SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------
FORM 10-K
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-24999
LOTUS PACIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1947160
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(State of Organization) (I.R.S. Employer Identification Number)
200 Centennial Avenue, Suite 201, Piscataway, New Jersey 08854
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 885-1750
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No _____ (2) Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
As of October 11, 2000, the aggregate market value of the shares of Common
Stock (based on the last sale price of the Common Stock on the OTC Bulletin
Board on that date) held by non-affiliates of the Registrant was approximately
$260 million.
As of October 11, 2000 there were 64,133,795 shares of the Registrant's
Common Stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of 10-K into which incorporated
--------------------------- --------------------------------------
Definitive Proxy Statement
Relating to Registrant's 2000 Part III
Annual Meeting of Stockholders
LOTUS PACIFIC, INC.
INDEX
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationship and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
PART I
ITEM 1. BUSINESS
Summary
Lotus Pacific, Inc. ("LPFC") creates, manages, and operates communications
and network technology companies. LPFC and its subsidiaries (the "Company")
provide solutions for the communications and network technology markets. The
Company is engaged in the development, manufacture and distribution of products
used for broadband Internet access, including "DOCSIS certified" data-over-
cable equipment, digital subscriber line ("DSL") access and networking devices,
and Internet set-top boxes. LPFC anticipates that the Company's experience in
communications and network technology and its expected accumulation of
additional capital based on its initial successes will enable it to capitalize
on new opportunities in diverse areas of the fast-growing telecommunications
industry.
LPFC was incorporated in Delaware on June 25, 1985. It was significantly
restructured and changed its name to Lotus Pacific, Inc. in September 1994.
Recent Developments
On June 16, 2000, LPFC sold its entire 50% stake in a joint venture (the
"Joint Venture") with TCL Holdings (BVI) Ltd. to Great Seasons Investments
Limited for $560,000, which amount was paid by the issuance of a note due
December 15, 2000. The Joint Venture was organized in September 1999 to
develop, manufacture and market Internet and network products and services in
The Peoples Republic of China. LPFC disposed of its interest in the Joint
Venture to avoid potential conflicts with its joint venture partner regarding
the management, development and funding of the Joint Venture. As a result
of this transaction, LPFC recorded a loss of approximately $4.3 million.
On March 31, 2000 and October 2, 2000, LPFC completed sales of portions of
its equity interest in Correlant Communications, Inc. ("Correlant"). Correlant
recently reincorporated under the laws of the State of Delaware, and prior to
such time, was known as TurboNet Communications) to unrelated foreign investors
in a series of individual offshore transactions pursuant to Regulation S under
the Securities Act. The sales completed in March generated net proceeds of
approximately $62.2 million and reduced LPFC's ownership of Correlant's capital
stock from approximately 81% to approximately 65%. The sales completed in
October generated net proceeds of approximately $11.1 million and further
reduced LPFC's ownership to approximately 62%. LPFC recorded a gain on the
March sales of approximately $45.5 million and a further gain on the October
sales in an amount to be determined.
On February 7, 2000, LPFC sold 72% of its interest in USS Online, Inc.
("Online") to Travelway International Limited. Online owns all of the
outstanding stock of U.S. Securities and Futures Corporation and Professional
Market Brokerage, Inc., which are engaged in securities brokerage and
commodity trading businesses. In exchange, LPFC received 732,802 shares of
LPFC's outstanding stock, valued at $9.6313 per share, or a total of
$7,057,835. LPFC continues to hold 28% of Online's outstanding stock and has
advanced Online $1,300,000 as a short-term loan to meet capital requirements.
LPFC recorded a loss of approximately $4.1 million on the disposition.
Strategy
LPFC develops, manages and operates emerging communications companies, which
it believes are positioned to become leaders in their markets. In addition to
providing its subsidiary companies with capital and strategic and
infrastructure services, LPFC's designees serve on the Boards of Directors of
its subsidiaries. The Company's collaborative group of communication companies
creates an environment designed to support business growth and the sharing of
information and business expertise. The LPFC strategy can be summarized as
follows:
* Focus on developing technology companies that can become market leaders
LPFC focuses on next generation communications technologies and companies that
are positioned to become leaders in their respective markets.
* Increase customer base and expand globally by developing strategic
relationships
LPFC plans to utilize its relationships throughout the world to strengthen its
customer base in the communications network industry. LPFC believes it has
established itself in the broadband access market. LPFC intends to capitalize
on the Company's existing relationships to open new doors in this industry and
complementary areas.
To capitalize on the international growth of the communications industry,
LPFC's strategy is to develop companies that operate in selected international
markets. In particular, the focus is on establishing relationships with
foreign companies that have business models similar to LPFC, providing capital
and infrastructure services targeted at their home markets.
OVERVIEW OF SUBSIDIARY COMPANIES
Correlant Communications, Inc. ("Correlant")
Correlant (formerly TurboNet Communications) develops hardware and software
technology to produce DOCSIS certified, data-over-cable equipment. Correlant
began volume shipments of its products in the first quarter of LPFC's fiscal
year ended June 30, 2000 ("Fiscal 2000") and had sales of approximately
$72,000,000 during Fiscal 2000, as compared to less than $4,000,000 during the
prior 12 months. Correlant operates on a September 30 fiscal year.
Correlant was able to begin commercial distribution of its products in the
United States, as a result of the DOCSIS certification of its cable modem
technology in March 1999. (The major domestic cable operators have
collaborated through the Multimedia Cable Network Systems consortium to develop
the Data-Over-Cable System Interface Specification, or DOCSIS, standard.)
Correlant's expertise resides at all levels of the data-over-cable product
architecture, including the integrated circuit, hardware, software and system
layers, allowing Correlant to rapidly modify and adapt its products to meet the
increasing demands of cable operators as well as evolving DOCSIS standards in a
timely and cost-effective manner. In addition, Correlant has developed a
strategic manufacturing alliance to cost-effectively mass produce data-over-
cable equipment for vendors who sell this equipment under their own brand names
to cable operators.
Correlant has a dedicated engineering team, consisting chiefly of the staff
that designed and developed the core software and hardware technology of its
cable modem. Beginning with the initial stages of design and development,
Correlant's design engineers work closely with the manufacturer's engineering
team to ensure the use efficient and cost efficient production of the
equipment.
Key elements of Correlant's strategy include:
* Maintain and enhance relationships with leading branded vendors of
data-over-cable equipment.
Large branded vendors are an important link in the data-over-cable equipment
distribution chain. By developing relationships with the largest and best
known branded vendors of data-over-cable equipment, LPFC expects Correlant
to reach a broader customer base and maximize economies of scale.
* Broaden the reach of customer base outside the United States.
The use of the Internet and the demand for high-speed access is growing
rapidly outside the United States. In addition, many countries are seeking
to adopt DOCSIS or similar standards. The Company expects that this demand
combined with the adoption of standard specifications for data-over-cable
equipment will accelerate the deployment of data-over-cable services outside
the United States. To take advantage of the anticipated growth of this market,
Correlant is currently developing relationships with leading vendors of
data-over-cable equipment in Asia and Europe.
* Expand product offerings in both the data-over-cable and high speed access
markets.
Correlant plans to expand its product line of data-over-cable equipment and
is developing additional features and functionality for its existing cable
modems, including voice-over-cable and video on demand capabilities. Correlant
is also developing a new DOCSIS modem (version 1.1), a CMTS (cable modem
termination system) or headend system used by cable operators to offer
high-speed Internet services to subscribers, and products for use in devices
serving the satellite and wireless markets.
* Utilize manufacturing partnership to provide cost effective and high
quality products.
A key competitive factor in the data-over-cable market is the ability to
produce high quality, low cost equipment in large volumes. Correlant's initial
success is partly attributed to its ability to develop leading edge products
while realizing significant economies of scale through its relationship with
its manufacturing partner.
Customers
Correlant sells products to vendors who in turn sell the products to cable
operators under their own private label. During Fiscal 2000, Correlant's
three most significant customers were Toshiba Corporation, Terayon
Communications and Com21, which together accounted for approximately 93% of
Correlant's revenues. Correlant anticipates that the majority of its revenue
will continue to be provided by a small number of customers.
ARESCOM Inc. ("Arescom")
Arescom designs, develops and markets a full line of DSL-based broadband
access and networking devices that address the needs of DSL providers and
users. Its solutions include both bridging and routing capabilities, which
can be used in single- and multiple-user environments. Arescom had sales of
approximately $14.4 million in Fiscal 2000 as compared to sales of only $1.4
million in the prior fiscal year. Sales increased primarily as the result of
the commencement during the year of sales of customized products to Cable &
Wireless Hong Kong Telecom ("HKT"). The introduction of these products was
the result of a successful joint development effort undertaken with HKT in
mid-1999. Arescom intends to further develop the relationship with HKT to
address HKT's current and future needs but has no long-term contracts or
commitments from HKT.
Arescom's engineering teams have designed and developed the core routing
software technology underlying its DSL products. With Arescom's proprietary
software routing technology, service providers can respond quickly to their
customers' requests without having to interface with third parties. Based on
its in-depth knowledge of routing technology, Arescom is continuing to develop
new products and features to meet emerging needs in the market. From a
manufacturing perspective, Arescom's proprietary software technology provides
the flexibility to rapidly incorporate alternative components, which
ultimately can enhance performance and reduce cost.
Arescom's broadband access products are designed to maximize interoperability
with the equipment of various DSLAM vendors. (A DSLAM, or digital subscriber
line access multiplexer, receives signals from multiple sources and multiplexes
them onto one line.) By establishing interoperability, its customers can
reduce the significant time and resources otherwise required to ensure that
the various components of their DSL system are compatible. Arescom's devices
are interoperable with, and are currently being deployed on, network systems
with most of the major DSLAM vendors, including Alcatel, Cisco, Copper
Mountain, Ericcson, Lucent, NEC, Nokia and Nortel. Arescom works closely
with DSLAM vendors, such as Copper Mountain and NEC, to present network
service providers a complete DSL access solution with guaranteed
interoperability.
Key elements of Arescom's business strategy include:
* Continue to Innovate
Arescom is continually developing its proprietary software technology and
hardware architecture. This contributes to Arescom's ability to customize
its devices to the particular needs of individual network service providers
and end users. By designing its own hardware architecture and software
technology, Arescom's engineering teams can rapidly introduce new products
featuring DSL technologies, such as VDSL and SHDSL, and new applications, such
as MTU solutions, VoDSL and wireless home LAN.
* Focus on Emerging High Growth Markets
Arescom will continue its focus on emerging high growth markets where demand
for DSL-based access solutions is expected to expand rapidly. The following
markets are expected to experience high growth:
* Small Business Sector.
* Multi-user Residential Sector
* Multi-tenant units (MTU) Sector
* Leverage and Expand Relationships with DSLAM Vendors
Arescom will continue to leverage and expand its already strong relationships
with DSLAM vendors to maximize market opportunities for its current and
future products. This will allow Arescom to more rapidly deploy complete
DSL-based broadband access solutions with guaranteed interoperability.
* Expand Strategic Relationships
Establishing relationships with leaders in DSL technology and services is
critical to Arescom's success. Arescom has formed, and expects to continue to
form, strategic relationships with DSLAM vendors, network service providers,
chipset manufacturers and other companies that are part of the growing DSL
market. To date, Arescom has entered into strategic relationships with
NorthPoint Communications, Copper Mountain, HKT and Nortel.
* Expand Customer Base
Arescom plans on expanding its presence in markets around the world, including
the United States, Asia and Western Europe. Arescom expects that the evolution
of DSL technology will result in the introduction of new applications and new
markets, such as the MTU market, where new types of customers such as hotels
and building owners will utilize DSL systems. Arescom also plans to leverage
its established self-installation technology and increasing brand recognition
to sell its products through retail channels.
Customers
Arescom primarily sells DSL products to local exchange communications providers
and Internet service providers. Arescom also sells ISDN (Integrated Services
digital Network) products to certain retail vendors and value-added resellers.
Arescom's customers include NorthPoint Communications, Microsoft, Cable and
Wireless HKT and Earthlink/Mindspring.
Regent Electronics Corp. ("Regent")
Regent designs, develops, manufactures and markets Internet related products
that offer Internet access through telephone lines and cable television lines.
Although Regent has recently undertaken efforts to expand its product line,
historically, Regent has generated most of its income from a single license of
acquired technology and patents and, to a lesser extent, from sales of its
A9000 television set-top boxes and chips (incorporating this technology) to
overseas customers, mainly in The Peoples Republic of China. During
Fiscal 2000, Regent's revenues declined significantly, and the Company and
Regent determined to write-off substantially all of the good will and
intangible patent assets (a total of approximately $54 million) associated with
this technology. Regent does not expect further significant revenues from the
use of the previously acquired technology, and its continued viability depends
on its success in acquiring or developing other technologies and new products.
Lotus World, Inc. ("Lotus World")
Lotus World was organized by LPFC in April 1999 to become a private-label Asian
language e-commerce service provider. Lotus World is still in the development
stage and is currently focused on Chinese language products, although its long
term objective is to provide e-commerce services in other languages as well.
Using its Asian language auction solution, the company is targeting business-
to-business and business-to-consumer markets, portal and ISP companies,
department stores, public and private auctions, and other merchant customers.
No date has been scheduled for the commercial introduction of Lotus World's
services. Lotus World is not expected to generate significant revenues in the
near future.
Sales and Markets
Markets
The Company sells its products in the United States and abroad, primarily
through direct wholesalers, relationships with original equipment manufacturers
("OEM"), strategic alliances and distributors. In Fiscal 2000, approximately
30% ($29 million ) of the Company's consolidated sales were made to customers
in the United States and approximately 70% ($66.3 million) were made to foreign
customers.
Customers
During Fiscal 2000, the Company had three customers with billings in excess of
10% of the Company's total revenues. The combined sales to these three
customers accounted for approximately 73% of the Company's total revenues.
The customers were Toshiba Corp. which accounted for approximately $49.0
million (51.4%) of consolidated revenues, HKT which accounted for
approximately $11.2 million (11.7%), and COM21 which accounted for
approximately $10.3 million (10.8%).
These three customers typically purchased products from the Company pursuant
to a few large purchase orders. The Company does not have written agreements
with these customers for ongoing or continued sales with specified minimum
quantities. As a result, although the Company believes that its relations with
these customers are good, there are no assurances of continued sales to these
customers. The loss of any of these customers, could have a material adverse
impact on the Company's operations.
Products
Correlant Products. Correlant designs, develops and markets standards-based,
high-speed cable modems to cable operators, network service providers, and
communications network users in the U.S. and internationally. Its principal
products include cable modems, cable modem chips and cable modem accessories.
Arescom Products. Arescom designs, manufactures (primarily through
subcontractors) and markets a broad range of high quality remote access
products, such as routers and remote managing software, and other inter-
networking equipment under analog, ADSL, PSTN, ISDN, xDSL and Ethernet
environments for ISPs, resellers, and system integrators.
Regent Products. Regent designs, develops, manufactures (through
subcontractors) and markets Internet-related products and services to
electronics manufacturers, commercial cable-television networks, hotels,
and individual customers. Regent has discontinued marketing efforts for
its prior products and is currently working on new product development.
Lotus World Services. Lotus World is developing AuctionLive, a private
label hosted online e-commerce site that will be targeted to international
clients. AuctionLive incorporates language-independent architecture, which
allows businesses to auction their products in almost any language. None of
Lotus World's products or services are currently commercially available.
Manufacturing
The Company does not maintain significant manufacturing facilities. Each of
LPFC's manufacturing subsidiaries contracts with third party manufacturers in
Taiwan or PRC for the supply of its products. The Company does not have any
long term contracts with its component suppliers or manufacturers. In the event
that any third party manufacturers were unable to manufacture the Company's
products, the Company would have to find alternative manufacturing
arrangements, which could take in excess of six months. Failure by the
Company's suppliers to supply required components may result in similar
interruptions to the Company's businesses.
Trademarks and Patents
The Company currently holds trademarks, copyrights and patent licenses of
Amiga-Commodore technology in PRC, Taiwan, Hong Kong, Macao and the bordering
countries between PRC and the former Soviet Union. These trademarks, copyrights
and patent licenses are not material to the Company's operations.
Employees
As of June 30, 2000, the Company had approximately 150 employees. None of
the Company's employees is represented by a labor union. To date, the Company
has not had any of its operations interrupted due to labor disputes and
considers its relationship with its employees to be good.
Backlog
The Company's general practice is to contract with third party manufacturers
to fill orders within delivery dates required by customers, with some
adjustments based on the Company's anticipation of demand. Substantially all
of the Company's products are produced in accordance with specifications and
production schedules determined by the Company based on orders placed by its
primary customers. The amount of unfilled orders at a particular time is
affected by a number of factors, including availability of finished inventory,
manufacturing and assembly capabilities of third party manufacturers and
product shipments. Accordingly, backlog from period to period is not
necessarily meaningful and may not be indicative of actual shipments to be
made to customers in any period.
Competition
The Internet-related products industry is highly competitive and is
characterized by rapid technological advances, frequent new product
introductions, evolving industry standards and competitive pricing. As a
developer and supplier of Internet-related products and services, the Company
encounters substantial competition from a number of firms, many of which have
longer operating histories, immensely greater financial resources, established
markets and more extensive facilities. New companies are continually entering
this market.
Arescom currently competes directly with other providers of DSL customer
premises equipment, including, among others, 2 Wire, 3Com, Alcatel, Cayman,
Cisco, Efficient Networks, NEC, and Siemens.
The Company's ability to anticipate technological changes and introduce
enhanced products on a timely basis will be a significant factor in its ability
to expand and remain competitive. The Company believes that it enjoys a
strong competitive position because of its strong relationships with the major
resellers in PRC and its technological and new product development
capabilities. There can be no assurance, however, that competitors will not be
able to develop products compatible with, or as alternatives to, the Company's
proprietary technology or systems, or that the Company will be able to
introduce new products and technologies on a timely basis. Furthermore, many
of the vendors to which the Company sells products for re-marketing under their
own names may elect to develop and manufacture these products on their own.
In the case of Correlant, these vendors include such industry leaders as Cisco,
Dassault, and Motorola as well as Correlant's principal customers, Toshiba,
Terayon and Com21.
Research and Development
During Fiscal 2000 the Company incurred research and development expenditures
of approximately $14.7 million. These expenditures were attributable
principally to continuing development activities by Correlant and Arescom in
connection with the customization of products and the introduction of new
products.
Forward-Looking Statements
The statements contained in this report that are not historical facts are
"forward-looking statements" which can be identified by the use of expressions
such as; "estimates," "projects," "anticipates," "expects," "intends,"
"believes," or variations thereof or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in such forward-looking
statements. Management cautions the reader that these forward-looking
statements, such as statements regarding development of the Company's business,
the Company's anticipated capital expenditures and other statements contained
in this report regarding matters that are not historical facts are only
estimates or predictions. No assurance can be given that anticipated future
results will be achieved. Actual events or results may differ materially from
those anticipated, as a result of risks facing the Company and unforeseen
affected by production difficulties or economic conditions adversely affecting
the markets for the Company's products.
ITEM 2. PROPERTIES
LPFC's executive offices are located at 200 Centennial Avenue, Piscataway, New
Jersey and consist of approximately 9,100 square feet under a lease that
expires on February 28, 2003. Correlant and Arescom lease office space in San
Diego, California (approximately 26,000 square feet) and Fremont, California
(approximately 36,000 square feet), respectively. Regent and Lotus World's
offices are both located at 200 Centennial Avenue, Piscataway, New Jersey.
The following table summarizes the Company's leases for offices and other
facilities in the United States:
Location Lease Term Commence Date Expiration Date
------------- -------------------- ---------------- ----------------
Piscataway, 5 years June 5, 1997 February 28, 2003
New Jersey
Middlesex, Annual June 5, 1999 Renewable
New Jersey Renewable
San Diego, 5 years July 30, 1999 July 31, 2004
California
Fremont, 2.7 years November 1, 1999 March 31, 2002
California
In addition, Correlant has a branch office in Taipei, Taiwan, and Arescom has
branch offices in Beijing, China, and Taipei, Taiwan. All overseas properties
are leased. Management believes that the Company's facilities, together with
planned expansions and upgrades of facilities, are adequate to meet present
and reasonably foreseeable needs. Management also believes that adequate space
will be available to replace any leased facilities whose leases expire in the
near future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1999 Annual Meeting of Shareholders of the Company held on April 28,
2000, the following matters were voted on by the shareholders:
Proposal 1: Election of Directors to hold office until the next Annual
Meeting or until their successors are duly elected and qualified. Each nominee
was elected by the votes cast as follows:
For Not Voted
-------------- ----------------
James Yao 35,836,567 26,780,030
Jeremy Wang 35,836,567 26,780,030
Jason Chang 35,836,567 26,780,030
David Leung 35,836,567 26,780,030
Thomas Dong Sheng Li 35,836,567 26,780,030
Gregg Chen 35,836,567 26,780,030
James Liu 35,836,567 26,780,030
Gary Huang 35,836,567 26,780,030
Proposal 2: Approval of the 2000 Equity Incentive Plan.
For Against Not Voted
---------------- -------------- ---------------
35,537,817 0 27,078,780
Proposal 3: Ratification of appointment of Schiffman Hughes Brown
(which by the date of the meeting had merged into Larson, Allen, Weishair
& Co., LLP) as Independent Auditors of the Company.
For Against Not Voted
---------------- --------------- ----------------
35,037,817 800,000 26,778,780
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
LPFC's common stock, par value $0.001 per share ("Common Stock"), has been
traded on the OTC Bulletin Board under the symbol "LPFC" since December 1,
1994. The following table sets forth the high and low closing sales prices of
the Common Stock for the periods indicated as reported on the OTC Bulletin
Board. These prices represent inter-dealer quotations, which do not include
retail mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.
Quarter Ended High Low
------------------ ------------- ------------
Fiscal Year 1999
----------------
September 30, 1998 $11.13 $8.50
December 31, 1998 $11.50 $6.75
March 31, 1999 $ 7.50 $6.13
June 30, 1999 $11.00 $6.44
Fiscal Year 2000
----------------
September 30, 1999 $15.00 $11.00
December 31, 1999 $11.00 $9.00
March 31, 2000 $13.81 $8.75
June 30, 2000 $12.97 $9.25
As of August 22, 2000, there were 64,133,795 shares of Common Stock issued
and outstanding, held by approximately 507 holders of record, as indicated on
the records of the Company's transfer agent. The total number of beneficial
holders of Common Stock as of such date was approximately 650.
To date, LPFC has not declared or paid any cash dividends on its Common Stock.
LPFC currently anticipates that it will retain all available funds for use in
the operation and expansion of its business, and no cash dividends are expected
to be paid on the Common Stock in the foreseeable future.
Recent Sales of Unregistered Securities
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. In accordance
with the terms of the agreement, on June 13, 2000, H&Q exchanged the shares of
Regent Preferred Stock for 2,250,000 shares of LPFC's Common Stock. LPFC
believes the exchange was exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"), since the transaction did not involve
a public offering within the meaning of Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
related notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
--------- --------- -------- --------- -------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales............................ $95,496 $ 42,383 $6,155 -- --
Cost of sales.................... 78,885 37,711 3,408 -- --
-------- --------- ------- ------- -------
Gross profit..................... 16,611 4,671 2,747 -- --
Royalty income................... -- 124 1,800 -- --
Operating Expenses
General and administrative....... 83,042 10,643 3,678 224 18
Research and Development......... 14,698 2,215 4,372 104 --
-------- -------- ------- ------- ------
Total operating expenses......... 97,740 12,859 8,050 328 18
Operating income (loss).......... (81,129) (8,063) (3,503) (328) (18)
--------- --------- -------- -------- ------
Other income (expenses), net..... 105 1,142 (10) 413 40
Loss on sale of joint
venture interest................ (4,254) -- -- -- --
Gain (Loss) on sale of stock of
subsidiaries.................... 41,373 (591) -- -- --
Minority interest in income of
consolidated subsidiaries....... 3,713 409 218 82 --
Net income (loss) before income taxes,
and discontinued operations..... (40,192) (7,103) (3,295) 167 22
--------- --------- --------- -------- ------
Income tax (expense) benefit..... (10,663) -- 81 (124) --
(Loss) income from
discontinued operations......... -- (53) 566 178 --
Net income (loss)................ $(50,855) $(7,157) $(2,649) $221 $22
========== ========= ========== ======= ========
Net income (loss) per share
Basic.......................... $(.80) $(0.15) $(0.06) $0.01 $0.00
======= ======= ======= ======= =======
Diluted........................ $(.80) $(0.15) $(0.06) $0.00 $0.00
======= ======= ======= ======= =======
Weighted average shares
outstanding..................... 63,867 49,032 44,421 29,238 26,799
AT JUNE 30
---------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- -------- ------- --------
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents........ $27,942 $ 30,799 $ 3,263 $ 357 $ 213
Working capital.................. 28,232 10,143 8,171 1,052 213
Total assets..................... 152,561 207,763 45,455 8,404 385
Long-term obligations............ -- -- -- -- --
Total shareholders' equity....... $106,428 $145,410 $35,875 $ 5,917 $ 385
========== ========= ======== ======= ========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Business Acquisitions and Dispositions
The Company completed the following transactions during Fiscal 2000.
On September 1, 1999, LPFC entered into a joint venture (the "Joint Venture")
with TCL Holdings (BVI) Ltd., to develop, manufacture and market Internet and
network products and services in The Peoples Republic of China. On June 16,
2000, LPFC sold its 50% stake in the Joint Venture to Great Seasons Investments
Ltd. for $560,000 (paid by the issuance of a note due December 15, 2000),
recording a loss of approximately $4.3 million in this transaction.
On February 7, 2000, LPFC sold 72% of its interest in USS Online, Inc. to
Travelway International Limited in exchange for 732,802 shares of LPFC
Common Stock. Online owns the stock of US Securities and Futures Corp. ("USSF")
and Professional Market Brokerage, Inc. ("PMB"), acquired by LPFC in February
1999, which are engaged in securities and commodities brokerage activities.
LPFC recorded a loss of approximately $4.1 million in this transaction. LPFC
continues to hold 28% of Online's outstanding stock.
On March 31, 2000, LPFC completed sales of common stock of Correlant to
unrelated foreign investors in a series of individual offshore transactions
pursuant to Regulation S under the Securities Act. The sales generated net
proceeds of approximately $62.2 million and reduced LPFC's ownership of
Correlant's capital stock from approximately 81% to approximately 65%. LPFC
recorded a gain on these transactions of approximately $45.5 million. In
similar transactions completed on October 2, 2000, LPFC sold additional shares
of Correlant common stock to unrelated foreign investors for net proceeds of
approximately $11.1 million, further reducing LPFC's ownership of Correlant's
capital stock to approximately 62%.
FISCAL 1999:
On February 23, 1999, LPFC acquired all of the outstanding securities of PMB
for $240,000 in cash and 500,000 shares of LPFC'S Common Stock valued at the
market price of $7.0625 per share at the time of the acquisition. The excess
of the purchase price and related costs over the value assigned to the net
tangible assets acquired was $3,114,769. Subsequent to the date of acquisition,
as required by the terms of the acquisition agreement, LPFC invested an
additional $3,518,750 of its Common Stock in PMB.
On February 23, 1999, LPFC acquired all of the outstanding securities of USSF
for $2.5 million in cash and 500,000 shares of LPFC's Common Stock valued at
the market price of $7.0625 per share at the time of the acquisition. The
excess of the purchase price and related costs over the value assigned to the
net tangible assets acquired was $5,949,675. Subsequent to the date of
acquisition, as required by the terms of the acquisition agreement, LPFC
invested an additional $250,000 in USSF.
On March 31, 1999, LPFC acquired 81% of Correlant's outstanding common stock
in exchange for up to $80 million of LPFC's Common Stock valued at the market
price of $7.21 per share at the time of the acquisition. The excess of the
purchase price and related costs over the value assigned to the net tangible
assets acquired was $78,190,640. A portion of the LPFC Common Stock allocable
to the Correlant transaction is reserved for issuance upon the exercise of
outstanding employee options to acquire shares of Correlant common stock.
Pursuant to the option arrangements, LPFC has issued or may be obligated to
issue up to 1,330,036 shares of LPFC Common Stock and will receive in
connection with such issuances up to 2,479,560 shares of Correlant common
stock.
On March 31, 1999, LPFC acquired 81% of Arescom's outstanding common stock in
exchange for up to $30 million of LPFC's Common Stock valued at the market
price of $7.21 per share at the time of the acquisition . The excess of the
purchase price and related costs over the value assigned to the net tangible
assets acquired was $28,069,302. A portion of the LPFC Common Stock allocable
to the Arescom transaction is reserved for issuance upon the exercise of
outstanding employee options to acquire shares of Arescom common stock.
Pursuant to the option arrangements, LPFC has issued or may be obligated to
issue up to 273,418 shares of LPFC Common Stock and will receive in connection
with such issuances up to 375,200 shares of Arescom common stock
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2000 AND 1999
Revenues
Total revenues for Fiscal 2000 increased by $53.1 million or 125% to $95.5
million compared to revenues of $42.4 million for the fiscal year ended
June 30, 1999 ("Fiscal 1999"). The increase in revenues resulted primarily
from the inclusion of the sales of both Correlant and Arescom for the entire
fiscal year. The sales of cable modems and DSL devices by Correlant and
Arescom, respectively, also increased substantially compared to Fiscal
1999.
In Fiscal 2000, LPFC's revenues (excluding proceeds generated from sales of
subsidiary capital stock) amounted to $2.6 million (approximately 3%) of the
Company's total revenues, Correlant's revenues amounted to $71.8 million
(approximately 75%) of the Company's total revenues, and Arescom's revenues
amounted to $14.2 million (approximately 15%) of the Company's total revenues.
LFPC's revenues in Fiscal 2000 (excluding such proceeds) consisted solely of
sales by LFPC of Regent's products to a single customer. Regent's revenues
amounted to $6.9 million (approximately 7%) of the Company's total revenues.
Lotus World did not have material revenue in Fiscal 2000.
Cost of Sales
Total cost of sales for Fiscal 2000 increased by $41.2 million or 109% to
$78.9 million compared to cost of sales of $37.7 million for Fiscal 1999.
The increase in cost of sales is proportional to the increases in sales of
Correlant and Arescom for Fiscal 2000.
Operating Expenses
Operating expenses, consisting of selling, general and administrative expenses,
increased by $72.4 million or 683%, to $83.0 million in Fiscal 2000, compared
to $10.6 million in Fiscal 1999. The increase is primarily attributable to
(1) write-offs of the Company's investment in Regent and Regent's intangible
assets in the aggregate amount of $54.0 million or 65% of total operating
expenses, (2) depreciation and amortization expenses of $8.8 million
attributable to LPFC's acquisition of controlling interests in Correlant,
Arescom, USSF and PMB, and (3) operating expenses of Correlant (including
deferred compensation charges of $5.1 million in connection with the issuance
of certain employee stock options) and Arescom for all of Fiscal 2000 as
compared to only a single quarter in Fiscal 1999 which increased commensurate
with increased revenues during Fiscal 2000.
Research and Development Expense
For Fiscal 2000, research and development expenses increased by $12.5 million,
or 568%, to $14.7 million compared to $2.2 million in Fiscal 1999. The increase
is primarily attributable to inclusion of the research and development expenses
of Correlant and Arescom for all of Fiscal 2000 as compared to only a single
quarter in Fiscal 1999.
Gains and Losses on Dispositions of Assets
LPFC sustained a loss of $4.3 million in connection with the sale of its 50%
interest in TCL International (U.S.), Inc. and a loss of approximately $4.1
million in connection with the sale of its 72% interest in Online.
LPFC recognized a gain of approximately $45 million in connection with its
sales of Correlant common stock during the third quarter of Fiscal 2000.
Goodwill and Intangible Asset Write-off
Goodwill, net of accumulated amortization ($11.1 million) was $64.6 million at
June 30, 2000, $63.6 million (50%) less than at June 30, 1999. During Fiscal
2000, substantially all of the goodwill associated with the Company's
investment in Regent (approximately $49 million) was written off due to
management's belief that Regent's technology and products have been rendered
obsolete by modern broadband-based Internet access technology. For similar
reasons, the intangible asset associated with Regent's patents (approximately
$5 million) was completely written off during Fiscal 2000.
Net Income (Loss)
As a result of the factors discussed above, the Company's net loss increased
by $43.7 million to $50.9 million, or $0.80 per diluted share, in Fiscal
2000 compared to a net loss of $7.2 million, or $0.14 per diluted share, in
Fiscal 1999. Excluding goodwill amortization expenses, related write-offs
and deferred compensation charges, the Company had net income of $10.5 million
in Fiscal 2000, or $0.17 per diluted share. The net income excluding goodwill
amortization expenses, related write-offs and deferred compensation charges
includes $37.1 million of net gain on sales of stock of subsidiaries and a
joint venture interest, as described above.
Income Taxes
LPFC incurred income taxes of approximately $10.7 million in Fiscal 2000
compared to no income taxes in Fiscal 1999. The increase is attributable
primarily to alternative minimum tax liability resulting from the gain on
sales of Correlant stock. The Company's net loss of $50.9 million in Fiscal
2000 is added to LPFC's current net operating loss carryover and may be used
to offset future earnings, if any. Correlant is not included in the Company's
consolidated income tax returns. Arescom is included in the Company's
consolidated income tax returns for the period from January 1 to June 30, 2000.
Both Regent and Lotus World are included in the Company's consolidated income
tax returns. Net operating loss carryforwards cannot be used to offset certain
alternative minimum tax liabilities.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
Revenues
Total revenues for Fiscal 1999 increased by $36.2 million or 584% to $42.4
million compared to revenues of $6.2 million for the fiscal year ended June 30,
1998 ("Fiscal 1998"). The increase in revenues resulted primarily from sales
of Regent's newly introduced TeleWeb A9000 set-top box and the sales of cable
modems and routers by Correlant and Arescom, which became majority-owned
subsidiaries in the third quarter of Fiscal 1999.
In Fiscal 1999, Regent's revenues amounted to $32.6 million (approximately
76.9%) of the Company's total revenues, LPFC's revenues amounted to $6 million
(approximately 14.2%) of the Company's total revenues, Correlant's revenues
amounted to $3.8 million (approximately 8.7%) of the Company's total revenues,
and Arescom's revenues amounted to $151,942 (approximately 0.4%) of the
Company's total revenues. The Company also had royalty revenue of $124,125
(approximately 0.4%) in Fiscal 1999, compared to $1.8 million in Fiscal 1998.
The royalty revenue was attributable to a single non-refundable fee charged
to a single customer for Regent's grant of marketing and distribution rights
to certain technology that subsequently became obsolete. The Company does not
anticipate generating material additional fees of this nature.
Discontinued Operations
On September 30, 1998, LPFC sold all of its textile and apparel businesses
(LPF International Corp. and Richtime Far East, Ltd.) to an unrelated third
party for $2.5 million. In Fiscal 1999, the Company had an operating loss of
$53,017 from discontinued operations and recorded a loss of $590,641 on sales
of the related assets. The Company's 1998 and 1997 financial statements have
been restated to reflect the textile and apparel businesses as discontinued
operations.
Operating Expenses
Operating expenses, consisting of selling, general and administrative expenses,
increased by $6.9 million or 189%, to $10.6 million in Fiscal 1999, compared to
$3.7 million in Fiscal 1998. The increase was primarily attributable to
(1) goodwill amortization expenses of $5.8 million, or 54.7% of total operating
expenses, in connection with LPFC's acquisitions of controlling interests in
Correlant, Arescom, USSF and PMB and (2) operating expenses of newly acquired
companies.
Research and Development Expense
For Fiscal 1999, research and development expenses decreased by $2.2 million,
or 49%, to $2.2 million compared to $4.4 million in Fiscal 1998. The decrease
was primarily attributable to completion of the initial stage of development
of Regent's TeleWeb set-top box project.
Net Income (Loss)
As a result of the factors discussed above, the Company's net loss in Fiscal
1999 increased by $4.5 million to $7.2 million, or $0.14 per diluted share,
compared to a net loss of $2.6 million, or $0.07 per diluted share, in Fiscal
1998. Excluding goodwill amortization expenses, the Company had a net loss
of $1.35 million in Fiscal 1999, or $0.03 per diluted share.
Income Taxes
The Company's loss in Fiscal 1999 may be used to offset future earnings, if
any. Loss carryforwards are not available to offset alternative minimum tax
liabilities.
Liquidity and Capital Resources
At June 30, 2000, the Company had working capital of $28.2 million, compared
to $10.1 million and $8.17 million at June 30, 1999 and 1998, respectively.
The increase in working capital resulted primarily from sales of Correlant
stock and increased net cash flow from Correlant's operations.
Net cash used by operating activities totaled $3.1 million in Fiscal 2000.
This amount reflected the decrease in accounts receivable ($8.1 million),
increase in inventories ($8.2 million), and depreciation and amortization
and write-off of goodwill and intangible assets ($62.8 million).
The depreciation and amortization and write-off of goodwill and intangible
assets consisted primarily of write-offs of the Company's investment in Regent
and Regent's intangible assets, as described above. Increases in inventory and
depreciation and amortization expenses resulted from acquisitions in Fiscal
1999, and substantial growth in Correlant's and Arescom's businesses in Fiscal
2000, partly reflecting the full year of operations as compared to a single
quarter in Fiscal 1999. Net cash used by operating activities for Fiscal 1999
totaled $18.8 million.
The Company's principal funding source has been and is expected to continue to
be private sales of stock of LPFC and certain subsidiaries. In Fiscal 2000,
cash flow from investment activities totaled $42.4 million. The sale of
Correlant stock provided approximately $62.2 million of additional cash in
fiscal 2000. Positive cash flows were partially offset by loans made by the
Company, consisting primarily of a loan of $10.0 million to TurboComm
Technology, Inc., the manufacturer of Correlant's cable modem products, and a
loan of $1.3 million to Online. The loan to TurboComm is due April 7, 2001
and bears interest at the rate of six percent per annum. The loan to Online
is payable on demand and bears interest at the rate of eight percent per
annum.
In December 1999, LPFC advanced $10 million to Correlant as a working capital
loan. Subsequent to June 30, 2000, this loan was converted into 10,000 shares
of Correlant's Series D Preferred Stock, which are in turn convertible into an
equal number of shares of Correlant's common stock. In Fiscal 2000,
Correlant's operating activities generated net cash of approximately $8.7
million. In September 2000, in connection with the resolution of a number of
matters stemming from LPFC's acquisition of a controlling interest in
Correlant, Correlant waived LPFC's obligation to fund $10 million of additional
working capital.
During Fiscal 1999 and Fiscal 2000, LPFC loaned $200,000 and $9.8 million,
respectively, to Arescom. Net cash used in Arescom's operating activities for
Fiscal 1999 and Fiscal 2000 was $3.6 million and $5.9 million, respectively.
The Company believes that its current cash balances together with funds that
may be generated from equity financings and operations will be sufficient to
meet its working capital requirements for the next 12 months. Nevertheless,
the Company's continuing operating and investing activities may require LPFC
to obtain additional sources of financing. There can be no assurance that any
necessary additional financing will be available to the Company on commercially
reasonable terms, if at all.
Recently Issued Financial Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. In June 2000, the SEC staff amended SAB 101 to provide issuers
with additional time to implement SAB 101. The Company will begin to adopt
SAB 101 effective October 2000. The impact on the Company's financial
statements is not expected to be material.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation. The Company will be
required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, Accounting for
Stock Issued to Employees. The Company has not completed its determination
of the impact of the adoption of this new accounting standard on its
consolidated financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its cash equivalents. The Company has not entered into any
transactions using derivative financial instruments or derivative commodity
instruments and believes that its exposure to market risk associated with
other financial instruments is not material.
Although the Company transacts a large portion of its business in Taiwan, the
functional currency of its Taiwan branch is the U.S. dollar. Only a small
number of transactions are denominated in the Taiwan dollar and exposed to
foreign currency exchange rate risk. Therefore, the Company does not have
any hedging or similar foreign currency contracts. To date, the Company has
not experienced any material foreign currency exchange rate gains or losses
associated with transactions denominated in the Taiwan dollar and does not
expect any significant changes in foreign currency exposure in the near
future.
Item 8. Financial Statements
The information required by this Item 8 is included separately at the end of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
The information required to be disclosed in Part III (Items 10, 11, 12 and 13)
will be incorporated by reference from the Company's definitive proxy statement
if filed by October 30, 2000 or, if such proxy statement is not filed by such
date, the information required to be disclosed by Part III will be disclosed
by amendment to this Form 10-K prior to October 31, 2000.
Item 14. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) The following consolidated financial statements of the Company and
the report of the independent auditors thereon are included in this
report commencing on page 25:
Independent Auditor's Report
Consolidated Balance Sheets at June 30, 2000 and 1999
Consolidated Statements of Operations for the Fiscal Years ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Exhibits
3.1 Certificate of Amendment of Certificate of Incorporation of
the registrant dated as May 25, 1999 (Exhibit 3.1 to Amendment
No. 3 to Registration Statement on Form 10, filed June 17,
1999)*
3.2 Certificate of Incorporation of the registrant, as amended
(Exhibit 3.1 to Registration Statement on Form 10, filed
October 27, 1998)*
3.3 Bylaws of the registrant, as amended
10.1 2000 Equity Incentive Plan (Exhibit A to Proxy Statement on
Schedule 14A filed on April 4, 2000)**
10.2 Agreement dated September 30, 2000, between the registrant and
TurboNet Communications (now Correlant Communications, Inc.)
relating, among other things, to the issuance of shares of
registrant's common stock upon exercise of Correlant stock
options.
21 Subsidiaries of the registrant
27 Financial Data Schedule
---------------------------------------
* This document has been previously filed with the Securities and Exchange
Commission as an exhibit to the registrant's Registration Statement on
Form 10 on the date indicated and is incorporated herein by reference.
**This document has been previously filed with the Securities and Exchange
Commission as an exhibit to the registrant's Proxy Statement on Schedule 14A
on the date indicated and is incorporated herein by reference.
(b) Reports on Form 8-K
During the fiscal quarter ended June 30, 200, the registrant filed the
following reports on Form 8-K:
Form 8-K filed April 14, 2000, in which the registrant reported its sale of
shares of Correlant Communications.
Amendment No. 1 to Form 8-K filed June 9, 2000, which provided historical
and pro forma financial statements relating to the registrant's acquisitions
of PMB and USSF as previously reported in the registrant's report on Form 8-K
filed February 12, 1999.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: October 13, 2000 Lotus Pacific, Inc.
By: /s/ Jeremy Wang
---------------------------------
Jeremy Wang, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/ James Yao
--------------------------- Date: October 13, 2000
James Yao, Chairman
/s/ David Li
--------------------------- Date: October 13, 2000
David Li, Chief Financial Officer
/s/ June L. Chang
---------------------------- Date: October 13, 2000
June L. Chang, Director
/s/ David Leung
----------------------------- Date: October 13, 2000
David Leung, Vice President & Director
/s/ Gary Huang
------------------------------ Date: October 13, 2000
Gary Huang, Director
/s/ Robert C. Ip
------------------------------- Date: October 13, 2000
Robert C. Ip, Director
/s/ Kuan C. Tsai
------------------------------ Date: October 13, 2000
Kuan C. Tsai, Director
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
LOTUS PACIFIC, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
JUNE 30, 2000, 1999 AND 1998
Page
------
Independent Auditor's Report.............................. 3
Consolidated Financial Statements:
Consolidated Balance Sheets.............................. 4
Consolidated Statements of Operations.................... 5
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows.................... 7
Notes to Consolidated Financial Statements................ 8-33
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Lotus Pacific, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Lotus Pacific,
Inc. and Subsidiaries as of June 30, 2000 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of Correlant Communications, Inc. (formerly TurboNet
Communications), a majority-owned subsidiary which reflect total assets of
$37,444,421 as of June 30, 2000 and total revenues of $71,829,439 for the year
then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Correlant Communications, Inc. (formerly TurboNet Communications),
is based solely on the report of the other auditors. The consolidated balance
sheet of Lotus Pacific, Inc. and Subsidiaries as of June 30, 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended June 30, 1999 were
audited by Schiffman Hughes Brown, PC (whose practice became a part of Larson,
Allen, Weishair & Co., LLP effective January 1, 2000) whose reports dated
September 22, 1999 (except for Note 16, which is deleted as of February 28,
2000) and September 4, 1998 expressed an unqualified opinion on those
consolidated statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lotus Pacific, Inc.
and Subsidiaries as of June 30, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
Blue Bell, Pennsylvania
September 22, 2000
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
-------------- -----------------
<S> <C> <C>
Current Assets:
Cash....................................... $ 27,942,258 $ 30,779,486
Accounts receivable........................ 19,534,974 27,655,975
Accounts receivable from related parties... 5,653,533 ---
Inventory.................................. 13,185,391 4,972,965
Prepaid expenses........................... 1,533,045 ---
Other...................................... 89,633 574,985
------------ -------------
Total current assets..................... 67,938,834 63,983,411
Property and equipment:
Furniture and office equipment............. 2,717,683 1,534,033
Equipment.................................. 1,175,859 1,540,221
Leasehold improvements..................... 234,086 29,836
------------ -------------
4,127,628 3,104,090
Less: accumulated depreciation............. 1,317,636 1,235,567
------------ -------------
2,809,992 1,868,523
Other assets:
Restricted cash............................ 300,000 ---
Notes receivable........................... 11,860,000 ---
Intangible asset, net of accumulated
amortization of $713,355 in 1999......... --- 5,098,604
Goodwill, net of accumulated amortization
of $11,091,760 in 2000 and $6,570,838
in 1999.................................. 64,576,749 128,157,062
Investment in unconsolidated subsidiary.... 4,329,925 8,457,314
Other...................................... 745,003 197,890
------------ ------------
81,811,677 141,910,870
$152,560,503 $207,762,804
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................. $ 1,278,000 ---
Accounts payable and accrued expenses...... 19,233,547 $ 8,950,281
Accounts payable to related parties........ 15,261,506 ---
Loans payable.............................. --- 195,565
Notes payable.............................. 1,500,000 ---
Investment deposits........................ --- 44,695,000
Income taxes payable....................... 2,434,150 ---
------------- ------------
Total current liabilities................ 39,707,203 53,840,846
Minority interest in subsidiaries........... 6,425,633 8,512,221
Commitments
Stockholders' equity:
Deferred stock compensation................ (16,643,967) ---
Common stock............................... 64,133 63,466
Preferred stock, Series A.................. 4 4
Additional paid-in capital................. 191,037,695 155,464,298
Treasury stock............................. (7,057,102) ---
Accumulated deficit........................ (60,973,096) (10,118,031)
-------------- -------------
106,427,667 145,409,737
$152,560,503 $207,762,804
============== =============
</TABLE>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- ------------
<S> <C> <C> <C>
Sales..................................... $95,496,358 $42,382,795 $ 6,154,935
Cost of sales............................. 78,885,231 37,711,338 3,408,377
------------ ----------- -----------
Gross profit.............................. 16,611,127 4,671,457 2,746,558
Royalty income............................ --- 124,125 1,800,000
----------- -----------
Operating expenses:
Selling, general, and administrative
expenses............................... 83,042,046 10,643,335 3,677,934
Research and development................. 14,697,752 2,215,455 4,371,990
------------ ----------- -----------
97,739,798 12,858,790 8,049,924
------------ ----------- -----------
Operating loss............................ (81,128,671) (8,063,208) (3,503,366)
------------- ----------- ------------
Other income (expense):
Interest income.......................... 790,816 58,932 36,302
Interest expense......................... (934,044) --- (46,259)
Loss on sale of joint venture interest... (4,254,000) --- ---
Gain (loss) on sale of stock of subsidiaries 41,372,561 (590,641) ---
Other income............................. 8,750 --- ---
Minority interest in income of
consolidated subsidiaries............... 3,712,568 408,600 217,729
Foreign exchange gain (loss)............ 71,894 (1,487) 99
Equity in earnings of
unconsolidated subsidiaries............. 176,811 1,075,384 ---
------------- ----------- -----------
40,936,606 959,538 207,871
------------- ----------- -----------
Net loss before income taxes and
discontinued operations.................. (40,192,065) (7,103,670) (3,295,495)
Income tax (expense) benefit.............. (10,663,000) --- 80,714
------------- ------------ -----------
Net loss from continuing operations....... (50,855,065) (7,103,670) (3,214,781)
(Loss) income from discontinued operations --- (53,017) 565,916
------------- ------------- ------------
Net loss.................................. $(50,855,065) $(7,156,687) $(2,648,865)
============== ============= ============
Earnings (loss) per share
Basic and diluted........................ $ (.80) $ (.14) $ (.07)
========== ========= =========
Discontinued operations.................. --- $ (.01) $ .01
========== ========= =========
Weighted average shares................... 63,866,585 49,032,615 44,421,334
</TABLE>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Common Preferred Additional Deferred
Shares Shares Paid-in Stock Treasury Accumulated
Outstanding Outstanding Amount Capital Compensation Stock Deficit Total
--------------- ------------- ------------- ------------- ------------ --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance 40,737,054 4,300 $ 40,741 $ 6,188,348 --- --- $ (312,479) $ 5,916,610
June 30, 1997
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 --- --- --- 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 47,391 38,788,698 --- --- (2,961,344) 35,874,745
Issuance of
common stock 384,500 --- 384 2,164,366 --- --- --- 2,164,750
Issuance of common
stock for services 22,500 --- 23 134,977 --- --- --- 135,000
Issuance of common
stock for purchase
of subsidiaries 16,550,670 --- 16,550 120,564,699 --- --- --- 120,581,249
Less treasury stock (878,000) --- (878) --- --- (6,188,442) --- (6,189,320)
Net loss for the
year ended
June 30, 1999 (7,156,687) (7,156,687)
------------- ------------ ---------- ------------ ----------- ----------- ------------- ------------
63,466,474 4,300 63,470 161,652,740 --- (6,188,442) (10,118,031) 145,409,737
Issuance of common
stock for Regent
Electronics Corp.
preferred stock 2,250,000 --- 2,250 21,232,125 --- --- --- 21,234,375
Treasury stock
reissued 878,000 --- 878 --- --- 6,188,442 --- 6,189,320
Treasury stock (732,802) --- (733) --- --- $(7,057,102) --- (7,057,835)
Retired common
stock (1,727,877) --- (1,728) (12,456,265) --- --- --- (12,457,993)
Deferred stock
compensation related
to stock options --- --- --- 20,609,095 $(20,609,095) --- --- ---
Amortization of
deferred stock
compensation --- --- --- --- 3,965,128 --- --- 3,965,128
Net loss for the
year ended (50,855,065) (50,855,065)
June 30, 1999 ------------- -------- ----------- ------------ ------------- --------- ------------ ------------
Balance
June 30, 2000 64,133,795 4,300 $ 64,137 $191,037,695 $(16,643,967) $(7,057,102) $(60,973,096) $106,427,667
========== =========== ========= ============= ============= ============ ============= ============
</TABLE>
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
---------------- ----------------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(50,855,065) $ (7,156,687) $(2,648,865)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Equity in earnings of unconsolidated subsidiaries (176,811) (1,075,384) ---
Depreciation, amortization and
write-off of goodwill..................... 62,794,851 6,243,655 1,731,903
Amortization of deferred stock compensation. 3,965,128 --- ---
Common stock issued for services............ --- 135,000 455,000
Loss on sale of joint venture............... 4,254,000 590,641 ---
Loss on disposal of fixed assets............ 33,000 --- ---
Gain on sale of subsidiaries' stock......... (41,372,561) --- ---
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.. 8,121,001 (20,498,144) (6,465,616)
Increase in accounts receivable from
related parties............................ (5,653,533) --- ---
Increase in inventory....................... (8,212,426) (4,972,965) ---
Increase in prepaid expenses................ (1,533,045) --- ---
Decrease (increase) in other current assets. 485,352 185,310 (757,941)
Increase in restricted cash................. (300,000) --- ---
Decrease (increase) in deposit.............. 157,679 (107,662) (71,092)
Decrease (increase) in cash surrender value. 17,436 (17,436) ---
Increase in other assets.................... (722,228) --- ---
Increase in accounts payable and
accrued expenses........................... 10,283,266 5,981,847 2,922,185
Increase in accounts payable to related parties 15,261,506 --- ---
Increase (decrease) in income taxes payable.. 2,434,150 (42,110) (81,282)
(Decrease) increase in minority interest
in subsidiary............................... (2,086,588) 1,942,677 5,783,771
-------------- ------------- -----------
Net cash provided by (used in) operating activities (3,104,888) (18,791,258) 868,063
------------- ------------- -----------
Cash flows from investing activities:
Purchase of property and equipment............ (1,475,500) (507,500) (114,346)
Proceeds from sale of fixed assets............ 51,000 --- ---
Purchase of affiliates........................ (1,000,000) (2,740,000) ---
Purchase of investments....................... (5,500,025) --- ---
Proceeds from sale of investment.............. --- 2,500,000 ---
Proceeds from sale of subsidiaries' stock..... 62,164,750 --- ---
Additions to notes receivable................. (11,860,000) --- ---
------------- -------------- ----------
Net cash provided by (used in) investing activities 42,380,225 (747,500) (114,346)
------------- -------------- -----------
Cash flows from financing activities:
Issuance of common stock...................... --- 2,164,750 2,072,000
Issuance of common stock warrants............. --- --- 80,000
(Decrease) increase in investment deposits.... (44,695,000) 44,695,000 ---
(Decrease) increase in loans payable.......... (195,565) 195,565 ---
Proceeds from line of credit.................. 1,278,000 --- ---
Proceeds from issuance of notes payable....... 1,500,000 --- ---
------------- -------------- -----------
Net cash provided by (used in) financing activities (42,112,565) 47,055,315 2,152,000
------------- ------------- -----------
Net (decrease) increase in cash................ (2,837,228) 27,516,557 2,905,717
Cash, beginning of year........................ 30,779,486 3,262,929 357,212
------------- ------------ ------------
Cash, end of year.............................. $ 27,942,258 $ 30,779,486 $ 3,262,929
============= ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest........................ $ 968,044 $ 59,845
============= ============
Cash paid for taxes........................... $ 8,250,200 $ 1,400 $ 500
============= ============ ============
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for services......... $ 135,000 $ 455,000
============= ============
Issuance of common stock for purchase of
subsidiaries................................. $120,581,249 $ 30,000,000
============== ============
Acquisition of treasury stock................. $ 869,393 $ 6,047,125
============ ==============
Conversion of subsidiary preferred stock
to parent common stock....................... $ 21,234,375
============
</TABLE>
LOTUS PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
Note 1 Description of Business:
The Company's subsidiaries design, develop and market standards-based, high-
speed cable modems, DSL-based broadband access and networking related devices
and teleweb systems for resale to corporate telecommuters and network service
providers in the United States and internationally.
Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements include all significant majority-owned
subsidiaries. Affiliated companies in which Lotus has no controlling interest
are accounted for using the equity method. Use of estimates and assumptions
as determined by management is required in the preparation of consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates and assumptions.
Principle of Consolidation:
The accompanying financial statements include the accounts of Lotus Pacific,
Inc.; its 92.3% owned subsidiary, Regent Electronics Corp. (Regent); its
64.7% owned subsidiary, Correlant Communications, Inc.(Correlant) (formerly
TurboNet Communications); its 81% owned subsidiary, ARESCOM Inc.(Arescom), and
its 90.5% owned subsidiary, Lotus World, Inc. The portions of Regent,
Correlant, Arescom and Lotus World, Inc. not owned by the Company appears as
minority interest in subsidiaries on the balance sheet. All intercompany
transactions have been eliminated in consolidation.
Cash Equivalents:
Cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and original maturities of three months or
less at the date of acquisition.
Accounts Receivable:
The allowance for doubtful accounts is based on management's evaluation of
outstanding accounts receivable at the end of the year. No allowance for
doubtful accounts has been provided, since management believes all accounts
are collectable.
Inventories:
Inventories are stated at the lower of cost (first in, first out) or market
(net realizable value). Given the volatility of the market for the Company's
products, the Company makes inventory write-downs for potentially excess and
obsolete inventory based on backlog and forecast demand. However, such backlog
and forecast demand is subject to revisions, cancellations, and rescheduling.
Actual demand will inevitably differ from such backlog and forecast demand, and
such differences may be material to the financial statements.
Investments:
The equity method of accounting is used for the Company's 28% minority
investment in USS OnLine, Inc. Under the equity method, the Company recognizes
its share in the net earnings or losses each year as they occur.
The Company's less than five-percent investment in TurboComm Technology, Inc.
is recorded at cost.
Currency Translation:
Lotus translates the assets and liabilities of international non-U.S.
functional currency subsidiaries into dollars at the rates of exchange in
effect at the end of the period. Revenues and expenses are translated using
rates that approximate those in effect during the period. Currency transaction
gains or losses are recognized in current operations and have not been
significant to the Company's operating results in any period.
Revenue Recognition:
The Company recognizes revenue upon passing of title and risk of ownership,
which coincides with the timing of product shipment. The Company, under
specific conditions, permits its customers to return products. The provision
for estimated sales returns is recorded concurrently with the recognition of
revenue. Contract services revenue is recognized over the term of the contract
as the services are performed.
Advertising Costs:
Advertising costs are charged to expense when incurred. Advertising expenses
were $610,599, $133,065 and $45,082 for fiscal years 2000, 1999 and 1998,
respectively.
Goodwill:
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible assets of businesses acquired. Goodwill is
amortized on a straight-line basis over 10 years. Periodically, the Company
reviews the recoverability of goodwill.
In management's opinion, the only material impairment that existed at June 30,
2000 was the goodwill associated with Regent. Amortization expense was
$56,302,416 in 2000, $5,805,441 in 1999, and $1,067,544 in 1998. Included in
the $56,302,416 is the write-down of the impaired assets totaling $49,268,775.
Equipment and Depreciation:
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over their estimated useful lives ranging from 3 to 7
years. Depreciation expense for the years ended June 30, 2000, 1999 and 1998
was $920,841, $397,787, and $322,594, respectively.
Intangible Asset:
Intangible asset consists of patents acquired by Regent in June, 1997. The
patents are carried at cost and amortized over the useful life of 17 years.
Amortization expense of the intangible asset for fiscal 2000, 1999 and 1998
was $5,118,466, $341,765, and $341,765, respectively.
At June 30, 2000 management determined that these patents were totally
impaired and, accordingly, the remaining balance of $4,756,225 was written
off and is included in the $5,118,466 amortization expense.
Research and Development:
Research and development costs consist of expenditures incurred by the Company
during the course of planned search and investigation aimed at the discovery of
new knowledge, which will be used to develop and improve its Internet access
product. The Company expenses all such research and development costs as they
are incurred.
Earnings per Common Share:
In 1997, the Financial Accounting Standards Board issued Financial Accounting
Standards No. 128 (FAS 128), "Earnings Per Share" which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Dilutive earnings per share is very similar to the previously
reported fully diluted earnings per share. The Company adopted FAS 128 in the
second quarter of fiscal 1998. Share and per share amounts for all periods
presented have been restated to comply with FAS 128.
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- -----------
<S> <C> <C> <C>
Net loss............................... $(50,855,065) $(7,156,687) $(2,648,865)
Net loss per share of common stock:
Basic & diluted:
Loss from continuing operations...... $(.80) $(.14) $(.07)
(Loss) income from discontinued
operations.......................... (.01) .01
------ ------ ------
Net loss............................... $(.80) $(.15) $(.06)
</TABLE>
Impairment of Long-Lived Assets:
The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future undiscounted net cash flows is less than the
carrying amount of the asset. Should an impairment exist, the impairment loss
would be measured based on the excess of the carrying amount of the asset over
the asset's fair value or discounted estimates of future cash flows. The
Company has identified impairment losses associated with Regent Electronics
Corp., which consisted of goodwill and patents totaling $49,268,775 and
$4,756,225, respectively. Substantially all of the Company's long-lived assets
are located in the United States.
Warranty Reserves:
The Company does not provide a cable modem warranty. The warranty liability for
defective product is the responsibility of the cable modem manufacturer.
The Company warrants its routers and cable data bridges for a period of three
years and provides currently for the estimated costs which may be incurred
under these product warranties.
Stock-Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, Accounting for Stock-Based
Compensation, requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB25, when the
exercise price of the Company's employee stock options is not less than the
fair value for accounting purposes of the underlying stock on the date of
grant, no compensation expense is recognized.
Income Taxes:
Current income tax expense or benefit is the amount of income taxes expected
to be payable or refundable for the current year. A deferred income tax asset
or liability is computed for the expected future impact of differences between
the financial reporting and tax basis of assets and liabilities and for the
expected future tax benefit to be derived from tax credits and loss
carryforwards. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
Comprehensive Income:
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are
recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including foreign currency
translation adjustments, and unrealized gains and losses on investments, shall
be reported, net of their related tax effect, to arrive at comprehensive
income.
Segment Information:
SFAS No. 131, Segment Information, amends the requirements for public
enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS No. 131,
are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The financial information is required
to be reported on the basis that is used internally for evaluating this segment
performance. The Company operates in one business segment: the design,
development and marketing of Internet related products and services.
Recently Issued Accounting Standards:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 will require the recognition of all
derivatives on the Company's balance sheet at fair value. The FASB has
subsequently delayed implementation of the standard for the financial years
beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. In June 2000, the SEC staff amended SAB No. 101 to provide
registrants with additional time to implement SAB 101. The Company expects
to adopt SAB No.101 effective October 2000. The impact on the Company's
financial statements is not expected to be material.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation. The Company will be
required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee
status that occur on or after that date. FIN 44 addresses practice issues
related to the application of Accounting Practice Bulletin Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has not completed its
determination of the impact of the adoption of this new accounting standard on
its consolidated financial position or results of operations.
Note 3 Inventories:
Inventories consist of the following:
As of June 30,
2000 1999
------------ -------------
Raw materials................ $12,521,391 $4,794,965
Work-in-process.............. 624,000 169,000
Finished goods............... 40,000 9,000
----------- ------------
$13,185,391 $4,972,965
=========== ===========
The above inventory balances as of June 30, 2000 are net of reserves for
potential excess quantities and obsolescence of approximately $2,095,000.
Note 4 Notes receivable:
The Company loaned $10,000,000 to Turbocomm Technology, Inc. (a supplier of
Correlant) on April 7, 2000. The note is due one year from effective date
with interest at the rate of six percent per annum.
During the year ended June 30, 2000, the Company loaned USS Online, Inc.
$1,300,000. The loan is due on demand with interest at the rate of eight
percent per annum.
In association with the sale of the Company's interest in a joint venture
(see Note 10), the Company received a note from the buyer in the amount of
$560,000. The note is due December 15, 2000 with interest at the rate of
6.5% per annum.
Note 5 Issuance of Stock:
During the year ended June 30, 2000, the Company issued 2,250,000 shares of its
common stock in exchange for 1,500,000 shares of outstanding preferred stock
of Regent.
During the year ended June 30, 1999, the Company issued an aggregate of
16,957,670 shares of its common stock, of which 384,500 shares were issued
for cash consideration of $2,164,750, 22,500 shares were issued for consulting
services, and 16,550,670 shares were issued in exchange for securities of
businesses acquired.
During the year ended June 30, 1998, the Company issued an aggregate of
6,649,750 shares of its common stock, of which 536,000 shares were issued
for cash consideration of $2,072,000, 113,750 shares were issued for consulting
services, and 6,000,000 shares were issued in exchange for an outstanding 17%
interest in Regent.
Note 6 Related Party Transactions:
Correlant Communications, Inc. (formerly TurboNet Communications) has
significant transactions with two related party shareholders. In 1997,
Correlant established a relationship with Toshiba Corporation ("Toshiba"),
whereby Correlant and Toshiba entered into a cooperative research and
development agreement. As part of this arrangement, Correlant will pay Toshiba
a percentage of the selling price of each developed product sold to customers,
other than Toshiba, which utilize the technology developed under the agreement.
In 1998, Toshiba purchased 250,000 shares of Correlant's Series B preferred
stock. Toshiba accounted for 68% of Correlant's revenues for the twelve months
ended June 30, 2000. Accounts receivable from Toshiba as of June 30, 2000 were
$5,653,533. As of June 30, 2000, Correlant has accrued royalties payable to
Toshiba of $639,330, representing the total royalties earned by Toshiba during
the twelve months ended June 30, 2000.
Correlant has also established a relationship with Turbocomm Technology, Inc.
("Turbocomm"), a company located in Taiwan that performs the manufacturing of
the cable modem product. In April 1999, Correlant sold 300,000 shares of
Correlant's Series C preferred stock to Turbocomm. Turbocomm warehouses the
integrated circuit inventory used in the production process; however, as
title and risk of loss are not transferred, the cost of the integrated circuit
is maintained in inventory of Correlant until the cable modem is produced and
delivered to a customer. Correlant invoices Turbocomm for the inventory at a
markup to cost at the time the inventory is transferred to Turbocomm; however,
no revenue is recognized until the finished cable modem is delivered to the
customer. Accordingly, any amounts for which Turbocomm has been billed but
delivery of the cable modem has not occurred are maintained in a deferred
account and offset against the related accounts receivable until such time
that the cable modem is delivered. At the time the product is delivered to
the end user and Correlant recognizes revenue, Turbocomm bills Correlant for
the entire cost of the finished cable modem, which includes the integrated
circuit, and Turbocomm becomes liable to Correlant for the initial amount
billed on the integrated circuit. As a result, Turbocomm is liable to
Correlant for $6,370,898 as of June 30, 2000 and Correlant is liable to
Turbocomm for $20,862,825 for the related integrated circuits used and cable
modems delivered. Such amounts have been netted in the caption accounts payable
to related parties in the accompanying balance sheet.
Note 7 Short-term Borrowings:
In March 2000, Arescom entered into a credit agreement with a bank, which
provided for a line of credit of up to $3,000,000 for general business
purposes. The line of credit bears interest at prime rate (9.5% as of June 30,
2000) plus 1.00%. Total borrowings are limited to the lesser of $3,000,000 or
80% of eligible accounts receivable plus $200,000, and are subject to Arescom's
compliance with financial and reporting covenants. The credit agreement
includes terms requiring satisfaction of certain financial ratios, maximum debt
to equity leverage, senior indebtedness, and tangible net worth. The repayment
of the borrowings is guaranteed by Lotus Pacific and is secured by virtually
all of Arescom's assets. As of June 30, 1999 and 2000, the outstanding
borrowings were $0 and $1,278,000, respectively.
As of June 30, 2000, Arescom was not in compliance with certain financial and
reporting covenants and had received a letter from the bank waiving such
compliance.
In June 2000, Arescom obtained a $1,500,000 working capital loan from a
third-party in the form of an unsecured short-term promissory note, which is
due in August 2000 and bears interest at 6.00% annual rate, payable at
maturity.
Note 8 Acquisitions:
Fiscal 1999:
During fiscal 1999, the Company acquired controlling interest in four
companies. The aggregate consideration for all transactions was approximately
$2,740,000 in cash and 16,750,670 shares of common stock. The acquisitions are
as follows:
Correlant Communications, Inc. (formerly TurboNet Communications):
On March 31, 1999 the Company acquired 81% of Correlant's (formerly TurboNet
Communications) outstanding common stock by exchanging 11,091,396 shares of
its common stock valued at $7.21 per share. The Company's stock is restricted
and cannot be sold until Correlant achieves sales of $30 million and net
income before income taxes of $6 million. Correlant manufactures and sells
cable modems. During the three months ended June 30, 1999 all of Correlant's
sales were to one customer, and its finished goods were supplied by two
manufacturers. The excess of the purchase price and related costs over the
value assigned to the net tangible assets acquired was $67,703,991. On
March 31, 2000 the Company sold approximately 17% of its ownership in
Correlant for net proceeds of $62,164,750. The Company recorded a gain in the
amount of $45,194,271 on the disposition.
Arescom:
On March 31, 1999 the Company acquired 81% of Arescom's outstanding common
stock by exchanging 4,159,274 shares of its common stock valued at $7.21
per share. The Company's stock is restricted and cannot be sold until Arescom
achieves sales of $15 million and net income before income taxes of $3 million.
Arescom manufactures and sells routers. The excess of the purchase price and
related costs over the value assigned to the net tangible assets acquired was
$26,097,959.
USS Online:
On June 28, 1999 the Company formed USS Online, Inc. to which it contributed
all the stock of Professional Market Brokerage, Inc. and U.S. Securities and
Futures Corp.
Professional Market Brokerage, Inc.:
On February 23, 1999 the Company acquired all of the outstanding securities
of Professional Market Brokerage, Inc. (PMB) for $240,000 in cash and 500,000
shares of the Company's common stock valued at $7.0625 per share. The common
stock is restricted with a three-year holding period. PMB is engaged in the
futures and options brokerage industry. The excess of the purchase price and
related costs over the value assigned to the net tangible assets acquired was
$3,114,769. Subsequent to the date of acquisition, the Company invested an
additional $3,518,750 of its common stock in PMB. At June 30, 1999, these
500,000 shares of common stock are included in the Company's treasury stock.
U.S. Securities and Futures Corp.:
On February 23, 1999 the Company acquired all of the outstanding securities
of U.S. Securities and Futures Corp. (USSF) for $2.5 million in cash and
500,000 shares of the Company's common stock valued at $7.0625 per share. USSF
is engaged in the futures and options brokerage industry. The excess of the
purchase price and related costs over the value assigned to the net tangible
assets acquired was $5,949,675. Subsequent to the date of acquisition, the
Company invested an additional $250,000 in USSF. At June 30, 1999, USSF owned
378,000 shares of the Company's common stock valued at $2,670,570, which are
included in the Company's treasury stock.
On February 7, 2000 the Company sold 72% of its ownership in USS Online, Inc.
for 732,802 shares of the Company's stock, valued at $9.6313 per share,
representing an aggregate agreed value of $7,057,835. The Company recorded a
loss in the amount of $4,121,710 on the disposition. The Company accounts for
the 732,802 shares of its stock received as treasury stock.
Fiscal 1998:
Regent Electronics Corp.:
The Company organized Regent in January 1997 to manufacture Internet access
software equipment to be marketed and sold in the Far East. In June 1997,
Regent issued approximately 30% of its common stock to a third party in
exchange for certain patent rights and related technology. In September 1997,
the Company acquired a portion of the third-party shares (representing 17%
of the common stock of Regent) in exchange for 6,000,000 shares of the
Company's common stock valued at the market price of the Company's common
stock at the time of the exchange.
LPF International Corp.:
In March 1998, the Company formed LPF International Corp. with an investment
of $1,300,000. LPF International Corp. was incorporated to be a broker in the
worldwide textile and apparel business. LPF International Corp. was sold on
September 30, 1998. See Note 9.
Fiscal 1997:
Richtime Far East Ltd.:
In April 1997, the Company formed Richtime Far East, Ltd. (a Hong Kong
corporation) with an investment of $600,000. Richtime Far East, Ltd. operates
as a broker in the worldwide textile and apparel business. Richtime Far East,
Ltd. was sold on September 30, 1998. See Note 9.
Pro Forma Information:
The following unaudited pro forma information represents the results of
operations of the Company and its subsidiaries, Regent, Correlant and Arescom
as if the acquisitions had taken place on July 1, 1997. These pro forma
results of operations have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which actually would
have resulted had the acquisitions occurred on the date indicated, or which
may result in the future.
The figures include amortization of goodwill as if the acquisitions had taken
place on July 1, 1997, and amounted to $13,774,937 and $11,693,538 in 1999 and
1998, respectively.
1999 1998
----------------- ---------------
Sales........................... $44,208,167 $ 7,503,873
Cost of sales................... 39,971,665 3,633,768
----------- -----------
Gross profit.................... 4,236,502 3,870,105
----------- -----------
Royalty income.................. 124,125 1,800,000
------------ -----------
Operating expenses:
Selling, general & administrative
expenses....................... 24,573,118 19,616,285
Research and development....... 2,204,255 6,541,012
------------ ------------
26,777,373 26,157,297
Operating loss................... (22,416,746) (20,487,192)
Other income (expense):
Interest income................. 93,386 153,045
Interest expense................ --- (2,910)
Other income.................... 64,310 81,887
Foreign exchange loss........... (366) (1,022)
------------ ------------
157,330 231,000
------------ ------------
Net loss before income taxes, minority
interest in income of consolidated
subsidiary and discontinued operations (22,259,416) (20,256,192)
Income tax expense (benefit)...... --- (122,024)
Minority interest in loss of consolidated
subsidiaries..................... 1,656,460 1,372,105
-------------- --------------
Net loss.......................... $(20,602,956) $(18,762,063)
============== ==============
Loss per share:
Basic............................. $ (.42) $ (.42)
============== ==============
Note 9 Dispositions:
Fiscal Year 1999:
LPF International Corp. and Richtime Far East, Ltd.:
On September 30, 1998 the Company sold LPF International Corp. and Richtime
Far East Ltd. to an unrelated third party for $2,500,000. The Company recorded
a loss in the amount of $590,641 on the dispositions and recorded the activity
of the two subsidiaries as discontinued operations.
Note 10 Joint Venture:
On June 28, 1999 the Company entered into an agreement with TCL Holdings
(BVI) Co., Ltd. to establish TCL International (U.S.), Inc., a 50-50 joint
venture. TCL Holdings (BVI) Co., Ltd.'s parent company owns 14.6% of the
Company's outstanding common stock. During fiscal 2000 the Company invested
$4,814,000 in the joint venture.
On June 16, 2000 the Company sold its stock in TCL International (U.S.), Inc.
for $560,000. The Company recorded a loss of $4,254,000 on the disposition.
Note 11 Income Taxes:
The Company and its subsidiaries, except for Correlant, will file a
consolidated federal income tax return as of June 30, 2000. For the years
ended June 30, 1999 and 1998 the Company and its subsidiaries did not file
consolidated federal income tax returns. Income taxes for the year ended
June 30, consisted of the following:
2000 1999 1998
------------ ----------- -----------
Current:
Federal................. $ 7,655,350 $ 0 $ (61,917)
State................... 2,999,000 0 (18,797)
Foreign................. 8,650 0 ---
------------ ----------- -----------
$10,663,000 $ 0 $ (80,714)
=========== ========== ==========
For year ended June 30, 2000, the Company's benefit from (provision for)
income taxes differed from the amount computed by applying the statutory U.S.
federal income tax rate to income (loss) from continuing operations before
income taxes, minority interest, extraordinary items, and cumulative effect
of accounting change as follows:
U.S. federal income tax provision at
federal statutory rate....................... $(14,067,000)
Permanent differences:
Taxable gain on sale of subsidiary's
stock in excess of financial statement gain.. 5,835,000
Amortization of goodwill...................... 19,586,000
Benefit of loss carryforward.................. (3,594,000)
State income taxes net of federal
income tax effect............................ 1,949,000
Other......................................... 954,000
------------
$ 10,663,000
============
The significant components of the Company's deferred tax assets as of June 30,
2000 are as follows:
Deferred tax assets:
Net operating loss carryforwards............. $ 3,850,000
Research tax credit carryforwards............ 504,000
Inventory related differences................ 2,116,000
Others....................................... 256,000
------------
Total deferred tax assets...................... 6,726,000
Valuation allowance............................ (6,726,000)
------------
Net deferred tax assets........................ $ 0
===========
Note 12 Financial Instruments:
Cash accounts are secured by the Federal Deposit Insurance Corporation up
to $100,000. At June 30, 2000 and 1999, the uninsured balances were
$27,276,000 and $30,197,000, respectively.
Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash, cash equivalents, and trade
accounts receivable.
The Company has concentrated its credit risk for cash by maintaining
substantially all of its depository accounts in a single financial institution.
Accounts in the bank are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. At various times throughout the year the
Company had cash balances in this financial institution that exceeded the FDIC
limit. The financial institution has a strong credit rating, and management
believes that credit risk relating to these deposits is minimal.
Cash equivalents consists of commercial paper with maturities not longer than
90 days and are maintained in an account with the investment division of the
above financial institution.
While the Company does not require collateral on its trade accounts receivable,
credit risk is limited because the Company's customer base consists primarily
of established companies in the telecommunications industry. Historically,
the Company has not suffered significant losses with respect to trade accounts
receivable.
Cash, cash equivalents, and accounts receivable approximate their fair value
due to the short maturity of these instruments.
Currently, the Company is dependent upon one third-party supplier for the
integrated circuits used in the Company's cable modem. The Company does not
have a long-term supply contract with the supplier. If the supplier is
unable or unwilling to supply the Company, or the Company decides to procure
from an alternative supplier, it may take in excess of six months before
receiving adequate products.
Note 13 Capital Stock:
Common stock - $.001 par value, 100,000,000 shares authorized, 64,133,795,
63,466,474, and 47,386,804 shares issued and outstanding at June 30, 2000,
1999 and 1998, respectively.
Preferred stock, Series A - $.001 par value, 100,000 shares authorized, 4,300
shares issued and outstanding at June 30, 2000, 1999 and 1998, respectively.
Common stock warrants - 8,000,000 warrants issued and outstanding at June 30,
2000, 1999, and 1998. Each warrant entitles the holder to purchase one share
of the Company's common stock at $3 per share. The warrants expire May 5,
2002.
Note 14 Retired and Treasury Stock:
During the year ended June 30, 2000, Correlant (formerly TurboNet
Communications) and Arescom returned Lotus Pacific common stock received in
connection with the Company's acquisition of its 81% interests in each of
Correlant and Arescom. The stock valued at $12,457,993 was intended for the
acquired companies' employee incentive stock option plans. In Fiscal 2000,
the stock was returned to the Company to be reserved for issuance upon future
exercise of such stock options. Accordingly, the Company reduced its
investment in the Correlant and Arescom and recorded the returned stock as
retired.
The Company sold 72% of its interest in USS Online in 2000 and, as part of the
transaction, reduced its treasury stock by $6,188,442. At June 30, 1999,
USS Online, a 100% owned subsidiary, owned Lotus Pacific common stock valued
at $6,188,442 and, accordingly, Lotus Pacific reported its stock owned by a
subsidiary as treasury stock.
Note 15 Significant Customers:
For the year ended June 30, 2000 the Company and its subsidiaries had three
customers with billings in excess of 10% of total revenues. Of the total
revenue, Toshiba Corp. accounted for $48,967,334 (51.3%), Cable and Wireless
Hong Kong Telecom $11,181,485 (11.7%), and Com 21 $10,024,897 (10.5%).
For the year ended June 30, 1999, the Company and its subsidiaries had four
customers with billings in excess of 10% of total revenues. Of the total
revenue, Allwell Technology accounted for $12,800,000 (30.2%), Shanghai Hong
Sheng Development Corp. $6,927,002 (16.3%), Tianshi Investment Consulting, Inc.
$6,000,000 (14.2%), and Toshiba Corp. $3,745,000 (8.8%).
For the year ended June 30,1998, the Company and its subsidiaries had four
customers with billings in excess of 10% of total revenues. Of the total
revenue, Shanghai Hong Sheng Development Corp. accounted for $4,840,000
(26.2%), Full Chance China Ltd. $2,749,000 (14.9%), and D&T Corp. $1,815,000
(9.8%).
Note 16 Stock Options:
In May 1997 the Company granted 1,090,000 options to certain officers and
key employees at an exercise price of $6.00 per share. The options are 100%
vested and expire five years from grant date. The exercise price in each case
was equal to the fair market value of the Company's common stock at time of
grant. As of June 30, 2000, 1999 and 1998 no options have been exercised.
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation which permits the use of the
intrinsic value method described in APB Opinion No. 25, Accounting for Stock
Issued to Employees, and requires the Company to disclose the pro forma effects
of accounting for stock-based compensation using the fair value method as
described in the optional accounting requirements of SFAS No. 123. As
permitted by SFAS No. 123, the Company will continue to account for stock-based
compensation under APB Opinion No. 25, under which the Company has recognized
no compensation expense.
Stock-Based Compensation Plan:
The stockholders approved the 2000 Equity Incentive Plan (Incentive Plan) on
April 28, 2000. The Incentive Plan is administered by the Board of Directors.
Employees, directors, and consultants of the Company and its affiliates, who
in the judgment of the Board render significant service to the Company, are
eligible to participate. The Incentive Plan provides for the award of a broad
variety of stock-based compensation alternatives such as nonstatutory stock
options, stock options, incentive stock options, restricted stock, performance
awards and stock appreciation rights. The Incentive Plan provides 11,354,907
shares of common stock to be offered. The vesting provisions of individual
options may vary. The exercise price shall not be less than 100% of the fair
market value of the common stock on the grant date. No options were granted
in 2000.
Correlant's Communications, Inc.'s (formerly TurboNet Communications) Stock
Option Plan is as follows:
In March 1998, Correlant's Board of Directors approved the 1998 Stock Option
/Stock Issuance Plan (the "Plan") under which 8,500,000 shares of Correlant's
common stock are authorized for future issuance, and reserved for purchase
upon exercise of options granted. The 1998 Stock Plan provides for the grant
of incentive and non-statutory options and issuance of common stock under the
stock issuance program (as defined) to employees, directors, and consultants.
The exercise price of incentive stock options must equal at least the fair
value on the date of grant and the exercise price of non-statutory stock
options and the issuance price of common stock under the stock issuance
program may be no less than 85% of the fair value on the date of grant or
issuance. The options are exercisable for a period of up to ten years after
the date of grant and generally vest over four years. Unvested shares obtained
through early exercise of options are subject to repurchase by Correlant at
the original issue price.
In anticipation of Correlant's contemplated initial public offering and other
events, which occurred in 1999 and 2000, Correlant reviewed its exercise
prices and arrived at the fair value for accounting purposes for each option
grant from July 1, 1999 to June 30, 2000. With respect to the 573,000
unrestricted options granted since July 1, 1999, Correlant has recorded
deferred stock compensation of $5,135,942 for the difference between the
exercise price per share determined by the Board of Directors and the fair
value per share for accounting purposes at the grant date. The approximate
weighted-average exercise price per share and the approximate weighted-average
fair value for accounting purposes per share for the 573,000 options was $8.96.
Deferred stock compensation is recognized and amortized on an accelerated basis
in accordance with Financial Accounting Standards Interpretation No. 28 over
the vesting period of the related options, generally four years.
The following table summarizes stock option activity under the 1998 Stock
Option Plan and related information for the twelve months ended June 30, 2000:
Weighted Average
Options Exercise Price
---------------- ----------------
Outstanding at June 30, 1999...... 1,156,579 $0.06
Granted.......................... 2,276,240 $1.97
Exercised........................ 176,974 $0.04
Canceled......................... (13,158) $0.06
---------- --------
Outstanding at June 30, 2000...... 3,242,687 $1.40
As of June 30, 2000, there were 371,712 options exercisable at weighted average
prices of $.07 per share and 5,034,286 shares are available for future grant.
The weighted average fair value of options granted during the twelve months
ended June 30, 2000 was $11.31 per share.
In connection with the acquisition of 81% of Correlant by the Company in March
1999, the Company obtained the right to acquire up to 2,479,560 additional
shares of Correlant's common stock upon exercise of options to acquire such
shares by the option holders. All options granted by Correlant through
December 21, 1999 are subject to an exchange agreement whereby the Company will
acquire 81% of the shares for which options are exercised in exchange for
shares of the Company's common stock, in the ratio of .5364 share of the
Company's common stock for each Correlant share. These options are subject to
vesting and other restrictions and are, therefore, considered to be contingent.
As of June 30, 2000, 2,479,560 shares of Correlant stock which may be issued
upon exercise of outstanding options are subject to exchange for 1,330,036
shares of the Lotus Pacific common stock.
The following table summarizes all Correlant options outstanding and
exercisable by price range as of June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -------------------------------
Weighted Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
----------------- ---------------- ---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03 to $0.50 1,050,658 8.2 $ 0.07 365,791 $0.06
$1.00 2,010,529 9.5 $ 1.00 5,921 $1.00
$12.00 91,500 9.7 $ 12.00 --- ---
$15.00 to $16.80 90,000 9.9 $ 15.10 --- ---
--------------- ----------------- ------------- -------------- ---------------
$0.03 to $16.80 3,242,687 9.1 $ 1.40 371,712 $0.07
</TABLE>
ARESCOM Inc.'s Stock Option Plans are as follows:
In April 1996, Arescom's Board of Directors approved the 1996 Stock Option
Plan (the "1996 Plan") under which 1,100,000 shares of Arescom's common stock
were authorized for future issuance and reserved for purchase upon exercise of
options granted. The 1996 Stock Plan provides for the grant of incentive
options and issuance of common stock under the stock issuance program (as
defined) to employees. Under the 1996 Plan, the exercise price of incentive
stock options shall be no less than the fair value of a share of common stock
on the date of grant or issuance.
In April 2000, Arescom's Board of Directors approved the 2000 Equity Plan
(the "2000 Plan") under which 5,218,211 shares of Arescom's common stock are
authorized for future issuance, and reserved for purchase upon exercise of
options granted. The 2000 Plan provides for the grant of incentive and non-
statutory options and issuance of common stock under the stock issuance
program (as defined) to employees, directors, and consultants.
Under the 2000 Plan, the exercise price of incentive stock options issued to
a stockholder who owns more than 10% of the voting power of all classes of
stock at the time of grant, shall be no less than 110% of the fair value on
the date of grant. For other incentive stock options, the exercise price shall
be no less than the fair value on the date of grant. The exercise price of
non-statutory stock options to a service provider who owns more than 10% of
the voting power of all classes of stock at the time of grant, shall be no less
than 110% of the fair value on the date of grant. For other non-statutory stock
options, the exercise price shall be no less than 85% of the fair value on the
date of grant.
Stock options granted under the 1996 Plan and 2000 Plan are nontransferable,
generally become exercisable over a four-year period, and expire ten years from
the date of grant. Unvested common shares obtained through early exercise of
options are subject to repurchase by Arescom at the original issue price.
The following table summarizes stock option activity under all Arescom plans:
Weighted Average
Number of Exercise Price
Shares per Share
------------ ----------------
Options outstanding as of June 30, 1997.... 226,000 $1.56
Granted.................................. 125,900 $1.53
Exercised................................ --- ---
Canceled................................. (6,000) $2.08
--------- -------
Options outstanding as of June 30, 1998.... 345,900 $1.35
Granted.................................. 158,700 $2.98
Exercised................................ (200) $1.25
Canceled................................. (106,400) $2.69
---------- -------
Options outstanding as of June 30, 1999 398,000 $1.64
Granted.................................. 4,626,000 $2.02
Exercised................................ (3,250) $1.27
Canceled................................. (27,550) $1.78
---------- -------
Options outstanding as of June 30, 2000.... 4,993,200 $1.99
The following table summarizes all options outstanding and exercisable by
price range as of June 30, 2000:
Options Outstanding Options Exercisable
------------------------------- ----------------------
Weighted Average
Remaining
Exercise Number Contractual Number
Prices Outstanding Life Exercisable
---------- --------------- ---------------- --------------------
$1.25 294,400 5.65 243,345
$2.00 4,441,000 9.77 36,875
$2.50 217,300 9.65 27,248
$3.75 40,500 8.56 10,125
------------ ---------------- --------------------
4,993,200 9.51 317,593
============ ================ ===================
In connection with the acquisition of an 81% interest in Arescom by Lotus
Pacific in March 1999 (Note 1), Lotus Pacific obtained the right to acquire
81% of the shares of Arescom's common stock reserved for issuance under the
1996 Plan. As a result, options granted by Arescom under the 1996 Plan are
subject to an exchange agreement whereby upon exercise of all such stock
option, 81% of Arescom's common stock receivable by the optionees, up to an
aggregate of 375,200 shares, will be exchanged for up to 273,418 shares of
Lotus Pacific common stock.
Had compensation cost of Correlant's (former TurboNet Communications) and
Arescom'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 share would
have been reduced to the pro forma amounts indicated below.
2000 1999 1998
------------ ----------- -------------
Net loss:
As reported............. $(50,855,065) $(7,156,687) $(2,648,865)
Pro forma............... $(51,254,638) $(7,156,687) $(2,648,865)
Net loss per common share:
As reported.............. $(.80) $(0.15) $(0.06)
Pro forma................ $(.80) $(0.15) $(0.06)
Significant assumptions used to calculate the above fair value of the awards
are as follows:
Correlant Arescom
------------ ------------
Risk free interest rates of return 6.50% 6.5%
Expected option life: 60 months 60 months
Expected dividends $-0- $-0-
Expected volatility 62% 75%
Note 17 Commitments
The Company and its subsidiaries lease office space and equipment under
noncancelable lease agreements expiring at various dates through June 30,
2004 and provide, among other things, for minimum annual rentals, exclusive
of additional rentals which may be required for increases in certain operating
expenses and taxes. The minimum annual commitments, including estimated
additional rentals based on actual amounts paid during 1999, are as follows:
Lease Sublease
Years Ending June 30, Obligations Income
------------------------- ---------------- -------------
2001 $ 841,232 $ 123,865
2002 769,551 128,820
2003 72,494 10,874
2004 2,384 ---
----------- ----------
$1,685,661 $ 263,559
=========== ==========
Rent expense for the period to June 30, 2000 and 1999 was $687,111 and
$483,017, respectively.
Note 18 Subsidiary Companies' Financial Information:
In fiscal 2000, Correlant (formerly TurboNet Communications) accounted for
more than twenty percent of revenue and/or assets.
In fiscal 1999, the Company had two subsidiaries, which accounted for more
than twenty percent of revenue and/or assets, Regent and Correlant (formerly
TurboNet Communications). In fiscal 1998, Regent accounted for more than
twenty percent of the revenues and assets.
Condensed financial information for Regent Electronics Corp. at June 30, 1999
and 1998:
BALANCE SHEETS
ASSETS
1999 1998
-------------- ----------------
Current assets............ $28,835,371 $ 7,232,436
Property and equipment.... 962,011 1,281,029
Other assets.............. 5,121,765 5,461,930
----------- ------------
$34,919,147 $13,975,395
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities........ $23,167,208 $ 2,134,683
Stockholders' deficit:
Common stock.............. 26,000 26,000
Preferred stock........... 1,500 1,500
Stock warrants............ 1,500 1,500
Additional paid-in capital 13,760,500 13,760,500
Accumulated deficit....... (2,037,561) (1,948,788)
----------- -----------
11,751,939 11,840,712
$34,919,147 $13,975,395
============ =============
STATEMENTS OF OPERATIONS
Sales...................... $32,485,165 $ 6,155,000
Cost of sales.............. (29,171,209) (3,408,500)
Interest income............ 27,850 30,535
Royalty income............. 124,125 1,800,000
Operating costs and expenses (3,554,704) (6,251,873)
------------ ------------
Net loss................... $ (88,773) $(1,674,838)
STATEMENTS OF CASH FLOWS
Cash flows provided by
operating activities.... $ 3,911,697 $(3,914,716)
Cash flows used in
investing activities.... (5,660) (38,083)
Cash flows from
financing activities.... --- 6,436,500
------------ ------------
Net increase in cash....... $ 3,906,037 $2,483,701
Condensed financial information for Correlant Communications, Inc. (formerly
TurboNet Communications) at June 30, 2000 and 1999:
BALANCE SHEET
ASSETS
2000 1999
------------- --------------
Current assets............. $35,218,952 $ 5,644,228
Property and equipment..... 1,557,241 411,925
Other assets............... 668,228 ---
----------- -------------
$37,444,421 $ 6,056,153
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities........ $18,092,692 $ 3,057,380
Long-term debt, related party 10,000,000 ---
Stockholders' deficit:
Common stock.............. 5,148,710 4,167
Preferred stock........... 8,426,143 8,450,000
Deferred compensation..... (3,108,967) ---
Accumulated deficit....... (1,114,157) (5,455,394)
------------- ------------
9,351,729 2,998,773
$37,444,421 $ 6,056,153
============ ===========
STATEMENT OF OPERATIONS
Sales...................... $71,829,439 $ 3,745,688
Cost of sales.............. (57,089,999) (2,910,723)
Interest income............ 367,716 16,035
Other gain (loss).......... 50,438 (1,487)
Operating costs and expenses (9,382,116) (1,558,497)
Provision for income taxes (1,420,650) ---
------------- -------------
Net loss................... $ 4,354,828 $ (708,984)
=========== ============
STATEMENT OF CASH FLOWS
Cash flows provided by
operating activities..... $ 8,654,313 $ 400,364
Cash flows used in
investing activities..... (1,368,768) (190,673)
Cash flows from
financing activities..... 10,007,825 1,470,000
----------- ------------
Net increase in cash....... $17,293,370 $1,679,691
=========== ===========
Note 19 Segment and Related Information:
In fiscal 2000 and 1999, the Company and its subsidiaries have been aggregated
into one reportable segment: computer and Internet products. In fiscal 1998
the reportable segments were computer and Internet related products and
textiles. The textile segment was sold in 1999 and reported as discontinued
operations.
The following table presents revenues by region based upon location of the
sale:
2000 1999 1998
---------- ------------ ------------
Asia................... $66,248,774 $34,569,315 $2,314,935
Europe................. $59,000 --- ---
United States.......... $29,443,725 $ 7,813,480 $3,840,000
Note 20 Minority Interest in Subsidiaries:
Two of the Company's subsidiaries have convertible preferred stock outstanding.
The convertible preferred stock is convertible on a one-to-one basis into the
subsidiaries' common stock. The outstanding preferred shares are as follows:
Shares
---------------------------------------
2000 1999 1998
Regent:
Preferred Shares........... -0- 1,500,000 1,500,000
Correlant Communications, Inc.:
Preferred Series A......... 2,300,000 2,300,000 ---
Preferred Series B......... 250,00 250,000 ---
Preferred Series C......... 800,000 800,000 ---
---------- ---------- ----------
Total preferred shares....... 3,350,000 4,850,000 1,500,000
========= ========= =========
Note 21 Investment Deposits:
At June 30, 1999 Lotus had received $44,695,000 from investors that were
negotiating with the Company to purchase stock of the Company's subsidiaries.
During 2000, the Company refunded the deposits.
Note 22 Employee Retirement Plan:
Lotus Pacific, Inc. has a 401(k) salary deferral plan, which is funded based
on employee contributions.
Correlant (formerly TurboNet Communications) has a 401(k)-salary deferral
plan ("Plan"), which is funded based on employee contributions. Terms of
the Plan provide for Correlant to make contributions to the Plan on behalf
of each eligible employee (as defined) in an amount equal to 50% on the first
four percent of the eligible employee's compensation contribution (as defined).
Correlant's contributions to the Plan were $55,755 for the twelve months ended
June 30, 2000.
Note 23 Financisal Statement Presentation:
Certain amounts in the 1999 and 1998 consolidated financial statements have
been reclassified to conform to the 2000 presentation.
