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 September 30, 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. Yes (X) No ( )
The number of shares outstanding of the Registrant's common stock as of
November 26, 1999 was 64,544,474.
LOTUS PACIFIC, INC.
FORM 10-Q
For the Quarter Ended September 30, 1999
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets (unaudited)
as of September 30, 1999 and June 30, 1999 ............... 2
b) Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended September 30, 1998 and 1999..... 3
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months ended September 30, 1998 and 1999...... 4
d) Notes to Condensed Consolidated Financial Statements ......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 6
Item 3. Quantitative and Qualitative Disclosure about Market Risk ..... 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 10
Item 2. Changes in Securities and Use of Proceeds ..................... 10
Item 3. Defaults upon Senior Securities ............................... 10
Item 4. Submission of Matters to a Vote of Security Holders ........... 10
Item 5. Other Information ............................................. 10
Item 6. Exhibits and Reports on Form 8-K .............................. 11
Signatures ............................................................. 12
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1999 June 30, 1999
------------------ -----------------
ASSETS
Current Assets:
Cash ........................... $ 5,536,092 $ 30,779,486
Accounts Receivable ............ 30,563,468 27,655,975
Inventories .................... 4,317,898 4,972,965
Other current assets ........... 190,657 574,985
------------- -------------
40,608,115 63,983,411
Property and equipment:
Furniture and office equipment.. 1,819,858 1,534,033
Equipment....................... 1,540,221 1,540,221
Leasehold improvements.......... 29,836 29,836
Less: accumulated depreciation . (1,338,503) (1,235,567)
------------- -------------
2,051,412 1,868,523
Other assets:
Cash surrender value of life
insurance...................... 20,436 17,436
Intangible assets, net ......... 5,012,549 5,098,604
Goodwill, net................... 126,484,093 128,157,062
Deposits........................ 78,586 180,454
Investment in affiliates........ 5,183,646 1,453,928
------------- -------------
136,779,310 134,907,484
Total Assets .................... $179,438,837 $ 200,759,418
============= ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts Payable and
accrued expenses............... $ 4,431,602 $ 8,950,281
Loan payable ................... ---- 195,565
Customer deposits............... 34,659 ----
Investment deposits ............ 30,400,000 44,695,000
------------- --------------
34,866,261 53,840,846
Minority interest in equity of
consolidated subsidiaries ...... 7,466,389 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, 64,544,474 shares issued
and outstanding ................ 64,544 64,544
Stock Warrants .................. 80,000 80,000
Additional paid-in capital ...... 151,270,219 151,270,218
Accumulated deficit ............. (14,308,580) (13,008,415)
------------- --------------
137,106,187 138,406,351
Total Liabilities &
Stockholders' Equity ........... $ 179,438,837 $ 200,759,418
============== ==============
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30
--------------------------------
1999 1998
--------------- -------------
Sales ............................. $ 11,237,743 $ 2,420,000
Cost of Sales....................... 9,152,532 1,198,000
------------ -------------
Gross profit ....................... 2,085,211 1,222,000
Operating expenses:
Selling, general & admin............ 4,234,255 458,512
Research and development ........... 1,090,600 565,743
Depreciation and amortization....... 1,970,070 522,923
----------- -----------
7,294,925 1,547,178
Operating Loss ...................... (5,209,714) (576,484)
----------- -----------
Other income (expenses):
Interest Income ..................... 66,305 8,647
Equity in earnings of unconsolidated
subsidiary.......................... 262,918
Other income ....................... 23,680 ----
----------
352,903
Gain of disposal of discontinued operations ---- 100,000
Net Income before income taxes
and minority interests in income of
consolidated subsidiaries.......... (4,856,811) (467,837)
Minority interest in loss of
consolidated subsidiaries.......... 638,166 7,351
Net income (loss)................... $ (4,218,645) $ (460,486)
============== =============
Earnings Per Share
Basic ............................ $(0.07) $(0.01)
Diluted .......................... $(0.07) $(0.01)
Weighted Average Shares............. 64,544,474 47,477,552
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended September 30
--------------------------------
1999 1998
-------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income ............................. $ (4,218,645) $ (460,486)
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation expenses.................. 297,101 167,073
Goodwill amortization ................ 1,672,969 355,850
Gain on sale of investment ............ ---- (100,000)
Equity in earnings of unconsolidated
subsidiary ............................ (262,918) ----
Common stock issued for service ....... ---- 135,000
Changes in assets & liabilities:
Increase in accounts receivable........ (2,907,493) (1,821,047)
Decrease in inventories ............... 655,067 ----
Decrease in other current assets ...... 384,328 757,421
Increase in cash surrender value ...... (3,000) ----
Decrease in deposit ................... 101,868 50,617
Decrease in accounts payable and
accrued expenses...................... (4,518,679) (1,008,496)
Increase in customer deposit .......... 34,659 ----
Decrease in minority interest ......... 1,764,539 598,914
------------- -------------
Net cash used in operating activities .. (7,000,204) (1,325,154)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase (sale) of equipment .......... (285,825) 1,050
Sale of leasehold improvement ......... ---- 74,571
Investment in affiliates............... (3,466,800) ----
------------ -----------
Net cash used in investing activities .. (3,752,625) 75,621
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock............... ---- 675,000
Decrease in investment deposit......... (14,295,000) ----
Decrease in loans payable.............. (195,565) ----
------------- ----------
Net cash used in financing activities .. (14,490,565) 675,000
Net decrease in cash ................... (25,243,394) (574,533)
Cash, beginning ........................ 30,779,486 3,193,127
Cash, ending ........................... $ 5,536,092 $ 2,618,594
Supplemental disclosure of non-cash financing activities:
Issuance of common stock for service: .. $ 135,000
The accompanying notes are an integral part of the financial statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
(1) Description of Business:
Lotus Pacific, Inc. is an Internet technology and services company. Through
its subsidiaries, the Company develops and markets a broad range of Internet-
related products and services in the United States and international markets.
The Company's products include TeleWeb systems, WonderTV/TeleWeb set-top boxes,
cable modems, cable modem chips, routers, cable data bridges and ISDN remote
managing software.
(2) Basis of Presentation
The accompanying consolidated condensed financial statements include the
accounts of Lotus Pacific, Inc. and its all significant majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Those statements and accompanying notes have not
been audited, but in the opinion of management, have been prepared in
conformity with generally accepted accounting principles applying certain
assumptions and estimates, including all adjustments (consisting only of
normal recurring items) considered necessary to present fairly such
information. Although these estimates are based on management's knowledge of
current events and actions the Company may undertake in the future, actual
results may ultimately differ from those estimates.
The Company reports on a fiscal year beginning July 1. The three-month periods
ended September 30, 1999 and 1998 are the first fiscal quarters of fiscal year
2000 and fiscal year 1999, respectively. Operating results for any interim
period are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Company's 1999 Form 10-K.
(3) Basic and Diluted Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed
in the same manner except that the weighted average number of common shares
outstanding assume the exercise and conversion of certain stock warrants
and options.
For the three-month periods ended September 30, 1999 and 1998, basic and
diluted earnings per share were the same.
(4) Joint Venture
On September 1, 1999, the Company formed a joint venture, TCL International
Inc, with TCL Holdings (BVI) Ltd. to develop, manufacture and market the
Internet and network products and services in China. The Company and TCL
Holdings each owns 50% share of the joint venture. TCL Holdings is a
subsidiary of TCL Group, China's fifth largest electronics manufacturer with
1998 revenue of $1.2 billion.
(5) Lotus World Inc.
On April 22, 1999, the Company registered a new subsidiary, Lotus World, Inc.
in the State of Delaware. Lotus World started to provide online auction and
online shopping services to the greater China markets in the quarter ended
September 30, 1999. On November 19, 1999, the Company formed a strategic
alliance with Shanghai Online, one of China's leading Internet portal and
ISP companies. The accounts of Lotus World were consolidated with the Company.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lotus Pacific is an Internet technology and services company. Through its four
subsidiaries, Regent Electronics Corp., TurboNet Communications, Arescom Inc.
and Lotus World, Inc., the Company develops and markets a broad range of
Internet-related products and services in the United States and international
markets. The Company's products include TeleWeb systems, WonderTV/TeleWeb
set-top boxes, cable modems, cable modem chips, routers and cable data bridges.
The Company also provides online auction and online shopping services.
On September 1, 1999, the Company formed a joint venture, TCL International
Inc, with TCL Holdings (BVI) Ltd. to develop, manufacture and market the
Internet and network products and services in China. The Company and TCL
Holdings each owns 50% share of the joint venture. TCL Holdings is a subsidiary
of TCL Group, China's fifth largest electronics manufacturer with 1998 revenue
of $1.2 billion.
Since November 1999, Lotus World, Inc., the Company's newly established
subsidiary, has started to provide AuctionLive, a private label hosted online
auction site to international clients. Lotus World's AuctionLive has a language
-independent architecture, which allows businesses to auction their products in
almost any languages. Lotus World has formed strategic alliance and partnerships
with Shanghai Online, TCL International Inc., and Industrial and Commercial
Bank of China, three major players in China's Internet services, television and
personal computers, and commercial banking sector respectively. Lotus World has
developed a strong presence in the Chinese market with eight regional offices
in the greater China area and more than fifty marketing agents.
RESULTS OF OPERATIONS
SALES
Sales for the first quarter of 2000 increased by 363% to $11.2 million,
compared with $2.4 million in the first quarter of 1999. The increase in sales
was primarily attributable to the following two factors: (1) 116% of increase
in sales from WonderTV A9000 chips; and (2) $5.6 million of cable modem sales
from TurboNet, one of the Company's subsidiaries.
DISCONTINUED OPERATIONS
In order to concentrate on its Internet-related products and services, on
September 30, 1998, the Company sold all of its textile and apparel business
(LPF International Corp. and Richtime Far East, Ltd.) to Clarinet Overseas Ltd.
for an aggregation consideration of $2.5 million in cash. The Company had
$100,000 of gain from sale of LPF and Richtime. Since then, the Company had no
sales from textile and apparel business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of selling,
general and administrative expenses, such as travel, selling, communications,
employee benefits, management, administrative and office rents. For the quarter
ended September 30, 1999, selling, general and administrative expenses
increased $3.8 million, or 723%, to $4.2 million from $458,512 during the same
period of the last year. The increase was mostly due to the expenses incurred
in the Company's newly acquired subsidiaries,TurboNet and Arescom.
RESEARCH AND DEVELOPMENT
For the quarter ended September 30, 1999, research and development expenses
increase $524,857 to $1.1 million, compared with $565,743 for the quarter ended
September 30, 1998. The increase in R&D expenses was primarily because of the
expenses incurred in the Company's newly acquired subsidiaries, TurboNet and
Arescom.
GOODWILL AMORTIZATION
The Company has accumulated approximately $134.7 million of goodwill from
acquisitions of business since September 1997. The goodwill is to be amortized
on the straight-line basis over 20 years. For the quarter ended September 30,
1999, the Company's goodwill amortization was $1.7 million, compared with
$356,000 for the quarter ended September 30, 1998.
NET INCOME (LOSS) AND EARNING PER SHARE
For the quarter ended September 30, the Company had net loss of $4.2 million,
compared with $460,486 of net loss for the same period of the prior year. For
the quarter ended September 30, 1999, the Company had net loss of $0.07 per
diluted share, compared with $0.01 per share of net loss for the quarter ended
September 30, 1998. Excluding $1.7 million of goodwill amortization expenses,
the Company had net loss of $2.5 million, or $0.04 per share, for the quarter
ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's liquid assets, consisting of cash and
cash equivalents, total $5.5 million, compared with $30.8 million as of
June 30, 1999.
For the quarter ended September 30, 1999, net cash used by operating activities
was $7.0 million, compared with $1.3 million of net cash used for the same
quarter of the last year. The increase in net cash used was primarily because
of increase in accounts receivable and decrease in accounts payable. The
Company's investing activities used $3.8 million of cash in the quarter ended
September 30, 1999, mostly for investing to the Company's new joint venture,
TCL International Inc, and purchase of equipment. For the quarter ended
September 30, 1999, net cash used in financing activities was $14.5 million.
As of September 30, 1999, the Company had 64,544,474 shares of Common Stock
with par value $.001 per share and 4,300 shares of Class A Preferred Stock
issued and outstanding.
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 twelve months. Although the Company's operating
activities may generate cash to cover its operating costs, the Company's
continuing operating and investing activities may require the Company to obtain
additional sources of financing, either from the secondary offerings or from
private placements. There can be no assurance that any necessary additional
financing will be available to the Company on commercially reasonable terms,
if at all.
YEAR 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by "Year 2000" issue, which has arisen because many existing
computer programs and chip-based embedded technology systems may recognize a
date using "00" as the year 1900 rather than year 2000. This could result in
a system failure or miscalculations which may cause disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has assembled a team of internal staff to oversee the matter and
has made every efforts to minimize the impact of the Year 2000 date change on
the Company's products, information technology systems, facilities and
production infrastructure. Internally, the Company has upgraded its business
system to address the Year 2000 issue. Externally, the Company has surveyed
and will continue to survey its suppliers, financial institutions, and other
organizations to ensure that those parties have appropriate plans to be "Year
2000 Compliant." Costs incurred to date and estimated costs to complete the
Company's Year 2000 compliance efforts are not expected to be material.
All critical aspects of the Company's Year 2000 compliance program are expected
to be completed by the end of the first week of December 1999. The Company will
continue to assess and test newly engaged suppliers and their products for Year
2000 compliance as part of the Company's normal business operations and address
any material issues, and develop contingency plan as it deems appropriate.
The failure to identify or correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain business activities or operations
such as the Company's ability to service its customers. Such failures could
materially and adversely affect the Company's results of operations, liquidity,
and financial condition. The Company's Year 2000 assessment process is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material suppliers and customers.
ITEM 3. 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 are not material.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
ITEM 2 Changes in Securities and Use of Proceeds
On August 23, 1999, Lotus International Holdings Corp., a major shareholder
of the Company, transferred 1,000,000 shares of the Company's common stock to
Luks Industrial Company Limited, a Hong Kong company, in exchange for
approximately 10% of the Luks Industrial's capital stock.
On September 1, 1999, TCL Industries Holdings Ltd, a Hong Kong company,
acquired approximately 15% of the Company's common stock from several
shareholders of the Company.
ITEM 3. Defaults by the Registrants on its Senior Securities
None
ITEM 4. Submission of Matters to A Vote of Securities Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
During the three-months ended September 30, 1999, the Company filed the
following reports on Form 8-K:
On July 12, 1999, the Company filed a Form 8-K to report that (1) on June 28,
1999, the Company transferred all of its ownership interests in each of U.S.
Securities & Futures Corp. and Professional Market Brokerage, Inc. to USS
Online Inc., a newly established subsidiary of the Company; (2) the Company
approved that USS Online granted options to the Company's common stock
shareholders of record as of August 30, 1999, on a pro rate basis; and (3) the
Company approved the management compensation plan of USS Online, whereby USS
Online will issue 5 million of its capital stock to its executive officers at
a price of $0.1 per share. As a result, the Company's ownership interest in
USS Online was reduced from 100% to approximately 44%.
On September 2, 1999, the Company filed a Form 8-K to report that (1) Lotus
International Holdings Corp., a major shareholder of the Company, transferred
one million shares of the Company's common stock to Luks Industrial Company
Limited, a Hong Kong company, in exchange for approximately 10% of the Luks
Industrial's capital stock; (2) TCL Industries Holdings Ltd, a Hong Kong
company, acquired 15% of the Company's common stock from shareholders of the
Company; and (3) the Company had set up a joint venture with TCL Holdings
(BVI) Ltd, a subsidiary of TCL Group, China's fifth largest electronics
manufacture.
On September 9, 1999, the Company filed a Form 8-K to report that Mr. David Li
was appointed as the Company's Chief Financial Officer.
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: November 26, 1999 By: Jeremy Wang
-----------------------------------
Jeremy Wang, Chief Executive Officer
and 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: November 26, 1999 By: David Li
----------------------------------
David Li, Chief Financial Officer