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, 2001
( ) 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, 2001:
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
(1) Condensed Consolidated Balance Sheets as of March 31, 2001
(unauduited) and June 30, 2000
(2) Condensed Consolidated Statements of Operations (unaudited) for
the Three and Nine Months Ended March 31, 2001 and 2000
(3) Condensed Consolidated Statements of Cash Flows (unaudited) for
the Nine Months ended March 31, 2001 and 2000
(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
Signatures
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
2001 2000
(Unaudited) (Audited)
Current assets:
Cash $ 25,794,802 $ 27,942,258
Accounts receivable 38,581,121 19,534,974
Accounts receivable from related parties 10,855,844 5,653,533
Inventory 28,469,339 13,185,391
Prepaid expenses 985,646 1,533,045
Other --- 89,633
Income tax receivable 2,060,349 ---
Deferred tax asset 1,313,000 ---
----------- ----------
Total current assets 108,060,101 67,938,834
Property and equipment:
Furniture and office equipment 4,741,331 2,717,683
Equipment 1,337,946 1,175,859
Leasehold improvements 497,287 234,086
----------- ----------
6,576,564 4,127,628
Less: accumulated depreciation 2,183,835 1,317,636
----------- ----------
4,392,729 2,809,992
----------- ----------
Other assets:
Restricted cash --- 300,000
Notes receivable 4,734,189 11,860,000
Goodwill, net of accumulated amortization of
$16,981,203 at March 31, 2001 and
$11,091,760 at June 30, 2000 65,545,067 64,576,749
Investment in unconsolidated subsidiary 3,103,803 4,329,925
Other 117,339 745,003
---------- ----------
73,500,398 81,811,677
---------- ----------
$185,953,228 $152,560,503
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,000,000 $ 1,278,000
Accounts payable and accrued expenses 28,558,583 19,233,547
Accounts payable to related parties 25,002,251 15,261,506
Notes payable 762,612 1,500,000
Deposits 31,684 ---
Income taxes payable --- 2,434,150
Stock purchase payable 3,100,000 ---
---------- ----------
Total current liabilities 60,455,130 39,707,203
---------- ----------
Minority interest in subsidiaries 17,043,393 6,425,633
---------- ----------
Commitments
Stockholders' equity:
Common stock 64,133 64,133
Deferred stock compensation (12,568,827) (16,643,967)
Preferred stock, Series A 4 4
Additional paid-in capital 200,779,951 191,037,695
Treasury stock (7,057,102) (7,057,102)
Accumulated deficit (72,763,454) (60,973,096)
------------ ------------
108,454,705 106,427,667
------------ ------------
$185,953,228 $152,560,503
=========== ===========
See notes to consolidated financial statements.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
-------- -------- -------- --------
Sales $49,356,450 $25,013,831 $254,907,299 $55,679,192
Cost of sales 46,499,665 20,622,930 221,691,003 44,488,265
---------- ---------- ----------- ----------
Gross profit 2,856,785 4,390,901 33,216,296 11,190,927
Operating expenses:
Selling, general, and
administrative expenses 10,962,387 14,267,227 28,316,115 28,586,297
Research and development 4,226,458 2,574,706 16,507,293 4,474,662
---------- ---------- ---------- ----------
15,188,845 16,841,933 44,823,408 33,060,959
---------- ---------- ---------- ----------
Operating income (loss) (12,332,060) (12,451,032) (11,607,112) (21,870,032)
---------- ---------- ---------- ----------
Other income (expense):
Interest income 221,821 153,913 1,076,606 290,722
Interest expense (3,500) --- (4,786) ---
Other income 26,495 109,457 30,249 148,241
Gain on sale of sub-
sidiaries' stock --- 42,317,838 --- 42,317,838
Minority interest in
(income) loss of con-
solidated subsidiaries 1,289,047 (3,987) 735,393 31,302
Foreign exchange gain (4,549) --- 123,444 ---
Equity in earnings (loss)
of unconsolidated
subsidiaries (146,929) 321,307 (1,226,122) 976,594
---------- ---------- --------- ----------
1,382,385 42,898,528 734,784 43,764,697
---------- ---------- --------- ----------
Net income (loss) before
income taxes (10,949,675) 30,447,496 (10,872,328) 21,894,665
Income tax expense(benefit) (6,604,477) 14,700,000 918,030 14,700,000
Net income (loss) $(4,345,198) $15,747,496 $(11,790,358) $ 7,194,665
========= ========== =========== ==========
Loss per share
Basic and diluted $(0.07) $ 0.25 $(0.18) $ 0.11
====== ====== ====== ======
Weighted average shares 64,133,795 63,579,406 64,133,795 63,503,568
========== ========== ========== ==========
See notes to consolidated financial statements.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(Unaudited)
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss $(11,790,358) $ 7,194,665
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in earnings of unconsolidated
subsidiaries 1,226,122 (976,594)
Depreciation and amortization 6,995,010 10,813,168
Amortization of deferred stock compensation 11,928,588 ---
Gain on sale of subsidiaries' stock --- (42,317,838)
Minority interest in subsidiary (735,393) 895,419
Changes in assets and liabilities:
Increase in accounts receivable (19,046,147) (11,611,215)
Increase in accounts receivable from
related parties (5,202,311) ---
Increase in inventory (15,283,948) (2,956,299)
Decrease in prepaid expenses 547,399 ---
Decrease (increase) in other current assets 89,633 (1,475,232)
Increase in income tax benefit (2,060,349) ---
Decrease in restricted cash 300,000 ---
Increase (decrease) in deposits 31,684 (263,575)
(Increase) decrease in other assets 627,664 (599,687)
Increase in deferred tax asset (1,313,000) ---
Increase in accounts payable and
accrued expenses 9,325,036 26,765,130
Increase in accounts payable to related
parties 9,740,745 ---
Increase (decrease) in income taxes payable (2,434,150) 14,700,000
----------- ----------
Net cash provided by (used in) operating activities(17,053,775) 167,942
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (2,461,604) (950,417)
Purchase of investments (4,000,000) (6,316,987)
Proceeds from sale of subsidiary stock 13,257,500 63,864,750
Notes receivable --- (1,311,748)
---------- ----------
Net cash provided by investing activities 6,795,896 55,285,598
---------- ----------
Cash flows from financing activities:
Decrease in investment deposits --- (44,172,070)
Payments of notes receivable 7,125,811 ---
Proceeds from line of credit 1,722,000 ---
Repayments of notes payable (737,388) (195,565)
---------- ----------
Net cash provided by (used in) financing activities 8,110,423 (44,367,565)
---------- ----------
Net (decrease) increase in cash (2,147,456) 11,085,905
Cash, beginning of year 27,942,258 30,779,486
---------- ----------
Cash, end of year $25,794,802 $41,865,391
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 84,105 $ ---
========== ==========
Cash paid for taxes $ 9,050,000 $ ---
========== ==========
See notes to consolidated financial statements.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(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 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, and
Internet set-top boxes. The Company also provides private label online auction
services in foreign markets.
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 nine-month period ended March 31, 2001 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: Regent
Electronics Corp. (92.3% owned), Correlant Communications, Inc. (66.5%),
Arescom, Inc. (81%) and Lotus World, Inc. (90.5%) 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 March 31, 2001, inventories consist of the following:
Raw materials ---
Work-in-process ---
Finished goods $28,469,339
----------
$28,469,339
==========
The above inventory balances as of March 31, 2001 are net of reserves for
potential excess quantities and obsolescence of approximately $2,452,709.
LOTUS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MARCH 31, 2001
(Unaudited)
NOTE 4 STOCK BASED COMPENSATION
The Company's subsidiary, Arescom, Inc. (Arescom), granted 550,000 Incentive
Stock Options (ISO) to employees during the nine months ended March 31, 2001.
Arescom recorded deferred compensation of $1,100,000 and amortized deferred
compensation of $148,956. The amortization of deferred compensation for ISO
granted in the prior year is $5,388,802.
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 as follows:
For the Six For the Three
For the Nine Months Months Ended Months Ended
Ended March 31, December 31, September 30,
2001 2000 2000 2000
---------- ---------- ------------ -------------
U.S. Federal income tax
provision at Federal
statutory rate $(3,805,000) $7,665,000 $ 30,000 $ 407,800
Amortization of goodwill 2,010,000 2,060,000 1,325,000 630,000
Deferred compensation
amortization 4,175,000 --- 3,661,500 2,996,700
Tax basis on sale of
subsidiary stock --- 5,325,000 --- ---
Minority interest in
subsidiaries 260,000 --- 195,000 ---
Equity in (income) loss
of unconsolidated
subsidiaries 430,000 (350,000) 400,000 ---
Benifit of subsidiary
pre-consolidation
losses (1,250,000) --- --- ---
State income taxes net
of federal income tax
effect (950,000) --- 1,650,000 ---
Other 48,030 --- 261,007 608,429
---------- ---------- ---------- ---------
$ 918,030 $14,700,000 $ 7,500,507 $4,642,929
========== ========== ========== =========
NOTE 6 PREFERRED STOCK
During the nine months ended March 31, 2001, Arescom, Inc. sold preferred stock
to third parties for net proceeds of $13,257,500.
NOTE 7 INVESTMENT IN SUBSIDIARY
In January the Company agreed to refund $7,100,000 to an investor that
purchased 355,000 shares of Correlant Communications Inc.'s common stock from
the Company during the fiscal year ended June 30, 2000. The refund increased
the Company's ownership of Correlant from 64.7% to 66.5%. As of March 31, 2001,
the Company has paid $4,000,000 and owes $3,100,000. The Company has recorded
goodwill associated with the refund of $6,857,761.
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 March 31, 2001, the Company's revenue was $ 49.4 million,
compared to $ 25.0 million for the same period of the previous year. On a
year to date basis, revenue in the first nine months of fiscal 2001 was $ 254.9
million, an increase of 358% over the first nine months of fiscal 2000. The
revenue growth in the three- and nine-month periods was primarily due to the
expanded pperations of Correlant Communications ("Correlant") and Arescom, Inc.
("Arescom"), both of which were acquired by LPFC in March 1999.
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 $20.6 million during the three-month period ended March 31, 2000
to $46.5 million in the corresponding period ended March 31, 2001. Cost of
sales increased from $44.5 million during the nine-month period ended March 31,
2000 to $221.7 million in the corresponding period ended March 31, 2001. This
increase in cost of sales reflected the increased level of sales. The gross
margins were approximately 6% and 13% for the three-month period and nine-month
period ended March 31, 2001, 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 $11.0 million in the March
quarter fiscal 2001 compared to $14.3 million in the March quarter of the prior
year, a 23% decrease. For the first three quarters of fiscal 2001, selling,
general and administrative expenses were $28.3 million, compared to $28.6
million in the first three quarters of fiscal 2000. The decrease in the third
quarter and the moderate increase in the first three quarters reflected more
streamlined operation by LPFC and its subsidiaries.
RESEARCH AND DEVELOPMENT
In the third quarter of fiscal 2001, research and development expenses
increased $1.7 million to $4.2 million, or 64%, from $2.6 million in the same
quarter of fiscal 2000. For the nine-month period ended March 31, 2001, the
Company's research and development expense increased nearly 4 times compared to
the same period of the prior year. The increase was attributable to the
expanded operations by the Company's subsidiaries acquired or established
during the second half of fiscal 1999.
DEPRECIATION & GOODWILL AMORTIZATION
The Company has accumulated approximately $82.5 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, 2001, the depreciation and amortization decreased approximately 29% to $2.5
million compared to the same period of the prior year. For the nine-month
period ended March 31, 2001, the Company's depreciation and goodwill
amortization expenses were approximately $7.0 million, compared to $10.8
million for the same period of the prior year. The decrease was attributable
to the write-off of certain businesses related to some of the Company's
subsidiaries.
NET INCOME (LOSS) AND EARNING PER SHARE
For the third quarter of fiscal 2001, the Company had net loss of $4.3 million,
or $0.07 per share, compared to a net income of $15.7 million for the same
period of the prior year. Excluding $2.5 million of depreciation and goodwill
amortization expenses, the net loss would be $1.8 million, or $0.03 per share.
The Company's loss during the current period reflected deteriorating macro-
economic environment in telecommunication industry. Specifically, the
contracting gross margin reflected increasing competitions in our industry.
Excluding the gains from the sale of Correlant stock in the corresponding prior
period, the loss was comparable to that of the same period last year.
For the nine months ended March 31, 2001, the Company had net loss of $11.8
million, or $0.18 per share, compared to the gain of $7.2 million for the same
period of the prior year. Excluding $7.0 million of depreciation and goodwill
amortization expenses, the net loss would be $4.8 million, or $0.05 per share.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the Company's liquid assets, consisting of cash and cash
equivalents, totaled $25.8 million, compared with $27.9 million as of June 30,
2000.
For the nine-month period ended March 31, 2001, net cash used by operating
activities was $14.0 million compared to $0.2 million net cash provided by
operations from the same period of the previous year.
For the nine-month period ended March 31, 2001, net cash provided by investing
activities was $3.7 million, attributable primarily to the private placement of
certain Arescom preferred stock.
For the nine-month period ended March 31, 2001, the Company had net cash
inflow of $8.1 million from financing activities attributable to the decrease
of certain loan receivable. For the same period of 2000, LPFC had a cash
outflow of $44.4 million that was attributable to the repayment of deposits
received in fiscal 1999 for a proposed purchase of securities which was
subsequently cancelled.
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 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 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 18, 2001 By: /S/ William G. Hu
-------------------------------
William G. Hu, Chief Executive Officer
By: /S/ David Li
-------------------------------
David Li, Chief Financial Officer