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 March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-24999
LOTUS PACIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of Organization)
52-1947160
(I.R.S. Employer Identification Number)
200 Centennial Avenue, Suite 201, Piscataway, New Jersey 08854
(Address of principal executive offices)
(732) 885-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
----- ------ ------ ------
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 31, 2000:
Class Number of Shares
Common Stock 63,611,672
Par Value $.001 Per Share
LOTUS PACIFIC, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
(1) Condensed Consolidated Balance Sheets as of March 31, 2000
(unauduited) and June 30, 1999
(2) Condensed Consolidated Statements of Operations (unaudited) for
the Three and Nine Months Ended March 31, 2000 and 1999
(3) Condensed Consolidated Statements of Cash Flows (unaudited) for
the Nine Months ended March 31, 2000 and 1999
(4) Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
2000 1999
------------- -------------
Current Assets:
Cash................................... $41,865,391 $30,779,486
Accounts receivable.................... 39,267,190 27,655,975
Inventory.............................. 7,929,264 4,972,965
Other current assets................... 2,050,217 574,985
------------ -----------
Total current assets.................. 91,112,062 63,983,411
Property and equipment:
Furniture and office equipment......... 1,401,765 1,534,033
Equipment.............................. 2,561,420 1,540,221
Leasehold improvements................. 91,322 29,836
----------- ------------
4,054,507 3,104,090
Less: accumulated depreciation......... 1,361,158 1,235,567
----------- ------------
2,693,349 1,868,523
Other assets:
Notes receivable....................... 1,311,748 ---
Cash surrender value of life insurance 13,218 17,436
Intangible assets, net of accumulated
amortization of $969,975 and $713,355
in 2000 and 1999, respectively....... 4,885,721 5,098,604
Goodwill, net of accumulated amortization
of $14,938,034 in 2000 and $6,570,838 in
1999.................................. 101,656,426 128,157,062
Deposits............................... 444,029 180,454
Investments (including joint ventures and
minority interest).................... 10,848,796 8,457,314
Other assets........................... 603,905 ---
----------- -------------
119,763,843 141,910,870
$213,569,254 $207,762,804
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.. $ 24,445,161 $ 8,950,281
Commission payable..................... 11,270,250 ---
Loans payable.......................... --- 195,565
Investment deposits.................... 522,930 44,695,000
Income taxes payable................... 14,700,000 ---
------------- -------------
Total current liabilities............. 50,938,341 53,840,846
Minority interest in subsidiaries....... 10,895,171 8,512,221
Commitments
Stockholders' equity:
Common stock........................... 63,321 63,466
Preferred stock, Series A.............. 4 4
Common stock warrants.................. 80,000 80,000
Additional paid-in capital............. 154,515,783 155,384,298
Accumulated deficit.................... (2,923,366) (10,118,031)
------------ -------------
151,735,742 145,409,737
$213,569,254 $207,762,804
============= ==============
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- ----------------------
2000 1999 2000 1999
------------ ----------- ----------- ----------
Sales........................... $25,013,831 $10,183,751 $55,679,192 $19,154,569
Cost of sales................... 20,622,930 9,513,521 44,488,265 16,740,554
------------ ----------- ----------- -----------
Gross profit.................... 4,390,901 670,230 11,190,927 2,414,015
Operating expenses
Selling, general and
administrative expenses...... 10,759,910 365,140 17,773,129 786,751
Research and development....... 2,574,706 122,009 4,474,662 571,747
Depreciation and amortization.. 3,507,317 167,507 10,813,168 1,756,417
------------- ---------- ----------- -----------
16,841,933 654,656 33,060,959 3,114,915
Operating income (loss)......... (12,451,032) 15,574 (21,870,032) (700,900)
Other income (expense):
Interest income................ 153,913 19,664 290,722 33,104
Equity in income (loss) of
unconsolidated subsidiaries... 321,307 (721,733) 976,594 (721,733)
Gain on sale of subsidiaries'
stock......................... 42,317,838 --- 42,317,838 ---
Other income................... 109,457 --- 148,241 ---
----------- ----------- ----------- ----------
42,902,515 (702,069) 43,733,395 (688,629)
Net income (loss) before income taxes,
minority interest in income (loss) of
consolidated subsidiaries and
discontinued operations.......... 30,451,483 (686,495) 21,863,363 (1,389,529)
Income taxes..................... (14,700,000) --- (14,700,000) ---
Minority interest in income (loss)
of consolidated subsidiaries.... (3,987) 835,909 31,302 902,745
------------- ------------- ------------ ----------
Income (loss) from continuing
operations.................... 15,747,496 149,414 7,194,665 (486,784)
Loss from discontinued operations. --- (53,017) --- (53,017)
Loss on sale of subsidiaries --- (690,641) --- (590,641)
------------ ----------- ----------- -----------
Net income (loss)................. $15,747,496 $ (594,244) $ 7,194,665 $(1,130,442)
============ ============= =========== ============
Earnings (loss) per share
Basic............................ $ .25 $ (.01) $ .11 $ (.03)
Diluted.......................... $ .21 $ (.01) $ .10 $ (.03)
Weighted average shares
Basic........................... 63,579,406 55,659,000 63,503,568 48,034,000
Diluted......................... 74,465,406 55,659,000 74,389,568 48,034,000
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Nine Months Ended
March 31, 2000 March 31, 1999
------------------- ------------------
Cash flows from operating activities:
Net income (loss).............................. $ 7,194,665 $(1,130,442)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in income of unconsolidated subsidiaries (976,594) 721,733
Depreciation and amortization................. 10,813,168 1,756,417
(Gain) loss on sale of subsidiaries' stock.... (42,317,838) 590,641
Loss from discontinued operations............. --- 53,017
Changes in assets and liabilities:
Increase in accounts receivable............... (11,611,215) (3,873,503)
Increase in inventory......................... (2,956,299) (1,331,051)
(Increase) decrease in other current assets... (1,475,232) 751,260
(Increase) decrease in deposit................ (263,575) 49,017
Increase in cash surrender value.............. 4,218 ---
Increase in other assets...................... (603,905) ---
Increase in accounts payable and accrued expenses 15,494,880 4,476,321
Increase in commission payable................ 11,270,250 ---
Increase (decrease) in income taxes payable... 14,700,000 (42,110)
Increase (decrease) in minority interest
in subsidiary................................ 895,419 (1,830,175)
------------- ---------------
Net cash provided by operating activities...... 167,942 191,125
Cash flows from investing activities:
Purchase of property and equipment............. (888,931) (10,303)
Purchase of intangible asset................... (45,697) ---
Purchase of leasehold improvements............. (61,486) ---
Investment in joint ventures................... (6,271,290) (2,740,000)
Proceeds from sale of subsidiary stock......... 63,864,750 ---
Notes receivable............................... (1,311,748) ---
-------------- --------------
Net cash provided by (used in) investing activities 55,285,598 (2,750,303)
Cash flows from financing activities:
Issuance of common stock....................... --- 865,000
Decrease in investment deposits................ (44,172,070) ---
Decrease in loans payable...................... (195,565) ---
-------------- --------------
Net cash provided by (used in) financing activities (44,367,635) 865,000
Net increase (decrease) in cash.................. 11,085,905 (1,694,178)
Cash, beginning.................................. 30,779,486 3,262,929
-------------- -------------
Cash, ending..................................... $ 41,865,391 $1,568,751
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for purchase of subsidiaries --- $7,062,500
Acquisition of treasury stock................... $ 868,515 $2,670,500
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
NOTE 1 General
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 have been included.
The results reported in these condensed consolidated financial statements for
the three-month and nine-month periods ended March 31, 2000 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 its four majority-owned subsidiaries: Regent
Electronics Corp. (87.3% owned), TurboNet Communications (81%, reduced to 63%
as of March 31, 2000), Arescom Inc. (81%) and Lotus World, Inc. (94%). The
minority interests in the subsidiaries are reflected as such on the balance
sheet in accordance with generally accepted accounting principles. All
intercompany transactions have been eliminated in consolidation.
Note 3 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 months ended March 31, 2000, the weighted average shares are
63,579,406 and 74,465,406 shares for the Basic and Diluted Earning Per Share
calculations.
Note 4 Business And Asset Disposition
As of June 30 and December 31, 1999, LPFC owned all of the outstanding stock
of USS Online, Inc. ("Online"), which was engaged in certain securities
brokerage and commodity trading activities through US Securities & Futures
Corp. and Professional Market Brokerage, Inc. The stock of Online had been
held for disposition since the fourth quarter of fiscal 1999, and its
operations are not included in the Company's consolidated financial
statements.
On February 8, 2000, LPFC disposed of 72% of the stock of Online in exchange
for 732,802 shares of LPFC's outstanding stock, valued at $9.6313 per share,
or a total of $7,057,835. The assets of Online at the time of the stock sale
included 777,500 shares of LPFC's common stock which were carried as treasury
shares until the stock sale and are deemed outstanding as of March 31, 2000.
LPFC retains a 28% minority interest in Online. In connection with the sale of
the Online stock, LPFC recognized a non-recurring loss of $3,487,741 and reduced
its investment in Online from $14.5 million to $5,077,506.
On March 31, 2000, LPFC completed sales of portions of its equity interest in
TurboNet Communications ("TurboNet") 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 $63.8 million and reduced
LPFC's ownership of TurboNet's capital stock from approximately 81% to
approximately 63%.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LPFC is a holding company focused on investing in and managing, developing and
operating a network of subsidiaries that develop and provide a wide range of
Internet-related products and services. Since 1997, LPFC has acquired and
currently maintains controlling equity interests in each of Regent Electronics
Corp., TurboNet Communications, Arescom, Inc., and Lotus World, Inc. The
Company's products include cable modem, DSL devices and Internet set-top boxes.
The Company also provides private label online auction services in foreign
markets.
RESULTS OF OPERATIONS
REVENUES
For the quarter ended March 31, 2000, the Company's revenue was $ 25.0 million,
compared with $ 10.2 million for the same period of the previous year. On a
year to date basis, revenue in the first nine months of fiscal 2000 was $ 55.7
million, an increase of 193% over the first nine months of fiscal 1999. The
revenue growth in the three- and nine-month periods was primarily due to the
operations of TurboNet Communications and Arescom, Inc., both of which were
acquired by LPFC in March 1999.
DISCONTINUED OPERATIONS
In order to concentrate on its Internet-related products and services, on
September 30, 1998, the Company sold all of its textile and apparel business
(LPF International Corp. and Richtime Far East, Ltd.) for an aggregate of $2.5
million in cash, realizing a non-recurring gain of $100,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $10.8 million in the third
quarter fiscal 2000 compared to $0.4 million in the March quarter of the prior
year, a 2600% increase. For the first three quarters of fiscal 2000, selling,
general and administrative expenses were $17.8 million, compared to $0.8
million in the first three quarters of fiscal 1999. The increase was
attributable almost entirely to the businesses that the Company acquired or
established during the second half of fiscal 1999.
RESEARCH AND DEVELOPMENT
In the third quarter of fiscal 2000, research and development expenses
increased $2.4 million to $2.6 million, or 2000%, from $0.1 million in the
same quarter of fiscal 1999. For the nine-month period ended March 31, 2000,
the Company's research and development expense increased nearly 8 times
compared to the same period of the prior year. The increase was attributable
almost entirely to the businesses acquired or established during the second
half of fiscal 1999.
DEPRECIATION & 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 three-month period ended
March 31, 2000, the depreciation and amortization increased almost 2000% to
$3.5 million compared to the same period of the prior year. For the nine-
month period ended March 31, 2000, the Company's depreciation and goodwill
amortization expenses were approximately $10.8 million, compared to $1.8
million for the same period of the prior year. The increase was attributable
to the businesses that the Company acquired during the second half of
fiscal 1999.
NET INCOME (LOSS) AND EARNING PER SHARE
For the third quarter of fiscal 2000, the Company had net income of $15.7
million, or $0.25 per share, compared to a net loss of $0.6 million for the
same period of the prior year. The Company's profitability during the current
period was attributable primarily to the gain on the sale of TuboNet stock and
was also positively affected by the results of TurboNet's operations during
the period. These factors were offset to some extent by the loss on
disposition of USS Online stock and by increases in depreciation and goodwill
amortization expense. Excluding the gain on sale of TurboNet stock, the Company
would have a net loss of $26.6 million or $0.42 per share for the third quarter
fiscal 2000.
For the nine months ended March 31, 1999, the Company had net income of $7.2
million, or $0.11 per share, compared to $1.1 million of net loss for the same
period of the prior year. Excluding the gain on sale of TurboNet stock, the
Company would have a net loss of $35.1 million or $0.55 per share for the nine
months.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company's liquid assets, consisting of cash and cash
equivalents, totaled $41.9 million, compared with $30.8 million as of June 30,
1999.
For the nine-month period ended March 31, 2000, net cash provided by operating
activities was $0.2 million, roughly unchanged from the same period of the
previous year.
For the nine-month period ended March 31, 2000, net cash provided by investing
activities was $55.3 million, attributable entirely to the sale of TurboNet
stock.
For the nine-month period ended March 31, 2000, the Company had net cash
outflow of $44.2 million from financing activities attributable to the
repayment of deposits received in fiscal 1999 for a proposed purchase of
securities which was subsequently cancelled. For the same period of 1999,
LPFC had a cash inflow of $865,000 from the sale of its common stock.
In the third quarter of fiscal 2000, LPFC arranged sales of portions of its
interest in TurboNet Communications to unrelated foreign investors for cash
consideration of approximately $64 million, net of fees and commissions,
reducing the Company's ownership in TurboNet Communications to
approximately 63%. LPFC expects to use proceeds of the sale for possible
acquisitions, investments in joint ventures and additional investment in its
subsidiaries.
The Company has no material long-term debt.
The Company believes that the existing cash and cash equivalents together with
funds generated from operations will be sufficient to meet its operating
requirements for the next 12 months. The Company's continuing operating and
investing activities may nevertheless make it necessary or desirable that the
Company obtain additional financing through loans or additional public or
private offerings of its securities. There can be no assurance that any
additional financing will be available to the Company on commercially
reasonable terms, if at all.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments is not material.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
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
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LOTUS PACIFIC, INC.
Date: May 19, 2000 By: /S/ Jeremy Wang
-------------------------------
Jeremy Wang, President
By: /S/ David Li
-------------------------------
David Li, Chief Financial Officer