FORM 10/A
Amendment No. 5
GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12 (b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
LOTUS PACIFIC, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State of Incorporation)
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52-1947160
(I.R.S. Employer Identification Number)
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200 Centennial Avenue, Suite 201, Piscataway, NJ 08854
(Address of Principal Executive Offices)
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(732) 885-1750
(Registrant's Telephone Number, Including Area Code)
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Securities to be Registered Pursuant to Section 12(b) of the Act:
Title of each class to be registered
NONE
Name of each exchange on each class is to be registered
NOT APPLICABLE
Securities to be Registered Pursuant to Section 12(g)(1) of the Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(Title of Class)
LOTUS PACIFIC, INC.
FORM 10
TABLE OF CONTENTS
1. Business
2. Financial Information
3. Properties
4. Security Ownership of Certain Beneficial Owners and Management
5. Directors and Executive Officers
6. Executive Compensation
7. Certain Relationships and Related Transactions
8. Legal Proceedings
9. Market Price of and Dividends on the Registrant's Common Equity
Related Stockholder Matters
10. Recent Sales of Unregistered Securities
11. Description of Registrant's Securities to be Registered
12. Indemnification of Directors and Officers
13. Financial Statements and Supplementary Data
14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
15. Financial Statements and Exhibits
16. Signatures
ITEM 1. BUSINESS
The information under this caption and elsewhere in this Report is as of June
10, 1999, unless otherwise stated to be as of an earlier or later date.
GENERAL
Lotus Pacific, Inc. (the "Company" or "Registrant") is an Internet technology
and services company that, through subsidiaries, develops and markets Internet
-related products and services in the United States and international markets.
The Company's principal subsidiaries engaged in these activities are Regent
Electronics Corp. ("Regent"), Arescom Inc. ("Arescom") and TurboNet
Communications ("TurboNet"). The Company's products include TeleWeb systems,
TeleWeb set-top boxes, WonderTV set-top boxes, Internet routers, cable modems
and cable modem chips.
The Company's recently acquired subsidiaries, U.S. Securities & Futures Corp.
("USSF") and Professional Market Brokerage, Inc. ("PMB"), are engaged in on-
line trading and full service brokerage services. The Company is currently
evaluating the relationship of these activities to its Internet-technology
activities in other areas.
The Company's Common Stock is currently traded on the OTC Bulletin Board under
the symbol "LPFC".
The Company was incorporated under the laws of the State of Delaware on June
25, 1985 as Quatech, Inc. to raise capital and to investigate and to acquire
any suitable asset, property or pursue other business opportunities. In April
1987, the Company completed a public offering of securities pursuant to a
registration statement on Form S-18 under the Securities Act. In June 1993,
the Company disposed of all of its interests in other entities and ceased to
have any business operations.
In September 1994, the Company was reorganized and changed its name to Lotus
Pacific, Inc. In January 1997, the Company's majority ownership was changed.
After new directors and executive officers were elected, the Company set up
two wholly owned subsidiaries, Regent, registered in the State of Delaware,
and Richtime Far East Ltd. in Hong Kong.
In June 1997, the Company, through Regent, acquired Amiga-based multimedia
technology and its related assets and rights from Rightiming Electronics Corp.
for an aggregate consideration of US $5 million plus 6 million shares of
Regent's common stock. The acquired assets included all Amiga-Commodore's
patents, licenses, trademarks, and copyrights to be registered and used in
China, Taiwan, Hong Kong, Macao, and the bordering countries between China
and the former Soviet Union. Over the past years Regent developed a series
of multimedia and cable TV based set-top boxes and systems, including the
TeleWeb Broadcasting System, WonderTV/TeleWeb A6000, A6060, A8000 and A9000.
In March 1997, Richtime Far East Ltd. started its garment and textile import
-export operation in Hong Kong. The Company received customer orders from
Europe and North America, and then contracted with garment or textile
manufacturers, mainly in China, to fulfill those orders. The finished goods
were then shipped overseas. In February 1998, LPF International Corp. ("LPF"),
a new wholly owned subsidiary of the Company, was set up to expand the
Company's existing textile and apparel business worldwide and place more
emphasis on fashion design. LPF is incorporated in the State of Delaware and
operated in New York, NY. Richtime Far East Ltd. was then merged into LPF to
be an indirect subsidiary of the Company.
In order to concentrate on its Internet-related products and services, the
Company entered into a Stock Purchase Agreement on September 30, 1998 with
Clarinet Overseas Ltd. Under the agreement, the Company sold all of its
ownership in LPF and Richtime, including all assets and liabilities, to
Clarinet Overseas Ltd. for an aggregation consideration of $2.5 million in
cash.
On February 12, 1999, the Company signed agreements to acquire all of the
outstanding stock of USSF and PMB. The acquisitions were consummated on March
1, 1999 and February 25, 1999, respectively. USSF is a full service financial
brokerage firm located on Wall Street in New York, NY. PMB is a Chicago-based
securities brokerage firm that provides Internet-based online trading services
to self-directed, broker-assisted, individuals, money managers, Commodity
trading advisers, and introducing brokers.
On March 15, 1999, the Company contracted to acquire a majority of equity
interest of TurboNet Communications, a San Diego, California corporation
("TurboNet"). Under the terms of the Acquisition Agreement, the Company will
issue $80 million of worth of its restricted common stock in exchange for 81%
of TurboNet's equity. The Company also agreed to provide TurboNet with $20
million of cash as working capital. TurboNet agreed that the Company's shares
issued to TurboNet's shareholders shall be prohibited from being sold, in whole
or in part, until TurboNet's annual gross revenue has exceeded $30 million with
pretax annual net income of $6 million. The acquisition was completed on March
31, 1999.
TurboNet designs, develops and markets telecommunications products to cable
operators, network service providers, and communications network users,
primarily in the United States and Asia. Its primary products include cable
modem chipsets, internal and external cable modems and cable modem accessories.
TurboNet was incorporated on February 13, 1996 in San Diego, California, and
Toshiba Corporation of Japan owns 5.5% of TurboNet's equity.
On March 15, 1999, the Company entered into an agreement with Arescom to
acquire 81% of Arescom's equity for $30 million shares of the Company's
restricted common stock. The Company also agreed to provide Arescom with $10
million of cash as working capital. All shareholders of Arescom agreed that
all the Company's shares issued to them shall be restricted from being sold
until the day that Arescom has reached its target of annual sales of $15
million and annual net income before income tax of $3 million. The acquisition
was completed on March 31, 1999.
Arescom designs, manufactures and markets a complete line of high quality inter
-networking equipment, primarily routers, for PSTN, ISDN, xDSL and Ethernet
environments. It provides users with a broad range of remote access products
that integrate voice and data along with Intelligent GUI and 100% remote
management tools for easy set-up and network management. Its customers include
Internet Service Providers (ISPs), resellers, and system integrators, primarily
in North America. Arescom was incorporated in January 1996 in Fremont,
California.
Since June 1997, the Company has invested significant resources in research,
product development, and engineering activities for its TeleWeb Broadcasting
System and its TeleWeb/WonderTV set-top boxes and other related products. As a
result of these R&D activities and the low volume of sales during the initial
commercialization of its products, the Company incurred net operating losses
during the fiscal year ended June 30, 1998. The Company anticipates that it
will continue to make expenditures for product development and marketing of
its Internet-related products and services in the foreseeable future.
BUSINESS SEGMENTS
Internet-Related Products and Services
The Company's Internet-related products and services segment consists of
Regent, TurboNet. and Arescom.
Regent designs, develops, provides and markets the Internet-related products
and services to electronics manufacturers, commercial cable-TV networks,
hotels, and general individual customers. Regent also generates its income from
granting its technology or license to electronic manufacturers and commercial
cable TV networks. The Company owns 87.3% of Regent's equity interest.
TurboNet designs, develops and markets telecommunications products to cable
operators, network service providers, and communications network users,
primarily in the United States and Asia. Its primary products include cable
modem chipsets, internal and external cable modems and cable modem accessories.
Arescom designs, manufactures and markets a complete line of high quality inter
-networking equipment, primarily routers, for PSTN, ISDN, xDSL and Ethernet
environments. It provides users with a broad range of remote access products
that integrate voice and data along with Intelligent GUI and 100% remote
management tools for easy set-up and network management. Its customers include
Internet Service Providers (ISPs), resellers, and system integrators, primarily
in North America.
Online Trading and Brokerage Services
The Company's online trading and brokerage services segment consists of USSF
and PMB. The Company is currently evaluating the relationship of these
activities to its Internet-technology activities in other areas.
USSF is a full service financial brokerage firm located on Wall Street in New
York, NY. With over 15 branches worldwide, USSF offers online securities
trading service and other financial and brokerage services to individuals and
institutions all around the world. USSF is registered as a Futures Commission
Merchant (FCM), and is a member of National Association of Securities Dealers
(NASD) and National Futures Association (NFA).
PMB is a Chicago-based securities brokerage firm that provides Internet-based
online trading services to self-directed, broker-assisted, individuals, money
managers, commodities trading advisers, and introducing brokers. PMB is
registered with the Commodity Futures Trading Commission (CFTC) as a Futures
Commission Merchant (FCM), and is a member of the National Futures Association
(NFA).
PRIMARY PRODUCTS AND SERVICES
The Company recently entered into several acquisition transactions intended to
provide a strong foundation for the Company's future business and to reinforce
its position as a leading provider and developer of the Internet -related
products and services with an emphasis on financial services. The Company also
licenses its technologies to electronics manufacturers, commercial cable TV
networks or contracts to manufacturers for production. While the Company does
not maintain manufacturing facilities, it has arrangements with several
manufacturers in Taiwan and China for the purpose of production. In order to
maximize the Company's benefit, the Company does not fix itself with only one
or two manufacturers. Instead, based on production quality, cost, and other
factors, the Company chooses different manufacturers from time to time.
Teleweb System and TeleWeb Set-Top Boxes
TeleWeb Systems
The TeleWeb system is an Internet broadcasting system that enables cable-TV
networks and cable-TV operators to broadcast the Internet contents and their
own commercial information and services to all cable TV networks subscribers.
The TeleWeb Broadcasting Systems sell at approximately $12,000.
TeleWeb Set-Top Boxes
The Company's TeleWeb set-top boxes are primarily designed for the Chinese
market as end-user terminals for the TeleWeb broadcasting system to receive
TeleWeb broadcasting information, and at the same time, they can be operated
as an independent Internet access device for going online via telephone
connection. The TeleWeb set-top boxes are sold at the price range of
approximately $250 to $400, depending on the models and variations.
There are many advantages for consumers and operators to use TeleWeb system
and its TeleWeb set-top boxes in the Chinese market: (1) ISP independent of
Internet access and no phone charges; (2) utilizing existing networks and no
new infrastructure investments needed; (3) information access controlled easily
by operators or by governments (a very important factor for the Chinese markets
and for other Asian countries); and (4) supporting both NTSC and PAL TV systems.
Supported by its TeleWeb system and TeleWeb set-top boxes, the Company is able
to compile and broadcast information to the Chinese cable-TV subscribers. These
information are organized into channels, such as shopping channel, shopping
guide channel, community service channel, home financial channel and online
education channel. The Company is currently negotiating with several government
-run cable TV operators in China to install its TeleWeb system and distribute
TeleWeb set-top boxes to cable TV subscribers.
The WonderTV set-top box to be marketed in the United States is an Internet
access device. It enables users to dial into Internet via regular phone
connection. Customers can use their home television as monitor to browse the
Internet. The WonderTV has a built-in modem and comes with a remote keyboard
and a remote control. Apart from being used in families, the WonderTV can also
be a valuable service device in hotel rooms, business conference rooms, and
even other public places. The WonderTV's unique functionality and easy-to-use
attributes open a door for those have little computer experience to go online,
trade online and entertain online.
Client Access Products
The Company's client access products include cable modem chipsets, internal
and external cable modems and cable data bridges.
Cable Modem Chipsets and Cable Modems
Cable modems provide dial-up access to the Internet, enterprise local area
networks (LANs) and a host of communications services. The Company was first
to manufacture cable modem with its own chipsets in the world, and its OEM
modem manufactured for Toshiba is the first of two DOCSIS cable modems
certified by CableLabs.
Cable Data Bridges
Cable data bridge is a device that offers system operators to hook a managed
network interface from a router or wide area network (WAN) to the broadband
CATV network, so that Ethernet traffic can be distributed to the cable modems
in end-users' home or offices. The Company has developed a flexible
configuration allowing the use of multiple return path channels per downstream
channel.
Inter-Networking Routers
Netlinker Routers
Routers are protocol-dependent devices that connect sub-networks together. The
Company offers a variety of backbone and remote routers for small-to-medium-
sized businesses to facilitate enterprise internetworking under PSTN, ISDN,
xDSL and Ethernet environments. With the router, an unlimited number of
Ethernet local area network users can access a Wide Area Network (WAN) via a
single ISDN line. The Company's products include ISDN BRI HUB/PBX router (for
Japanese market), Ethernet HUB/ISDN/DSU/POTS router, Apex 1100 router (for
North American and Korean markets), Apex 1000 and Flash 200 high-speed leased
line routers. The Company is the first and the only router manufacturer that
offers five methods of router configuration and management as standard on
router products.
Remote Managing Software
Remote managing software is widely used by network managers and Internet
service providers (ISPs) to install, monitor, troubleshoot, and maintain ISDN
connections. The Company's Remote Manager supports 16 Connection Profiles
providing a flexible array of dial-in and dial-out combinations, caller ID
(block) to prevent unwanted solicitors, faxes and errant dial-ins, while
checking SPID registration automatically. The Remote Manager's comprehensive
diagnostic capabilities allows network managers and ISPs to resolve
connectivity conflict problems quickly by using an intuitive GUI interface or
command line administration via the telenet or the local console. Because the
Company's remote managing software is able to set up client ISDN routers in
minutes, rather than three to five hours they were accustomed to, this software
is recommend by their clients nationally.
Online Trading and Brokerage Services
The Company provides securities brokerage and related financial services to
individuals and institutions all around the world, including self-directed,
broker-assisted, individuals, money managers, commodity trading advisers,
introducing brokers, and other corporate accounts.
The Company offers both full services and online financial trading, including
the purchase and sale of listed and OTC securities, options, futures and
commodities. The Company also trade fixed income investments, such as US
Treasuries, listed and OTC corporate bonds and municipal bonds. The Company's
online investing services include automated order placement, portfolio
tracking, real-time market commentary and analysis, and news. Other information
services are also available to all investors at the Company to meet their
varying investment and financial needs.
PATENTS, TRADEMARKS AND LICENSES
The Company is pursuing patent applications in certain foreign countries. There
can be no assurance that any of the Company's currently pending patent
applications or future applications will be granted in full or in part or that
claims allowed will be sufficiently broad to protect the Company's technology.
The Company currently holds all right, title, and interest in and to the
trademarks, copyrights, patent license of Amiga-Commodore for registration and
use in the People's Republic of China, Taiwan, Hong Kong, Macao and the Asian
bordering countries between the People's Republic of China and the former
Soviet Union.
COMPETITION
As the Company enters the market for Internet related products, it expects to
experience significant competition from both existing competitors and
additional companies that may enter this market. Some of these companies have
greater technical, marketing, manufacturing, and financial resources than the
Company.
To address the competitive nature of the business, the Company is constantly
seeking innovation to maintain its competitive edge. This includes using newly
developed technologies to continuously upgrade its electronic products that our
customers require to stay competitive in the future.
The markets for the Company's products are highly competitive and are
characterized by rapid technological advances, frequent new product
introductions, evolving industry standards, and competitive price pressures.
The Company will continue to develop and market appropriate products to remain
competitive. The Company believes that one of the factors in its competitive
success is its continued commitment of resources to research and development.
SIGNIFICANT CUSTOMERS
For the year ended June 30, 1998, the Company had three customers with billings
in excess of 10% of the Company's 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%), D&T Corp., and $1,815,000 (9.8%).
Although the Company believes that its relations with those three customers are
good, the Company does not have written agreements with any of its customers
that require the purchase of any minimum quantities of products and, therefore,
such customers could reduce or curtail their purchases at any time. As a
result, a substantial reduction in orders from existing customers would have a
material adverse effect on the Company unless the Company is able to attract
orders from new customers, of which there can be no assurance.
EMPLOYEES
The Company and its subsidiaries have 250 full-time employees. The Company also
employs independent contractors and other temporary employees in its software
development programs. None of the Company's employees is represented by a labor
union. The Company considers relations with its employee to be good.
ITEM 2. FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
"Consolidated Statements of Operations Data" and "Consolidated Balance Sheet
Data" are derived from the consolidated financial statements of the Company and
its subsidiaries, which financial statements have been audited by Schiffman
Hughes Brown, the Company's independent public accountants, to the extent
indicated in their report included elsewhere herein.
RESTATEMENT
The financial date for 1997, 1998 and the first nine months of fiscal 1999
given below has been restated pursuant to the comments of the United States
Securities Exchange Commission. Three transactions have been restated: (1) On
September 18, 1997, the Company issued 6 million shares of its common stock to
Rightiming Electronics Corp. in exchange for 6 million shares of common stock
of Regent Electronics Corp., a subsidiary of the Company. The acquisition of
Regent's equity was then valued at $1,532,042 on the basis of Regent's book
value at that time, and this transaction was now revised using the fair value
of consideration given, which in this case is the $5 per share of the Company's
common stock as traded on the OTC Bulletin Board; (2) In March 1997, Richtime
Far East Ltd. was created by the Company, as a wholly-owned subsidiary, to
engage in garment and textile import-export business. This Hong Kong-based
operation was previously not consolidated with the Company. The Company has
revised its treatment and Richtime's operating results has been consolidated
with the Company; and (3) the Company's acquisitions of US Securities & Futures
Corp. and Professional Market Brokerage, Inc. in February and March 1999,
respectively, were previously accounted for pooling of interest method on its
Form 10-Q for the quarter ended March 31, 1999. The Company has restated those
acquisitions by using purchase method accounting. The excess of acquisition
cost over the net assets acquired has been amortized on the straight-line basis
over 10 years.
The selected consolidated financial data set forth below is qualified in its
entirely by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", the
Consolidated Financial Statements, the notes thereto and the other financial
information included elsewhere in this report.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSAND, EXCEPT PER SHARE DATA)
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NINE MONTHS
ENDED MARCH 31 FISCAL YEARS ENDED JUNE 30
(Unaudited)
------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995 1994
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues ................... $23,630 $18,498 $1,991 --- --- ---
Cost of sales .............. 20,737 13,101 1,777 --- --- ---
------- ------- ------- ------- ------- ------
Gross profit ............... 2,893 5,397 214 --- --- ---
Operating Expenses
General and administrative. 3,266 3,962 260 18 17 1
Research and Development .. 1,620 4,372 104 --- --- ---
------- ------- ------- ------- ------- ------
Total operating expenses. 4,886 8,334 364 18 17 1
Operating income (loss)....... (1,993) (2,937) (150) (18) (17) (1)
Other income (expenses), net.. 14 (10) 413 40 3 ---
Income from continuing operations (1,979) (2,947) 263 22 (14) (1)
------- ------- ------- ------- ------- ------
Discontinued operations
Gain on disposal of LPF ... 100 --- --- --- --- ---
Net income before income taxes
& minority interest ...... (1,879) (2,947) 263 22 (14) (1)
Income tax benefit (expenses).. 18 81 (124) --- --- ---
Minority interest in loss of
Consolidated subsidiary .... (46) 218 82 --- --- ---
Net income (loss) ............. $(1,814) $(2,649) $221 $22 $(14) $(1)
========= ========= ========= ========= ========= ======
Net income (loss) per share
Basic ..................... $(0.04) $(0.06) $0.01 $0.00 $0.00 $0.00
Diluted .................... $(0.04) $(0.06) $0.00 $0.00 $0.00 $0.00
Weighted average
shares outstanding ......... 48,534 44,421 29,238 26,799 26,860 17,003
AT MARCH 31 AT JUNE 30
(Unaudited)
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1999 1998 1997 1996 1995 1994
CONSOLIDATED
BALANCE SHEET DATA:
Cash and cash equivalents ..... $ 1,446 $ 3,263 $ 357 $ 213 $ 221 ---
Working capital ............... 107,827 11,181 1,052 213 221 ---
Total assets .................. 208,997 45,455 8,404 385 221 ---
Long-term obligation .......... --- --- --- --- --- ---
Total shareholders' equity .... 151,100 35,875 5,917 385 217 ---
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion of the consolidated financial condition and
results of operations of Lotus Pacific, Inc. and its subsidiaries for the
fiscal years ended June 30, 1998 and 1997 and for the three-month and nine-
month periods ended March 31, 1999 and 1998. It should be read in conjunction
with the Consolidated Financial Statements of Lotus Pacific, the Notes thereto
and other financial information included elsewhere herein. This management's
discussion includes forward-looking statements made based on current management
expectations. These statements are not guarantees of future performance, and
the actual outcomes may differ materially from what is expressed or forecasted.
There are many factors that affect the Company's business and its results of
operations, including the factors discussed below.
GENERAL
Lotus Pacific, Inc. (the "Company" or "Registrant") is an Internet technology
and services company that, through its five subsidiaries, develops and markets
Internet-related products and services in the United States and international
markets and offers online trading and brokerage services. The Company's Common
Stock is currently traded on the OTC Bulletin Board under the symbol "LPFC".
The Company operates in two segments: (1) the development and marketing of the
Internet-related products and services. Its products include TeleWeb systems,
TeleWeb set-top boxes, WonderTV set-top boxes, Internet routers, cable modems
and cable modem chips; and (2) on-line trading and full service brokerage
services. Regent, Arescom. and TurboNet are three subsidiaries of the Company
that are engaged in business involving Internet-related products and services.
USSF and PMB are engaged in the business of providing on-line trading and full
service brokerage services.
During the quarter ended March 31, 1999, the previously announced acquisitions
of PMB, USSF, TurboNet and Arescom were consummated. After the acquisitions,
the Company owns 100% of equity interests in each of USSF and PMB, and 81% of
the equity interests in each of TurboNet and Arescom. The Company is currently
evaluating the relationship of the activities of PMB and USSF to its Internet-
technology activities in other areas.
The purchase method was used to account for each of the acquisitions of USSF,
PMB, TurboNet and Arescom. The excess of the purchase prices over the fair
values of net assets acquired (a total of approximately $109.6 million) was
recorded as goodwill of acquired businesses and is being amortized on a
straight-line basis over 10 years.
RESULTS OF OPERATIONS
FISCAL QUARTERS ENDED MARCH 31, 1999 AND 1998
The acquisition of PMB was consummated on February 25, 1999, USSF on March 1,
1999, and TurboNet and Arescom on March 31, 1999, respectively. Accordingly,
for the quarter ended March 31, 1999, the Company's results of operations
included the results of Regent, USSF (from March 1, 1999 to March 31, 1999) and
PMB (from February 25, 1999 to March 31, 1999). Since the acquisitions of
TurboNet and Arescom were consummated on the last day of this quarter and those
acquisitions were accounted for on the purchase method, the results of
operations of TurboNet and Arescom were not included.
REVENUES
For the quarter ended March 31, 1999, the Company's revenue increased 523% to
$11.8 million, compared with $1.9 million in the quarter ended March 31, 1998.
Of the total revenues for the quarter ended March 31, 1999, $10.2 million,
approximately 86.6% of the Company's total revenue, was derived from Regent,
mostly due to its sale of newly released WonderTV set-top boxes. For the
quarter ended March 31, 1999, USSF and PMB contributed $1.58 million, about
13.4%, of revenue to the Company. For the nine months ended March 31, 1999, the
Company's revenue increased 175% to $23.6 million from $8.60 million of the
prior year.
DISCONTINUED OPERATIONS
In order to concentrate on its Internet-related products and services, on
September 30, 1998, the Company sold all of its textile and apparel business
(LPF International Corp. and Richtime Far East, Ltd.) to Clarinet Overseas Ltd.
for an aggregation consideration of $2.5 million in cash. The Company had
$100,000 of gain from sale of LPF and Richtime. Since then, the Company had no
revenue from textile and apparel business.
The Company's sales from its textile and apparel business for the nine months
ended September 30, 1998 was $5.64 million, approximately 40% of the Company's
total revenue.
COST OF REVENUES
Cost of revenues consists mainly of purchases and commissions paid to brokers
and clearing firms. For the quarter ended March 31, 1999, the Company's cost
of revenues increased to $10.8 million, compared with $1.9 million in the prior
year. This increase was primarily because of increased business activities and
the commissions paid to brokers and clearing firms by USSF and PMB, the
Company's two newly acquired subsidiaries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of selling,
general and administrative expenses, such as travel, selling, communications,
employee benefits, management, administrative and office rents. For the quarter
ended March 31, 1999, selling, general and administrative expenses increased
$369,000, or 76%, to $851,000 from $482,000 during the same period of the last
year. The increase was primarily because of the expenses incurred in the
Company's newly acquired financial businesses.
RESEARCH AND DEVELOPMENT
For the quarter ended March 31, 1999, research and development expenses
decreased to $364,000, compared with $1.9 million for the quarter ended March
31, 1998. For the nine months ended March 31, 1999, the R&D expense of the
Company decreased 78% to $1.62 million compared to the same period of the last
year. The decrease in research and development expenses was primarily because a
number of R&D projects were completed, as well as outsourcing consulting
expenses have been reduced.
GOODWILL AMORTIZATION
The Company has accumulated approximately of $138.0 million of goodwill from
acquisitions of businesses since September 1997. The goodwill is to be
amortized on the straight-line basis over 10 years. For the quarter ended March
31, 1999, the Company's goodwill amortization was $373,000, compared with
$356,000 for the quarter ended March 31, 1998. For the nine months ended March
31, 1999, goodwill amortization was $1.10 million, about 5% of the Company's
total cost and expenses. Beginning from April 1, 1999, goodwill amortization is
expected to increase significantly when amortization of an additional $109.6
million of goodwill commences.
NET INCOME (LOSS)
For the quarter ended March 31, the Company had net loss of $722,000, compared
with $$2.6 million of net loss for the same period of the prior year. The
decrease in net loss was mainly due to the fact that, compared to the prior
year, revenues increased 523%, and at the same time, cost and expenses
increased only 163%. On a year to date basis, net loss decreased to $1.82
million of loss from $3.43 million of loss for the same period of the last
year. For the first nine months of fiscal 1999, the Company's diluted earning
per shares was $0.04 of loss compared with $0.07 of loss for the same period of
fiscal 1998.
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
REVENUES
During the fiscal 1998, the Company generated its revenue primarily from resale
of chipsets and sales from its textile and apparel business. The Company's
revenues increased to $18.5 million in fiscal 1998 from $2.0 million in fiscal
1997. This increase was because the Company then generated its revenue mainly
through its two subsidiaries, Regent and Richtime Far East, Ltd. Those two
subsidiaries were not operational until March - April 1997. For the fiscal year
ended June 30, 1997, the Company had only $2.0 million of sales, wholly from
its textile and apparel business. Stating from fiscal 1998, the Company's
revenue began to increase, primarily due to the product development and
marketing efforts of the Company.
The Company's products, TeleWeb broadcasting systems and TeleWeb/WonderTV set-
top boxes, are marketed to electronics manufactures, commercial cable TV
networks, and hotels. In order to manufacture the Company's products, the
manufactures must obtain the dedicated chipsets and the accompanying software.
Therefore, the Company sells the chipsets to those companies that assemble and
market the set-top boxes. For the year ended June 30, 1998, the Company's
revenue from resale of chipsets was $6.16 million, about 33% of the Company's
total revenue.
For the fiscal 1998, the Company has royalty revenue of 1.8 million, about 10%
of the Company's total revenue. The royalty revenue was from non-refundable,
one-time fee that permitted the third parties to market and distribute the
Company's products in China. The Company is expected to continue to receive
royalty payments as it continues to market its TeleWeb/WonderTV set-top boxes
and TeleWeb System.
The Company's revenue from its textile and apparel business, for the year ended
June 30, 1998, was $10.54 million, approximately 57% of the Company's total
revenue. For the fiscal 1998, the Company's textile and apparel business
generated $565,916 of net income (see Financial Statement Notes 13 for more
information).
DISCONTINUED OPERATIONS
On September 30, 1998, the Company sold all of its textile and apparel business
to Clarinet Overseas Ltd. for an aggregation consideration of $2.5 million in
cash in order to concentrate on its Internet-related products and services. The
Company had $100,000 of gain from sale of its textile and apparel business.
Since then, the Company had no revenue from textile and apparel business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist primarily of personnel
costs, including all compensation and employee benefits, and support costs
including utilities, insurance, travel, communications, office rents,
depreciation and amortization expenses and all costs associated with a
reporting company. Selling, general and administrative expenses increased $3.70
million, about 14 times, to $3.96 million in fiscal 1998 from $259,887 in
fiscal 1997. The primary reason for the increase was due to the fact that the
Company has not fully operated until April 1997. Accordingly, the Company's
expenses on office rent, selling, travel, consulting, legal and accounting
expenses significantly increased in fiscal 1998.
Of the total selling, general and administrative expenses, approximately 36%,
i.e., $1.41 million, were goodwill amortization expenses. The Company acquired
an additional 17% of equity interest in Regent on September 18, 1997. The
excess of acquisition cost over the net assets acquired (approximately $28.5
million) has been amortization as goodwill on the straight-line basis over 10
years.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with the
design and testing of new technologies and products. These costs relate
primarily to the costs of materials, personnel, and engineering designing, and
R&D related consulting fees. For the year ended June 30, 1998, the Company
spent $4.37 million in research and development, approximately 52% of the
Company's total operating expenses, compared with $103,870, about 28% of the
total operating expenses in fiscal 1997. The significant increase in research
and development expenses was primarily a result of developing the TeleWeb
broadcasting system and TeleWeb/WonderTV set-top boxes. The Company's software
development costs are recorded in accordance with Statement of Financial
Accounting Standards No. 86. To date, the Company has expensed all of its
internal software development.
NET INCOME (LOSS)
As a result of the factors discussed above, the Company's operating income
decreased from $221,133 of net income in fiscal 1997 to $2.65 million of loss
in fiscal 1998. For the year ended June 30, 1998, the Company has net loss of
$0.06 per diluted share, compared with zero in fiscal 1997.
INCOME TAXES
The Company's loss in fiscal 1998 may be utilized as an offset against future
earnings, although there is no assurance that future operations will produce
taxable earnings.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's liquid assets, consisting of cash and cash
equivalents, total $1.44 million, compared to $3.26 million and $357,212 at
June 30, 1998 and 1997, respectively.
Net cash used by operating activities was $2.1 million for the first nine
months of fiscal 1999, compared with $3.6 million of net cash used by operating
activities during the first nine months of fiscal 1998. The decrease was a
combination of the increases in accounts receivable, inventories, notes
receivable, accounts payable and goodwill amortization. The Company's investing
activities used $490,000 of cash for the nine months ended March 31, 1999,
primarily due to acquisition of business ( $2.5 million for USSF and $240,000
for PMB), as well as $2.5 million of proceeds from sale of the Company's equity
in LPF and Richtime Far East. For the first nine months of fiscal 1999, cash
flow from financing activities was $745,000, which were from issuing 124,500
shares of the Company's common stock, as compared to $8.19 million provided by
financing activities for the first nine months of fiscal 1998, which were
primarily from the equity investment by Hambrecht & Quist Asia Pacific Ltd. As
of March 31, 1999, the Company had 63,204,474 shares of Common Stock with par
value $.001 per share and 4,300 shares of Class A Preferred Stock issued and
outstanding.
For the quarter ended March 31, 1999, the Company issued a total of 16,250,666
shares of its common stock to acquire businesses. Please see Note 3: Business
Acquisition for more detail information ("Notes to Interim Consolidated
Financial Statements for the Quarter Ended March 31, 1999").
Since 1997, the Company has financed a portion of its operations and
expenditures through the sale of its capital stock. On February 8, 1998,
Hambrecht & Quist Asia Pacific Ltd. and its affiliate Asia Pacific Growth Fund
II, L.P. (collectively "H&Q") invested $6 million to acquire 1,500,000 shares
of Preferred Stock of Regent Electronics Corp. H&Q's acquisition represented
approximately 5.45% of Regent's equity interest. Pursuant to the agreement,
subject to certain conditions, the Regent shares held by H&Q may be converted
into Common Stock of the Company after January 1, 2000 and on or before March
31, 2000. During the period of July 1, 1997 through March 31, 1999, the Company
sold 660,500 shares of the Common Stock to eleven accredited investors for an
aggregate consideration of $2,936,750.
At June 30, 1998, the Company had working capital of $8.2 million. During the
Fiscal 1998, operating activities provided $748,063 of net cash, investing
activities used $ 114,346 of net cash for equipment purchases, and financing
activities provided $2.27 million of net cash, primarily from the Company's
private placements.
As to date, the Company has no material commitments for capital expenditures.
The Company believes that the anticipated funds from operations and the
existing cash and cash equivalents will be sufficient to meet its cash
requirements for at least the next twelve months. Although the Company's
operating activities may generate cash to cover its operating costs, the
Company's continuing operating and investing activities may require the Company
to obtain additional sources of financing, either from the secondary offerings
or from private placements. There can be no assurance that any necessary
additional financing will be available to the Company on commercially
reasonable terms, if at all.
The Company has no long-term debt and has trade credits available from many
corporations with each credit line up to $50,000, net 30 days.
The Asian economic crisis will have certain impact on the Company's operations
and marketing in the future. The Company is mainly concentrating on the Chinese
market for its sales of TeleWeb Broadcasting Systems and TeleWeb set-top
boxes.The Company's operation may be severely affected by the risks of slow
economic growth, devaluation of the Chinese currency, and restrictions on
transferring foreign currencies. In addition to the Chinese market, the
Company has decided to market its Internet-related products and services in
the U.S. and European markets to reduce its Asian risk.
In fiscal 1999, the Company, through its subsidiary Regent Electronics Corp.,
will actively look for business opportunities in China and its bordering
countries to manufacture and market its TeleWeb broadcasting system and TeleWeb
series products. The Company has been contacting several big TV manufacturers
in China seeking a contractor for such purpose. The Company is confident in its
market potential based on the continuation of economic growth and the
increasing demand for Internet access and multimedia entertainment in China. It
is part of the Company's business strategy to use the revenues generated from
sales of the TeleWeb system and TeleWeb series products to finance the
Company's research and development activities in its new generation of products
for multimedia home entertainment.
Some international companies with capability of producing similar products are
also trying to enter into the China's multimedia entertainment market. To
improve its competitiveness, the Company focuses on products that are
accustomed to China's cultural tradition and the Company will persist in its
aggressive drive to reduce business cost. While subject to many variables, the
Company anticipates revenue increases in the coming fiscal year. At the same
time, the Company will continue to raise capital necessary for its expansionary
operations and research and development activities.
Factors that May Affect Future Results
Factors that could cause future results to differ from materially these
expectations include the following: growth in the multimedia electronics
industry; lower than expected customer orders; delays in receipt of orders or
cancellation of orders; competitive factors, such as increased competition, new
product offerings by competitors and price pressures; the availability of parts
and supplies at reasonable prices; changing technologies; changes in product
mix; new product development; the timing of the negotiation of new contracts;
and the general domestic and international economic conditions.
In additional to the information contained in this Report, there are other
factors that could cause the Company's future results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company.
Although the Company has been considering entering retail channels in the
future, all of the Company's sales as to date are wholesales. For the year
ended June 30, 1998, the Company had three customers with billings in excess
of 10% of the Company's total revenue. The Company does not have written
agreements with any of its customers that require the purchase of any minimum
quantities of products and, therefore, such customers could reduce or curtail
their purchases at any time. As a result, a substantial reduction in orders
from existing customers would have a material adverse effect on the Company
unless the Company is able to attract orders from new customers, of which there
can be no assurance.
The Company's foreign sales are denominated in the U.S. dollars. The Company
does not incur any foreign currency risks; however, fluctuations in currency
exchange rates could cause the Company's products and services to become
relatively more expensive to foreign customers, which may result in a reduction
in foreign sales or the profitability of any of such sales.
Historically, the size and timing of sale transactions have varied
substantially from quarter to quarter, and the Company expects such variations
to continue into the future. Because a significant portion of the Company's
overhead is fixed in the short-term, the Company's results of operations may be
adversely affected if revenues fall below the Company's expectation.
YEAR 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by "Year 2000" issue, which has arisen because many existing
computer programs and chip-based embedded technology systems may recognize a
date using "00" as the year 1900 rather than year 2000. This could result in a
system failure or miscalculations which may cause disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has assembled a team of internal staff to oversee the matter and is
underway in completing its Year 2000 assessment. Internally, the Company has
upgraded its business system to address the Year 2000 issue. Externally, the
Company has surveyed and will continue to survey its suppliers, financial
institutions, and other organizations to ensure that those parties have
appropriate plans to be "Year 2000 Compliant." Costs incurred to date and
estimated costs to complete the Company's Year 2000 compliance efforts are not
expected to be material.
The Company has substantially completed many procedures to test and replace
existing computer systems. Additionally, the Company continues to assess and
test newly engaged suppliers and their products for Year 2000 compliance as
part of the Company's normal business operations. The Company will continue to
monitor its Year 2000 Compliance program, address any material issues, and
develop contingency plan as it deems appropriate.
The failure to identify or correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain business activities or operations
such as the Company's ability to service its customers. Such failures could
materially and adversely affect the Company's results of operations, liquidity,
and financial condition. The Company's Year 2000 assessment process is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of its material suppliers and customers.
ITEM 3. PROPERITIES
The Company's corporate headquarters, including Regent's offices and R&D
facility, is located at 200 Centennial Avenue, Piscataway, New Jersey and
consist of approximately 9,400 square feet under a lease that expires in June
4, 2002. The other four subsidiaries of the Company are located in San Diego,
CA (13,013 SF), Fremont, CA (11,435 SF), New York, NY (14,000 SF) and Chicago,
IL (4,595 SF). The Company believes that its existing facilities are adequate
to meet its requirements for the near term and that additional space will be
available on commercially reasonable terms if needed.
The following table summarizes the lease agreements held by the Company and its
subsidiaries relating to offices and other facilities:
Location Lease Term Commence Date Expiration Date
---------- ---------- -------------- ---------------
Piscataway 5 years June 5, 1997 June 4, 2002
New Jersey
Middlesex annually June 5, 1998 renewable
New Jersey renewable
San Diego 5 years July 30, 1997 July 31, 2002
California
Fremont 5 years March 30, 1997 March 31, 2002
California
New York 5 years January 30, 1995 Jan. 30, 2000
New York
Chicago, IL 5 years March 1, 1997 Feb. 28, 2002
Illinois
Overseas, Regent Electronics Corp. maintains a technical support and sales
office space in Shanghai, China.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known by the Company
regarding the beneficial ownership of the Company's Common Stock as of June 10,
1999, by (i) each person who is known by the Company to own beneficially more
than 5% of the Company's outstanding Common Stock; (ii) each of the Company's
officers and directors, and (iii) directors and officers of the Company as a
group.
FIVE PERCENT (5%) SHAREHOLDERS
NO. OF SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED OF CLASS
---------------------------------- -------------- --------
Lotus International Holdings Corp. 8,286,670 11.3%
308 East Bay Street
Nassau, Bahamas
Yao Investment Corp. 8,000,000 10.9%
308 East Bay Street
Nassau, Bahamas
Rightiming Electronics Corp. 6,000,000 8.2%
P.O. Box 186
Piscataway, NJ 08855-0186
Evolving Investments Ltd. 3,100,000 4.2%
25G Block 10 Locwood Ct.
Kingswood Villas Yuen Lon
NT Hong Kong
The percentages indicated are based on the Company's outstanding Stock Options
and Warrants exercisable as of June 10, 1999 and 63,784,470 shares of Common
Stock issued and outstanding as of June 10, 1999.
As of June 10, 1999, there were 63,784,470 shares of the Company's Common Stock
and 4,300 shares of Series A Preferred Stock issued and outstanding. Each share
of Common Stock is entitled to one vote per share.
The 4,300 outstanding shares of Class A Preferred Stock are owned by Lotus
International Holdings Corp. Such shares are convertible into an equal number
of shares of Common Stock.
None of the Company's officers and directors own shares individually, except
stock options. See Item 6. "Executive Compensation".
James Yao, Chairman of the Board of the Company and James Liu, Vice President
of the Company, are two majority shareholders of Lotus International Holdings
Corp., and both of them serve on the Board of that entity.
James Yao owns Yao Investment Corp.; Sunman Lee owns Evolving Investments Ltd.,
and Robert Wang and John Wang are principal shareholders of Rightiming
Electronics Corp.
In addition to the shares of Common Stock and Series A Preferred Stock issued
and outstanding, the Company also issued stock options for 1,090,000 shares of
common stock in May 1997 to certain directors and officers of the Company as
part of their compensation. All options are exercisable at $6.00 per share and
will expire in May 2002.
The following table sets forth the certain information known to the Company
with respect to beneficial ownership of the Company's common stock options as
of June 10, 1999. Options to purchase a total of 1,090,000 shares of common
stock were issued and outstanding as of June 10, 1999.
BENEFICIAL OWNERS NO. OF SHARES
--------------------------------------- -------------
James Yao, Chairman of the Board 180,000
Jeremy Wang, President & Director 180,000
David Leung, Vice President & Director 500,000
James Liu, Vice President & Director 180,000
Cheng Wang, Former Director 50,000
All directors and executive officers
as a group 1,090,000
In May 1997, the Company issued 8,000,000 redeemable Common Stock Warrants to
Evolving Investments Limited. Each of the warrants entitles the holder to
purchase a share of the Company's Common Stock at $3.00 per share until May 5,
2002.
There are no arrangements including pledges by any person of the Company, which
may result in a change in control of the Company at a subsequent date.
Item 5. DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors, executive officers and their respective ages
and positions as of June 10, 1999 are as follows:
Name Age Date Appointed Position
---- ---- -------------- -------------------------------
James Yao (1) (2) ... 45 Jan. 1997 Chairman of the Board & Director
Jeremy Wang (1) (2).. 44 March 1999 President & Director
John O. Hing ........ 52 March 1999 Chief Finance Officer
Huaya Lu Tung ....... 46 March 1999 Treasurer
David Leung ......... 54 Jan. 1997 Vice President & Director
James Liu ........... 44 Jan. 1997 Vice President & Director
Thomas V. White ..... 47 March 1999 Vice President
Stefan H. Benger .... 31 March 1999 Vice President
Harold Tuan ......... 45 April 1999 Vice President
Max Lu .............. 45 April 1999 Vice President
De-Liang Wang ....... 41 March 1999 Vice President
Richard Ho .......... 45 March 1999 Vice President
C. Jeffrey Gull ..... 38 March 1999 Vice President
Simon Gu (1) ........ 44 Sept. 1997 Director
Jason Chang (1) ..... 45 March 1999 Director
Gary Huang .......... 43 Jan. 1997 Secretary & Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The following are biographies of the Company's executive officers and directors
for the recent years.
JAMES YAO has been Chairman of the Company's Board of Directors since January
1997. Previously he served as President of the Company until March 1999. He has
over 15 years of business experience in multinational companies as well as new
ventures in textile and apparel industry, most recently with Yao Investment
Corp. and Lotus International Holdings Corp., where he served as Chairman. Mr.
Yao graduated from Miya Gawa University in Tokyo, Japan.
JEREMY H.WANG has been President of the company since March 1999. He was
elected as a Director of the Company in 1997. In the past fifteen years, Mr.
Wang worked for Bell Laboratories and AT&T, and has been an independent
consultant in the telecommunications industry. He has extensive experiences in
the communications system development and product /project management. Mr. Wang
has an MS in Engineering from University of Virginia, and an MS in Computer
Science from New Jersey Institute of Technology.
JOHN O. HING has been appointed as Chief Financial Officer since March 1999.
After earning his MBA from Harvard University in 1974, Mr. Hing was employed at
Merrill Lynch in various capacities of substantial responsibility for 19 years.
Most recently he served as CEO of U.S. Securities & Futures Corp. in New York,
NY. He was a member of the Board Governor of New York Mercantile Exchange and a
former president of Research Division of the Futures Industry Association.
HUAYA LU TUNG has been the Company's Treasurer since March 1999. Currently she
serves as Chairman of U.S. Securities & Futures Corp. Previously she worked for
AT&T for six years. Mrs. Tung received her bachelor degree from East
Stroudsburg University and her MA degree from University of Rochester.
DAVID LEUNG has been a Director and Vice President of the Company since January
1997. Previously he served as General Manager of Shenzhen New Technology
Development Co., Ltd. in Shenzhen, China. He is a director of Lotus
International Holdings Corp. He was employed as a research fellow with
Electronics Research Institute in Guangzhou, China under Academia Sinica from
1984 to 1992. Mr. Leung had a BS degree from Beijing Institute of Technology.
JAMES LIU has been a Director and Vice President of the Company since January
1997. Prior to his joining the Company, Mr. Liu served as President of JBL
International Inc., an apparel agent in New York, NY, that contracts apparel
orders and transfers finished goods between wholesalers and apparel
manufacturers. He is a director of Lotus International Holdings Corp. From 1983
to 1990, he was a manager in charge of international trade in Jiangsu
Provincial Government of the People's Republic of China. He graduated with a BA
degree from Nanjing University, China.
HAROLD TUAN was appointed as Vice President of the Company and director of
TurboNet Communications in April 1999. Mr. Tuan has over 20 years of research
and development experience in digital TV system, Data-Over-Cable System, Signal
Processing and Communication Systems. Mr. Tuan is the founder of TurboNet
Communications and currently serves as its President.
MAX LU was appointed as Vice President of the Company and director of Arescom
Inc. in April 1999. Mr. Lu has more than 11-year management, marketing and
engineering experiences in computer and communication industries. Mr. Lu was
the Vice President of Engineering and marketing at CNet. He had led CNet to
become the technology leader in Taiwan and to go public in December of 1995.
Before CNet, Mr. Lu was the founder and Vice President of Lanwan Technologies
in San Jose, California. His engineering experience includes working for Cisco,
Hughes, ERSO, and NEOTECH from 1983 to 1991. Mr. Lu currently serves as
President of Arescom, Inc.
THOMAS V. WHITE has been appointed as Vice President of the Company since March
1999. He has over 20 years of experience in a management and sales enhancing
the overall productivity of the full-service brokerage operations. Before
joining Lotus Pacific, Mr. White is President of U.S. Securities and Futures
Corp. He has been a senior executive in many companies in the financial trading
industry. Previously he was senior vice president of American Futures Group and
Index Futures Group. Mr. White holds a BA degree in Business Administration and
Quantitative Analysis from Bernard Baruch College.
STEFAN H. BENGER has been appointed as Vice President of the Company since
March 1999. Mr. Benger has been the CEO and Chairman of Professional Market
Brokerage, Inc. ("PMB") since 1995. Under Mr. Benger's leadership, PMB becomes
a leading FCM with a reputation to be one of the most advanced futures trading
firms in the global marketplace. Before founding PMB, Mr. Benger was president
of WB Werbeagentur Stefan Benger GmbH and trading director at Futures & Options
GmbH. Having experience in Europe and the United States, he is very familiar
with the international aspects of trading various financial products, exchange
and over-the-counter securities. He is a frequent speaker at various industry
associations and conferences. His professional expertise is frequently quoted
in industry publications.
DE-LIANG WANG has been appointed as Vice President of the Company since March
1999. After receiving his MS degree in Electrical Engineering and Mechanical
Engineering from the University of Texas at Austin, Mr. Wang served as a senior
hardware engineer at AT&T Bell Laboratories. He has extensive experience in
leading major system design projects.
RICHARD HO has been appointed as Vice President of the Company since March
1999. Prior to his joining the Company, Mr. Ho was President of Rightiming
Electronics Corp. He has many years of experience in corporate administration
and planning. Mr. Ho received his B.A in International Business in 1986 in
China.
C. JEFFREY GULL has been appointed as Vice President of the Company since March
1999. He began with the company on January 1, 1999. Prior to joining the
company, he was the director of Asia Development for Nu Skin International,
Inc. Mr. Gull spent over 8 years with Nu Skin working with New Market
Development and Operations for their Asia Pacific region. He has also worked in
the financial and computer software industries with Dean Witter and Clyde
Digital. Mr. Gull has a B.S. in business finance from Brigham Young University.
SIMON GU has been a director since September 1997. Mr. Gu has more than twelve
years of experience in electronics and computer industries, and has been a
senior computer engineer at AT&T since 1990. He held several senior technology
positions at US Army Armament Research, Development and Engineering Center and
Information Department of Town & County International, Inc. from 1987 to 1990.
Mr. Gu holds a Master of Sciences in computer sciences from Polytechnic
University of New York and a BS in computer sciences at Kean College of New
Jersey.
JASON CHANG has been selected as director of the Company since March 1999. He
has many years of experience in corporate management and international trade.
He was Deputy General Manager of Minmetals International Trading Co, a Chinese
governmental corporation; and had been served as president of Minmetals U.K.
Ltd., president of Chi Mei Corporation (USA), and president of Harmony Corp.
Mr. Chang served as a board member at several domestic and international
corporations.
GARY HUANG has been Corporate Secretary of the Company since January 1997.
Prior to joining the Company, Mr. Huang served as Senior Accountant / Financial
Analyst at Rightiming Electronics Corp. with responsibilities in accounting,
financial reporting and treasury functions. He holds an MBA in finance from
University of New Haven and an MA in Economics from Yale University.
All directors hold office for their elected term or until their successors are
duly elected and qualified. Should a director be disqualified or unable to
serve as a director, the vacancy so arising may be filled by the Board of
Directors for the unexpired portion of his term. All officers serve at the
discretion of the Board of Directors. There are no family relationships among
the members of the Board of Directors or any executive officers of the Company.
COMMITTEES AND BOARD COMPENSATION
The Board of Directors conducts its business through meetings of the Board of
Directors and through its committees. In accordance with the By-laws of the
Company, the Board of Directors has established an Audit Committee and a
Compensation Committee.
AUDIT COMMITTEE
The Audit Committee acts on behalf of the Board of Directors with respect to
the Company's financial statements, record-keeping, auditing practices and
matters relating to the Company's independent public accountants, including
recommending to the Board of Directors the firm to be engaged as its
independent public accountants for the next fiscal year; reviewing with the
Company's independent public accountants the scope and results of the audit
and any related management letter; consulting with the independent public
accountants and management with regard to the Company's accounting methods
and adequacy of its internal accounting controls; approving the professional
services rendered by the independent public accountants; and reviewing the
independence of the independent public accountants. The Audit Committee
consists of Messrs. James Yao, Jeremy Wang, Simon Gu and Jason Chang.
COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations to the Board of
Directors the appropriate compensation of directors and executive officers of
the Company. The Compensation Committee consists of Messrs. James Yao and
Jeremy Wang.
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.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the officers or directors has been involved in any material legal
proceedings that occurred within the last five years of any type as described
in Section 401(f) of Regulation S-K.
ITEM 6. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information concerning the
total compensation of the Company's executive officers for services rendered in
all capacities to the Company for the last three fiscal years ended June 30.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------- ----------------------------------------------
Restricted Securities
Names and Principle Other Annual Stock Underlying LTIP All Other
Position Year Salary($) Bonus($) Compensation Award Options/SAR Payouts Compensation
------------------- ---- --------- -------- ------------ ----- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Yao ....... 1998 68,000 --- --- --- --- --- ---
Chairman 1997 18,000 --- --- --- 180,000 --- ---
1996 --- --- --- --- --- --- ---
Jeremy Wang * 1999 120,000 --- --- --- --- --- ---
President 1998 N/A --- --- --- --- --- ---
John O. Hing* 1999 120,000 --- --- --- --- --- ---
Chief Financial 1998 N/A --- --- --- --- --- ---
Officer
James Liu ...... 1998 68,000 --- --- --- --- --- ---
Vice President 1997 --- --- --- --- 180,000 --- ---
1996 --- --- --- --- --- --- ---
David Leung ..... 1998 --- --- --- --- --- --- ---
Vice President 1997 --- --- --- --- 500,000 --- ---
1996 --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------------
</TABLE>
* Messrs. Jeremy Wang and John O. Hing were appointed in March 1999. The salary
indicated above are their initial annual base salary.
Each of the options issued above is currently exercisable at an exercise price
of $6.00 per share and shall be expired on May 15 and May 30, 2002. As of March
31, 1999, no stock options have been exercised.
There are no reportable transactions between Lotus Pacific, Inc. and Lotus
International Holdings Corp., Yao Investment Corp., Rightiming Electronics
Corp., Evolving Investments Ltd. other than disclosure as shareholders.
ITEM 7. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
On December 2, 1997, Lotus International Holdings Corp., a shareholder of the
Company, disposed of the Company's Common Stock to its shareholders, affiliate
companies and related parties. From this transaction, Yao Investment Corp.
received 8 million shares of Common Stock of the Company. James Yao, Chairman
of the Board of the Company, owns Yao Investment Corp.
ITEM 8. LEGAL PROCEEDINGS
There have been no changes in the legal proceedings previously reported in the
Company's Annual Report on Form 10-K/A filed with the Securities and Exchange
Commission on January 8, 1999 for the year ended June 30, 1998.
ITEM 9. MARKET PRICE AND DIVIDEND ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock, par value $0.001, has been traded on the OTC
Electronic Bulletin Board under the symbol "LPFC" since December 1, 1994, and
there are currently nine (9) market makers for the stock of the Company.
The following table sets forth the high and low closing prices of the Company's
Common Stock as reported on the OTC Bulletin Board from January 1997 through
June 10, 1999. These price quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
Quarter Ended High Low
------------------------- ----- -----
1997
----
March 31, 1997 .......... $ 2.50 $0.13
June 30, 1997 ........... $ 4.50 $1.50
September 30, 1997 ...... $ 7.00 $2.38
December 31, 1997 ....... $ 7.13 $4.87
1998
----
March 31, 1998 .......... $ 7.50 $5.50
June 30, 1998 ........... $10.50 $5.88
September 30, 1998 ...... $11.50 $8.50
December 31, 1998 ....... $10.31 $7.38
1999
----
March 31, 1999 .......... $ 7.44 $6.13
April 1, 1999 through
June 10, 1999 ........... $ 7.44 $6.88
NUMBER OF REGISTERED HOLDERS
The number of registered holders of the Company's Common Stock as of June 10,
1999 was about 613, and the Company believes that there are a greater number of
beneficial owners of shares of its Common Stock.
DIVIDENDS
To date, the Company has not declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all available
funds for use in the operation and expansion of its business, and no cash
dividend are expected to be paid on the Common Stock in the foreseeable future.
Further, there can be no assurance that the proposed operations of the Company
will generate the revenue and cash flow needed to declare cash dividends in the
foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The Company believes that the transactions set forth below were exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), by reason of Section 4(2) of the Securities Act. In each of these
transactions, 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 the Company 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 September 18, 1997, the Company issued 6 million shares of its Common Stock
to Rightiming Electronics Corp. in exchange for 6 million shares of Regent
Electronics Corp., a subsidiary of the Company. The purpose of the share
exchange was to gain more control over the subsidiary of the Company.
On February 8, 1998, the Company entered into a stock subscription agreement
with Hambrecht & Quist Asia Pacific Ltd. and its affiliate Asia Pacific Growth
Fund II, L.P. (collectively "H&Q"). Under the agreement, H&Q invested $6
million to acquire 1,500,000 shares of Preferred Stock of Regent Electronics
Corp., a subsidiary of the Company. H&Q's acquisition represented approximately
5.5% of equity interest of Regent Electronics Corp. Regent also issued Stock
Warrants to H&Q for subscription of $6 million worth of Regent's common shares
on or before December 31, 2002. Pursuant to the agreement, the Regent shares
held by H&Q may be converted, subject to certain conditions, into Common Stock
of the Company, on or after January 1, 2000 and on or before March 31, 2000.
The Company entered into two Commission Agreements with Clarinet Overseas Ltd.
on June 8, 1997 and June 1, 1998, respectively. Pursuant to the Agreements,
Clarinet introduced eight sophisticated investors for the Company's private
placements. These individuals purchased a total of 545,000 shares of the
Company's common stock for $2,495,000. As compensation to its service, the
Company paid Clarinet $109,200, plus 136,250 shares of the Company's common
stock.
On March 4, 1999, pursuant to the Share Purchase and Exchange Agreement, the
Company issued 500,000 shares of its common stock to Mr. Stefan Benger, the
sole shareholder of Professional Market Brokerage, Inc., as part of the
consideration for the Company's acquisition of Professional Market Brokerage,
Inc.
On March 15, 1999, the Company entered into an Acquisition Agreement to acquire
a controlling equity interest in TurboNet Communications ("TurboNet"), a San
Diego, California, corporation. Under the terms of the Acquisition Agreement,
the Company issued $80 million worth of its restricted common stock to the
shareholders of TurboNet in exchange for 81% of TurboNet's equity. TurboNet's
existing shareholders agreed that the shares so issued by the Company are
prohibited from being sold, in whole or in part, until TurboNet's annual gross
revenue exceeds $30 million with annual pretax net profit of not less than $6
million. As of March 31, 1999, 11,091,393 shares of the Company's common stock
were issued to 45 shareholders of TurboNet.
On March 15, 1999, the Company entered into an agreement with Arescom Inc.
("Arescom"), a Fremont, California, corporation, whereby the Company will issue
$30 million worth of restricted shares to acquire an 81% equity interest in
Arescom. Arescom's existing shareholders agreed not to sell the shares so
issued until Arescom's annual gross revenue exceeds $15 million with annual
pretax net profit of not less than $3 million. As of March 31, 1999, 4,159,273
shares of the Company's common stock were issued to 35 shareholders of Arescom.
During the period of July 1, 1997 through March 31, 1999, the Company sold
660,500 shares of its common stock to eleven accredited investors for an
aggregate consideration of $2,936,750.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of 100,000,000 shares of
Common Stock with a par value of $0.001 per share, 10,000,000 shares of
Preferred Stock with a par value of $.001 per share, and 4,300 shares of Class
A Preferred Stock with a par value of $0.001 per share. As of June 10, 1999,
there were 63,204,474 shares of Common Stock issued and outstanding (exclusive
of treasury shares) and held of record by approximately 613 registered
stockholders, and the number of beneficial holders was unknown. As of the same
date, there were 4,300 shares of Class A Preferred Stock issued and
outstanding. Also as of that date, there were a total of 11,340,000 shares of
Common Stock reserved for issuance upon exercise of outstanding options and
warrants. See "Item 4. Security Ownership of Certain Beneficial Owners and
Management" and "Item 10. Recent Sales of Unregistered Securities".
The Company's Common Stock with a par value $.001 is currently traded on the
OTC Bulletin Board under the symbol "LPFC". The following descriptions of
capital stock are qualified in all respects by reference to the Certificate of
Incorporation and By-laws of the Company.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share for the election
of directors and all other purposes and do not have cumulative voting rights.
As for the election of directors, this means that the holders of a majority of
shares can elect all members of the Board of Directors. Except as otherwise
required by applicable Delaware law, a majority vote is sufficient for any
action that requires the vote or concurrence of stockholders, except that a
plurality vote is sufficient to elect directors. The holders of Common Stock
are entitled to receive dividends when, as, and if declared by the Board of
Directors, and in the event of the liquidation by the Company, to receive pro-
rata, all assets remaining after payment of debts and expenses and liquidation
of the preferred stock. See "Item 9. Market Price and Dividends on the
Registrant's Common Equity and Related Stockholder Matters - Dividend Policy".
The holders of Common Stock do not have any pre-emptive or other rights to
subscribe for or purchase additional shares of capital stock, no conversion
rights, redemption, or sinking-fund provisions. Upon liquidation or dissolution
of the Company, the holders of Common Stock are entitled to share ratably in
the net assets of the Company remaining after payment of liabilities and
liquidation preferences of any outstanding shares of Preferred Stock. All
shares of Common Stock now outstanding are fully paid and non-assessable.
PREFERRED STOCK
The Company has 10,000,000 shares of Preferred Stock with a par value of $.001
per share authorized, and no shares have been issued. Holders of Preferred
Stock are entitled to receive dividends, if any, when, as, and if declared by
the Board of Directors from funds legally available therefor. The shares of
Preferred Stock are not redeemable, and the holders of Preferred Stock do not
have the right to vote.
CLASS A PREFERRED STOCK
The Company has 4,300 shares of Class A Preferred Stock with a par value of
$.001 authorized, and 4,300 shares are issued and outstanding as of June 10,
1999. Holders of Class A Preferred Stock are entitled to receive dividends, if
any, when, as and if declared by the Board of Directors from funds legally
available therefor. The holders of Class A Preferred Stock do not have the
rights to vote, but they are entitled to receive $10.00 per share upon the
liquidation of the Company. The holders of Class A Preferred Stock may at
their option exchange shares of Class A Preferred Stock for an equal number of
shares of Common Stock of the Company. The shares of Class A Preferred Stock
are not redeemable.
WARRANTS
The Company currently has outstanding Warrants to purchase 8,000,000 shares of
its Common Stock. The above-mentioned Warrants were issued to the investor
purchasing shares of Common Stock in equity financing closed effective May 5,
1997. Each Warrant entitles the holder to purchase, at any time until May 5,
2002, one share of Common Stock at an exercise price of $3.00 per share,
subject to adjustment.
The Warrants may be exercised in whole or part upon surrender of the
certificate therefor on or prior to the expiration date at the offices of the
Company with the Exercise Form attached to the certificate duly completed and
executed, accompanied by payment (in the form of cash or certified or bank
cashier's check payable to the order of the Company) of the full exercise
price. The registered owner of a Warrant will not possess any rights as a
stockholder of the Company unless and until the Warrant is exercised. Upon the
expiration date of the Warrants, they will no longer be exercisable for shares
of Common Stock and will not have any value.
STOCK OPTIONS
Options to purchase a total of 1,090,000 shares of Common Stock have been
issued to certain executive officers and directors as part of their
compensation in May 1997. Each Option entitles the holder thereof to purchase,
at any time until May 15 and May 30, 2002, one share of Common Stock at an
exercise price of $6.00 per share, subject to adjustment.
In February 1998, Hambrecht & Quist Asia Pacific Limited ("H&Q AP), an
investment bank specializing in high-tech companies, and Asia Pacific Growth
Fund II, L.P. ("APGF"), a fund controlled by H&Q AP (collectively "H&Q),
invested $6 million in Regent Electronics Corp., a subsidiary of the Company,
in exchange for 1.5 million shares of Regent's Preferred Stock. The shares
acquired by H&Q represented approximately 5.5% of Regent's equity. Regent also
issued Stock Warrants to H&Q for subscription of $6 million worth of Regent's
common stock on or before December 31, 2002. Pursuant to the Share Exchange
Agreement among the Company, H&Q and Regent, the Company granted H&Q an
irrevocable right to exchange, under certain circumstances and subject to
certain conditions, part or all of the shares that H&Q subscribed from Regent
for Common Stock of the Company ("Lotus Shares") on the basis of one (1) Regent
share for one and one-half (1.5) Lotus shares. The exchange right held by H&Q
become exercisable on or after January 1, 2000 and expires on March 31, 2000.
The exchange right may be exercised in whole or part upon surrender of the
certificate therefor on or prior to the expiration dates at the officers of the
Company with the Exercise Form attached to the certificate duly completed and
executed, accompanied by payment (in the form of cash or certified or bank
cashier's check payable to the order of the Company) of the full exercise
price. The registered owner of the exchange right will not possess any rights
as a stockholder of the Company unless and until the exchange right is
exercised.
TRANSFER AGENT
The Company's transfer agent and registrar is Colonial Stock Transfer Co., 455
E. 400 South, Salt Lake City, Utah 84111.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws provide that the Company shall indemnify any and all
persons who may serve or who have served at any time as directors or officers,
or who at the request of the Board of Directors of the Company may serve or at
any time have served as directors or officers of another corporation in which
the Company at such time owned or may own shares of stock or of which it was
or may be a creditor, and their respective heirs, administrators, successors
and assigns, against any and all expenses, including amounts paid upon
judgments, counsel fees and amounts paid in settlement (before or after suit is
commenced), actually and necessarily incurred by such persons in connection
with the defense or settlement of any claim, action, suit or proceeding in
which they, or any of them, are made parties, or a party , or which may be
asserted against them or any of them, by reason of being or having been
directors or officers or a director or officer of the Company, or of such other
corporation, except in relation to matters as to which any such director or
officer or former director or officer or person shall be adjudged in any
action, suit or proceeding to be liable for his own negligence or misconduct in
the performance of his duty. Such indemnification shall be in addition to any
other rights to which those indemnified may be entitled under any law, by-law,
amendment, vote of stockholders or otherwise.
LIMITATION OF LIABILITY
The Bylaws of the Company provides that no director shall be personally liable
to the Company or any shareholder for monetary damages for breach of fiduciary
duty as a director, except for any matter in respect of which such director
shall be liable by reasons that, in addition to any and all other requirements
for such liability, he (i) shall have breached his duty of royalty to the
Company or its shareholders, (ii) shall not have acted in good faith or, in
failing to act, shall not have acted in good faith, (iii) shall have acted in a
manner involving intentional misconduct or a knowing violation of law or, in
failing to act, shall have acted in a manner involving intentional misconduct
or a knowing violation of law.
This provision may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefited the Company and its shareholders. However, this provision, together
with the provision described above that requires the Company to indemnify its
officers and directors against certain liabilities, is intended to enable the
Company to attract qualified persons to serve as directors who might otherwise
be reluctant to do so.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See ITEM 15 (a) for an index to the audited consolidated financial statements
and supplementary financial information that are included in this registration
statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company appointed the accounting firm of Schiffman Hughes Brown to serve as
the independent auditors of its year-end financial statements starting from its
fiscal year of 1995. To the best knowledge of the current management, the
Company did not use an auditor for its fiscal year prior to 1995 and therefore
had no auditors.
The Company has no disagreement with accounting and financial disclosure.
ITEM 15. fINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
The following is a list of each financial statement filed as a part of
this Registration Statement:
1) Report of Schiffman Hughes Brown, Independent Auditors
2) Audited Consolidated Balance Sheets at June 30, 1998 and 1997
3) Audited Consolidated Statements of Operations - for the Fiscal Years
Ended June 30, 1998, 1997 and 1996
4) Audited Consolidated Statements of Shareholders' Equity - for the
Fiscal Years Ended June 30, 1998, 1997 and 1996
5) Audited Consolidated Statements of Cash Flows - for the Fiscal Years
Ended June 30, 1998, 1997 and 1996
6) Notes to the Audited Consolidated Financial Statements
7) Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and June
30, 1998
8) Consolidated Statements of Operations (Unaudited) for the Three and
Nine Months Ended March 31, 1999 and 1998
9) Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended March 31, 1999 and 1998
10)Notes to Consolidated Financial Statements for the Quarter ended March
31, 1999
2. Financial Statement Schedules.
3. Exhibits
3.1 Certificate of Amendment of Certificate of Incorporation of the
Registrant dated as May 25, 1999 (filed with Amendment No. 3 to the
registration statement).
3.2 Certificate of Incorporation of the Registrant, as amended (Exhibit 3.1
to General Form for Registration of Securities on Form 10, filed
October 27, 1998)
3.3 Bylaws of the Registrant, as amended (Exhibit 3.2 to General Form for
Registration of Securities on Form 10, filed October 27, 1998)
10.1 Stock Subscription Agreement, dated as of March 18, 1997, between
Evernew International Limited and Lotus Pacific, Inc. (Exhibit 10.1 to
Amendment No. 1 to General Form for Registration of Securities on Form
10, filed January 7, 1999)
10.2 Stock Subscription Agreement, dated as of May 5, 1997, between Evolving
Investments Ltd. and Lotus Pacific, Inc. (Exhibit 10.2 to Amendment No.
1 to General Form for Registration of Securities on Form 10, filed
January 7, 1999)
10.3 Warrant Purchase Agreement, dated as of May 5, 1997, between Evolving
Investments Ltd. and Lotus Pacific, Inc. (Exhibit 10.3 to Amendment No.
1 to General Form for Registration of Securities on Form 10, filed
January 7, 1999)
10.4 Stock Exchange Agreement, dated as of September 18, 1997, between
Rightiming Electronics Corp. and Lotus Pacific, Inc. (Exhibit 10.4 to
Amendment No. 1 to General Form for Registration of Securities on Form
10, filed January 7, 1999)
10.5 Stock Subscription Agreement, dated as of December 31, 1997, between
Clarinet Overseas Limited and Lotus Pacific, Inc. (Exhibit 10.5 to
Amendment No. 1 to General Form for Registration of Securities on Form
10, filed January 7, 1999)
10.6 Stock Purchase Agreement, dated as of September 30, 1998, between
Clarinet Overseas Limited and Lotus Pacific, Inc. (Exhibit 10.6 to
Amendment No. 1 to General Form for Registration of Securities on Form
10, filed January 7, 1999)
10.7 Commission Agreement, dated as of June 8, 1997, between Clarinet
Overseas Limited and Lotus Pacific, Inc. (Exhibit 10.7 to Amendment No.
1 to General Form for Registration of Securities on Form 10, filed
January 7, 1999)
10.8 Commission Agreement, dated as of June 1, 1998, between Clarinet
Overseas Limited and Lotus Pacific, Inc. (Exhibit 10.8 to Amendment
No. 1 to General Form for Registration of Securities on Form 10, filed
January 7, 1999)
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: July 6, 2000 Lotus Pacific, Inc.
By: /s/ Jeremy Wang
--------------------------------
Jeremy Wang, President & Director
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, 1998 and 1997 and the related statements of
operations, stockholders' equity, and cash flows for the years ended June 30,
1998, 1997 and 1996. 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 the 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, 1998 and 1997, and the results of its operations
and its cash flows for the years ended June 30, 1998, 1997 and 1996 in
conformity with generally accepted accounting principles.
/s/
Schiffman Hughes Brown
Blue Bell, Pennsylvania
September 4, 1998
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
ASSETS
Current Assets: 1998 1997
------------ -----------
<S> <C> <C>
Cash ......................................... $3,262,929 $ 357,212
Accounts Receivable .......................... 7,157,831 692,215
Prepaid Expenses ............................ 760,295 ---
Advance ...................................... --- 2,354
------------- -----------
Total current assets........................ 11,181,055 1,051,781
Property and equipment:
Furniture and office equipment ............... 93,666 93,158
Equipment .................................... 1,541,231 1,502,120
Leasehold improvements ....................... 75,612 1,041
------------ ----------
1,710,509 1,596,319
Less: accumulated depreciation .............. 349,460 27,254
------------- -----------
1,361,049 1,569,065
Other assets:
Intangible asset, net of accumulated
amortization of $370,477 and $28,480
in 1998 and 1997, respectively .............. 5,439,523 5,781,520
Goodwill, net of accumulated amortization
Of $1,067,544 in 1998 ....................... 27,400,414 ---
Deposit ...................................... 72,792 1,700
------------- -----------
32,912,729 5,783,220
$ 45,454,833 $8,404,066
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Account payable .............................. $ 2,752,381 $ 20,478
Refundable deposit (Note 3) .................. 120,000 ---
Salaries Payable ............................. 63,819 ---
Payroll taxes payable ........................ 32,234 25,771
Income taxes payable (Note 6) ................ 42,110 123,392
------------- -----------
Total current liabilities ................... 3,010,544 169,641
Minority interest in subsidiary (Note 5)....... 6,569,544 2,317,815
Commitments (Note 11)
Stockholders' equity:
Common stock (Note 8) ........................ 47,387 40,737
Preferred stock, Series A (Note 8) ........... 4 4
Common Stock Warrant (Note 8) ................ 80,000 ---
Additional paid-in capital ................... 38,708,698 6,188,348
Accumulated deficit .......................... (2,961,344) (312,479)
-------------- ------------
35,874,745 5,916,610
$ 45,454,833 $ 8,404,066
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998,1997 AND 1996
1998 1997 1996
------------- -------------- ------------
<S> <C> <C> <C>
Sales ................................. $16,698,371 $ 1,990,481 ---
Cost of sales ......................... 13,101,600 1,776,763 ---
------------ ------------ -----------
Gross profit .......................... 3,596,771 213,718 ---
Royalty income (Note 12) .............. 1,800,000 --- ---
Operating expenses
Selling, general and admin ........... 3,962,231 259,887 17,934
Research and development ............. 4,371,990 103,870 ---
------------- ------------ -----------
Total operating expenses ............ 8,334,221 363,757 17,934
Operating Loss ........................ (2,937,450) (150,039) (17,934)
------------- ------------ -----------
Other income (expenses):
Interest income ...................... 36,302 13,880 11,008
Interest expense ..................... (46,259) --- ---
Gain on sale of investment ........... --- 398,805 ---
Equity in earnings of
unconsolidated subsidiary ........... --- --- 29,090
Foreign exchange gain ................ 99 144 ---
------------- ----------- ----------
(9,858) 412,829 40,098
Net income (loss) before income taxes
and minority interest in income
of consolidated subsidiaries ......... (2,947,308) 262,790 22,164
------------- ----------- -----------
Income tax benefit (expenses) (Note 6). 80,714 (123,842) ---
Minority interest in loss of
consolidated subsidiaries ........... 217,729 82,185 ---
Net income (loss) ..................... $(2,648,865) $ 221,133 $ 22,164
============ =========== ==========
Net income (loss) per share
Basic ..................................... $ (0.06) $ 0.01 $0.00
======== ======= ======
Diluted ................................... $ (0.06) $ 0.00 $0.00
Weighted average shares...................... 44,421,334 29,238,081 26,799,387
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
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, 1995......... 26,347,054 4,300 --- $26,351 $746,433 $(555,776) $217,008
Issuance of
common stock ......... 590,000 --- --- 590 145,715 --- 146,305
Net Income for the year
Ended June 30, 1996... ------------ ----------- ----------- ----------- ----------- 22,164 22,164
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
=========== ======= =========== ========= ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
-------------- -------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................. $(2,648,865) $ 221,133 $ 22,164
Adjustments to reconcile income (loss) to
net cash provided by operating activities:
Depreciation and amortization ............... 1,731,903 55,734 ---
Common stock issued for services ............. 455,000 --- ---
Gain on sale of investment ................... --- (398,805) ---
Equity in earnings of unconsolidated subsidiary --- --- (29,090)
Changes in assets and liabilities:
Increase in accounts receivable ............... (6,465,616) (692,215) ---
Increase in prepaid expenses .................. (760,295) --- ---
Increase (decrease) in advances ............... 2,354 (2,354) ---
Increase in deposit ........................... (71,092) (1,700) ---
Increase (decrease) in accounts payable ....... 2,731,903 20,478 (4,400)
Increase in payroll taxes payable ............. 6,463 25,771 ---
Increase in salaries payable .................. 63,819 --- ---
Increase (decrease) in income tax payable ..... (81,282) 123,392 ---
Increase in minority interest in subsidiary.... 5,783,771 2,317,815 ---
-------------- ------------ ------------
Net cash provided by (used in) operating activities 748,063 1,669,249 (11,326)
Cash flows from investing activities:
Purchase of property and equipment ............ (114,346) (1,596,319) ---
Purchase of intangible asset .................. --- (5,810,000) ---
Proceeds from sale of investment .............. --- 571,200 ---
------------- ------------ ------------
Net cash used in investing activities........... (114,346) (6,835,119) ---
Cash flows from financing activities:
Issuance of common stock ...................... 2,072,000 5,310,000 3,000
Issuance of common stock warrants ............. 80,000 --- ---
Increase in refundable deposit................. 120,000 --- ---
------------- ------------ ------------
Net cash provided by financing activities....... 2,272,000 5,310,000 3,000
Net cash increase (decrease) in cash ........... 2,905,717 144,130 (8,326)
----------- ----------- ------------
Cash, beginning ................................ 357,212 213,082 221,408
Cash, ending ................................... $ 3,262,929 $ 357,212 $ 213,082
=========== ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for taxes ........................... $ 500 $ 100 ---
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for services .......... $455,000 --- $3,000
Issuance of common stock
for purchase of subsidiary..................... $30,000,000 --- ---
</TABLE>
The accompanying notes are an integral part of these financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
1. Description of business:
Lotus Pacific, Inc. (the "Company") is a holding company and its main business
is conducted through its three subsidiaries: Regent Electronics Corp.
("Regent"); LPF International Corp. ("LPF"); and Richtime Far East, Ltd.
Regent is a New Jersey based cybertech corporation. Regent generates its income
from selling products to China or its neighboring countries through a
combination of direct sales, under reseal agreement, or through distribution
channels, such as governmental authorities and local cable TV stations. The
Company owns 87.3% of Regent's equity interest.
LPF International Corp., a newly formed and wholly owned subsidiary of the
Company, was incorporated in the State of Delaware in February 1998 and
operates in New York City, NY. The formation of this new subsidiary in the
United States is part of the Company's business strategy to develop the
Company's textile and apparel business worldwide.
In January 1997, the Company set up a wholly owned subsidiary, Richtime Far
East, Ltd. (a Hong Kong corporation operated in Hong Kong). The Company is
continuing to investigate business opportunities.
2. Summary of significant accounting policies:
Principle of Consolidation:
The accompanying financial statements include the accounts of Lotus Pacific,
Inc.; its 87.3%-owned subsidiary, Regent Electronics Corp.; and its wholly
owned subsidiaries, Richtime Far East, Ltd. and LPF International Corp. The
12.7% non-owned portion of Regent Electronics Corp. appears as minority
interest in subsidiary on the balance sheet. All intercompany transactions
have been eliminated in consolidation.
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.
Cash and Cash Equivalents:
For purposes of reporting cash flows, the Company considers all cash accounts
that are not subject to withdrawal restrictions or penalties to be cash or
cash equivalents.
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.
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. The carrying amount of
goodwill is reviewed annually using estimated undiscounted cash flows for the
businesses acquired over the remaining amortization periods. Amortization
expense charged to earnings amounted to $1,067,544 in the year ended June 30,
1998 and -0- in the year ended June 30, 1997.
Equipment and Depreciation:
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over their estimated useful lives from 3 to
$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.
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 that will be used to develop and improve its Internet access
products. The Company expenses all such research and development costs as
they are incurred.
Income Taxes:
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of balance sheet items for
financial and income tax reporting. There is no difference between the basis
for financial and income reporting.
Foreign currency:
All balance sheet accounts of foreign operations are translated into U.S.
dollars at the year end rate of exchange and statements of earnings items are
translated at the weighted average exchange rates for the year. Gains and
losses from foreign currency transactions are included in the consolidated
statements of earnings.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
Concentration of Credit Risk:
The Company occasionally maintains deposits in excess of federally insured
limits. The risk is managed by maintaining all deposits in high quality
financial institutions.
Earnings (loss) Per Share:
Basic earnings (loss) per share are computed by dividing net income (loss) by
the weighted-average number of shares of common stock during the period.
Diluted earnings (loss) per share reflect the dilutive effect of an equivalent
number of common shares of convertible preferred stock, options and warrants.
For the year ended June 30, 1998, the computation of diluted loss per share
was antidilutive; therefore, the amounts reported for basic and diluted loss
per share were the same.
3. Refundable deposit:
Represents money deposited with the Company in June 1998 from a potential
investor who requested his money be returned. The $120,000 was refunded to
him in July 1998.
4. Issuance of Stock:
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.
5. Acquisitions and Dispositions:
Shanghai Union Auto Bicycle Co., Ltd.:
On September 25, 19 95 the Company exchanged 560,000 shares of its common stock
for a seventy percent equity interest in Shanghai Union (Shanghai Union) Auto
Bicycle Co., Ltd. in Shanghai, People's Republic of China. At September 25,
1995, Shanghai Union had stockholder's 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 stockholder's 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.
Regent Electronics Corp.:
In April and May 1997, the Company also 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 $5.00 per
share which was 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 products 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 February 1998, the Company formed LPF International Corp. for $1,300,000.
LPF International Corp. was incorporated to be a broker in the worldwide
textile and apparel business. The accounts of LPF International Corp. are
consolidated with the parent's (Lotus Pacific, Inc.) accounts.
Richtime Far East, Ltd.:
In April 1997, the Company formed Richtime Far East, Ltd. (a Hong Kong
corporation) with an investment of $600,000. Richtime Far East, Ltd. operates
as a broker in the worldwide textile and apparel business. The accounts of
Richtime Far East, Ltd. are consolidated with the parent's (Lotus Pacific,
Inc.) accounts.
6. Income Taxes:
Income taxes for years ended June 30, 1998 and 1997 consisted of the following:
1998 1997
------------ ------------
Current:
Federal ............ $(61,917) $92,120
State............... (18,797) 31,722
------------- -----------
$(80,714) $123,842
=========== ==========
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
7. Financial Instrument:
Cash accounts are secured by the Federal Deposit Insurance Corporation up
to $100,000. At June 30, 1998 and June 30, 1997, the uninsured balance was
$2.743,480 and $56,199, respectively.
8. Capital Stock:
Common stock - $.001 par value, 60,000,000 shares authorized, 47,387,644 and
40,737,894 shares issued and outstanding in 1998 and 1997, respectively.
Preferred stock - $.001 par value, 100,000 shares authorized, there is no
shares issued and outstanding in 1998 and 1997.
Preferred stock, Series A - $.001 par value, 4,300 shares authorized, 4,300
shares issued and outstanding in 1998 and 1997.
Common stock warrants - 8,000,000 warrants issued and outstanding. Each
warrant entitles the holder to purchase one share of the Company's common
stock at $3.00 per share. Warrants expire May 5, 2002. As of June 30, 1998,
no warrants have been exercised.
9. Significant customers:
For the year ended June 30, 1998, the Company had three customers with billings
in excess of 10% of total revenues. These three customers accounted for
approximately 51% of the Company's total revenues. Of the total revenue,
Shanghai Hong Sheng Development Corp. accounted for $4,840,000 (26.2%), Full
Chance China Ltd. $2,749,000 (14.9%), and D&T Corp. $1,815,000 (9.8%).
10. Stock options:
In May 1997, the Company granted 1,090,000 shares of stock options to certain
officers and directors. Exercise price on the options is $6.00 per common
share, are 100% vested and expire five years from grant date. All issuances
were granted at the fair market value of the Company's common stock at time of
grant. As of June 30, 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 required 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
nocompensation 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:
1998 1997
---------------- ---------------
Net income (loss):
As reported .............. $(2,648,865) $ 221,133
Pro forma ................ (2,648,865) (803,467)
Net income (loss) per common share:
As reported............... $ (0.06) $ 0.01
Pro forma................. $ (0.06) $ (0.03)
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-
11. Commitments:
The Company leases its principal facilities of total approximately 9,400 square
feet in Piscataway, New Jersey. Under the lease, the Company pays $7,100 per
month until expiration of lease in June 2002. Rent expense for the year ended
June 30, 1998 was $85,200.
The Company leases an additional space in Middlesex, NJ. The lease is annually
renewable and the monthly rent is $825. Rent expenses for the year ended
June 30, 1998 was $9,900.
12. Royalty income:
In the year ended June 30, 1998, Regent entered into licensing agreements with
an unrelated party which provided for Regent's receipt of a one-time, non-
refundable fee in exchange for the grant of certain non-exclusive rights,
including rights to market and distribute under Regent's trademark, certain of
Regent's products embodying licensed patents and related know-how in certain
designated areas in the Far East. The license provides for a term coinciding
with the life of the related patents but imposes no material continuing
obligations on Regent or the licensee. Sales of covered products were made to
the licensee during fiscal 1998, but the related technology was superseded
during that year. There have been no subsequent sales of the products to or
through the licensee, and none are expected. Accordingly, the Company has
recognized the entire fee during the only year in which any benefits of the
license will be realized by either party. The Company does not have plans for
other licensing or distribution arrangements providing for a non-recurring
royalty or fee.
13. Condensed Financial Statements for Regent Electronics Corp. at June 30,
1998 and 1997:
BALANCE SHEET
ASSETS
1998 1997
---------------- ---------------
Current assets .................. $ 7,232,436 $ 205,035
Property and equipment .......... 1,281,029 1,564,334
Other assets .................... 5,461,930 5,783,220
-------------- --------------
$13,975,395 $7,552,589
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities ............. $ 2,134,683 $ 38,539
Stockholders' deficit:
Common stock ................... 26,000 26,000
Preferred stock ................ 1,500 ---
Stock warrants ................. 1,500 ---
Additional paid-in capital ..... 13,760,500 7,762,000
Accumulated deficit ............ (1,948,788) (273,950)
-------------- ---------------
11,840,712 7,514,050
$13,975,395 $ 7,552,589
============== ==============
STATEMENT OF OPERATIONS
Sales ........................... $ 6,155,000 ---
Cost of sales ................... (3,408,500) ---
Interest income ................. 30,535 $ 2,563
Royalty income .................. 1,800,000 ---
Operating costs and expenses .... (6,251,873) (276,513)
---------------- --------------
Net Loss ........................ $ (1,674,838) $ (273,950)
================ ==============
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
STATEMENT OF CASH FLOWS
Cash flows used in
operating activities ........... $(3,914,716) $(235,411)
Cash flows used in
investing activities ........... (38,083) (7,347,554)
Cash flows from
financing activities ........... 6,436,500 7,788,000
---------------- ----------------
Net increase in cash............. $2,483,701 $205,035
13. Condensed Financial Statements for LPF International Corp. at
June 30, 1998:
BALANCE SHEET
ASSETS
Current assets ................................ $ 1,435,933
Property and equipment ........................ 75,603
Other assets .................................. 50,617
--------------
$ 1,562,153
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities ........................... $ 171,962
Stockholders' deficit:
Common stock ................................. 1,300,000
Retained earnings ............................ 90,191
--------------
1,390,191
$ 1,562,153
==============
STATEMENT OF OPERATIONS
Sales ......................................... $ 4,843,940
Cost of sales ................................. (4,580,823)
Interest income ............................... 67
Operating costs and expenses .................. (172,993)
--------------
Net income .................................... $ 90,191
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997 AND 1996
STATEMENT OF CASH FLOWS
Cash flows used
in operating activities ..................... $ (984,919)
Cash flows used
in investing activities ..................... (75,603)
Cash flows from
financing activities ........................ 1,300,000
----------------
Net increase in cash .......................... $ 239,578
13. Condensed Financial Statements for Richtime Far East, Ltd. at
June 30, 1998 and 1997:
BALANCE SHEET
1998 1997
-------------- --------------
ASSETS
Current assets .................... $ 2,247,874 $ 780,749
Property and equipment ............ 2,321 2,527
-------------- -------------
$ 2,250,195 $ 783,276
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities ............... $ 1,467,362 $ 476,168
Stockholders' equity:
Common stock ..................... 129,366 129,366
Retained earnings ................ 653,467 177,742
-------------- -------------
$ 2,250,195 $ 783,276
STATEMENT OF OPERATIONS
Sales ............................. $ 5,699,496 $ 1,990,481
Cost of sales ..................... (5,112,400) (1,776,763)
Interest income ................... 2,687 2,693
Interest expense .................. (46,259) ---
Foreign exchange gains ............ 99 144
Operating costs and expenses ...... (67,898) (38,812)
------------- ------------
Net income ........................ $ 475,725 $ 177,743
STATEMENT OF CASH FLOWS
Cash flows used
in operating activities ....... $(18,395) $ (508,309)
Cash flows used
in investing activities ........ (336) (3,158)
Cash flows from
financing activities ............ --- 600,000
-------------- -------------
Net increase (decrease) in cash .... (18,731) 88,533
Cash, beginning .................... 88,533 ---
Cash, ending ....................... $ 69,802 $ 88,533
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
March 31, 1999 June 30, 1998
---------------- -----------------
ASSETS
<S> <C> <C>
Cash & cash equivalent ................... $ 1,446 $ 3,263
Accounts Receivable ....................... 8,428 7,158
Notes Receivable .......................... 4,000 ---
Inventories (note 5)....................... 3,766 ---
Other current assets ...................... 187 833
Property and Equipment (including
leasehold improvement ) (note 6) .......... 1,727 1,361
Assets of financial business (note 4) ..... 47,583 ---
Investments ............................... 1,172 ---
Intangible Assets, net.... ................ 4,915 5,440
Goodwill of acquired business (note 3)..... 135,768 27,400
----------- ----------
Total Assets .............................. $208,990 $ 45,455
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts payable .......................... $ 8,433 $ 2,752
Refundable deposit......................... --- 120
Other accrued expenses .................... 297 139
---------- ----------
8,730 3,011
Liabilities of financial business (note 4) 41,983 ---
Minority interest in equity of
consolidated subsidiaries ................ 7,177 6,569
Stockholders' Equity
Preferred Stock, Class A, $.001 par value,
4,300 shares authorized; 4,300 shares issued
and outstanding .......................... --- ---
Common Stock, $.001 par value, 100 million
shares authorized, 63,204,474 shares issued
and outstanding .......................... 63 47
Stock Warrants ............................ 80 80
Additional paid-in capital ................ 154,561 38,709
Accumulated deficit ....................... (3,604) (2,961)
------------ ------------
Total Stockholders' Equity ................ 151,100 35,875
Total Liabilities &
Stockholders' Equity ..................... $ 208,990 $ 45,455
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
March. 31 March 31
1999 1998 1999 1998
-------------------------- -----------------------
<S> <C> <C> <C> <C>
Revenues
Sales revenue ..................... $10,184 $ 1,887 $ 21,925 $6,795
Royalty income .................... --- --- 124 1,800
Revenue from financial Business ... 1,581 --- 1,581 ---
--------- --------- ---------- --------
Total revenue ................... 11,765 1,887 23,630 8,595
Cost and Expenses
Cost of goods sold ................ 9,514 1,868 19,496 6,273
Cost of financial services sold ... 1,241 --- 1,241 ---
Selling, general & admin........... 851 482 1,678 1,790
Research and development .......... 364 1,894 1,620 3,018
Depreciation. & amortization....... 168 166 502 497
Goodwill amortization.............. 373 356 1,085 810
--------- -------- --------- --------
Total cost and expenses.......... 12,511 4,766 25,623 12,389
Operating Loss ..................... (746) (2,879) (1,993) (3,793)
Interest Income .................... 1 10 14 14
Income from continuing
Operations ........................ (745) (2,869) (1,978) (3,780)
---------- --------- --------- ---------
Discontinued operations
Gain on disposal of LPF
Net of income taxes............... --- --- 100 ---
Net Income before income taxes
and minority interests ........... (745) (2,869) (1,878) (3,780)
Income tax benefit ................. 18 --- 18 ---
Minority interest of income
Consolidated Subsidiaries.......... (5) (294) (46) (352)
Net income (loss)................... (722) (2,575) (1,814) (3,428)
======== ========== ========= ========
Earnings Per Share:
Basic ........................... $(0.01) $(0.05) $(0.04) $(0.07)
======= ======= ======= =======
Diluted ......................... $(0.01) $(0.05) $(0.04) $(0.07)
======= ======== ======= =======
Weighted Average Shares............. 55,659 47,016 48,034 46,829
</TABLE>
The accompanying notes are an integral part of the financial statements
<TABLE>
<CAPTION>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31
(Dollars in Thousand) ---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income .................................... $ (1,814) $(3,428)
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation & amortization .................. 502 497
Goodwill amortization ........................ 1,085 810
Equity in earnings of unconsolidated subsidiaries 166 ---
Gain on sale of investment ................... (100) ---
Common stock issued for service .............. 135 ---
Changes in assets & liabilities:
Increase in accounts receivable............... (1,270) (2,640)
Increase in notes receivable ................. (4,000) ---
Increase in inventories ...................... (3,766) (1,273)
Decrease in other current assets ............. 646 ---
Increase in accounts payable ................. 5,840 2,652
Increase (decrease) in minority interest ..... 505 (264)
----------- ----------
Net cash used in operating activities ......... (2,071) (3,646)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment ........................ --- (7)
Proceeds from sale of investment ............. 2,500 ---
Business acquisitions......................... (2,990) ---
----------- ---------
Net cash used in investing activities.......... (490) (7)
CASH FLOW FROM FINANCING ACTIVITIES:
Refundable deposit............................ --- 120
Return of refundable deposit.................. (120) ----
Issuance of common stock ..................... 865 2,072
Issuance of preferred stock .................. --- 6,000
Issuance of warrants ......................... --- 2
----------- ---------
Net cash provided by financing activities...... 745 8,194
Net increase (decrease) in cash ............... (1,817) 4,540
---------- ---------
Cash, beginning ............................... 3,263 357
Cash, ending .................................. $ 1,446 $ 4,898
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for service ........... $ 135
Issuance of common stock
for business acquisitions...................... $ 117,063
Acquisition of treasury stock................... $ 4,096
<CAPTION>
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
NOTE 1 General
Lotus Pacific, Inc. (the "Company") is an Internet technology and services
company that, through its five subsidiaries, develops and markets Internet-
related products and services in the United States and international markets.
The Company operates in two segments: (1) the development and marketing of the
Internet-related products and services. Its products include TeleWeb systems,
TeleWeb set-top boxes, WonderTV set-top boxes, Internet routers, cable modems
and cable modem chips; and (2) on-line trading and brokerage services. Regent
Electronics Corp., TurboNet Communications, Arescom Inc are the Company's three
subsidiaries that engaged in the business of the Internet-related products and
services. U.S. Securities & Futures Corp., and Professional Market Brokerage,
Inc. are engaged in the business of online trading and full service brokerage
services.
NOTE 2 Basis of Presentation
The accompanying condensed quarterly financial statements represent the
consolidation of Lotus Pacific, Inc. and all companies that it directly
controls through majority ownership. Those financial statements were prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should
be read in conjunction with the financial statements and notes included in
the Company's Annual Report on Form 10-K/A filed on June 16, 1999 for the year
ended June 30, 1998.
The condensed consolidated quarterly financial statements are unaudited. Those
statements include all adjustments (consisting of normal accruals) considered
necessary by management to present a fair statement of the results of
operations, financial position and cash flows. The results reported in these
condensed consolidated financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire year.
The accompanying financial statements include the accounts of Lotus Pacific,
Inc. and its five subsidiaries: 87.3% owned Regent Electronics Corp., 81% owned
TurboNet Communications, 81% owned Arescom Inc., 100% owned US Securities &
Futures Corp, and 100% owned Professional Market Brokerage, Inc. The non-owned
portions of the Company's subsidiaries appear as minority interest in
subsidiaries on the balance sheet in accordance with generally accepted
accounting principles. All intercompany transactions have been eliminated in
consolidation.
NOTE 3 Business Acquisitions
On February 25, 1999 and March 1, 1999, the previously announced acquisition
of Professional Market Brokerage, Inc. (PMB) of Chicago, IL., and US Securities
& Futures Corp. ("USSF") of New York, NY were completed, respectively. After
those acquisitions, the company owns 100% of both USSF and PMB. Owners of USSF
shares received acquisition consideration of approximately $6.03 million,
consisting of $2.5 million in cash and the remainder in stock (500,000 shares
at the closing price of $7.0625/share). The shareholder of PMB received
acquisition consideration of approximately $3.77 million, consisting of
$240,000 in cash and $3.53 million in stock (500,000 shares based on the
closing price of $7.0625/share). The Acquisitions of USSF and PMB have been
accounted for by the purchase method of accounting and, accordingly, the results
of operations of USSF and PMB for the period from February 25, 1999 to
March 31, 1999 (PMB), and for the period from March 1, 1999 to March 31, 1999
(USSF), respectively, are included in the accompanying consolidated financial
statements.
The purchase prices were allocated to the assets acquired based on their
estimated fair values. The excess of the purchase price over the fair value of
the net assets acquired (goodwill) was approximately $4.20 million ($2.39
million for PMB and $1.81 million for USSF) and is being amortized on a
straight-line basis over 10 years.
USSF is a full service brokerage firm with its headquarters on Wall Street in
New York, NY. With over 15 branches worldwide, USSF, registered with the
Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant
(FCM), offers online securities trading services and other financial and
brokerage services to individuals and institutions all around the world.
PMB is a Chicago-based financial trading firm that provides online trading
services from its advanced Internet-based system to self-directed, broker-
assisted, individuals, money managers, commodity trading advisers, or
introducing brokers. PMB is also registered as a FCM.
On March 16, 1999, the Company announced that it had signed acquisition
agreements with TurboNet Communications ("TurboNet") and Arescom Inc.
("Arescom") to acquire each of their 81% of equity interests, respectively.
The acquisitions were consummated on March 31,1999.
Under the terms of the agreement with TurboNet, shareholders of TurboNet
received total consideration of $80 million in stock (11,091,393 shares based
on the closing price of $7.2128 per share). Pursuant to the agreement, the
shares so issued were prohibited from being sold until TurboNet's annual gross
revenue exceeds $30 million with a before-tax annual net profit of not less
than $6 million.
Under the terms of the agreement with Arescom, shareholders of Arescom
received total consideration of $30 million in stock (4,159,273 shares based
on the closing price of $7.2128 per share). Pursuant to the agreement, the
shares so issued may not be sold until Arescom's annual
gross revenue exceeds $15 million with a before-tax annual net profit of not
less than $3 million.
The purchase method was used to account for each of acquisitions of TurboNet
and Arescom. The excess of the purchase prices over the fair values of net
assets acquired (approximately $105.37 million) were recorded as goodwill of a
cquired businesses and is being amortized on a straight-line basis over 10
years. Since the acquisitions were consummated on March 31, 1999, the last
day for the quarter ended March 31, 1999, the results of their operation were
not included in the accompanying consolidated quarterly financial statements.
TurboNet, a San Diego, California, corporation, is a premier developer of
advanced cable modem technologies and products, including DOCSIS compliant
cable modem chipsets, TurboPort-MCNS cable network module, MCNS cable data
bridge, and internal and external cable modems. TurboNet also provides cable
modems and infrastructure on an OEM basis. Toshiba Corporation of Japan is one
of TurboNet's shareholders and partners.
Arescom, a Fremont, California, corporation, designs, manufactures and markets
a complete line of inter-networking router equipment for PSTN, ISDN, xDSL and
Ethernet environments. It provides users with a broad range of remote access
products that integrate voice and data along with Intelligent GUI and 100%
remote management tools for easy set-up and network management. Arescom has
established partners and channels throughout the world to develop and market
its router products for vertical and mass communication markets. Its customers
include ISPs, re-sellers and system integrators in North America. Arescom's
worldwide partners include Telecom Device of Japan, NST of China, EuroBizz of
Germany, Viking Telecom of Sweden, Exer Datacom of France, Dakel Information of
Spain, and PcExpress of Italy.
NOTE 4 Financial Business
Assets and liabilities of Lotus Pacific's financial business as of March 31,
1999 are summarized below (in thousands).
Assets
Cash and cash equivalent .............. $ 1,031
Receivables ........................... 2,972
Short-term investments ................ 11,759
Segregated funds ...................... 31,046
Other assets .......................... 775
-----------
$ 47,583
Liabilities
Commission payables ................... $ 3,401
Payable to customers .................. 37,460
Other payables ........................ 412
Long-term liabilities ................. 710
-----------
$ 41,983
The results of operations of the Company's financial business for the period
from February 25, 1999 (PMB), and for the period from March 1, 1999 (USSF),
respectively, to March 31, 1999 are summarized below (in thousands).
Revenues
Commissions ......................... $ 1,627
Trading profit (loss) ............... (204)
Other ............................... 158
------------
1,581
Cost and expenses
Commissions ......................... 1,242
General and admin.................... 523
------------
1,765
Income (loss) before income taxes ..... (184)
Income taxes benefit.. ................ 18
Net loss ........... .................. $ (166)
============
NOTE 5 Inventories
As of March 31, 1999, inventories consisted of the following:
(dollars in thousands)
Raw materials ................... $ 1,879
Work in process .................. 1,331
Finished goods ................... 556
-------------
$ 3,766
NOTE 6 Property and Equipment
Property and equipment was comprised of the following:
At
--------------------------
(Dollars in thousands) 3/31/99 6/30/98
------------ ----------
Furniture and office equipment ......... $ 342 $ 90
R&D equipment .......................... 1,978 1,541
Leasehold improvements ................. 1 76
----------- ----------
2,321 1,707
Less: accumulated depreciation ....... 594 348
----------- ----------
$ 1,727 $ 1,359
NOTE 7 Discontinued Operations
On September 30, 1998, the Company completes the sale of its 100%-owned LPF
International Corp. subsidiary (including Richtime Far East Ltd.) for $2.5
million in cash. The Company recorded an after tax gain on the sale of $100,000
in the first quarter of fiscal 1999. The LPF's results of operations has been
classified as discontinued operations and the prior periods have been restated.
NOTE 8 Capital Stock
The following table summarized the Company's common stock activity during the
first nine months of fiscal 1999:
Common Stock
(100,000,000 shares authorized)
-------------------------------------
Outstanding
-----------------------
Balance outstanding at June 31, 1998 ........ 47,386,804
Common stock issued in connection
With acquisitions of businesses............. 16,250,670
Common stock issued in private
Placements ................................. 124,500
Common stock issued for services ............ 22,500
Less: treasury stock acquired............... (580,000)
-------------
Balance at March 31, 1999 ................... 63,204,474
Common stock - $.001 par value, 100,000,000 shares authorized, 63,204,474
shares issued and outstanding as of March 31, 1999.
Preferred stock - $.001 par value, 10,000,000 shares authorized, no shares
issued and outstanding as of March 31, 1999.
Class A Preferred stock, - $.001 par value, 4,300 shares authorized, 4,300
shares issued and outstanding as of March 31, 1999.
Common stock warrant - 8,000,000 warrants issued and outstanding. Each warrant
entitled the holder to purchase one share of the Company's common stock at
$3.00 per share. These warrants expire May 5, 2002. As of March 31, 1999, no
warrants have been exercised.
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