UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-24999
LOTUS PACIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Organization)
52-1947160
(I.R.S. Employer Identification Number)
200 Centennial Avenue, Suite 201, Piscataway, New Jersey 08854
(Address of principal executive offices)
(732) 885-1750
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the proceeding 12
months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No _____ (2) Yes X No _____
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of December 31, 1999:
Class Number of Shares
Common Stock 64,344,474
Par Value $.001 Per Share
LOTUS PACIFIC, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999
(unaudited) and June 30, 1999 (audited)
Condensed Consolidated Statements of Operations (unaudited) for the
Three and Six Months Ended December 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Six Months ended December 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Dollars)
December 31, 1999 June 30, 1999
------------------ -----------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash ..................... $ 22,155,704 $ 30,779,486
Accounts Receivable .... 25,972,756 27,655,975
Inventories .......... 5,301,757 4,972,965
Other current assets .. 1,811,323 574,985
------------- -------------
55,241,540 63,983,411
Property and equipment.. 3,563,996 3,104,090
Less: accumulated depreciation(1,194,266) (1,235,567)
----------------- --------------
2,369,730 1,868,523
Other assets:
Intangible assets, net ..... 4,955,588 5,098,604
Goodwill, net................122,986,047 128,157,062
Investment in affiliates... 15,450,550 1,453,928
Other............................ 77,055 197,890
------------------ ----------------
143,469,240 134,907,484
Total Assets .......... $ 201,080,510 $ 200,759,418
============= ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts Payable and
accrued expenses........... $ 12,664,498 $ 8,950,281
Loan payable ................... --- 195,565
Investment deposits ........... 37,800,015 44,695,000
Other current liabilities...... 42,359 ---
----------- --------------
Total current liabilities.... $ 50,506,872 $ 53,840,846
Minority interest in equity of
consolidated subsidiaries ... 7,639,298 8,512,221
Stockholders' Equity:
Preferred Stock, Class A, $.001 par value,
4,300 shares authorized; 4,300 shares issued
and outstanding ............ 4 4
Common Stock, $.001 par value, 100 million
shares authorized, 64,344,474 shares issued
and outstanding .................. 64,344 64,344
Stock Warrants .................. 80,000 80,000
Additional paid-in capital ..... 162,985,241 151,270,418
Translation Adjustment 18,347 ---
Accumulated deficit ............ (20,213,596) (13,008,415)
------------- ----------------
142,934,340 138,406,351
Total Liabilities &
Stockholders' Equity ...... $ 201,080,510 $ 200,759,418
============== ==============
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Dollars except share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
----------------------------- -----------------------------
1999 1998 1999 1998
--------- ------- --------- ---------
Sales ............... $ 19,609,595 $ 6,550,818 $ 30,847,338 $ 8,970,818
Cost of Sales............. 14,821,931 6,029,033 23,974,463 7,227,033
------------------
Gross profit............ $ 4,787,664 $ 521,785 $ 6,872,875 $ 1,743,785
Operating expenses:
Selling, general & admin 4,894,547 $ 703,498 $ 9,128,802 $ 1,410,521
Research and development . 959,010 483,995 2,049,610 1,049,738
Depreciation and amortization3,688,002 --- 5,658,072 ---
----------------
$ 9,541,559 $1,187,493 $ 16,836,484 $2,460,259
Operating Income (Loss) $ (4,753,895) $ (665,708) $ (9,963,609) $ (716,474)
---------------
Other income (expenses):
Interest Income ...... 62,138 4,793 128,443 13,440
Other income ............... --- --- 23,680 ---
62,138 4,793 152,123 13,440
Discontinued operations
Gain on disposal of discontinued LPF -- --- --- 100,000
----------------
Net Income before income taxes,
equity in unconsolidated subsidiaries
and minority interests.. (4,691,757) (660,915) (9,811,486) (603,034)
Earnings in unconsolidated
subsidiary............ 63,130 --- 326,048 ---
Minority interest in income of
Consolidated subsidiaries.(172,909) (74,187) 465,257 (66,836)
-----------------
Net income (loss)..... $ (4,801,536) $ (586,728) $(9,020,181) $ (536,198)
================
Earnings Per Share
Basic ................... $ (0.07) $ (0.01) $ (0.14) $ (0.01)
Diluted .................... $ (0.07) $ (0.01) $ (0.14) $ (0.01)
Weighted Average Shares.... 64,344,474 47,499,304 64,344,474 47,488,428
The accompanying notes are integral part
notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Dollars)
(Unaudited)
Six Months Ended Six Months Ended
December 31, 1999 December 31, 1998
----------------- ------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $ (9,020,181) $ (536,198)
Adjustments to reconcile net income
to net cash used in operating
activities
Depreciation & amortization 5,658,072 333,804
Equity in earnings of unconsolidated
subsidiaries (326,048) ---
Common Stock issued for service --- 135,000
Change in assets and liabilities
Decrease in accounts receivable 1,683,219 (4,491,258)
Decrease in prepaid expenses --- 729,084
(Increase) in inventories (328,792) (13,650)
(Increase) in other current assets (1,236,338) ---
Decrease in other assets 120,835 ---
Increase in accounts payable
And accrued expenses 3,714,217 2,003,815
Increase in notes receivable --- (1,808,000)
Increase (decrease) in investment
deposit (3,935,931) ---
Increase (decrease) in other liabilities (153,206) ---
Increase (decrease) in minority interest (872,923) 498,466
-----------------------
Net cash provided from (used for)
operating activities (4,697,076) (3,148,937)
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (459,906) ---
Sales of equipment --- 1,050
Sale of leasehold improvement --- 74,571
Investment in affiliates (3,466,800) 100,000
----------------------
Net Cash provided in investing activities (3,926,706) 175,621
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock --- 675,000
---------------------
Net Cash provided by financing activities --- 675,000
Net increase in cash (8,623,782) (2,298,316)
Cash beginning 30,779,486 3,193,127
----------------------
Cash Ending 22,155,704 894,811
=========== ==========
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
NOTE 1 Description of Business:
Lotus Pacific, Inc. ("LPFC") is a holding company focused on
investing in and managing, developing and operating a network
of subsidiaries. LPFC and its subsidiaries (the "Company") today
are engaged in the development, manufacture and distribution of
devices used in supplying high-speed Internet access, including
cable modem and DSL devices and Internet set-top boxes, and in
providing private label online auction services.
NOTE 2 Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company in accordance
with the instructions to Form 10-Q and Article 10 of Regulation
S-X relating to interim financial statements. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report
on Form 10-K of Lotus Pacific, Inc. for the year ended June 30
1999 ("fiscal 1999"). In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary to present fairly the information
set forth in the accompanying condensed consolidated financial statements
for the three months and six months ended December 31, 1999 should not
be regarded as necessarily indicative of results that may be expected for the
year ending June 30, 2000 ("fiscal 2000").
The accompanying unaudited condensed consolidated financial
statements include the accounts of LPFC and four majority-owned
subsidiaries: Regent Electronics Corp. (87.3% owned), TurboNet
Communications (81%), Arescom Inc. (81%), and Lotus World, Inc.
(94%). The financial statements do not include the operations of
USS Online, Inc. ("Online"), which was wholly-owned by LPFC as of
December 31, 1999 but had been held for disposition since the fourth
quarter of fiscal 1999 (which was shortly after the Company's acquisition
of the operating businesses of Online). On February 8, 2000, LPFC disposed
of a 72% interest in Online, retaining a 28% minority interest. LPFC's
interest in Online as of December 31,1999 was carried as investment
of $13,571,250. During January and February 2000, LPFC has arranged sales
of portions of its interest in TurBonet Communications to foreign
intvestors for cash consideration of up to approximately $80,000,000,
reducing LPFC's ownership to between 65% and 70% of the total outstanding
common stock of TurBonet Communications. The minority interests in the
subsidiaries are reflected as such on the balance sheet in acordance
with generally accepted accounting principles. All intercompany transactions
have been eliminated in consolidation.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (CONTINUED)
NOTE 3 Basic and Diluted Earnings Per Share
Basic earnings per share is computed on the basis of the weighted
average number of shares of common stock outstanding. Diluted
earnings per share is computed in the same manner except that
the weighted average number of shares outstanding assumes the
exercise and conversion of certain stock warrants and options.
For the three-month and six-month periods ended December 31, 1999,
there was no difference between basic and diluted earnings per share.
Note 4 Joint Venture
On September 1, 1999, LPFC entered into a 50-50 joint venture
with TCL Holdings (BVI) Ltd., to develop, manufacture and market
Internet and network products and services in China.
TCL Holdings is a subsidiary of TCL Group, China's fifth
largest electronics manufacturer with 1998 revenue of $1.2
billion. LPFC's participation in the joint venture is currently
carried as an investment.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the
accompanying condensed consolidated financial statements and
related notes and with the Management's Discussion and Analysis
of Financial Condition and Results of Operations and audited
consolidated financial statements and related notes included
in the Company's Annual Report on Form 10-K for the year ended
June 30, 1999 ("fiscal 1999").
GENERAL
Lotus Pacific ("LPFC") is a holding company focused on investing
in and managing, developing and operating a network of subsidiaries
which develop and/or supply products or services that use or support
Internet technology. As a player in today's Internet revolution, LPFC
and its subsidiaries (the "Company") are capitalizing on the abundance
of opportunities in this fast-growing marketplace. LPFC traces its
involvement in this sector to its 1997 acquisition of a controlling
interest in technology-based Regent Electronics Corporation (REC).
It has subsequently pursued a strategy of investing
in Internet-related companies by organizing or acquiring controlling
interests in TurboNet Communications, Arescom, Inc., and Lotus World,
Inc.. The Company today is engaged in the development, manufacture
and distribution of devices used in supplying high-speed Internet
access, including cable modem and DSL devices and Internet set-top
boxes, and in providing private label online auction services.
On September 1, 1999, LPFC entered into a 50-50 joint venture with
TCL Holdings (BVI) Ltd., to develop, manufacture and market Internet
and network products and services in China. TCL Holdings is a
subsidiary of TCL Group, China's fifth largest electronics
manufacturer with 1998 revenue of $1.2 billion. The joint venture
is currently in the development stage and is carried as an investment.
Lotus World, Inc., was formed by LPFC in April 1999. In November 1999,
Lotus World began to offer AuctionLive, a private label hosted online
auction site to international clients. AuctionLive has a
language-independent architecture, which allows businesses to
auction their products in almost any language. Lotus World has
formed strategic alliances and partnerships with Shanghai Online,
TCL International Inc., and Industrial and Commercial Bank of
China, major players in, respectively, China's Internet se
ersonal computers, and commercial banking activities. Lotus
World has eight regional offices in the greater China area and
more than fifty marketing agents. It officially launched
commercial operations on December 18, 1999 and had no significant
impact on revenue during the three and six month periods then ended.
RESULTS OF OPERATIONS
REVENUES
Revenue for the second quarter of the fiscal year that began
July 1, 1999 ("fiscal 2000") increased $13 million, or nearly 200%,
compared to the same period in fiscal 1999. Revenues for the six
months of fiscal 2000 increased $21.9 million, or 244%, compared
to the same period of fiscal 1999. The increase in revenues for
fiscal 2000 was primarily attributable to the operations of
TurboNet Communications which was acquired by LPFC in the third
quarter of fiscal 1999.
DISCONTINUED OPERATIONS
In order to concentrate on its Internet-related products and
services, on September 30, 1998, LPFC sold all of its textile
and apparel business (LPF International Corp. and Richtime Far
East, Ltd.) for an aggregate $2.5 million in cash, realizing a
non-recurring gain of $100,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of
travel, selling, communications, employee benefits, management,
administrative expenses and office rents. For the second quarter
of fiscal 2000, selling, general and administrative expenses
increased $4.2 million (597%) from $703,498. For the six
months of fiscal 2000, selling, general and administrative
expenses increased more than 500% to over $9 million compared
to the same period of fiscal 1999. The increase was attributable
almost entirely to the business acquired or established during
the second half of fiscal 1999.
RESEARCH AND DEVELOPMENT
For the second quarter of fiscal 2000, research and development
expenses increased $475,015 to $959,010, or 98%, from $483,995 in
the second quarter of fiscal 1999. For the six months of fiscal
2000, R&D expenses also nearly doubled compared to the same
period of fiscal 1999. The increase was attributable almost
entirely to business acquired or established during the second
half of fiscal 1999.
GOODWILL AMORTIZATION
The Company has accumulated approximately $134.7 million of
goodwill from acquisitions of businesses since September 1997.
The goodwill is amortized on the straight-line basis over 10 years.
For the quarter ended December 31, 1999, the Company's goodwill
amortization was approximately $1.7 million.
NET INCOME (LOSS) AND EARNING PER SHARE
For the second quarter of fiscal 2000, the Company had a net loss of
$4.8 million, which was identical to its loss in the same quarter
of fiscal 1999. The losses are not properly comparable, since
the loss in the 1999 period was mainly attributed to the operation
of Regent Electronics Corp., one of the subsidiaries, whereas the
loss for the fiscal 2000 period was largely attributable to the
conduct of businesses acquired during the second half of fiscal
1999. For the second quarter of fiscal 2000, the Company had a net loss of
.07 per diluted share, again compared with $0.01 per share of
net loss in the same quarter of fiscal 1999. Excluding $1.7
million of goodwill amortization expenses, the Company had a net
loss of $3.1 million, or $0.05 per share, for the quarter ended
December 31, 1999.
For the six months of fiscal 2000, net loss widened significantly
compared to the same period of fiscal 1999. The increase in loss
is attributable almost entirely to the inclusion of businesses
established or acquired during the second half of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company's liquid assets, consisting of
cash and cash equivalents, totaled $22.2 million, compared with $30.8
million as of June 30, 1999.
For the six months ended December 31, 1999, net cash used by
operating activities was $4.7 million compared with $3.1 million
of net cash used for the same period of fiscal 1998. The increase
in net cash used was attributable primarily to the inclusion of the
operations from various business acquired or originated in the second
half of fiscal 1999.
During January and February, 2000, LPFC arranged sales of portions of
its interest in TurboNet Communications to unrelated foreign investors
for cash consideration of up to approximately $80,000,000, reducing
LPFC's ownership of TurboNet Communications to between 65% and 70%
of the total outstanding common stock. LPFC expects to use proceeds
of the sales in connection with possible additional acquisitions and
joint ventures and for further investment in its subsidiaries.
The Company believes that the existing cash and cash equivalents
together with funds generated from operations and sales of TurboNet
stock will be sufficient to meet its operating requirements for the
next 12 months. The Company's continuing operating and investing
activities may nevertheless make it necessary or desirable that
the Company obtains additional financing, through loans or
additional public or private offerings of its securities.
There can be no assurance that any additional financing will be
y on commercially reasonable terms, if at all.
The statements contained in this report that are not historical
facts are "forward-looking statements" (as such term is defined in
the Private Securities Litigation Reform Act of 1995) which can be
identified by the use of forward-looking terminology such as;
"estimates," "projects," "anticipates," "expects," "intends,"
"believes," or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in
such forward-looking statements. Management
wishes to caution the reader that these forward-looking statements,
such as statements regarding development of the Company's business,
the Company's anticipated capital expenditures and other statements
contained in this report regarding matters that are not historical
facts are only estimates or predictions. No assurance can be given
that future results will be achieved; actual events for results may
differ materially as a result of risks facing the Company or
actual results differing from the assumptions underlying such
statements. In particular, expected revenues could be adversely
affected by production difficulties or economic conditions adversely
affecting the market for the Company's products. There also can be
no assurance that products under development will be successfully
developed or that once developed such products will be commercially
successful.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes
that its exposure to market risk associated with other financial
instruments is not material.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults by the Registrant on its Senior Securities
None.
Item 4. Submission of Matters to A Vote of Security Holders
None
Item 5. Other Information
(a) On February 8, 2000, Lotus Pacific ("LPFC") sold a controlling 72%
interest in USS Online, Inc. ("Online") to Travelway International
Limited ("Travelway"). In eschange, LPFC received 732,802 shares
of LPFC's outstanding stock, valued at $9.6313 per share, or a
total of $7,057,835. The value of the LPFC shares received was
based on the average of the closing prices of the LPFC stock in
the over the counter market on the 10 trading days preceding
January 18, 2000, when the terms of the transaction were agreed.
The amount of the consideration was negotiated based on a $10,000,000
valuation for Online, which the Board deemed fair. LPFC will
recognize a loss on the transaction of approximately $2,713,000.
LPFC continues to hold 28% of Online's outstanding stock and has
advanced Online $1,550,000 as a short-term loan to meet capital
requirements. LPFC had previously reported its intention to
divest itself of control of Online.
Online owns all of the outstanding stock of U.S. Securities and
Futures Corporation ("USSF") and Professional Market Brokerage,
Inc. ("PMB"). USSF is a securities firm headquartered on Wall
Street in New York City, offering online securities trading and
other financial and brokerage services to individuals and
institutions. PMB is a Chicago-based financial trading firm that
provides online trading services from an advanced Internet-based
system. The two companies were acquired by LPFC in February and March
1999. The assets of Online at the time of the sale to Travelway included
877,500 previously-acquired shares of LPFC's common stock, which are
restricted securities within the meaning of Rule 144 under the
Securities Act of 1933.
Travelway is owned by Huaya Lu Tung who was, until the date of the
sale, the Treasurer of LPFC. Concurrently with the sale, Ms. Tung
resigned from all positions with LPFC, and Jeremy Wang, who is
President and a director of LPFC, resigned as President of Online.
Mr. Wang continues to serve as a minority director of Online.
Travelway had been the owner of USSF until February 23, 1999,
when it sold USSF to LPFC for consideration consisting of $2.5
million in cash and 500,000 shares of LPFC's common stock.
As previously reported, shortly after LPFC's acquisition of USSF and
PMB, LPFC began to seek methods to divest itself of control and
reduce its investment in these entities. This change resulted
from a determination that these entities would not significantly
benefit from association with LPFC's technology and resources, were
subject to significant litigation and regulatory risks and would
require managerial oversight and resources that would be better
devoted to LPFC's core businesses. Accordingly, LPFC
es as temporary investments since shortly after the time of
their acquisition and has not included their operations in its
consolidated financial statements except for a portion of the
third quarter of fiscal 1999 in which they were acquired.
In June 1999, to facilitate a disposition, ownership of both entities
was transferred to Online which was newly-formed for this purpose.
On July 12, 1999, LPFC reported certain transactions involving Online,
which were intended to effect a disposition of a substantial portion of
LPFC's interest in Online as of June 28, 1999. The proposed transactions
included the issuance of 5,000,000 shares of Online's common stock to
its senior management team and a planned distribution to LPFC's
stockholders of record on August 30, 1999 of options to
purchase 32,272,237 shares of Online's common stock at
$.01 per share for two years after an initial public offering of
Online's common stock
For various administrative and regulatory reasons, LPFC's management
determined that the proposed transactions were not practicable, and
its prior decisions to carry out these transactions were rescinded.
Accordingly, the options were not granted, LPFC did not declare the
proposed distribution, and shares were not issued to Online's senior
management.
In light of the transactions that were proposed and pending as of
June 30, 1999, LPFC's balance sheet as of June 30 and September 30,
1999 reflected a net investment of $1,453,928 after charges for the
proposed distribution and the issuance of management shares. These
charges have been reversed as of December 31, 1999, and the investment
has been restated at $13,571,250. As of December 31, 1999, the
Company continued to carry Online as an investment, in the expectation
that disposition of a controlling interest would be effected
within the next 60 days. In connection with the disposition
of 72% of Online, LPFC sustained a one time loss of approximately
$2,713,000. The 28% of Online retained by LPFC represents an
investment of approximately $3,799,950.
(b) During January and February, 2000, LPFC arranged sales of portions
of its interest in TurboNet Communications to unrelated foreign investors
for cash consideration of up to approximately $80,000,000, reducing
LPFC's ownership of TurboNet Communications to between 65% and 70% of
the total outstanding common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LOTUS PACIFIC, INC.
Date: February 15, 2000 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 person
on behalf of the registrant and in capacities and on the dates
indicated.
Date: February 15, 2000 By: /S/ David Li
----------------------------------
David Li, Chief Financial Officer