UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
( ) 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) 885-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No _____ (2) Yes X No _____
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 25, 2000:
Class Number of Shares
Common Stock 64,133,795
Par Value $.001 Per Share
LOTUS PACIFIC, INC.
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
(1) Condensed Consolidated Balance Sheets as of September 30, 2000
(unauduited) and June 30, 2000
(2) Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended September 30, 2000 and 1999
(3) Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months ended September 30, 2000 and 1999
(4) Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2000 2000
------------ ------------
(Unaudited) (Audited)
Current Assets:
Cash.................................... $ 51,997,290 $ 27,942,258
Accounts receivable..................... 42,942,445 19,534,974
Accounts receivable from related parties 21,515,322 5,653,533
Inventory............................... 14,475,155 13,185,391
Prepaid expenses........................ 1,265,140 1,533,045
Other................................... 116,376 89,633
Deferred tax asset...................... 1,313,000 ---
------------ ------------
Total current assets............... 133,624,728 67,938,834
------------ ------------
Property and equipment:
Furniture and office equipment.......... 2,828,878 2,717,683
Equipment............................... 1,682,106 1,175,859
Leasehold improvements.................. 291,253 234,086
------------ ------------
4,802,237 4,127,628
Less: accumulated depreciation.......... 1,556,018 1,317,636
------------ ------------
3,246,219 2,809,992
------------ ------------
Other assets:
Restricted cash......................... --- 300,000
Notes receivable........................ 11,860,000 11,860,000
Goodwill, net of accumulated amortization of
$12,983,473 at September 30, 2000 and
$11,091,760 at June 30, 2000.......... 62,685,036 64,576,749
Investment in unconsolidated subsidiary 4,271,586 4,329,925
Other................................... 1,572,068 745,003
------------ ------------
80,388,690 81,811,677
------------ ------------
$217,259,637 $152,560,503
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.......................... $ 3,000,000 $ 1,278,000
Accounts payable and accrued expenses... 24,815,444 19,233,547
Accounts payable to related parties..... 49,184,130 15,261,506
Notes payable........................... 1,914,390 1,500,000
Deposits................................ 1,612,328 ---
Income taxes payable.................... 7,588,150 2,434,150
------------ ------------
Total current liabilities.......... 88,114,442 39,707,203
------------ ------------
Minority interest in subsidiaries......... 17,632,955 6,425,633
------------ ------------
Commitments
Stockholders' equity:
Common stock............................ 64,133 64,133
Deferred stock compensation............. (18,295,593) (16,643,967)
Preferred stock, Series A............... 4 4
Additional paid-in capital.............. 201,251,496 191,037,695
Treasury stock.......................... (7,057,102) (7,057,102)
Accumulated deficit..................... (64,450,698) (60,973,096)
------------ ------------
111,512,240 106,427,667
------------- ------------
$217,259,637 $152,560,503
============ ============
See notes to consolidated financial statements.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
Sales..................................... $ 99,906,930 $ 11,237,743
Cost of sales............................. 81,334,231 9,152,532
------------ ------------
Gross profit.............................. 18,572,699 2,085,211
------------ ------------
Operating expenses:
Selling, general, and administrative
expenses.............................. 8,418,948 6,204,325
Research and development................ 8,344,965 1,090,600
------------ ------------
16,763,913 7,294,925
------------ ------------
Operating income (loss)................... 1,808,786 (5,209,714)
------------ -------------
Other income (expense):
Interest income.......................... 429,403 66,305
Interest expense......................... (84,105) ---
Other income............................. 11,040 23,680
Minority interest in (income) loss of
consolidated subsidiaries.............. (961,669) 638,166
Foreign exchange gain.................... 20,211 ---
Equity in earnings of unconsolidated
subsidiaries........................... (58,339) 262,918
------------ ------------
(643,459) 991,069
------------ ------------
Net income (loss) before income taxes..... 1,165,327 (4,218,645)
Income tax (expense) benefit.............. (4,642,929) ---
------------ ------------
Net loss.................................. $( 3,477,602) $( 4,218,645)
============= ============
Earnings (loss) per share
Basic and diluted....................... $ (.05) $ (.07)
============ ============
Weighted average shares................... 64,133,795 64,544,474
============ ============
See notes to consolidated financial statements.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss................................ $( 3,477,602) $( 4,218,645)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in earnings of unconsolidated
subsidiaries........................ 58,339 (262,918)
Depreciation and amortization......... 2,130,095 1,970,070
Amortization of deferred stock
compensation........................ 8,562,174 ---
Minority interest in subsidiary....... (961,669) 1,764,539
Changes in assets and liabilities:
Increase in accounts receivable....... (23,407,470) ( 2,907,493)
Increase in accounts receivable from
related parties..................... (15,861,789) ---
(Increase) decrease in inventory...... (1,289,764) 655,067
Decrease in prepaid expenses.......... 267,905 ---
Decrease (increase) in other current
assets.............................. (26,743) 384,328
Decrease in restricted cash........... 300,000 ---
Decrease in deposit................... --- 101,868
Increase in cash surrender value...... --- (3,000)
Increase in other assets.............. (827,065) ---
Increase in deferred tax asset........ (1,313,000) ---
Increase (decrease) in accounts payable
and accrued expenses................ 5,581,897 (4,484,020)
Increase in accounts payable to
related parties..................... 33,922,624 ---
Increase in income taxes payable....... 5,154,000 ---
------------ ------------
Net cash provided by (used in) operating
activities.............................. 8,811,932 (7,000,204)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment...... (655,618) (285,825)
Purchase of investments................. --- (3,466,800)
Proceeds from sale of subsidiary
preferred stock....................... 12,150,000 ---
------------ ------------
Net cash provided by (used in) investing
activities.............................. 11,494,382 (3,752,625)
------------ ------------
Cash flows from financing activities:
(Decrease) increase in investment deposits 1,612,328 (14,295,000)
(Decrease) increase in loans payable.... --- (195,565)
Proceeds from line of credit............ 1,722,000 ---
Proceeds from issuance of notes payable... 414,390 ---
------------ ------------
Net cash provided by (used in) financing
activities.............................. 3,748,718 (14,490,565)
------------ ------------
Net (decrease) increase in cash........... 24,055,032 (25,243,394)
Cash, beginning........................... 27,942,258 30,779,486
------------ ------------
Cash, end................................. $ 51,997,290 $ 5,536,092
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest.................. $ 84,105 $ ---
============ ============
Cash paid for taxes..................... $ 9,050,000 $ ---
============ ============
See notes to consolidated financial statements.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
NOTE 1 GENERAL
Lotus Pacific, Inc. ("LPFC") creates, manages, and operates communications
and network technology companies. LPFC and its subsidiaries (the "Company")
provide solutions for the communications and network technology markets. The
Company is engaged in the development, manufacture, and distribution of
products used for broadband Internet access, including "DOCSIS certified"
data-over-cable equipment, digital subscriber line ("DSL") access and
networking devices, and Internet set-top boxes. The Company also provides
private label online auction services in foreign markets.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X relating to interim financial statements.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the consolidated financial statements
and notes thereto included in the Annual Report on Form 10-K of the Company for
the year ended June 30, 2000 ("fiscal 2000").
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the information set forth in the
accompanying condensed consolidated financial statements have been included.
The results reported in these condensed consolidated financial statements for
the three-month period ended September 30, 2000 should not be regarded as
necessarily indicative of results that may be expected for the year ended
June 30, 2001 ("fiscal 2001").
The accompanying unaudited condensed consolidated financial statements include
the accounts of LPFC and its four majority-owned subsidiaries: Regent
Electronics Corp. (92.3% owned), Correlant Communications, Inc. (formerly
TurboNet Communications) (64.7%), Arescom, Inc. (81%) and Lotus World, Inc.
(90.5%) The minority interests in the subsidiaries are reflected as such on the
balance sheet in accordance with generally accepted accounting principles. All
intercompany transactions have been eliminated in consolidation.
NOTE 3 INVENTORIES
As of September 30, 2000, inventories consist of the following:
Raw materials ---
Work-in-process ---
Finished goods $ 14,475,155
------------
$ 14,475,155
============
The above inventory balances as of September 30, 2000 are net of reserves
for potential excess quantities and obsolescence of approximately $883,603.
NOTE 4 STOCK BASED COMPENSATION
The Company's subsidiary, Arescom, Inc. ("Arescom"), granted 550,000 Incentive
Stock Options (ISOS) to employees during the quarter ended September 30, 2000.
Arescom recorded deferred compensation of $1,100,000 and amortized deferred
compensation of $49,652. The amortization of deferred compensation for ISOS
granted in the prior year is $1,830,843.
The Company's subsidiary, Correlant Communications, Inc. ("Correlant"), also
has an Incentive Stock Option Plan and it has elected to follow APB Opinion 25
"Accounting of Stock Issued to Employees" in accounting for its employee stock
options. When calculating the deferred compensation, the options had to be
split between LPFC shares and Correlant shares because the LPFC shares granted
include a contingent component associated with the grant. The contingent
component was that the shares of LPFC stock could be sold when certain
financial goals were met. LPFC lifted the restriction during the quarter and,
accordingly, Correlant amortized all of the deferred compensation from the
original grant date. The total amortization amounted to $6.7 million. The
amortization expense was charged to research and development, $4.8 million and
to general and administrative expense, $1.3 million.
NOTE 5 INCOME TAXES
The Company's September 30, 2000 provision for income taxes differed
from the amount computed by applying the statutory U.S. Federal income
tax rate to income before income taxes and minority interest as follows:
U.S. Federal income tax provision
at Federal statutory rate $ 407,800
Amortization of goodwill 630,000
Deferred compensation amortization 2,996,700
Other 608,429
------------
$ 4,642,929
=============
NOTE 6 PREFERRED STOCK
During the quarter ended September 30, 2000, Arescom sold preferred stock to
third parties for net proceeds of $12,150,000.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lotus Pacific, Inc. ("LPFC") creates, manages, and operates communications and
network technology companies. LPFC and its subsidiaries (the "Company") provide
solutions for the communications and network technology markets. The Company
is engaged in the development, manufacture and distribution of products used
for broadband Internet access, including "DOCSIS certified" data-over-cable
equipment, digital subscriber line ("DSL") access and networking devices, and
Internet set-top boxes. The Company also provides private label online auction
services in foreign markets.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three-month period ended September 30, 2000 were $ 99.9
million as compared to revenues for the corresponding three-month period ended
September 30, 1999 of $ 11.2 million. The change represented increases of $88.4
million, or 790%, for the quarter ended September 30, 2000 over the quarter
ended September 30, 1999. The increase in revenues was primarily a result of
Correlant's sales of cable modems to several new customers, including Com21,
Terayon and Best Bata after receiving its DOCSIS1.0 certification and Arescom's
increased sales of its ATM and DSL products. For the quarter ended
September 30, 2000, a significant portion of the revenues, $87.9 millions or
approximately 88%, was from Correlant, and Arescom contributed $11.9 million,
or about 12%, to the revenues. For the three-month period ended September 30,
2000, Regent Electronics Corp. and Lotus World, Inc., two subsidiaries of the
Company, have no operating revenues.
COST OF SALES
Cost of sales consisted principally of the cost of components, contracted
manufacturing charges, other materials, in certain case labor related to
testing and warranty expenses. The Company outsourced substantially all of its
manufacturing operation, and had no manufacturing plant. Cost of sales
increased from $9.2 million during the three-month period ended September 30,
1999 to $81.3 million in the corresponding period ended September 30, 2000.
This increase in cost of sales reflected the increased level of sales. The
gross margin was 18.59% in the three-month period ended September 30, 2000 as
compared to 18.55% of the corresponding period of 1999. The Company expects
that gross margins will fluctuate due to changing product mix, and different
sales prices, and product quantities shipped to various customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $8.4 million in the three-
month period ended September 30, 2000 compared to $6.2 million in the
corresponding period of the prior year, which represented a 35.7% of increase.
The increase was primarily the result of increased staffing and growth in
recruiting and facility related expenses. To a lesser extent, this increase was
due to the amortization of deferred compensation of $1.4 million during this
period. As a percentage of net sales, selling, general and administrative
expenses decreased from approximately 55% for the quarter ended September 30,
1999 to 8.5% for the same period of this year.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $1.1 million for the three-
month period ended September 30, 1999 to $8.3 million for the three-month
period ended September 30, 2000. This increase was primarily due to the growth
of our research and development staff and consultants to support the commercial
development of current and future products and nonrecurring engineering
charges. To a lesser extent, this increase was due to the amortization of
deferred compensation of $4.8 million during this period. As a percentage of
net revenue to our research and development expenses decreased from 9.7% in the
three-month period ended September 30, 1999 to 8.4% in the corresponding period
of 2000. The decrease in research and development expense as a percentage of net
revenue was primarily the result of an increase in net revenues. We believe
that continued investment in research and development is critical to meet the
demands of our customers and reduce the cost of our products.
DEPRECIATION AND GOODWILL AMORTIZATION
The Company has accumulated approximately $75.7 million of goodwill from
acquisitions of businesses since September 1997. The goodwill is amortized on
the straight-line basis over 10 years. For the three-month period ended
September 30, 2000, the depreciation and amortization expense was $2.13 million
compared to $1.97 million for the corresponding period of the previous year.
OPERATING INCOME
Operating income for the three-month period ended September 30, 2000 was $1.8
million compared to operating loss of $5.2 million for the three-month period
ended September 30, 1999. The $7.0 million of increase in operating income was
primarily a result of increased sales from both Correlant and Arescom.
OTHER INCOME (LOSS)
Due to increased average cash balances and interest receivable on the notes
receivable, the Company's interest income increased from $66,305 for the three-
month period ended September 30, 1999 to $429,403 for the same period ended
September 30, 2000. However, the minority interest in income of consolidated
subsidiaries was decreased from income of $638,166 for the quarter ended
September 30, 1999 to a loss of $961,669 for the same period of this year. As
a result, the Company has other expenses of $643,459 compared to gain of
$991,069 for the same period of the previous year.
INCOME TAXES
During the quarter ended September 30, 2000, the Company recorded income tax
provision of $4.6 million as compared to zero for the quarter ended
September 30, 1999. The amounts of income tax provision for the quarter ended
September 30, 2000 reflect the increased net income of Correlant.
NET INCOME (LOSS) AND EARNING PER SHARE
For the quarter ended September 30, 2000, the company had net loss of $3.5
million, or $0.05 per share, compared to a net loss of $4.2 million for the
same period of the prior year. The decrease in net loss during the current
period was attributable primarily to the operations of Correlant and Arescom
during the period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of $52.0
million as compared to $27.9 million at June 30, 2000.
For the three-month period ended September 30, 2000, net cash provided by
operating activities was $8.8 million compared to net cash used in operating
activities of $7.0 million for the same period of the previous year. The
increase in cash and cash equivalents provided by operating activities during
the quarter ended September 30, 2000 was primarily due to the decrease in net
loss, increase in amortization of deferred stock compensation, and higher
accounts payable and accrued liabilities, which was partially offset by
increase in accounts receivable and inventory.
Net cash and cash equivalents used in investing activities during the thee-
month period ended September 30, 2000 was $11.5 million as compared to net
cash used of $3.75 million for the corresponding period ended September 30,
1999. The increase in cash and cash equivalents provided in investing
activities in the quarter ended September 30, 2000 was largely due to proceeds
from sale of subsidiary preferred stock.
Net cash and cash equivalents provided in financing activities during the
thee-month period ended September 30, 2000 was $3.75 million compared to net
cash used in financing activities of $14.50 million for the same period of the
previous year. The increase in cash provided by financing activities during the
quarter ended September 30, 2000 resulted primarily from proceeds from line of
credit and increase in investment deposits.
As a result, for the three-month period ended September 30, 2000, the Company's
cash and cash equivalents increased $24.1 million to $52.0 million.
The Company has no material long-term debt, and Arescom, a subsidiary of the
Company, has $3.0 million of line of credit for general business purposes. The
Company has no material commitment for capital expenditures, however, we
anticipate increasing capital expenditures consistent with anticipated growth
in operations.
The Company believes that the existing cash and cash equivalents together with
funds generated from operations will be sufficient to meet its operating
requirements for the next 12 months. The Company's continuing operating and
investing activities may nevertheless make it necessary or desirable that the
Company obtains additional financing through loans or additional public or
private offerings of its securities. There can be no assurance that any
additional financing will be available to the Company on commercially
reasonable terms, if at all.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments is not material.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
In November 2000, Arescom, a subsidiary of the Company, issued certain Series
A Preferred Stock to unrelated accredited investors for approximately thirteen
million dollars in cash. In March and October 2000, the Company sold portions
of its equity interest in Correlant and Arescom to unrelated offshore investors
for approximately seventy-three million dollars in cash. In connection with the
transactions, Hywin Investments Limited has been granted stock options to
purchase Correlant and Arescom shares from the Company. Said options expire on
November 15, 2005. The total number of shares issuable upon exercise is
approximately two million eight hundred twenty-seven thousand Corelant shares
and five million seven hundred forty-six thousand Arescom shares, respectively.
The exercise prices are calculated on the basis of valuations of one hundred
twenty million dollars and fifty million dollars divided by the total number of
Correlant shares and Arescom shares issued and outstanding as of November 15,
1999, respectively.
All the funds so raised have been used as working capital and as investments
in new projects for the Company and its subsidiaries.
As a result of these transactions, the Company's current equity positions in
Correlant and Arescom have been reduced to approximately 64% and 75%,
respectively.
ITEM 3. Defaults by the Registrant on its Senior Securities
None.
ITEM 4. Submission of Matters to A Vote of Security Holders
None.
ITEM 5. Other Information
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LOTUS PACIFIC, INC.
Date: November 20, 2000 By: /s/ Jeremy Wang
---------------------------------
Jeremy Wang, President
By: /s/ David Li
---------------------------------
David Li, Chief Financial Officer
