Exhibit 99.4
TURBONET COMMUNICATIONS
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Turbonet Communications
We have audited the accompanying balance sheets of Turbonet Communications
as of March 31, 1999 and June 30, 1998 and 1997 and the related statements
of operations, stockholders' equity, and cash flows for the nine months
ended March 31, 1999 and for the years ended June 30, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Turbonet Communications as of
March 31, 1999 and June 30, 1998 and 1997, and the results of its operations
and its cash flows for the nine months ended March 31, 1999 and the years
ended June 30, 1998 and 1997 in conformity with generally accepted accounting
principles.
Schiffman Hughes Brown
Blue Bell, Pennsylvania
December 17, 1999
TURBONET COMMUNICATIONS
BALANCE SHEETS
MARCH 31, 1999, JUNE 30, 1998 AND 1997
ASSETS
1999 1998 1997
---------- ---------- ----------
Current Assets:
Cash ............................. $ 467,494 $ 977,156 $2,024,114
Accounts receivable .............. 460,945 46,588 665,633
Advance .......................... 1,000,000 --- ---
Inventories and supplies ......... 579,065 --- ---
Other ............................ 3,500 3,500 3,500
--------- ---------- ---------
Total current assets ........... 2,511,004 1,027,244 2,693,247
Property and equipment, net ....... 244,756 301,136 253,338
Other assets:
Restricted cash .................. 90,000 90,000 90,000
----------- ----------- -----------
$2,845,760 $1,418,380 $3,036,585
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments ............. $ 16,173 $ 31,938 $ 29,604
Accounts payable and
accrued expenses ............... 373,048 307,832 97,562
---------- --------- ----------
Total current liabilities....... 389,221 339,770 127,166
Long-term debt .................... --- 5,560 37,498
Commitments
Stockholders' equity:
Common stock ..................... 5,167 4,167 4,167
Preferred stock .................. 6,980,000 4,450,000 2,999,985
Foreign currency translation
adjustment .................. 9,612 --- ---
Accumulated deficit .............. (4,538,240) (3,381,117) (132,231)
------------ ------------ ----------
2,456,539 1,073,050 2,871,921
$2,845,760 $1,418,380 $3,036,585
=========== =========== ==========
The accompanying notes are an integral part of these financial statements
TURBONET COMMUNICATIONS
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1999 1998 1997
------------ ----------- ----------
Sales ........................ $ 994,656 $ 0 $ 0
Cost of sales ................ 460,430 0 0
----------- --------- ----------
Gross profit ................. 534,226 0 0
Reimbursed research and
development expenses ....... 221,500 1,238,400 503,000
Operating expenses:
Selling, general and
administrative expenses ..... 473,629 231,550 24,209
Research and development ..... 1,472,432 4,343,422 224,784
------------ ---------- ----------
1,946,061 4,574,972 448,993
Operating income (loss) ....... (1,190,335) (3,336,572) 54,007
Other income:
Interest income (net) ........ 33,212 87,686 51,845
Net income (loss).............. (1,157,123) (3,248,886) 105,852
Other comprehensive losses:
Foreign currency translation
adjustments ............... 9,612 --- ---
Comprehensive income (loss).... $(1,166,735) $(3,248,886) $ 105,852
============= ============ ==========
Earnings (loss) per share:
Basic ........................ $ (0.32) $ (0.98) $ 0.05
Diluted ...................... $ (0.32) $ (0.98) $ 0.05
Weighted average shares ....... 3,669,098 3,313,602 2,171,831
The accompanying notes are an integral part of these financial statements
TURBONET COMMUNICATIONS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Accumulated other
Common Preferred comprehensive losses-
Shares Shares foreign currency
Outstanding Outstanding Amount translation adjustment Deficit Total
-------------- --------------- ----------- ---------------------- --------- ------------
Balance,
June 30, 1996..... 900,000 500,000 $ 754,167 --- $ (238,083) $ 516,084
Issuance of
preferred stock... --- 1,800,000 2,249,985 --- --- 2,249,985
Net income for the
year ended
June 30, 1997..... --- --- --- --- 105,852 105,852
----------- -------- --------- ------------- ---------- ---------
Balance,
June 30, 1997..... 900,000 2,300,000 3,004,152 --- (132,231) 2,871,921
Issuance of
preferred stock... --- 250,000 1,450,015 --- --- 1,450,015
Net loss for the year
ended June 30, 1998 --- --- --- --- (3,248,886) (3,248,886)
----------- --------- ---------- ------------ ----------- ------------
Balance,
June 30, 1998..... 900,000 2,550,000 4,454,167 --- (3,381,117) 1,073,050
Issuance of
preferred stock... --- 506,000 2,530,000 --- --- 2,530,000
Redemption of
common stock...... (36,000) --- --- --- --- ---
Exercise of common
stock options .... 5,000 --- 1,000 --- --- 1,000
Common stock
dividend.......... 14,575,737 --- --- --- --- ---
Comprehensive loss. --- --- --- $9,612 --- 9,612
Net loss for the
nine months ended
March 31, 1999.... --- --- --- --- ---
(1,157,123) (1,156,123)
------------- ----------- ----------- --------------- ------------ -----------
15,444,737 3,056,000 $6,985,167 $9,612 $(4,538,240) $ 2,456,539
The accompanying notes are an integral part of these financial statements
TURBONET COMMUNICATIONS
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1999 1998 1997
------------ ------------ -----------
Cash flows from operating activities:
Net income (loss).......................... $(1,157,123) $(3,248,886) $ 105,852
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization........... 60,278 82,453 40,729
Foreign currency translation adjustment.. 9,612 --- ---
Changes in assets and liabilities:
(Increase) decrease in accounts receivable. (414,357) 619,045 (663,257)
Increase in inventory..................... (579,065) --- ---
Decrease in other current assets ......... --- --- 2,500
Increase in restricted cash .............. --- --- (90,000)
Increase (decrease) in accounts payable... 65,216 210,270 5,735
--------------- ------------- ----------
Net cash used in operating activities...... (2,015,439) (2,337,118) (598,441)
Net cash used in investing activities:
Purchase of property and equipment......... (3,898) (130,251) (235,189)
Cash flows from financing activities:
Issuance of preferred stock ............... 2,530,000 1,450,015 2,249,985
Exercise of common stock options........... 1,000 --- ---
Increase in notes receivable .............. (1,000,000) --- ---
Increase (decrease) in loans payable ...... (21,325) (29,604) 67,102
------------- -------------- ----------
Net cash provided by financing activities... 1,509,675 1,420,411 2,317,087
Net increase (decrease) in cash............. (509,662) (1,046,958) 1,483,457
Cash, beginning............................. 977,156 2,024,114 540,657
----------- ------------- -----------
Cash, ending ............................... $ 467,494 $ 977,156 $ 2,024,114
============= ============= ===========
Supplemental disclosure of cash flow information:
Cash paid for interest .................... $ 1,468 $ 4,159 $ 4,703
The accompanying notes are an integral part of these financial statements
TURBONET COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1. Organization and summary of significant accounting policies:
The Company:
Turbonet Communications (the "Company") was incorporated on February 13, 1996.
The Company is organized to design, develop and market telecommunications
products to cable operators, network service providers, and communications
network users, primarily in the United States and Asia.
Basis of accounting:
From inception, February 13, 1996 through June 30, 1998, the Company performed
research and development activities and had not completed product development.
Accordingly, the Company's activities had been accounted for as those of a
"development stage enterprise" as set forth in the Financial Accounting
Standards Board Statement No. 7 ("FASB 7"). The Company developed a product
during the nine months ended March 31, 1999 and generated revenue from sales
of the product; therefore, the Company is no longer a development stage
enterprise.
Comprehensive income:
In July 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the disclosure of comprehensive income, which
includes, in addition to net income, other comprehensive income consisting of
unrealized gains and losses, which bypass the traditional income statement and
are recorded indirectly into a separate section of shareholders' equity on the
balance sheet. The components of other comprehensive income for the Company
consist of gains and losses on foreign currency translation adjustments.
Foreign currency translation:
The financial statements of the Company include transactions measured using
the local currency of Taiwan as the functional currency. Assets and
liabilities arising from these transactions are translated at exchange rates
as of the balance sheet date. Revenues and expenses are translated at average
rates of exchange in effect during the year. The resulting cumulative
translation adjustments have been recorded as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in comprehensive income.
Cash and cash equivalents:
Cash equivalents consist of highly liquid investments purchased with a maturity
of three months or less.
Inventories and supplies:
Inventories and supplies consist of supplies and cable modem chips and are
valued at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method.
Property:
Property is stated at cost. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets (generally five years).
Concentration of credit risk:
The Company invests its excess cash in money market accounts. The Company has
not experienced any material losses on these accounts.
Income taxes:
Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109 ("FASB 109"), "Accounting for Income Taxes."
Under FASB 109, the deferred tax provision is determined under the liability
method. Under this method, deferred tax assets and liabilities are recognized
based on differences between the financial statement and tax basis of assets
and liabilities using presently enacted tax rates (Note 7).
Reimbursements - research and development expenditures:
Reimbursement for research and development expenditures is recognized on a
basis consistent with the performance requirements of the related agreements
(Note 8).
Accounting estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results may differ from the estimates.
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 1998. Share and per share amounts for all periods presented
have been restated to comply with FAS 128.
2. Advance:
In March, 1999 the Company advanced a Taiwanese manufacturer, an unrelated
party, $1 million for preproduction costs and the initial production of cable
modems. The advance was repaid in May, 1999.
3. Inventories and supplies:
Inventories at March 31, 1999 consisted of chips for cable modems and supplies
totaling $23,163 and $555,902, respectively.
4. Property:
Property as of March 31, 1999 and June 30, 1998 and 1997 are as follows:
March 31, June 30,
------------- ----------------------
1999 1998 1997
------------- ------------ ---------
PROPERTY - at cost:
Equipment .................... $184,716 $184,716 $164,955
Furniture and fixtures........ 33,974 30,401 21,898
Instruments .................. 99,662 99,662 73,444
Computer hardware............. 40,914 40,914 25,942
Computer software............. 24,972 24,972 7,828
Leasehold improvements........ 43,978 43,653 ---
---------- ---------- ---------
428,216 424,318 294,067
Less accumulated depreciation.. (183,460) (123,182) (40,729)
----------- --------- ---------
Total......................... $244,756 $301,136 $253,338
5. Long-term debt:
The Company's long-term debt consists of a bank note with an original maturity
of three years. The note bears interest at 7.76% per annum and is repayable in
36 monthly installments of $2,810 including interest. The unpaid balance is
secured by a $90,000 certificate of deposit. The loan is personally guaranteed
by certain Company officers. The repayment schedule on the note is as follows:
March 31, June 30,
------------- ---------------------
1999 1998 1997
------------- ----------- ---------
Note payable ................ $16,173 $37,498 $ 67,102
Current installment ......... 16,173 31,938 29,604
------------- --------- ---------
Long term debt .............. $ 0 $ 5,560 $37,498
============= ========== ==========
6. Shareholders' equity:
The Company is authorized to issue two classes of stock designated "Common
Stock" and "Preferred Stock", respectively.
Common stock:
The Company issued 900,000 shares of common stock to four shareholders
/employees at approximately $.0046 per share. Under a shareholders' agreement
(the "Agreement"), the Company has a right to repurchase any "unvested" shares
in the event of the termination of any of the four shareholders/employees at
the original issue price. 300,000 of the shares vest immediately and the
remainder of the shares vest at the rate of 150,000 shares each year on
March 1. The unvested shares vest immediately upon the occurrence of certain
events stipulated in the Agreement. The unvested shares at December 31, 1997
and 1996 totaled 450,000 and 600,000, respectively. Under the Agreement,
transfer of the common stock is restricted. During 1999 one of the original
shareholders sold his vested shares to two of the original shareholders and
eight other employees, and the unvested shares were repurchased by the Company
at the original issue price. At March 31, 1999, 869,000 shares were issued and
outstanding.
Preferred stock purchase agreements:
In June 1996 the Company entered into a stock purchase agreement with three
Taiwan corporations. Pursuant to the agreement, the Taiwan corporations
indicated their intention to purchase 3,324,997 shares of the Company's Series
A preferred stock for a total of $6,000,000. As of September 30, 1996, the
Corporation had received $250,000 stock subscriptions for the purchase of
166,667 shares of Series A preferred stock at $1.50 per share.
The obligations to purchase all shares remaining to be issued under the June
1996 agreement were cancelled by Amendment No. 1 to the agreement, which was
entered into June 1, 1997. In August 1997, the Company entered into a second
stock purchase agreement with various investors for the sale and issuance of
up to 2,133,333 shares of Series A Preferred Stock at $1.50 per share. During
fiscal 1997, all such shares were issued under the agreement for a total
consideration of $3,200,000.
Preferred Stock:
The owners of the Series A, B and C Preferred Stock have a liquidation
preference over the owners of the Common Stock in the event of a Company
liquidation. Each preferred shareholder also has:
. one vote for each full share of Common Stock for which its respective
Preferred Stock would be converted.
. the right to convert their shares into Common Stock at a designated
"Conversion Price" as defined in the Stock Purchase Agreement.
. the obligation to convert to Common Stock all their preferred shares in
the event of a public offering of $6,000,000 or more at a per share price
of at least $10.
. certain anti-dilutive rights.
Stock dividend and exchange of shares:
On March 30, 1999, the Company declared a Common Stock dividend of
approximately 4.26 shares for each outstanding share of Common Stock and
Preferred Stock. The stock dividend was payable upon the Company's filing of
Restated Articles of Incorporation to increase the authorized number of shares
of Common Stock. Such filing was effective on May 17, 1999, whereupon the
Company issued the stock dividend of approximately 18,002,250 shares of Common
Stock. The shareholders exchanged approximately 74% of their Common Stock for
Lotus Pacific, Inc.'s stock on May 18, 1999.
Stock option plan:
In 1998, the Company established a stock option plan under which it could issue
stock options in an aggregate amount up to 30% of its issued and outstanding
shares of Common Stock. Through March 31, 1999, the Company had granted options
to purchase 232,500 shares (without adjustment for the stock dividend) of its
Common Stock at an exercise price ranging from $0.20 to $.50 per share. The
options vest 25% on the vesting start date, and vest over the following three
years at the rate of 25% on each anniversary of the vesting start date. At
March 31, 1999, options for 30,375 (without adjustment for the stock dividend)
shares had been exercised.
7. Commitments and contingencies:
Leases:
The Company leases its facilities under various non-cancelable operating
leases, which expire through July 31, 2002. Lease expense for the nine months
ended March 31, 1999 and the years ended June 30, 1998 and 1997 was
approximately $82,926, $119,576, and $46,864, respectively.
Future minimum lease commitments, including leased equipment under a non-
cancelable sublease agreement, are summarized as follows:
Year ended June 30,
--------------------
2000 $114,996
2001 119,592
2002 124,404
IRA savings plan:
Effective January 1, 1997, the Company adopted a Simple IRA Plan, which enables
eligible employees to make pre-tax contributions to the Plan, subject to annual
limits. The Company is required to contribute 2% of participating employees'
annual salary.
Legal Proceedings:
On August 10, 1999 a former shareholder filed suit against the Company and
several individuals alleging intentional misrepresentation, negligent
misrepresentation and constructive fraud/breach of fiduciary duty. TurboNets
management and the individuals are attempting to settle the disputes. The
Companys legal counsel has not expressed an opinion concerning the outcome of
the case.
On October 19, 1999 the Company received a letter from the attorney for CIS
Technology, Inc. (CIS) alleging that the Company has refused to perform under
a contract dated April 10, 1998 whereby CIS was to purchase 400,000 shares of
the Companys Class C Preferred Stock. No action has been commenced; however,
if and when action does commence it is the intention of TurboNets management
to vigorously defend against CIS claim. The Companys legal counsel has not
expressed an opinion concerning the outcome of the case.
8. Income taxes:
The Company had Federal and state net operating loss carryforwards available
to offset future taxable income of approximately $4,500,000. Such Federal and
state net operating loss carryforwards expire at various dates beginning with
the year 2011. In the event of certain ownership changes, the Internal Revenue
Code imposes certain restrictions on the amount of net operating loss
carryforwards which may be used in any year by the Company. As discussed in
Note 6, "Stock Dividend and Exchange of Shares", control changed on March 31,
1999. The net operating loss carryforward therefore, is limited to the value of
the stock of the Company immediately before the exchange and each years net
operating loss carryforward deduction is limited to an amount determined by
multiplying the value of the Company just prior to the ownership change by
the Federal long term tax exempt rate in effect on the date of the change.
Under this formula, the Company can carryforward the entire amount of its
pre-change net operating losses.
The Company has Federal and state income tax credit carryforwards available to
offset future tax liabilities of $6,117 and $6,524, respectively. Such Federal
and state income tax credit carryforwards expire at various dates beginning
with the year 2010.
The Company has recorded a valuation allowance equal to the net deferred tax
assets as of March 31, 1999. The realization of these net deferred tax assets
is dependent upon the timing and amount of future earnings. The valuation
allowance will be reduced at such time as management is able to determine that
it is more likely than not that these tax assets will be realized.
9. Research and development agreement:
Effective November 12, 1996 and amended March 24, 1998, the Company entered
into a memorandum of understanding ("MOU"), as amended, with a Japanese
corporation for joint development activities. The MOU provides that the
Japanese corporation reimburse the Company for milestones attained up to a
maximum of $2,012,000. Any technology developed under the MOU will be jointly
owned by the Company and the Japanese corporation, subject to licensing and
royalty arrangements between the parties with respect to products developed
pursuant to the MOU.
For the nine months ended March 31, 1999 and the years ended June 30, 1998
and 1999, the Company received $221,500, $1,238,400, and $503,000, respectively
under the MOU as reimbursement of research and development expenditures
(Note 1). The total received under the contract was $1,962,900.
10. Significant customer and vendor:
For the nine months ended March 31, 1999, the Company had one customer with
billings in excess of 95% of total sales. One hundred percent of the
reimbursement for research and development expenses was received from one
unrelated party.
The Company purchased one hundred percent of the cable modems sold during the
nine months ended from one vendor located in Taiwan.
11. Year 2000:
The Year 2000 issue is the result of shortcomings in many electronic data
processing systems and other electronic equipment that may adversely affect the
Companys operations as early as fiscal year 1999.
The Company has assessed its various types of electronic equipment and does not
believe the Year 2000 issue will pose significant operational problems. The
Company also is communicating with parties with whom the Company does business
to coordinate Year 2000 conversion.