct
Kingswood Villas Yuen Lon
NT Hong Kong
Yao Investment Corp (5) 8,000,000 10.9%
200 Centennial Avenue
Piscataway, NJ 08854
Lotus International Holdings Corp. (3)(4) 7,679,999 10.5%
200 Centennial Avenue, Suite 201
Piscataway, NJ 08854
Rightiming Electronics Corp. 6,000,000 8.2%
P.O. Box 186
Piscataway, NJ 08855
(i) Directors and Officers
James Yao (3)(4)(5)(6) 15,859,999 21.6%
Jeremy Wang (7) 180,000 *
David Li 0 0
Huaya Lu Tung** 877,500 1.2%
David Leung (4)(8) 500,000 *
James Liu (3)(4)(9) 7,859,999 10.7%
Gary Huang 0 0
Johnson Chang 0 0
Thomas V. White 0 0
Stefan H. Benger 500,000 *
Harold Tuan 862,156 1.2%
Max Lu 238,620 *
De-Liang Wang (10) 50,000 *
Richard Ho 10,000 *
C. Jeffrey Gull 4,800 *
All directors and executive officers
as a group (consisting of 14 persons)
**(3)(5)(6)(7)(8)(9)(10) 18,380,575 25.0%
- -------------------------------------------------------------------------------------
</TABLE>
* Less than one (1) percent
** Ms. Tung resigned as treasurer on February 7, 2000; her shares are excluded
from shares held by directors and executive officers as a group. The shares
attributed to Ms. Tung are shares owned by subsidiaries of Travelway
International Ltd. of which she is the controlling shareholder, and were
acquired in transactions with LPFC which took place at the time of her
resignation.
(1) Shares beneficially owned and percentage of ownership are based upon
64,344,474 shares of Common Stock issued and outstanding as of March 22, 2000,
1,090,000 shares that may be acquired by exercise of stock options within
60 days of that date, and warrants to purchase 8,000,000 shares of Common Stock
that are exercisable as of that date.
(2) TCL Industries Holdings (HK) Ltd. is an affiliate of TCL Holdings Group.
(3) Mr. James Yao, Chairman of LPFC's Board of Directors, Mr. David Leung,
Vice President and director of LPFC, and Mr. James Liu, Vice President and
director of LPFC, are directors of Lotus International Holdings Corp.
Mr. Yao and Mr. Liu are the majority stockholders of Lotus International
Holdings Corp. and have shared voting power and shared dispositive power with
respect to 7,679,999 shares. Mr. Leung has no voting power and no dispositive
power with respect to such shares.
(4) Lotus International Holdings Corp. also owns all 4,300 outstanding shares
of LPFC's Series A Preferred Stock.
(5) Mr. James Yao is the sole stockholder of Yao Investment Corp. and has
sole voting power and dispositive power with respect to such shares of Common
Stock owned by Yao Investment Corp.
(6) Includes 180,000 shares subject to stock options that are currently
exercisable; 7,679,999 shares of Common Stock beneficially owned by Lotus
International Holdings Corp. and 8,000,000 shares of Common Stock beneficially
owned by Yao Investment Corp.
(7) Includes 180,000 shares subject to stock options that are currently
exercisable.
(8) Includes 500,000 shares subject to stock options that are currently
exercisable.
(9) Includes 180,000 shares subject to stock options that are currently
exercisable; and 7,679,999 shares of Common Stock beneficially owned by
Lotus International Holdings Corp.
(10) Includes 50,000 shares subject to stock options that are currently
exercisable.
(11) Evolving Investments Limited owns currently exercisable warrants to
purchase 8,000,000 shares of Common Stock. Mr. Sunman Lee owns Evolving
Investments Limited and has sole dispositive power with respect to such
warrants.
(12) "Beneficial ownership" has been determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934. The majority of these shares
are restricted securities within the meaning of Rule 144 under the Securities
Act of 1933.
Robert Wang and John Wang are the principal stockholders of Rightiming
Electronics Corp. and are not related to Jeremy Wang or De-liang Wang.
Jeremy Wang and De-liang Wang are not related to each other.
Options
The following table sets forth the certain information known to the Company
with respect to beneficial ownership of options to purchase LPFC's Common Stock
held by its directors and executive officers as of March 22, 2000. Options to
purchase a total of 1,090,000 shares of Common Stock were exercisable as of
that date.
BENEFICIAL OWNER NO. OF SHARES
- ---------------------- ---------------------
James Yao 180,000
Jeremy Wang 180,000
David Leung 500,000
James Liu 180,000
David Li 300,000*
Cheng Wang (former director) 50,000
All directors and
executive officers as a group: 1,390,000
- -------------------------------
*These options were granted on August 14, 1999, become vested as to 100,000
shares annually, and expire five years from grant date.
Warrants
In May 1997, LPFC sold to Evolving Investments Limited warrants to purchase
8,000,000 shares of Common Stock at $3.00 per share expiring May 5, 2002.
LPFC is not aware of any arrangements (including any pledge of an interest in
LPFC) the operation of which may result in a change in control of LPFC at a
future date.
Item 13. Certain Relationship and Related Transactions
During Fiscal 1999, the Company did not participate in any related party
transactions of the kind described in Item 404 of Regulation S-K.
Item 14. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) The following consolidated financial statements of the Company and the
report of the independent auditors thereon are included in this report
commencing on page 33:
Independent Auditor's Report
Consolidated Balance Sheets at June 30, 1999 and 1998
Consolidated Statements of Operations for the Fiscal Years ended June 30,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Exhibits
3.1 Certificate of Amendment of Certificate of Incorporation of the
registrant dated as May 25, 1999 (Exhibit 3.1 to Amendment No. 3 to
Registration Statement on Form 10, filed June 17, 1999)*
3.2 Certificate of Incorporation of the registrant, as amended (Exhibit
3.1 to Registration Statement on Form 10, filed October 27, 1998)*
3.3 Bylaws of the registrant, as amended (Exhibit 3.2 to Registration
Statement on Form 10, filed October 27, 1998)*
10.1 Stock Subscription Agreement, dated as of March 18, 1997, between
Evernew International Limited and the registrant (Exhibit 10.1 to
Amendment No. 1 to Registration Statement on Form 10, filed January 7,
1999)*
10.2 Stock Subscription Agreement, dated as of May 5, 1997, between
Evolving Investments Ltd. and the registrant (Exhibit 10.2 to
Amendment No. 1 to Registration Statement on Form 10, filed January 7,
1999)*
10.3 Warrant Purchase Agreement, dated as of May 5, 1997, between Evolving
Investments Ltd. and the registrant (Exhibit 10.3 to Amendment No. 1
to Registration Statement on Form 10, filed January 7, 1999)*
10.4 Stock Exchange Agreement, dated as of September 18, 1997, between
Rightiming Electronics Corp. and the registrant (Exhibit 10.4 to
Amendment No. 1 to Registration Statement on Form 10, filed
January 7, 1999)*
10.5 Stock Subscription Agreement, dated as of December 31, 1997, between
Clarinet Overseas Limited and the registrant (Exhibit 10.5 to
Amendment No. 1 to Registration Statement on Form 10, filed
January 7, 1999)*
10.6 Stock Purchase Agreement, dated as of September 30, 1998, between
Clarinet Overseas Limited and the registrant (Exhibit 10.6 to
Amendment No. 1 to Registration Statement on Form 10, filed
January 7, 1999)*
10.7 Commission Agreement, dated as of June 8, 1997, between Clarinet
Overseas Limited and the registrant (Exhibit 10.7 to Amendment
No. 1 to Registration Statement on Form 10, filed January 7, 1999)*
10.8 Commission Agreement, dated as of June 1, 1998, between Clarinet
Overseas Limited and the registrant (Exhibit 10.8 filed with
Amendment No. 1 to Registration Statement on Form 10, filed
January 7, 1999)*
21 Subsidiaries of Registrant
27 Financial Data Schedule
------------------------------------------------
* This document has been previously filed with the Securities and Exchange
Commission as an exhibit to the registrant's Registration Statement on Form 10
on the date indicated and is incorporated herein by reference.
(b) Reports on Form 8-K
(1) The registrant filed a report on Form 8-K/A, dated April 6, 1999,
amending its previously filed report on Form 8-K, dated October 14,
1998, with respect to the disposition of LPF International Corp.
(2) The registrant filed a report on Form 8-K, dated April 6, 1999,
reporting the acquisitions of 81% of each of TurboNet Communications
and Arescom Inc. for a total of 15,250,667 shares of its Common Stock.
(3) The registrant filed a report on Form 8-K, dated April 23, 1999,
reporting the election of certain officers and directors.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: April 3, 2000 Lotus Pacific, Inc.
By: /s/ James Yao
------------------------------------
James Yao, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Jeremy Wang
---------------------------------- Date: March 31, 2000
Jeremy Wang, President & Director
/s/ David Li
---------------------------------- Date: March 31, 2000
David Li, Chief Financial Officer
/s/ David Leung
---------------------------------- Date: March 31, 2000
David Leung, Vice President & Director
/s/ James Liu
- ----------------------------------- Date: March 31, 2000
James Liu, Vice President & Director
/s/ Johnson Chang
- ---------------------------------- Date: March 31, 2000
Johnson Chang, Director
/s/ Simon Gu
- ----------------------------------- Date: March 31, 2000
Simon Gu, Director
/s/ Gary Huang
- ----------------------------------- Date: March 31, 2000
Gary Huang, Director
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Subsidiary Name Jurisdiction of Incorporation
- ---------------------------- --------------------------------
Regent Electronics Corporation Delaware
TurboNet Communications California
Arescom Inc. California
Lotus World, Inc. Delaware
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.
As discussed in Note 16 to the financial statements, the Board of Directors
had resolved to spin off approximately ninety percent of its unconsolidated
brokerage industry subsidiary. Subsequent to the issuance of the financial
statements, the Board of Directors rescinded the resolution and the financial
statements have been restated to reflect the changes.
Schiffman Hughes Brown
Blue Bell, Pennsylvania
September 22, 1999, except for Note 16, which is dated as of February 28, 2000
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
ASSETS
1999 1998
------------- --------------
As Restated
See Note 16
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 unconsolidated subsidiary 8,457,314 ---
-------------- --------------
$207,762,804 $ 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 subsidiaries.. 8,512,221 6,569,544
Commitments
Stockholders' equity:
Common stock...................... 63,466 47,387
Preferred stock, Series A......... 4 4
Common stock warrants (Note 8).... 80,000 80,000
Additional paid-in capital........ 155,384,298 38,708,698
Accumulated deficit............... (10,118,031) (2,961,344)
-------------- -------------
145,409,737 35,874,745
$207,762,804 $45,454,833
============== =============
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
1999 1998 1997
--------------- ------------- -------------
As Restated
See Note 16
<S> <C> <C>
Sales .................................. $ 42,382,795 $ 6,154,935 $ 0
Cost of sales........................... 37,711,338 3,408,377 0
------------ ------------ ----------
Gross profit............................ 4,671,457 2,746,558 0
Royalty income.......................... 124,125 1,800,000 ---
Operating expenses:
Selling, general and
administrative expenses............. 10,643,335 3,677,934 223,911
Research and development............... 2,215,455 4,371,990 103,870
------------ ------------ -----------
12,858,790 8,049,924 327,781
Operating loss.......................... (8,063,208) (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
Equity in income of
unconsolidated subsidiaries........... 1,075,384 --- ---
------------ ----------- ---------
1,141,579 (9,858) 412,829
Net income (loss) before income taxes,
minority interest in income of consolidated
subsidiary and discontinued operations.. (6,921,629) (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)....................... $(7,156,687) $(2,648,865) $ 221,133
============== ============= ===========
Earnings (loss) per share:
Basic................................. $ (.15) $ (.06) $ .01
======= ======= ======
Diluted............................... $ (.15) $ (.06) $ .00
======= ======= ======
Weighted average shares................. 49,032,615 44,421,334 29,238,081
</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.... 16,550,670 --- --- 16,550 120,564,699 --- 120,581,249
Less treasury stock (878,000) --- --- (878) (6,188,442) --- (6,189,320)
Net loss for the year
ended June 30,
1999, as restated,
63,466,474 4,300 8,000,000 $143,470 $155,384,298 $(10,118,031) $145,409,737
</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
--------------- ------------ -------------
As Restated
See Note 16
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ (7,156,687) (2,648,865) $ 221,133
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in income of unconsolidated subsidiaries (1,075,384) --- ---
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)
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........................ $ 120,581,249 $30,000,000
Acquisition of treasury stock............ $ 6,047,125
</TABLE>
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998 AND 1997
Note 1 Description of Business:
Lotus Pacific, Inc. (the Company) 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. An affiliated company in which Lotus has controlling interest is
expected to be temporary and 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.
Principles of consolidation:
The accompanying financial statements include the accounts of Lotus Pacific,
Inc.; its 87.3% owned subsidiary, Regent Electronics Corp.; its 81% owned
subsidiary, TurboNet Communications; and its 81% owned subsidiary, Arescom Inc.
The non-owned portion of Regent Electronics Corp., TurboNet Communications and
Arescom Inc. appears as minority interest in subsidiaries on the balance sheet.
All intercompany transactions have been eliminated in consolidation.
Cash equivalents:
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and original maturates 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.
Investments:
The equity method of accounting is used for the Company's temporary investment
in USS On-Line. Under the equity method, the Company recognizes its share in
the net earnings or losses of these associated companies each year as they
occur.
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:
Revenue from product sales is recognized 15 business days after shipment,
allowing for expiration of the period during which the Company generally
permits 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.
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 primary 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)..... $(7,156,687) $(2,648,865) $ 221,133
Shares used to compute net
income per common share 49,032,615 44,421,334 29,238,081
Shares used to compute net
income per common share
--diluted .......... 57,032,615 50,374,256 39,328,081
Net income per common share
-basic............. $(.15) $(.06) $.01
Net income per common share
-diluted............ $(.15) $(.06) $.00
Note 3 Issuance of stock:
During the year ended June 30, 1999, the Company issued an aggregate of
16,957,670 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 16,550,670 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.
Note 4 Acquisitions:
Fiscal 1999:
During fiscal 1999, the Company acquired controlling interests in four
companies. The aggregate consideration for all transactions was approximately
$2,740,000 in cash and 16,550,670 shares of common stock, valued in each case
at the market price of the common stock at the time of the acquisition. The
acquisitions are as follows:
TurboNet Communications:
On March 31, 1999 the Company acquired 81% of TurboNet Communications
outstanding common stock in exchange for 11,091,396 shares of the Company's
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 in exchange for 4,159,274 shares of the Company's 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.
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. Subsequent to the date of acquisition, the Company invested an
additional $3,518,750 of its common stock in PMB. These 500,000 shares of
common stock are included in the Company's treasury stock.
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. Subsequent to the date of acquisition, the
Company invested an additional $250,000 in USSF. At June 30, 1999, USSF owned
380,000 shares of the Company's common stock valued at $2,670,570 which is
included in the Company's treasury stock.
USS Online:
On June 28, 1999 the Company formed USS Online and transferred to it all of the
outstanding stock of PMB and USSF.
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.
in exchange for 6,000,000 shares of the Company's common stock valued at the
market price of the Company's common stock at the time of the exchange .
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. LPF International Corp. was sold on September 30, 1998.
See Note 5.
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. Richtime Far East,
Ltd. was sold on September 30, 1998. See Note 5.
Pro Forma Information:
The following unaudited pro forma information represents the results of
operations of the Company and its subsidiaries, Regent Electronics Corp.,
TurboNet Communications and Arescom, Inc. 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 loss............ (366) (1,022) (1,507)
----------- ----------- ------------
157,330 231,000 538,120
Net 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 loss.......................... $(20,602,956) $(18,762,063) $(11,844,866)
============== ============== ==============
Loss per share:
Basic ........................... $ (.42) $ (.42) $ (.41)
</TABLE>
Note 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 70% 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.
Note 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.
Note 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.
Note 8 Capital Stock:
Common stock - $.001 par value, 100,000,000 shares authorized, 63,487,314,
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.
Note 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%).
Note 10 Stock Options:
In May, 1997, the Company granted options to purchase 1,090,000 shares of its
common stock to certain of its officers, key employees and/or consultants. The
options are immediately exercisable at a price of $6.00 per share and expire
five years from grant date. The exercise price in each case is equal to the
fair market value of the Company's common stock at the time of grant. As of
June 30, 1999, 1998 and 1997, no options have been exercised.
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 loss:
As reported............ $(7,156,687) $(2,648,865)
Pro forma.............. $(7,156,687) $(2,648,865)
Net loss per common share:
As reported............ $(0.15) $(0.06)
Pro forma.............. $(0.15) $(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-
Note 11 Commitments
The Company and its subsidiaries lease office space and equipment under
noncancelable lease agreements expiring at various dates through June 30,
2002 which 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.
Note 12 Subsidiaries' Financial Information:
In 1999, the Company has two subsidiaries each of which accounted 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 revenue and assets.
Condensed financial information for Regent Electronics Corp. at June 30,
1999, 1998 and 1997:
BALANCE SHEETS
ASSETS
1999 1998 1997
------------ ------------ -------------
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
============ ============= ============
STATEMENTS OF OPERATIONS
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
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
=============
Note 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
Note 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
the Company's common stock at the option of the holder at any time. The
outstanding preferred shares are as follows:
Shares
----------------------------------------
1999 1998
------------------- ------------------
Regent Electronics:
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
Note 15 Investment Deposits:
At June 30, 1999, the Company had received $44,695,000 from investors that
were negotiating with the Company to purchase stock of one or more of the
Company's subsidiaries. The negotiations were continuing as of the report
date.
Note 16 Restatement:
Subsequent to the issuance of the Company's financial statements for the year
ended June 30, 1999, the Board of Directors rescinded their decision to spin
off ninety percent of the Company's wholly owned subsidiary, USS Online, as of
June 28, 1999. The spin off was to occur by granting options to existing
shareholders to acquire shares of USS Online and by issuing shares of USS
Online's common stock to USS Online's management.
The Company's total investment in USS Online was previously reported as
$14,983,750 and the partial spin off and related stock issuance were accounted
for as follows: dividend $11,714,822; compensation $1,815,000; and investment
in USS Online $1,453,928.
As a result of the decision not to spin off the subsidiary, the accompanying
consolidated statements as of and for the year ended June 30, 1999 present the
restated results.
A summary of the effects of the restatement follows.
ASSETS
June 30, 1999
-------------------------------------
As Previously Restated
Reported
Current Assets:
Cash............................ $ 30,779,486 $ 30,779,486
Accounts receivable............. 27,655,975 27,655,975
Inventory....................... 4,972,965 4,972,965
Other........................... 574,985 574,985
------------- -------------
Total current assets........... 63,983,411 63,983,411
Property and equipment:
Furniture and office equipment.. 1,534,033 1,534,033
Equipment....................... 1,540,221 1,540,221
Leasehold improvements.......... 29,836 29,836
------------- --------------
3,104,090 3,104,090
Less: accumulated depreciation... 1,235,567 1,235,567
------------- --------------
1,868,523 1,868,523
Other assets:
Cash surrender value of life insurance 17,436 17,436
Intangible asset, net of accumulated
amortization of $713,355 and
$370,477 in 1999 and 1998, respectively 5,098,604 5,098,604
Goodwill, net of accumulated
amortization of $6,570,838 in 1999
and $1,067,544 in 1998......... 128,157,062 128,157,062
Deposits ....................... 180,454 180,454
Investment in unconsolidated
subsidiaries ................. 1,453,928 8,599,509
------------- --------------
134,907,484 142,053,065
$200,759,418 $207,904,999
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses................ $ 8,950,281 $ 8,950,281
Loans payable.................... 195,565 195,565
Investment deposits.............. 44,695,000 44,695,000
Income taxes payable............. --- ---
--------------- ----------------
Total current liabilities...... 53,840,846 53,840,846
Minority interest in subsidiary... 8,512,221 8,512,221
Commitments
Stockholders' equity:
Common stock..................... 64,544 63,486
Preferred stock, Series A........ 4 4
Common stock warrants (Note 8)... 80,000 80,000
Additional paid-in capital....... 151,270,218 155,526,473
Accumulated deficit.............. (13,008,415) (10,118,031)
--------------- ---------------
138,406,351 145,551,932
$200,759,418 $207,904,999
=============== ===============
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------
As Previously
Reported Restated
<S> <C> <C>
Sales............................. $42,382,795 $42,382,795
Cost of sales..................... 37,711,338 37,711,338
-------------- --------------
Gross profit...................... 4,671,457 4,671,457
Royalty income.................... 124,125 124,125
Operating expenses
Selling, general and
administrative expenses......... 12,458,335 10,643,335
Research and development......... 2,215,455 2,215,455
------------- --------------
14,673,790 12,858,790
Operating loss.................... (9,878,208) (8,063,208)
Other income (expense):
Interest income.................. 58,932 58,932
Other income..................... 8,750 8,750
Foreign exchange loss............ (1,487) (1,487)
------------ --------------
66,195 66,195
Net loss before income taxes,
minority interest in income of consolidated
subsidiary and discontinued operations.. (9,812,013) (7,997,013)
Income tax expense (benefit)
Equity in income of unconsolidated subsidiaries --- 1,075,384
Minority interest in loss of
consolidated subsidiaries........ 408,600 408,600
(Loss) income from discontinued operations (53,017) (53,017)
Loss on sale of subsidiaries...... (590,641) (590,641)
--------------- --------------
Net loss.......................... $(10,047,071) $(7,156,687)
Loss per share:
Basic............................ $ (.20) $ (.15)
========= =======
Diluted.......................... $ (.20) $ (.15)
========= =======
Weighted average shares........... 49,498,519 49,032,615
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 30,779,486
<SECURITIES> 0
<RECEIVABLES> 27,655,975
<ALLOWANCES> 0
<INVENTORY> 4,972,965
<CURRENT-ASSETS> 63,983,411
<PP&E> 3,104,090
<DEPRECIATION> 1,235,567
<TOTAL-ASSETS> 207,762,804
<CURRENT-LIABILITIES> 53,840,846
<BONDS> 0
0
4
<COMMON> 63,466
<OTHER-SE> 80,000
<TOTAL-LIABILITY-AND-EQUITY> 207,762,804
<SALES> 42,382,795
<TOTAL-REVENUES> 43,524,374
<CGS> 37,711,338
<TOTAL-COSTS> 37,711,338
<OTHER-EXPENSES> 12,858,790
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,921,629)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,921,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,156,687)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
