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, 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 December 31, 2000:
Class Number of Shares
-------------- -----------------------
Common Stock 64,133,795
Par Value $.001 Per Share
LOTUS PACIFIC, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of December 31, 2000
(unaudited) and June 30, 2000 (audited)
b) Condensed Consolidated Statements of Operations (unaudited) for the
Three and Six Months Ended December 31, 2000 and 1999
c) Condensed Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended December 31, 2000 and 1999
d) Notes to Interim 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
Signatures
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2000 2000
-------------- -------------
(Unaudited) (Audited)
Current Assets:
Cash.............................. $ 16,959,509 $ 27,942,258
Accounts receivable............... 55,477,961 19,534,974
Accounts receivable from related parties 21,869,996 5,653,533
Inventory......................... 20,144,385 13,185,391
Prepaid expenses.................. 1,526,545 1,533,045
Other............................. --- 89,633
Deferred tax asset................ 1,313,000 ---
------------- --------------
Total current assets.......... 117,291,396 67,938,834
Property and equipment:
Furniture and office equipment.... 3,267,968 2,717,683
Equipment......................... 1,854,612 1,175,859
Leasehold improvements............ 446,989 234,086
------------ -------------
5,569,569 4,127,628
Less: accumulated depreciation.... 1,833,632 1,317,636
------------ -------------
3,735,937 2,809,992
Other assets:
Restricted cash................... --- 300,000
Notes receivable.................. 8,300,000 11,860,000
Goodwill, net of accumulated amortization of
$14,875,186 at December 31, 2000 and
$11,091,760 at June 30, 2000.... 60,793,323 64,576,749
Investment in unconsolidated subsidiary 3,250,732 4,329,925
Other............................. 173,044 745,003
------------ --------------
72,517,099 81,811,677
$193,544,432 $152,560,503
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................... $ 3,000,000 $ 1,278,000
Accounts payable and accrued expenses 27,899,398 19,233,547
Accounts payable to related parties 30,151,704 15,261,506
Notes payable...................... 622,372 1,500,000
Deposits........................... 32,047 ---
Income taxes payable............... 3,188,463 2,434,150
------------- --------------
Total current liabilities...... 64,893,984 39,707,203
Minority interest in subsidiaries.... 18,332,440 6,425,633
Commitments
Stockholders' equity:
Common stock....................... 64,133 64,133
Deferred stock compensation........ (15,291,461) (16,643,967)
Preferred stock, Series A.......... 4 4
Additional paid-in capital......... 201,020,689 191,037,695
Treasury stock..................... (7,057,102) (7,057,102)
Accumulated deficit................ (68,418,255) (60,973,096)
-------------- --------------
110,318,008 106,427,667
$193,544,432 $152,560,503
============== ==============
See Notes to Interim Consolidated Financial Statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
------------ --------------- ------------ ------------
Sales....................... $105,643,919 $19,609,595 $205,550,849 $30,847,338
Cost of sales............... 93,857,107 14,821,931 175,191,338 23,974,463
------------ ------------ ------------- -----------
Gross profit................ 11,786,812 4,787,664 30,359,511 6,872,875
Operating expenses:
Selling, general, and
administrative expenses... 8,934,780 8,582,549 17,353,728 14,786,874
Research and development... 3,935,870 959,010 12,280,835 2,049,610
-------------- ------------ ------------- ------------
12,870,650 9,541,559 29,634,563 16,836,484
Operating income (loss)..... (1,083,838) (4,753,895) 724,948 (9,963,609)
--------------- ------------ ------------- ------------
Other income (expense):
Interest income............ 425,382 62,138 854,785 128,443
Interest expense........... 82,819 --- (1,286) ---
Other income............... (7,286) --- 3,754 23,680
Minority interest in (income) loss
of consolidated subsidiaries.. 408,015 (172,909) (553,654) 465,257
Foreign exchange gain....... 107,782 --- 127,993 ---
Equity in earnings (loss) of
unconsolidated subsidiaries .. (1,020,854) 63,130 (1,079,193) 326,048
------------ ----------- ------------- -----------
(4,142) (47,641) (647,601) 943,428
---------- ---------- ------------ -----------
Net income (loss) before
income taxes................ (1,087,980) (4,801,536) 77,347 (9,020,181)
Income tax expense .......... 2,879,578 --- 7,522,507 ---
----------- ----------- ------------- -----------
Net loss..................... $ (3,967,558) $(4,801,536) $ (7,445,160) $(9,020,181)
============= ============ ============== ============
Loss per share
Basic and diluted.......... $(0.06) $(0.07) $(0.12) $(0.14)
======== ======= ======= =======
Weighted average shares...... 64,133,795 64,544,474 64,133,795 64,544,474
========== =========== ========== ==========
See Notes to Interim Consolidated Financial Statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
2000 1999
------------------- -----------------
Cash flows from operating activities:
Net loss.................................. $ (7,445,160) $ (9,020,181)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in earnings of unconsolidated subsidiaries 1,079,193 (326,048)
Depreciation and amortization........... 4,392,867 5,658,072
Amortization of deferred stock compensation 10,393,017 ---
Minority interest in subsidiary......... (553,654) (872,923)
Changes in assets and liabilities:
Increase in accounts receivable......... (35,942,987) 1,683,219
Increase in accounts receivable
from related parties.................. (16,164,463) ---
Increase in inventory................... (6,958,994) (328,792)
Decrease in prepaid expenses............ 6,500 ---
Decrease (increase) in other current assets 89,633 (1,236,338)
Decrease in restricted cash............. 300,000 ----
Increase in deposits.................... --- (3,935,931)
Decrease in other assets................ 571,959 120,835
Increase in deferred tax asset.......... (1,313,000) ---
Increase in accounts payable and accrued expenses 8,665,851 3,561,011
Increase in accounts payable to related parties 14,890,198 ---
Increase in income taxes payable........ 754,313 ---
-------------- -----------
Net cash used in operating activities...... (27,234,727) 4,697,076)
-------------- -----------
Cash flows from investing activities:
Purchase of property and equipment....... (1,441,941) (459,906)
Purchase of investments ................. --- (3,466,800)
Proceeds from sale of subsidiary preferred stock 13,257,500 ---
------------ ------------
Net cash provided by (used in) investing activities 11,815,559 (3,926,706)
------------ ------------
Cash flows from financing activities:
Increase in investment deposits ......... 32,047 ---
Decrease in loans receivable............. 3,560,000 ---
Proceeds from line of credit............. 1,722,000 ---
Repayments of notes payable.............. (877,628) ---
----------- ------------
Net cash provided by financing activities.. 4,436,419 ---
------------
Net decrease in cash....................... (10,982,749) (8,623,782)
Cash, beginning of year.................... 27,942,258 30,779,486
------------ -----------
Cash, end of year.......................... $16,959,509 $22,155,704
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest................... $ 84,105 $ ---
Cash paid for taxes...................... $ 9,050,000 $ ---
See Notes to Interim Consolidated Financial Statements
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(Unaudited)
NOTE 1 GENERAL
Lotus Pacific, Inc. creates, manages, and operates communications and network
technology companies. LPFC and its subsidiaries (the "Company") provide
solutions for the communications and network technology markets. The Company is
primarily engaged in the development, manufacture, and distribution of products
used for broadband Internet access, including "DOCSIS certified" data-over-
cable equipment, digital subscriber line ("DSL") access and networking devices.
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, 2000 ("fiscal 2000").
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 six-month period ended December 31, 2000, should not be regarded as
necessarily indicative of results that may be expected for the year ended
June 30, 2001 ("fiscal 2001").
The accompanying unaudited condensed consolidated financial statements include
the accounts of LPFC and its four majority-owned subsidiaries: Arescom, Inc.
(81%), Correlant Communications, Inc. (64.7%), and Lotus World, Inc. (90.5%),
and Regent Electronics Corp. (92.3% owned). 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 INVENTORIES
As of December 31, 2000, inventories consist of the following:
Raw materials ---
Work-in-process ---
Finished goods $20,144,385
-----------
$20,144,385
The above inventory balances as of December 31, 2000 are net of reserves for
potential excess quantities and obsolescence of approximately $3,192,503.
NOTE 4 STOCK BASED COMPENSATION
The Company's subsidiary, Arescom, Inc. (Arescom), granted 550,000 Incentive
Stock Options (ISOS) to employees during the six months ended December 31,
2000. Arescom recorded deferred compensation of $1,100,000 and amortized
deferred compensation of $99,304. The amortization of deferred compensation
for ISOS granted in the prior year is $3,661,686.
The Company's subsidiary, Correlant Communications, Inc. (Correlant), also has
an Incentive Stock Option Plan and it has elected to follow APB Opinion 25
"Accounting of Stock Issued to Employees" in accounting for its employee stock
options. When calculating the deferred compensation, the options had to be
split between Lotus shares and Correlant shares because the Lotus shares
granted include a contingent component associated with the grant. The
contingent component was that the shares of Lotus stock could be sold when
certain financial goals were met. Lotus lifted the restriction during the six
months and, accordingly, Correlant amortized all of the deferred compensation
from the original grant date. The total amortization amounted to $6.7 million.
The amortization expense was charged to research and development, $4.8 million
and to general and administrative expense, $1.3 million.
NOTE 5 INCOME TAXES
The Company's December 31, 2000 provision for income taxes differed from the
amount computed by applying the statutory U.S. Federal income tax rate to
income before income taxes and minority interest as follows:
U.S. Federal income tax provision
at Federal statutory rate ........... $ 30,000
Amortization of goodwill.............. 1,325,000
Deferred compensation amortization.... 3,661,500
Minority Interest in subsidiaries..... 195,000
Equity in loss of unconsolidated subsidiaries 400,000
State income taxes net of federal income tax effect 1,650,000
Other.................................. 261,007
-----------
$7,522,507
==========
NOTE 6 PREFERRED STOCK
During the six months ended December 31, 2000, Arescom sold preferred stock to
third parties for net proceeds of $13,257,500.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Lotus Pacific, Inc. ("LPFC") creates, manages, and operates communications and
network technology companies. LPFC and its subsidiaries (the "Company") provide
solutions for the communications and network technology markets. The Company is
primarily engaged in the development, manufacture, and distribution of products
used for broadband Internet access, including "DOCSIS certified" data-over-
cable equipment, digital subscriber line ("DSL") access and networking devices.
RESULTS OF OPERATIONS
REVENUES
For the quarter ended December 31, 2000, the Company's revenue was $105.6
million, compared with $19.6 million for the same period of the previous year.
Revenue in the first half of fiscal 2000 was $205.6 million, an increase of
566% over the first two quarters of fiscal 1999. The revenue growth in the
three- and six-month periods was primarily due to increases in sales by
Correlant Communications, Inc. ("Correlant") and Arescom, Inc. ("Arescom"),
which were acquired by LPFC in March 1999. For the three-month period ended
December 31, 2000, Regent Electronics Corp. ("Regent") and Lotus World, Inc.
("Lotus World"), two subsidiaries of the Company, had insignificant operating
revenues.
COST OF SALES
Cost of sales consisted principally of the cost of components, contracted
manufacturing charges, other materials, in certain case labor related to
testing and warranty expenses. The company outsourced substantially all of
its manufacturing operation, and had no manufacturing plant. Cost of sales
increased from $14.8 million during the three-month period ended December 31,
1999 to $93.9 million in the corresponding period ended December 31, 2000.
Cost of sales increased from $24.0 million during the six-month period ended
December 31, 1999 to $175.2 million in the corresponding period ended December
31, 2000. This increase in cost of sales reflected the increase level of
sales. The gross margin were 11.2% and 14.8% for the three-month period and
six-month period ended December 31, 2000, respectively. The Company expects
that gross margin will fluctuate due to changing product mix, different sales
prices, and product quantities shipped to various customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $8.9 million in the second
quarter of fiscal 2000 compared to $8.6 in the corresponding quarter of the
prior year, a 4% increase. For the first two quarters of fiscal 2000, selling,
general and administrative expenses were $17.4 million, compared to $14.8
million in the first two quarter of fiscal 1999, a 17.4% of increase. The
increase was primarily the result of increased staffing and growth in
recruiting and facility related expenses.
RESEARCH AND DEVELOPMENT
In the second quarter of fiscal 2000, research and development expenses
increased $3.0 million to $3.9 million, or 310%, from $1.0 million in the same
quarter of fiscal 1999. For the six-month period ended December 31, 2000, the
Company's research and development expenses increased approximately 500%
compared to the same period of the last year. The increase was primarily due to
the growth of our research and development staff and consultants to support the
commercial development of current and future products and nonrecurring
engineering charges.
DEPRECIATION & GOODWILL AMORTIZATION
The Company has accumulated approximately $75.7 million of goodwill from
acquisitions of businesses since September 1997. For the six-month period
ended December 31, 2000, the Company's depreciation and goodwill amortization
expenses were approximately $4.4 million, compared to $5.7 million for the same
period of the prior year.
NET LOSS AND LOSS PER SHARE
For the second quarter of fiscal 2001, the Company had a net loss of $4.0
million, or $0.06 per share, compared to $4.8 million or $0.07 per share of net
loss for the same period of the prior year. The decrease in net loss was mainly
due to the increase in sales revenue accompanied by relatively less increase
in operating expenses. Excluding $2.1 million of depreciation and goodwill
amortization expenses, the net loss would be $1.9 million, or $0.03 per share.
For the six-month period ended December 31, 2000, the Company had a net loss of
$7.4 million, or $0.12 per share, compared to $9.0 million, or $0.14 per share,
of net loss for the same period of the prior year. Excluding $4.4 million of
depreciation and goodwill amortization expenses, the net loss would be $3.0
million, or $0.05 per share.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company's liquid assets, consisting of cash and
cash equivalents, totaled $17.0 million, compared with $27.9 million as of
June 30, 2000.
For the six-month period ended December 31, 2000, net cash used by operating
activities was $27.2 million, compared with $4.7 million used at the same
period of the previous year. The increase in net cash used by operating
activities was primarily due to the combination of substantial increase in
accounts receivables, offset partially by the increase of accounts payable.
For the six-month period ended December 31, 2000, net cash provided by
investing activities were $11.8 million. The Company purchased $1.4 million
of equipment. Arescom, one of the Company's subsidiaries, sold preferred
stock to third parties for net proceeds of $13.3 million.
For the six-month period ended December 31, 2000, net cash provided by
financial activities were $4.4 million, primarily from decrease in loan
receivable and proceeds from line of credit.
The Company has no material long-term debt.
The Company believes that existing cash and cash equivalents together with
funds generated from operations will be sufficient to meet its operating and
investment requirements for the next 12 months. The Company's continuing
operating and investing activities may nevertheless make it necessary or
desirable that LPFC obtain additional financing, through loans or public or
private offerings of its securities or securities of its subsidiaries. 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
a) On January 5, 2001, the Board of Directors of the Company
appointed William G. Hu as Chief Executive Officer of the Company
to succeed the late president, Jeremy Wang, and as Chairman of
the Board of Directors of Acumen Technology, Inc. ("Acumen"), a
wholly-owned subsidiary of the Company. Jeremy Wang, the late
President of the Company, passed away in an accident in late
December 2000.
b) Due to scheduling conflicts, Mr. Kuan C. Tsai resigned as
director of the Company in January 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LOTUS PACIFIC, INC.
Date: February 15, 2001 By: /s/ William G. Hu
----------------------------------
William G. Hu, Chief Executive Officer
By: /S/ David Li
------------------------------------
David Li, Chief Financial Officer