UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2002
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from               to

 

Commission File Number: 000-24999

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has subject to such filing requirements for the past 90 days.

(1)  Yes  o  No  ý  (2)  Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Registrant S-K is not contained herein, and will not be contained to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý

 

The aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant was approximately $293,633 (computed using the adjusted closing sales price of $0.01 per share of Common Stock on March 31, 2004 as reported by the Pink Sheets).  Shares of Common Stock held by each officer and director and each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates.  The determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of shares of Common Stock outstanding as of March 31, 2004 was 50,970,016.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

PART I

 

Item 1.  Business

 

Explanatory Note - Restatement of Prior Financial Information and Delays in Reporting

 

This Annual Report on Form 10-K for Lotus Pacific, Inc. (the “Company” or “Lotus Pacific”) for the fiscal year ended June 30, 2002 is being filed after the required due date as a result of restatement of financial information for prior periods as set forth in more detail throughout this report.

 

As previously reported, on June 29, 2001, a majority of the Company’s stockholders, led by T.C.L. Industries Holdings (H.K.) Limited (“TCL”), were successful in a hostile consent solicitation to gain control of the Company and to replace prior management of the Company.  On June 29, 2001, new directors and officers were appointed and the then existing directors and officers were immediately removed from office.

 

Following the replacement of prior management, the new management began an extensive review of various transactions undertaken by and involving old management prior to June 29, 2001.  Due to the preliminary results, the Company dismissed its then existing independent accountants and replaced such firm with new independent accountants.  On March 25, 2002, the new independent accountants were engaged to audit fiscal 2002.  As previously reported, during its preliminary investigation, new management of the Company identified various transactions involving Regent Electronics Corporation (“Regent”), a former subsidiary of Lotus Pacific, and other transactions undertaken by prior management which impacted reported financial and operating results with respect to its consolidated financial statements for fiscal 2001, 2000 and 1999 and ultimately concluded that a reaudit of the financial statements for fiscal 2001, 2000 and 1999 was required.  On July 24, 2002, the Company engaged its new independent accountants, to perform such reaudit and the Company concluded that it must restate these prior periods. As previously reported, new management concluded such restatements would include adjustments, among others, to the Company’s previously reported revenues, cost of sales, net loss, earnings per share and related party transactions.

 

The financial results presented in this Annual Report reflect the impact of the adjustments and reclassifications being made in the restatement of the Company’s financial results.  Specifically, this Annual Report for fiscal 2002 restates the Company’s consolidated financial statements for fiscal 2001, 2000 and 1999 to reclassify or restate certain revenues and expenses, and to restate certain other transactions and make certain other adjustments, as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 8. Restated Financial Statements and Supplementary Data Note 2 – Restatement of Previously Issued Financial Statements and Delays in Reporting.”

 

Explanatory Note - Events Resulting in Reclassification

 

In December 2001, under the leadership of new management, the Company sold a major portion of its investment in and cash advances to one of its subsidiaries, Arescom, Inc (“Arescom”).  In addition to the restatement of prior financial information discussed above, this sale required the reclassification of all periods to present Arescom as discontinued operations. Details of the transaction resulting in the discontinued operations are provided at “Item 8. Restated Financial Statements and Supplementary Data Note 2 – Restatement of Previously Issued Financial Statements and Delays in Reporting” and “Other Business Developments and Subsidiary Activity During Fiscal 2002.”

 

Explanatory Note – Update Subsequent to Fiscal 2002

 

Because this report relates to fiscal 2002, except as otherwise noted herein, this report speaks as of June 30, 2002. The Company has not updated the disclosures in this report to speak as of a later date, except as specifically referenced in the following sections:

 

•	Item 1.  Business;
•	Item 2.  Properties;
•	Item 3.  Legal Proceedings;
•	Item 5.  Market for Registrant’s common equity and related stockholder matters;
•	Item 8. Restated Financial Statements and Supplementary Data Note 1 – Business and Background and Note 21 – Subsequent Events.

 

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•	Item 10:  Directors and Executive Officers of the Registrant;
•	Item 12.  Security Ownership of Certain Beneficial Owners and Management;
•	Item 13.  Certain Relationships and Related Transactions;
•	Item 14.  Principal Accounting Fees and Services; and
•	Item 15.  Exhibits

 

Accordingly, the disclosure in this report does not contain complete and updated information regarding the Company and its operations as of the date of filing this report.  All such information contained in this report therefore is subject to updating and supplementing to be provided by the Company in its reports to be filed with the SEC for periods subsequent to fiscal 2002.  The Company is working to complete such reports for subsequent periods and will file them as soon as they are available.

 

Explanatory Note – Disclaimer of Audit Opinion

 

The Company’s independent accountants were unable to audit the financial statements of Arescom, a significant subsidiary, during the years ended June 30, 2001, 2000, and 1999, as the subsidiary would not provide the necessary information to allow the independent accountants to complete the audits.  Due to Arescom’s lack of cooperation, the Company’s independent accountants were unable to attain satisfaction about Arescom’s account balances by means of other auditing procedures.  As a result, the Company’s independent accountants did not express an opinion on the consolidated financial statements for the years June 30, 2001, 2000, and 1999.

 

Company Overview

 

Unless otherwise noted, references to “Lotus Pacific,” the “Company,” “we,” “our” or “us” mean Lotus Pacific, Inc., and its subsidiaries.

 

The Company was incorporated in Delaware on June 25, 1985.  Under prior management, the Company was significantly restructured and changed its name to Lotus Pacific, Inc. in September 1994.  Lotus Pacific is a holding company that conducts its business through its subsidiaries. The Company develops, manages, and operates emerging communications and consumer electronics companies, focusing on developing next generation consumer electronics and communication products. The Company provides its subsidiaries with capital and strategic and infrastructure services.

 

Business Developments and Subsidiary Activity Prior to Fiscal 2002

 

In April 1997, the Company formed Richtime Far East Ltd. (“Richtime”), a garment import and export business in Hong Kong.  Richtime received customer orders from Europe and North America, and contracted the orders to garment manufacturers mainly in Nanjing, Jiangsu, China.  It then shipped the products overseas. In March 1998, the Company set up a new subsidiary LPF International (“LPF”) to expand the apparel business in the United States and transferred all equity interest in Richtime into LPF.  On September 30, 1998 the Company sold LPF and Richtime.

 

In April and May 1997, the Company acquired 70% of the common stock of Regent.  In June 1997, Regent acquired Amiga-based, multimedia technology related assets and rights from Rightiming Electronics Corporation (“Rightiming”). On June 26, 2001, the Company spun-off Regent to Regent’s management.

 

In February 1999, the Company acquired 100% of the outstanding shares of Professional Market Brokerage, Inc. (“PMB”), a Chicago-based financial trading firm that provided online trading services, and 100% of the outstanding shares of US Securities & Futures Corp. (“USSF”), a full service brokerage firm in New York, NY.  In June 1999, the Company created USS Online, Inc. (“USS Online”), a wholly-owned subsidiary, and transferred all of its ownership interests in each of USSF and PMB to USS Online to run those two financial service subsidiaries. In February 2000, the Company sold 72% of its ownership in USS Online.

 

In March 1999, the Company acquired 95% of the issued and outstanding common shares of Correlant Communications, Inc. (formerly TurboNet Communications, Inc.) (“Correlant”), representing an 81% ownership interest in Correlant.  Based in San Diego, California, Correlant designed, developed and marketed telecommunications products to cable operators, network service providers, and communications network users in the United States and Asian countries.

 

In March 1999, the Company acquired 77% of the issued and outstanding common shares of Arescom.  Based in

 

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Fremont, California, Arescom designed, manufactured and marketed a broad range of high quality remote access products, such as routers and remote managing software, and other inter-networking equipment for Internet Service Providers (“ISP”), resellers, and system integrators in the North America market.  In December 2001, the Company sold approximately 92% of its investment in Arescom, representing 65% of the outstanding securities of Arescom to an unrelated third party.

 

At the time Correlant and Arescom were acquired, Lotus Pacific’s strategy for growth was to increase its product line and customer base through the acquisition of businesses which provided Internet-related products and services and complemented Lotus Pacific’s existing Internet technology and resources.

 

On April 22, 1999, the Company organized Lotus World, Inc. (“Lotus World”) to offer Auction Live, an online auction service, to international clients.  The wholly-owned subsidiary was incorporated in Delaware in April 1999, and was a private-label Asian language e-commerce service provider, targeting business-to-business and business-to-customer markets, portals and ISP companies.  Due to the negative response in general to e-commerce, the operations of Lotus World were suspended by prior management in 2001.

 

On November 13, 2000, the Company established a wholly-owned subsidiary, Acumen Technology, Inc. (“Acumen”), incorporated in Delaware.  In December 2000, the Company transferred all of the capital stock it held in Correlant and Arescom to Acumen. Other than its holdings of the Correlant and Arescom stock, Acumen had no material independent operations.  In December 2001, Acumen was merged into Lotus Pacific and all the assets and liabilities of Acumen were assumed by the Company.

 

In June 2001, Acumen formed Lotus Pacific Communications Technology (Beijing) Co., Ltd. (“Beijing Lotus”), a wholly-owned subsidiary, to support business activity in Beijing.  Beijing Lotus has no material independent operations.

 

Significant Business Developments and Subsidiary Activity During Fiscal 2002

 

Following the hostile takeover of the Board of Directors of the Company on June 29, 2001, new management of the Company began a thorough review of all aspects of the business operations of the Company and its subsidiaries and has engaged in numerous transactions to restructure the Company’s business.

 

Under new management, the Company’s primary strategy for business operations has been to restructure or shut down its unprofitable businesses, acquire undervalued or underutilized companies and focus on profitable growth.  The Company has moved aggressively to sell, restructure or shutdown its businesses which were not operating profitably and/or which may or would have required significant cash investments. The Company seeks to identify market opportunities that will create and accelerate the growth and success of its subsidiary companies and to implement new business plans to improve the returns on these businesses.

 

As of June 30, 2002, Lotus Pacific had one operating subsidiary, Correlant. Until December 23, 2003, Correlant was a developer of cable modems and cable modem termination systems (“CMTS”).  See “Significant Business Developments and Subsidiary Activity Subsequent to Fiscal 2002.”

 

Correlant is a significant subsidiary of Lotus Pacific and represented essentially 100% of the Company’s consolidated revenues, cost of revenues and research and development expense during fiscal 2002, 2001, 2000 and 1999, included in continuing operations. Correlant was incorporated in California on February 13, 1996 under the name TurboNet Communications, Inc. and reincorporated in Delaware on October 4, 2000 as Correlant Communications, Inc.

 

From inception through March 1999, Correlant was a development stage company whose operating activities related primarily to establishing a research and development organization, testing prototype designs, developing a Media Access Control (“MAC”) chip, developing production-ready cable modems including the complete software application, developing CMTS infrastructure equipment, commencing the staffing of general and administrative, marketing and technical support organizations and establishing manufacturing relationships.

 

From 1996 through March 1999, the major domestic cable operators collaborated through the Multimedia Cable Network Systems consortium, of which Correlant was a contributing member, to develop the Data-Over-Cable System Interface Specification (“DOCSIS”) standard. Correlant was able to begin commercial distribution of its products in the United States as a result of being awarded the DOCSIS certification for its cable modem technology in March 1999. Correlant continued to design, develop, and market DOCSIS certified, high-speed

 

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data over cable technology, including cable modems and CMTS units for resale to corporate telecommuters, small office/home office, and residential users domestically and internationally through December 23, 2003.

 

Prior to February 2002, Correlant sold DOCSIS certified cable modems and in certain instances, the MAC bundled with Correlant’s cable modem software (“MAC+software”), which are both components of the competed cable modem.  Correlant developed and owns the proprietary software used in the cable modem.  Effective February 2002, Correlant changed its business model whereby it primarily sold the MAC + software and only sold the completed cable modem in specific circumstances.  Instead of focusing on selling the completed cable modem, Correlant then concentrated efforts toward selling only the MAC+software. The new business model was a result of Correlant’s attempt to increase gross profit percentage, streamline business operations and reduce operating expenses. However, this business model ultimately proved unsuccessful, as gross margins continued to decrease as a result of increased competition in the cable modem market and more broadly, the high-speed Internet market.  In addition, many of Correlant’s major customers chose to design and manufacture their own DOCSIS cable modems or chose to utilize either platforms of competitors or platforms incompatible with Correlant’s products.

 

During this period, Correlant faced competition from other technologies that enabled high-speed Internet access services such as  technologies to increase the efficiency of digital transmission over telephone companies’ existing copper infrastructure, high-speed Internet access service deployed over a number of other media, including fiber optic cable, digital subscriber lines (“DSL”), direct broadcast satellite (“DBS”) and other wireless technologies. As high-speed Internet access services based on competing technologies became more readily available,  the market for cable modem-based services was materially and adversely affected.

 

Products

 

Correlant’s products were divided into two categories:

 

•                  Cable modems.  Cable modems, installed at the end user’s premises, allowed access to data-over-cable services; and

•                  Infrastructure equipment.  Correlant’s CMTS was infrastructure equipment installed at the service provider’s premises, which enabled service providers to provide high-speed two-way data services to their customers.

 

Cable Modems.  Correlant’s cable modems received both the DOCSIS 1.0 and 1.1 certifications.  The cable modems connect to the end user’s computer via a standard Ethernet or Universal Serial Bus (“USB”) connector, and to the cable network via a standard TV coaxial cable connector.

 

The following table shows revenues attributable to Correlant’s DOCSIS 1.0/1.1 cable modems (in thousands):

 

 

MAC+Software.  As part of the aforementioned change in business model, Correlant began selling a key component of the completed cable modem, MAC+software, rather than the completed cable modem effective February, 2002.  The following table shows revenue attributable to MAC+Software (in thousands):

 

 

Infrastructure Equipment.  During fiscal 2002, Correlant completed initial development of a CMTS to complement its cable modems.  Its CMTS was designed to enable cable operators to provide a complete solution for two-way data transfer between the Internet and the end-user, utilizing its cable modem at one end and its

 

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head-end equipment at the other.  CMTS sales were limited during fiscal 2002.

 

Significant Countries

 

The following table shows revenue to significant countries (in thousands):

 

		Year Ended June 30,
		2002			2001			2000			1999
Japan		$	30,033		$	175,893		$	48,993		$	3,726
Taiwan		20,757			9,178			2,372			—
United States		5,090			78,121			20,474			7
		$	55,880		$	263,192		$	71,839		$	3,733

 

Segment disclosures and geographical information for fiscal 2002, 2001, 2000 and 1999 are presented in “Item 8. Restated Financial Statements and Supplementary Data Note 18 – Segment and Geographic Information.”

 

Research and Development

 

The following table shows Correlant-sponsored research and development expenses (in thousands):

 

		Research and development including amortization of deferred stock compensation					Research and development excluding amortization of deferred stock compensation
Year ended June 30,		Dollars			Percentage of Total Revenues		Dollars			Percentage of Total Revenues
2002		$	9,977		18	%	$	8,690		16	%
2001		16,695			6	%	9,570			4	%
2000		7,479			10	%	5,854			8	%
1999		711			19	%	711			19	%

 

Customers

 

Correlant sold its data-over-cable products to vendors who then sold the equipment under their brand name to cable operators.  A relatively small number of customers accounted for a significant percentage of the Company’s revenues.  The percentage of revenues derived from significant customers is detailed as follows:

 

		Year Ended June 30,
		2002		2001		2000		1999
Toshiba, a related party		54	%	67	%	68	%	100	%
TurboComm Technologies, Inc(“TurboComm”, a related party)		37	%	3	%	3	%	—	%
Terayon		8	%	13	%	11	%	—	%
COM21		—	%	11	%	13	%	—	%

 

At March 31, 2004 TurboComm owed Correlant $2,053,000.

 

Manufacturing and Distribution

 

During fiscal 2002, Correlant had limited in-house manufacturing capability at its facility in San Diego, California.  This facility was used for design, assembly and testing of prototypes, pilot production of new modem designs, sample testing of products received from other manufacturers, developing the manufacturing process and documentation for new products in preparation for outsourcing.

 

Correlant had an established relationship and manufacturing contract with TurboComm, a company located in Taiwan, that manufactured the high-speed data-over-cable technology products.  From the early stages of design and development, Correlant worked closely with TurboComm’s engineers to ensure optimal and cost effective manufacturing. Correlant’s manufacturing agreement with TurboComm provided TurboComm would supply all of Correlant’s forecasted orders for cable modems at prices to be agreed to by Correlant and TurboComm on a

 

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quarterly basis.  TurboComm is obligated to repair or replace any defective cable modems and CMTS units.  Although the term of the original contract went through May 2003, both Correlant and TurboComm mutually agreed to continue the relationship beyond that date.

 

Correlant sold its data-over-cable products to vendors who sold equipment under their brand name to cable operators.  This market had, and still has, a limited number of existing and potential customers.  Correlant already had established relationships with several existing vendors.  As a result, Correlant required only a limited sales and marketing infrastructure.

 

Backlog

 

Correlant’s general practice was to contract with TurboComm and fill orders within delivery dates required by customers, with some adjustments based on Correlant’s forecast. During fiscal 2002, substantially all Correlant’s products were produced in accordance with specifications and production schedules determined by Correlant based on orders placed by its primary customers. The amount of unfilled orders at any particular time could be affected by a number of factors including, but not limited to, the availability of cable modem components, and the manufacturing and assembly capacity of Correlant’s third party manufacturer. Accordingly, backlog information is not meaningful to an understanding of its business and may not be indicative of actual shipments made to customers in any period.

 

Working Capital and Raw Materials

 

As result of Correlant producing products in accordance with customer orders and its third party manufacturer procuring a large portion of cable modem components, Correlant was not required to carry finished goods inventory.  Occasionally, when Correlant did carry a raw materials inventory, the amount was not material.  Accordingly, inventory requirements, and the impact of inventory requirements on working capital, are not meaningful to an understanding of our business.

 

Intellectual Property

 

Although Correlant developed and owns the proprietary software used in its cable modem products, Correlant never held any patents or copyrights on its technology. Due to the rapid change in technology and the high cost associated with obtaining and defending a patent, Correlant management never applied for a patent.  Instead, Correlant entered into confidentiality and invention assignment agreements with employees, and entered into non-disclosure agreements with key suppliers, distributors and customers to limit access to and disclosure of proprietary information.  However, these contractual arrangements may not prove sufficient to prevent misappropriation of Correlant’s technology or deter independent third-party development of similar technologies. In addition, the laws of some foreign countries may not protect Correlant’s intellectual property rights to the same extent as do the laws of the United States.

 

Competition

 

Correlant sold its data-over-cable products to vendors who sold equipment under their brand names to cable operators. However, many of these vendors have chosen to, and others may in the future choose to, design and manufacture their own DOCSIS cable modems.  During fiscal 2002, Correlant’s primary competitors for the sale of cable modems included Askey, Ambit Microsystems and Motorola.  Primary competitors during fiscal 2002 for the sale of the CMTS included ADC, Arris, Cisco, Com21, Motorola and Terayon.  Other potential competitors included, among others, Alcatel, Best Data, Dassault, Ericcson, Future Networks, NEC, NetGear, Nortel, Pace, Phasecom, Samsung, Scientific-Atlanta, Riverstone, Sony, Thomson Consumer Electronics and Zoom Telephonics.

 

Correlant’s principal competitive factors included:

 

•                  The other technologies described above;

•                  The ability to receive the DOCSIS certification;

•                  Price;

•                  Quality;

•                  Ensuring product availability through effective planning and procurement of key components; and

•                  Product support.

 

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Other Business Developments and Subsidiary Activity During Fiscal 2002

 

To further new management’s restructuring effort, the Company consummated the following transactions during fiscal 2002:

 

As previously reported, on December 11, 2001, the Company merged Acumen into the Company.  As a result of the merger, the Company assumed all the rights and obligations of Acumen and acquired the assets of Acumen that included, without limitation, shares of stock of Correlant and Arescom. Acumen had no operations other than serving as a holding company for the shares of stock of Correlant and Arescom.

 

As previously reported, on December 11, 2001, the Company sold to Solomon Extreme International Ltd. (BVI), 24,234,738 shares of common stock of the Company’s subsidiary, Arescom, representing approximately 65% of the outstanding shares of Arescom, for $10,000,000 in cash.  The Company determined that Arescom would not generate consistent cash flow from operations in the foreseeable future, and decided to sell its interests for cash to pursue other business opportunities. The Company retained approximately 6% of the outstanding common shares and 11,048 shares of subordinated preferred stock of Arescom.

 

Pursuant to the terms of the Company’s acquisition of Arescom in March 1999, an aggregate of 3,885,856 shares of the Company’s common stock issued to the former shareholders of Arescom in exchange for their shares of Arescom were restricted and could not be sold until Arescom’s annual gross revenue and net income before taxes reached certain levels.  As previously reported, in connection with the transaction involving the sale of the Company’s controlling interest in Arescom, the Company agreed to release the restrictions previously imposed on the shares of common stock of the Company held by the former shareholders of Arescom.

 

As previously reported, on March 12, 2002, the Company and Lotus World entered into an Asset Purchase and Assignment and Assumption Agreement with Avtech Technology, whereby the Company assigned its rights to certain contracts and related intangibles to Avtech in exchange for Avtech’s assumption of all of the Lotus World’s obligations under the contracts assigned.  Subsequent to the completion of the transaction, the Company dissolved Lotus World.

 

Significant Business Developments and Subsidiary Activity Subsequent to Fiscal 2002

 

Significant business developments, other than the legal proceedings described in “Item 3. Legal Proceedings,” subsequent to fiscal 2002, but before the filing of this report are summarized below:

 

New Joint Venture

 

As previously reported, in January 2003, the Company finalized an agreement to form a joint venture with Beijing Youbang Online Electronics Technology Co., Ltd. (“Youbang”), TCL Computer Technology Co., Ltd. and all the equity holders of Youbang, pursuant to which the Company acquired a 50% interest in a new joint venture to own substantially all of Youbang’s operations.  Pursuant to the agreement, all of Youbang’s assets, other than real estate, were transferred to a newly formed Beijing, China joint venture named TCL Digital Technologies, Ltd. (“TCL Digital”), a computer notebook manufacturing company in China.  The Company agreed to contribute approximately $5,240,000, payable in three installments and representing 50% of the total investment amount.  At the time, the investment was part of the Company’s business strategy to seek businesses to maximize the Company’s growth potential based on its assets.  However, shortly after it began running the joint venture, the Company deemed the joint venture’s business model did not fit with the Company’s long-term business strategy, and diverted management resources from the operations of other subsidiaries, notably Opta Systems, LLC, a Delaware limited liability company (“Opta Systems” or “GoVideo”), as discussed below under “Acquisition of New Subsidiary.”  In September 2003, the Company entered into an agreement with TCL Information Technology Industrial (Group) Ltd. (“TCL Information”), whereby the Company sold its 50% interest in TCL Digital for approximately $5,600,000 cash.  The transaction was completed in December 2003.

 

Cessation of Correlant’s Historical Operations

 

In February 2003, Lotus Pacific, as majority stockholder of Correlant, appointed four new members to the Board of Directors of Correlant, effectively taking control of Correlant’s Board of Directors. Prior to this, Lotus Pacific had only one representative on Correlant’s Board of Directors and did not control Correlant’s Board or its operations.  Immediately thereafter, the Board of Directors created a new Executive Committee of the Board,

 

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comprised of two members who are Lotus Pacific employees, to act on behalf of the Board of Directors and oversee Correlant’s management and operations.

 

As previously reported, effective July 31, 2003, Harold Tuan, President, Chief Executive Officer and co-founder of Correlant resigned as a director of Correlant and no longer serves as President and CEO of Correlant. From such date until December 23, 2003, Correlant attempted to find a permanent CEO to replace Mr. Tuan and retained outside consultants to advise and assist during the transition period.  Such consultants were charged with evaluating Correlant’s business operations, its products and demand for its products, and future business prospects.

 

Upon recommendation of its consultants, following Mr. Tuan’s resignation as CEO, Correlant began a substantial reduction in its workforce and operations to reduce operating expenses, reducing the number of Correlant employees from 34 as of August 1, 2003 to 18 employees as of December 23, 2003 and three employees as of March 31, 2004.

 

As previously reported, as a result of declining margins and demand for its products, Correlant’s Board of Directors approved the wind down and cessation of Correlant’s historical operations in the cable modem and CMTS business effective December 23, 2003. As part of the wind down of Correlant, the Company plans to license and sell Correlant’s technology.  The wind down of Correlant’s operations was substantially completed by March 31, 2004.

 

Concurrently, Correlant has been exploring opportunities to acquire or invest in other businesses or technologies.  The Company currently expects that Correlant will identify market opportunities and implement a new business plan complementary with the Company’s business and long-term strategies.

 

Settlement with Arescom

 

As previously reported, effective September 10, 2003, Lotus Pacific divested its remaining 6% ownership in Arescom by settling all legal claims against Arescom.

 

Acquisition of New Subsidiary

 

As previously reported, in April 2003, the Company loaned $5,986,000 to Opta Systems, which was used, in addition to a deposit of $250,000 paid by Opta Systems to complete its purchase of substantially all assets and assumption of certain liabilities of a product line known as “GoVideo” from SONICblue Incorporated, a Delaware corporation (NASDAQ: SBLU), and Sensory Science Corporation, a Delaware corporation and wholly-owned subsidiary of SONICblue, pursuant to a purchase agreement and an order issued by the United States Bankruptcy Court, Northern District of California, San Jose Division overseeing SONICblue’s bankruptcy case.

 

Immediately subsequent to Opta System’s purchase of the GoVideo product line, the Company purchased 100% of the outstanding membership interests of Opta Systems from Carmco Investments, LLC, a Connecticut limited liability company, for $420,000, representing the return of the $250,000 deposit used in the acquisition of the GoVideo product line and related transaction fees and expenses. Subsequent to the closing, the Company paid an additional $294,000 in connection with these items.  In connection with this agreement, the $5,986,000 originally loaned to Opta Systems was converted to a capital contribution, resulting in a total purchase price, including actual out-of-pocket expenses of approximately $6,770,000.  In October 2003, the purchase price was reduced by $962,000 based on a purchase price adjustment, resulting in an adjusted purchase price of $5,808,000 for GoVideo.

 

The GoVideo product line, established in 1984, designs and manufactures product lines in the consumer electronics industry, including digital video disc (“DVD”) players, portable DVD, DVD-Video Cassette Recorder (“VCR”) Combo, the Dual-Deck VCR, DVD Recorder, DVD Recorder + VCR, and LCD TV. GoVideo holds various patents covering Dual-Deck technology as well as other electronics products and systems.

 

Current management intends to rebuild the Company’s business based on its newly acquired subsidiary, GoVideo, and concentrate its future business in the related industries of consumer electronics and telecommunications.

 

The Company further seeks to improve the efficiencies of the Company’s operations and accelerate growth by

 

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utilizing its competitive advantages. The Company believes these competitive advantages include the significant experience of current management in the communications and consumer electronics industry and business opportunities presented to the Company in China and Asia through the strength of its relationships with its significant shareholders, including TCL.  TCL is an affiliated company of TCL International Holdings Limited (HKSE: 1070) (“TCL International”), a leading multimedia consumer electronics product manufacturer, with a strong brand presence in China and Asia.  TCL International’s core products include televisions, mobile handsets, personal computers, audio-visual equipment as well as information technology services.  Under its highly recognized and well-established TCL brand, it is one of the strongest players in the TV and mobile handset marketplace in China. Headquartered in China, it operates a number of highly efficient manufacturing bases in Asia.

 

Employees

 

As of June 30, 2002, Lotus Pacific had eight employees in sales general and administration.  Correlant had 49 full-time employees, including 39 in research and development and ten in sales, general and administration.

 

As of March 31, 2004, Lotus Pacific had seven employees in sales, general and administration.  Correlant had three employees in sales, general and administration.  See “Significant Business Developments and Subsidiary Activity Subsequent to Fiscal 2002.”  GoVideo had 62 full-time employees, including five in research and development and 57 in sales, general and administration.  No employees are represented by any collective bargaining organization, and the Company has never experienced a work stoppage.

 

Item 2.  Properties

 

At June 30, 2002, Lotus Pacific’s executive offices were located at 18200 Von Karman, Avenue, Suite 730, Irvine, California and consisted of approximately 2,250 square feet.  The lease expired in July 2003.  Currently, Lotus Pacific’s executive offices are located at 2402 Michelson Drive, Suite 220, Irvine, California and consist of approximately 2,100 square feet under a month-to-month lease.  Correlant leases approximately 26,000 square feet of office space in San Diego, California, which expires November 2007.

 

Due to the shut down of operations, Correlant’s interim management has attempted to either sublease the San Diego facility or negotiate a lease buy out with the landlord.  Due to the weak commercial real estate market in San Diego, interim management has not been successful.    Additionally, there can be no guarantees that interim management will successfully sublease the building or buy out the lease in the future.  If Correlant’s management is successful, Correlant will operate from Lotus Pacific’s office for the interim.  After Correlant’s facilities closure, the Company believes its facilities will be suitable for their respective uses and adequate for the Company’s needs.

 

GoVideo leases two facilities in Scottsdale, Arizona.  One facility, used for warehousing, is approximately 13,100 square feet.  The lease expires October 2009, with a five year renewal option.  The other facility, used for administration, warehousing and distribution, is approximately 33,000 square feet.  The lease expires February 2006, with a three year renewal option.  The leased space is suitable for GoVideo’s current needs.

 

Item 3.  Legal Proceedings

 

Legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company became, or was, a party during fiscal 2002 or subsequent thereto, but before the filing of this report are summarized below:

 

Lotus Pacific v. William Hu and Lotus Pacific v.USS Online et al.

 

On January 3, 2001, Lotus Pacific filed a lawsuit in the United District Court Eastern District of New York against William Hu, which complaint was subsequently amended July 30, 2002.  In the amended complaint, Lotus Pacific brought claims for breach of fiduciary duty, professional negligence, accounting and conversion relating to transfers in December 2000 of approximately $3,600,000 from Mr. Hu’s attorney trust account.  Mr. Hu was alleged to be the Company’s counsel from January 1998 and later its former CEO from January 2001 to June 29, 2001.

 

On January 16, 2002, Lotus Pacific filed a lawsuit in the Supreme Court of the State of New York, New York County against USS Online, Travelway International Ltd. (“TIL”), and Huaya Lu Tung, seeking to recover approximately $1,800,000 in principal and interest due on loans made to USS Online, and seeking to pierce the

 

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corporate veil and recover such amounts from defendants TIL and Huaya Lu Tung.  The Company asserted that Ms. Tung was the Chairperson and sole owner of TIL and the Chairperson of USS Online and the former Treasurer of Lotus Pacific.

 

In order to avoid the costs of litigation, after evaluation of the Company’s likelihood of recovering any assets from the defendants in the two cases cited above and the defendants’ ability to pay any judgment secured against them, if any, in  February 2003, the Company entered into a settlement agreement with USS Online, TIL, Mr. Hu, Ms. Tung, Lotus International Holdings Corp. a shareholder of the Company (“LIH”), and three individuals to settle all claims against the defendants in the two cases cited above, subject to a number of conditions.  In entering into the settlement agreement, none of the defendants admitted or conceded any liability in connection with the claims asserted in the cases.  As conditions to the settlement agreement, the Company was required to receive: (a) 3,000,000 shares of the Company’s common stock; (b) a promissory note of LIH in the principal amount of $4,000,000, payable on February 19, 2008, with interest accruing at a rate of 3% per annum (the “Note”); (c) a stock pledge agreement, granting to the Company a first priority security agreement in 1,000,000 shares of the Company’s common stock as partial security for the Note (the “Pledged Shares”); (d) original stock certificates representing the Pledged Shares; (e) personal guaranty of the Note; and (f) all of the assets of USSF. To date, the Company has not received stock certificates for the Pledged Shares or the assets of USSF.  The Company has made demand on the other parties for fulfillment of the conditions to the settlement and has entered into negotiations with the other parties to settle these demands.  To date, no settlement has been achieved.  The Company has reserved the right to take all actions for breach of the settlement, including reinstituting the original actions.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.

 

 

PART II

 

Item 5.  Market for Registrant’s common equity and related stockholder matters.

 

Lotus Pacific’s common stock began trading on the over-the-counter (“OTC”) Bulletin Board under the symbol “LPFC” on December 1, 1994. As previously reported, on November 5, 2002, the Company’s shares of common stock were removed from the OTC Bulletin Board for failure to comply with NASD Rule 6530, as a result of the Company’s inability to timely file its Form 10-K for the period ended June 30, 2002. Effective November 5, 2002, the Company’s shares of common stock are quoted on the National Quotation Bureau’s “Pink Sheets,” under the symbol “LPFC.PK.”   Trading in the Company’s common stock has been minimal with limited or sporadic quotations and there is no established public trading market for the Company’s common stock.  The high and low common stock prices per share were as follows:

 

 

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These OTC market quotations reflect inter-dealer prices, without retail mark-up, mark down or commission and may not necessarily represent actual transactions.

 

As of March 31, 2004, there were 50,970,016 shares of Common Stock issued and outstanding, held by approximately 800 shareholders of record as indicated on the records of the Company’s transfer agent.

 

To date, the Company has not declared or paid any cash dividends on its common stock. The Company anticipates that it will retain all available funds for use in operation and expansion of its business, and no cash dividends are expected to be paid on the common stock in the foreseeable future.

 

In May 1997, Lotus Pacific granted 1,090,000 options to certain officers and key employees with an exercise price of $6.00 per share, which was the market price of Lotus Pacific’s common stock at the time of grant.  Options were 100% vested when granted and expire five years from grant date.  There were 1,090,000 options outstanding as of June 30, 2001, 2000 and 1999.  All options expired during fiscal 2002 and as such there were no options outstanding as of June 30, 2002.

 

The shareholders approved the 2000 Equity Incentive Plan (“Incentive Plan”) on April 28, 2000. The Board of Directors administers the Incentive Plan. Employees, directors, and consultants of the Company and its affiliates, who in the judgment of the Board render significant service to the Company, are eligible to participate. The Incentive Plan provides for the award of a broad variety of stock-based compensation alternatives such as nonstatutory stock options, incentive stock options, restricted stock, performance awards and stock appreciation rights. The Incentive Plan provided 11,355,000 shares of common stock to be offered. The vesting provisions of individual options may vary. The exercise price shall not be less than 100% of the fair market value of a common stock on the grant date. No options have been granted since the Incentive Plan’s adoption.

 

As part of the 1999 acquisitions of Correlant and Arescom, Lotus Pacific entered into share exchange agreements with both Correlant and Arescom.  As stipulated by the agreements, Lotus Pacific set aside a total of 1,708,000 of contingently issuable shares of Lotus Pacific common stock.  The contingent shares were to be issued as Correlant and Arescom stock options, specified in the purchase agreements, were exercised.  For each option exercised by a Correlant stock option holder, 81% of such shares were to be transferred to Lotus Pacific in exchange for 0.5364 shares of Lotus Pacific common stock for each share of Correlant stock transferred.  For each option exercised by an Arescom stock option holder, 81% of such shares were to be transferred to Lotus Pacific in exchange for 0.02915 shares of Lotus Pacific common stock for each share of Arescom stock transferred.  There were a total of 1,134,000, 1,551,000, 1,602,000 and 775,000 Lotus Pacific shares contingently issuable in connection with both share exchange agreements as of June 30, 2002, 2001, 2000 and 1999, respectively.  Due to the sale of Arescom, there were no contingently issuable shares with respect to Arescom options as of June 30, 2002.  Due to the wind down of Correlant’s historical operations, there were 17,000 Lotus Pacific shares contingently issuable with respect to the Correlant shares as of March 31, 2004.

 

There were no sales of unregistered securities by the Company during fiscal 2002.

 

Item 6.  Selected Consolidated Financial Data

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Consolidated Financial Statements of the Company and related notes included elsewhere in this Annual Report on Form 10-K.

 

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		As of or for the Fiscal Year Ended June 30,
(in thousands, except per share amounts)		2002 (1)			2001			2000 (2)			1999 (3)			1998
					(Restated)			(Restated)			(Restated)			(Unaudited)
Results of Operations
Net revenues		$	55,880		$	263,192		$	71,839		$	3,733		$	—
Loss from continuing operations		$	(36,529	)	$	(7,433	)	$	(2,249	)	$	(6,606	)	$	(10,405	)
Net income (loss) per common share – basic and diluted:
Loss from continuing operations		$	(0.57	)	$	(0.12	)	$	(0.04	)	$	(0.13	)	$	(0.22	)
Total gain (loss) from discontinued operations		$	0.27		$	(0.45	)	$	(0.19	)	$	(0.05	)	$	—
Net income (loss)		$	(0.30	)	$	(0.57	)	$	(0.23	)	$	(0.18	)	$	(0.22	)
Cash dividends per share		$	—		$	—		$	—		$	—		$	—
Financial Position
Total assets from continuing operations		$	53,342		$	117,214		$	121,737		$	158,624		$	3,679
Long-term obligations, less current portion		$	—		$	—		$	—		$	—		$	—
Total stockholders’ equity		$	36,560		$	54,328		$	83,730		$	94,801		$	914

 

(1) Fiscal 2002 included: (a) $20,071,000 asset impairment and (b) $17,554,000 total gain from discontinued operations, net of related taxes, as a result of selling our former subsidiary, Arescom, on December 18, 2001.

 

(2) Fiscal 2000 included a $50,512,000 gain related to the sale of our subsidiary’s common stock.

 

(3) We purchased Correlant on March 31, 1999.  Therefore results of operations for fiscal 2002, 2001 and 2000 include 12 months of Correlant’s activity compared to only three months of Correlant’s activity during fiscal 1999.

 

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Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of the financial condition and results of operations should be read in conjunction with the Restated Consolidated Financial Statements and Notes thereto included elsewhere in this report.

 

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) with a description of Lotus Pacific’s business.  This is followed by a discussion of why we were unable to timely file our Form 10-K for the year ended June 30, 2002, and the major events that lead up to the requirement to restate prior financial information.  The next discussion relates to material acquisitions and dispositions and a comparison of our results of operations as follows:

 

•              Fiscal 2002 compared to fiscal 2001;

•              Fiscal 2001 compared to fiscal 2000; and

•              Fiscal 2000 compared to fiscal 1999.

 

These comparisons are provided solely for readers to understand the historical results of our operations during the time periods covered.  However, due to the strategic change in direction of Lotus Pacific discussed in “Item 1. Business,” and throughout the MD&A section, these results are not indicative of future results.

 

After the results of operations we analyze the changes in our cash flows, and discuss our financial commitments in the section entitled “Liquidity and Capital Resources.”  We then address our “Business Outlook” from March 31, 2004.   We conclude this MD&A with (I) A discussion of the Critical Accounting Estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results; and (II) Recently Issued Accounting Standards and the impact they had or will have on our results of operations.

 

This MD&A should be read in conjunction with the other sections of this Annual Report on Form 10-K including:

 

•              Item 1.  Business;

•              Item 6.  Selected Financial Data; and

•              Item 8.  Restated Financial Statements and Supplementary Data.

 

The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Business Outlook” section.  Our actual results may differ materially from these forward-looking statements.

 

Description of Business

 

Lotus Pacific, a Delaware corporation, is a holding company and we conduct our business through our subsidiaries. We presently develop, manage, and operate emerging communications and consumer electronics companies, focusing on developing next generation consumer electronics and communication products. We provide our subsidiaries with capital and strategic and infrastructure services.

 

Explanatory Note - Restatement of Prior Financial Information and Delays in Reporting

 

As previously reported, on June 29, 2001, a majority of our stockholders, led by TCL, were successful in a hostile consent solicitation to gain control of Lotus Pacific and replace prior management of the Company.   On June 29, 2001, new directors and officers were appointed and the then existing directors and officers were immediately removed from office.  Following the termination of our relationship with prior independent accountants, new management concluded that a reaudit of the financial statements for fiscal 2001, 2000 and 1999 was required.  Effective July 24, 2002, we engaged our new independent accountants to reaudit and restate these prior periods.

 

This Annual Report for fiscal 2002 restates our consolidated financial statements for fiscal 2001, 2000 and 1999 to reclassify or restate certain revenues and expenses, and to restate certain other transactions and make certain other adjustments.  For more details see “Item 8. Restated Financial Statements and Supplementary Data Note 2 – Restatement of Previously Issued Financial Statements and Delays in Reporting.”

 

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Explanatory Note - Events Resulting in Reclassification

 

In December 2001, we sold a major portion of our investment in and cash advances to our subsidiary, Arescom.  This sale required the reclassification of all periods to present Arescom as discontinued operations. As the results of Arescom’s operations are not included in our continuing operations, the following discussion does not include Arescom.   We included in “Item 8.  Financial Statements and Supplementary Data Note 2 – Restatement of Previously Issued Financial Statements and Delays in Reporting and Note 4 – Acquisitions and Dispositions – Majority Owned Subsidiaries,” a more comprehensive discussion about our discontinued operations.

 

Acquisitions and Dispositions

 

During fiscal 2002, 2001, 2000 and 1999, we engaged in multiple acquisitions and dispositions.  The details of these transactions are described in detail in “Item 8. Restated Financial Statements and Supplementary Data Note 4 – Acquisitions and Dispositions – Majority Owned Subsidiaries, Note 5 – Acquisitions and Dispositions – Equity Method Investees and Note 6 – Acquisitions and Dispositions – Cost Method Investees.”  However, unless specifically addressed in MD&A, these acquisitions and dispositions were not material to our results of operations and the understanding of our business.  As such, the details have been omitted from MD&A.

 

Regent Electronics Corporation

 

In April and May 1997, we acquired 70% of the common stock of Regent.  Regent designed, developed, manufactured and marketed Internet-related products that offered Internet access through telephone lines and cable television lines.  In June 1997, Regent acquired Amiga-based, multimedia technology related assets and rights from Rightiming.  On June 26, 2001, we spun-off Regent to Regent’s management.

 

Correlant Communications, Inc

 

Correlant is a major subsidiary of Lotus Pacific and represented essentially 100% of our consolidated revenues, cost of revenues and research and development expense during fiscal 2002, 2001, 2000 and 1999 from continuing operations.

 

On March 31, 1999, we entered into a share exchange agreement which provided for the acquisition of 95% of the issued and outstanding common shares of Correlant, representing an 81% ownership interest in Correlent in consideration for the issuance of 9,656,946 common shares of the Company valued at $7.21 per share plus contingently issuable shares of up to 1,435,000. The contingent shares will be issued as Correlant options specified in the agreement are exercised.  For each option exercised, 81% of such shares were to be transferred to us in exchange for 0.5364 shares of Lotus Pacific common stock for each share of Correlant stock transferred.   At the acquisition date, the excess of the purchase price and related costs over the value assigned to the net tangible assets acquired was $74,545,000 and was assigned to goodwill.  During fiscal 2001 and 2000, we recorded an additional $18,000 and $554,000, respectively as additional goodwill as a result of the issuance of 79,000 of the contingently issuable shares.  As of March 31, 2004 there were only 17,000 contingently issuable shares outstanding.

 

At the purchase date, shares of Lotus Pacific stock exchanged were restricted and could not be sold until Correlant achieved sales of $30,000,000 and net income before income taxes of $6,000,000. Effective August 31, 2000, the restrictions were removed.

 

During March 2000, we sold, to unrelated parties, 3,657,000 shares of Correlant stock, which reduced our ownership to 65%.  During September 2000, we sold to unrelated parties, 656,000 shares of Correlant stock, which further reduced our ownership to 62%.

 

Demand for Correlant’s products

 

During the first half of calendar year 2000, cable modem manufacturers experienced shortages and long lead times for component materials such as flash memory and capacitors.  Due to these shortages, the production of cable modems was constrained and our customers placed substantial orders for our cable modems.  We believe cable operators also overbought in the second half of calendar year 2000 to ensure they had sufficient product to meet subscriber demand.  As a result, we believe there was an inflated demand for cable modems for the first six months of fiscal 2001, June 2000 through December 2000.  Starting in January 2001, our customer orders began dropping sharply resulting in lower demand as end customers started to work through their inventory levels.  This lower demand continued through June 30, 2002.

 

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The extremely competitive nature of the market for broadband access systems resulted in significant price erosion over time.  We experienced downward pressure on our completed cable modem average selling price per unit.  This downward pressure on the completed cable modem selling price places downward pressure on cable modem components, including the MAC+software.  Therefore, Correlant experienced continued price erosion under its new business model.  This price erosion continued until Correlant discontinued selling cable modem and cable modem-related products as discussed below.

 

Change in Correlant’s Business Model

 

Prior to January 31, 2002, Correlant sold DOCSIS certified cable modems and in certain instances, the Media Access Controller (“MAC”) bundled with Correlant’s cable modem software (“MAC+software”), which were both key components of the completed cable modem.  Correlant developed and owns the proprietary software used in the cable modem.  Effective January 31, 2002, Correlant changed its business model whereby they only sell the completed cable modem in certain circumstances.  Instead of focusing on selling the completed cable modem, Correlant concentrated efforts toward selling only the MAC+software.  The new business model was a result of Correlant’s attempt to increase gross profit percentage, streamline business operations and reduce operating expenses.  This change had the following impacts to our results of operations, cash flows and financial position:

 

•                  Decreased revenues cost of revenues, inventory, accounts receivable and accounts payable.  Because the sales price and the related cost of the MAC+software were substantially lower than the completed cable modems, our revenues, cost of revenues, inventory, accounts receivable and accounts payable all decreased.

•                  Unchanged gross profit dollars.  Previous to the change in Correlant’s business model, all the profit realized from selling the completed cable modem was attributable to the MAC+software.  Therefore on a per unit basis, gross profit dollars remained unchanged.

•                  Increased gross profit percentage.  Because gross profit dollars remained unchanged while the sales price decreased, gross profit percentage increased.

•                  Decreased selling, general and administrative expense.  As a result of the change in business model, Correlant closed its Taiwan branch.

 

The change in Correlant’s business model and the fluctuation of demand for our product resulted in a material impact to our results of operations, financial position and cash flows as of or for the years ended June 30, 2002, 2001, and 2000.

 

Cessation of Correlant’s Historical Operations

 

As previously reported, effective July 31, 2003, Harold Tuan, President, Chief Executive Officer and co-founder of Correlant resigned as a director of Correlant and no longer serves as President and CEO of Correlant. From such date until December 23, 2003, Correlant worked to find a permanent CEO to replace Mr. Tuan and retained outside consultants to advise and assist during the transition period.  Such consultants were charged with evaluating Correlant’s business operations, its products and demand for its products, and future business prospects.

 

Upon recommendation of its consultants, following Mr. Tuan’s resignation as CEO, Correlant began a substantial reduction in its workforce and operations to reduce operating expenses, reducing the number of Correlant employees from 34 as of August 1, 2003 to 18 employees as of December 23, 2003 and three employees as of March 31, 2004.

 

On December 23, 2003, upon recommendation of its consultants, Correlant’s Board of Directors approved the wind down and cessation of Correlant’s historical operations in the cable modem and cable modem software business.  The wind down was substantially completed by March 31, 2004.

 

Concurrently, Correlant has been exploring opportunities to acquire or invest in other businesses or technologies.  We expect Correlant to identify market opportunities and implement a new business plan complementary with our business and long-term strategies.  See “Business Outlook.”

 

Due to the cessation of Correlant’s historical operations, future financial statements will not be comparable to our historical financial statements.

 

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USS Online, Inc., Professional Market Brokerage, Inc and US Securities & Futures Corp

 

In February 1999, we acquired 100% of PMB, a Chicago-based financial trading firm that provided online trading services and 100% of USSF, a full service brokerage firm in New York, NY. In June 1999, we created USS Online, a wholly-owned subsidiary, and transferred all of our ownership interests in each of USSF and PMB to USS Online to run those two financial service subsidiaries. In February 2000, we sold 72% of our ownership in USS Online to TIL, in exchange for 733,000 shares of our common stock.

 

Lotus World, Inc.

 

On April 22, 1999, we organized Lotus World to offer Auction Live, an online auction service, to international clients.  The wholly-owned subsidiary was incorporated in Delaware in April 1999, and was a private-label Asian language e-commerce service provider, targeting business-to-business and business-to-customer markets, portals and ISP companies.  Due to the negative response in general to e-commerce, the operations of Lotus World were suspended in 2001.  On March 12, 2002, we entered into an Asset Purchase and Assignment and Assumption Agreement with Avtech Technology, whereby we assigned our rights to certain contracts and related intangibles to Avtech in exchange for Avtech’s assumption of all of Lotus World’s obligations under the contracts assigned.  Subsequent to the completion of the transaction, we dissolved Lotus World.

 

Results of Operations

 

Comparison of Fiscal 2002 to Fiscal 2001

 

The following table summarizes certain aspects of our results of operations for fiscal 2002 compared to fiscal 2001 (in thousands):

 

		June 30,
		2002			2001			$ Change			% Change
					(Restated)
Revenues		$	55,880		$	263,192		$	(207,312	)	(79	)%
Gross profit		5,939			32,591			(26,652		)	(82	)%
As a percentage of revenues		11		%	12		%
Selling, general and administrative		4,700			13,151			(8,451		)	(64	)%
Depreciation and amortization		12,782			12,460			322			3	%
Research and development		9,977			16,695			(6,718		)	(40	)%
Impairment of assets		20,071			—			20,071			N/A
Total other income (expense), net		638			(2,937		)	3,575			122	%
Provision (benefit) for income taxes		(3,181		)	(6,434		)	(3,253		)	(51	)%

 

Revenues

 

The significant decrease in overall revenues for fiscal 2002 as compared to fiscal 2001 was primarily attributable to the following factors:

 

•      Unit sales of DOCSIS cable modems sold by Correlant decreased approximately 80%;

•                  An industry-wide downturn in broadband equipment purchase as cable operators, and in turn our customers, worked through their excess inventory;

•                  Average sales price of our DOCSIS cable modems sold by Correlant declined approximately 9% due to heavy price competition; and

•      The aforementioned change in Correlant’s business model.

 

Revenues generated by international sales as a percentage of total revenues increased to 91% from 70% during fiscal 2002 as compared to fiscal 2001.  The large increase was primarily attributable to the loss of Correlant’s

 

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significant US customers, as a result of customers developing their own DOCSIS cable modems, and to a lesser extent the aforementioned change in Correlant’s business model.

 

Due to the significant economic slowdown in the cable modem industry, both domestic and international, we experienced a slowdown in customer orders during fiscal 2002.  Subsequent to fiscal 2002, revenues continued to be negatively impacted.  Additionally, the average sales price of cable modems continued to decline, which in turn placed price pressure on the cable modem components.  Ultimately, this significant slowdown and continued pricing pressure resulted in the cessation of Correlant’s historical operations in the cable modem industry December, 2003.

 

Gross Profit

 

The decrease in gross profit dollars for fiscal 2002 compared to fiscal 2001 was a direct result of reduced revenue from declining cable modem unit sales and severe price competition.  Cable modem selling prices decreased faster than the associated product cost reductions, which resulted in selling cable modems at negative gross profit in order to keep market share.

 

Although the gross profit dollars decreased, and the gross profit percentage realized from cable modem sales decreased, the overall gross profit percentage remained fairly constant for fiscal 2002 compared to fiscal 2001.  This was due to a higher proportion of overall revenues generated from the sale of Correlant’s MAC+software, which bears a higher gross profit percentage than cable modems.

 

Operating Expenses

 

Selling, general and administrative (“SG&A”).  SG&A expense consists primarily of personnel costs, including amortization of deferred stock compensation for our administrative and support personnel, allowance for doubtful accounts, and legal and accounting fees.  The decrease in SG&A expense for fiscal 2002 as compared to fiscal 2001 was due to the following factors:

 

•                  $4,433,000 decrease in allowance for doubtful accounts to $44,000 in fiscal 2002 from $4,477,000 in fiscal 2001.  Fiscal 2002 allowance related to Correlant’s smaller customers not being able to pay due to the significant economic slowdown in the modem industry.  Fiscal 2001 allowance related to the forgiveness of $4,098,000 due from our subsidiary, Regent, in connection with the spin off of Regent.  The remaining allowance for doubtful accounts in fiscal 2001 was due to a $300,000 cash advance to our former subsidiary PMB, who subsequently defaulted, and $79,000 accrued interest on our loans to USS Online and PMB.

•                  Decrease of $1,696,000 in amortization of deferred stock compensation as a result of accounting for stock options under the accelerated provisions allowed by Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 44, Accounting for Certain Transactions Involving Stock Compensation – An Interpretation of APB Opinion No. 25;

•                  Decrease of $1,000,000 legal and accounting fees associated with a contemplated initial public offering (“IPO”) Correlant in 2001, which in 2002 was put on hold indefinitely;

•                  Closure of Correlant’s Taiwan branch office; and

•                  Decreased salary expense associated with a reduction in force.

 

The above decreases were slightly offset by an increase in legal and accounting fees resulting from the previously discussed takeover of Lotus Pacific by TCL and the subsequent replacement of prior Lotus Pacific management.

 

Depreciation and amortization (“D&A”).  D&A expense consists of goodwill amortization related to the purchase of Correlant and depreciation of property and equipment.  Goodwill amortization stayed fairly constant from fiscal 2002 compared to fiscal 2001 as there were no significant business acquisitions or dispositions resulting in a change to goodwill amortization.  As described below, the goodwill associated with Correlant was considered impaired at June 30, 2002 and fully written off.  Depreciation expense increased slightly as capital expenditures increased to support our expanding technology infrastructure during fiscal 2002.

 

Research and development (“R&D”).  R&D expense consists primarily of personnel costs, including amortization of deferred stock compensation of employees engaged in research, design and development

 

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activities and, to a lesser extent, design prototype material expenditures and equipment and supplies required to develop new products and enhance existing products.  The decrease in R&D expense for fiscal 2002 as compared to fiscal 2001 was primarily attributable to the following factors:

 

•      Decrease of $5,838,000 in amortization of deferred stock compensation; and

•      Decreased salary expense associated with natural attrition without replacing vacant positions.

 

The above decreases were partially offset by increased fees related to the DOCSIS cable modem certification process.

 

Impairment of assets.  Impairment of assets during fiscal 2002 related to the goodwill associated with the purchase of Correlant.  As of June 30, 2002, we deemed the goodwill impaired due to the competitive nature of Correlant’s industry and its significant reduction in revenues.  As a result, the $20,071,000 of remaining goodwill was fully written off.

 

Total other income (expense)

 

Total other income (expense) consists of interest income, interest expense foreign exchange gain (loss) and other non-operating items.  We experienced net other income during fiscal 2002 primarily due to interest income earned on our cash and investments, which was offset slightly by our foreign exchange loss from our Taiwan branch and interest expense.  We experienced net other expense during fiscal 2001 primarily due to the following transactions undertaken by prior management:

 

•                  In January 2001, prior management agreed to refund, in exchange for stock, $7,100,000 to several investors who had purchased a total of 355,000 shares of Correlant common stock during fiscal 2000.  Prior management gave $7,100,000 to Hywin Investments Limited (“Hywin”), a shareholder of the Company, who was to return the funds to the individual investors and return the stock to Lotus Pacific.  However, the shares were never returned to the Company.   In connection with the refund, Hywin refunded to us $1,065,000 of commissions relating to the shares to be returned. The Company investigated the transaction and was unable to recover the funds.  As a result, the net amount of $6,035,000 was expensed.

•                  In December 2000, prior management agreed to refund, in exchange for stock, $1,500,000 received in connection with Lotus Pacific’s previous sale of shares of Arescom stock.  Lotus Pacific gave the refund amount to William Hu, the Company’s attorney at that time, to process the refund.   However, the refund was never returned to the investors and the shares were never returned to us.  We investigated the transaction and have been unable to recover the funds.  See “Item 3. Legal Proceedings.”  As a result, the $1,500,000 was expensed.

•                  In October 2000, prior management sold shares of Correlant common stock owned by the Company to various unrelated parties.  Although the Correlant shares were transferred to the parties, the Company did not receive any of the proceeds. We investigated the transaction and have been unable to recover the funds, and as a result we expensed $2,266,000.

 

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The above fiscal 2001 expenses were offset by the $3,886,000 gain on the spin off of Regent and interest income earned on our cash and investments.

 

Provision (benefit) for income taxes

 

We record an asset or liability for tax assessments based on our estimate of the potential assessments.  Among other reasons, new laws and new interpretations of laws and rulings may affect the liability for potential tax assessments by tax authorities.  Due to the subjectivity and complex nature of the underlying issues, actual payments or refunds or assessments may differ from our estimates.  To the extent our estimates differ from actual payments or refunds or assessments, income tax expense is adjusted.  In June, 2003, we were notified by the Internal Revenue Service (“IRS”) that it would be reviewing our tax returns for the years ended June 30, 2001, 2000 and 1999.    Subsequently, we filed amended returns for the years ended June 30, 2001, 2000 and 1999.  The amendments relate to the restatement of our financial statements as well as the deconsolidation of consolidated tax returns and subsequent filing of separate returns by us and each of our subsidiaries.  Because we filed tax returns separate from our subsidiaries, we could no longer offset income from its sale of stock in subsidiaries against operating losses within its subsidiaries.  However, because we experienced losses in subsequent years these losses were available to carryback against these gains.

 

Comparison of Fiscal 2001 to Fiscal 2000

 

The following table summarizes certain aspects of our results of operations for fiscal 2001 compared to fiscal 2000 (in thousands):

 

		Year ended June 30,
		2001			2000			$ Change			% Change
		(Restated)			(Restated)
Revenues		$	263,192		$	71,839		$	191,353		266	%
Gross profit		32,591			14,607			17,984			123	%
As a percentage of revenues		12		%	20		%
Selling, general and administrative		13,151			16,132			(2,981		)	(18	)%
Depreciation and amortization		12,460			14,763			(2,303		)	(16	)%
Research and development		16,695			7,479			9,216			123	%
Impairment of assets		—			3,486			(3,486		)	(100	)%
Total other income (expense), net		(2,937		)	46,424			(49,361		)	(106	)%
Provision (benefit) for income taxes		(6,434		)	21,099			(27,533		)	(130	)%

 

Revenues

 

The significant increase in overall revenues for fiscal 2001 as compared to fiscal 2000 was primarily attributable to the 333% increase in unit sales of DOCSIS cable modems.  The increase in cable modem unit sales was somewhat offset by the decrease in the average selling price of our cable modems as discussed below.   Revenues generated by international sales as a percentage of total revenues remained fairly constant with 70% and 72% of revenue generated from international sales for fiscal 2001 and 2000, respectively.

 

Gross Profit

 

The decrease in gross profit dollars as well as the gross profit percentage was due to the following:

 

•                  An approximate 41% decrease in the average sales price of our DOCSIS cable modems sold by Correlant as a result of heavy price competition.  Selling prices decreased faster than the associated product cost reductions, which reduced approximately 24%;

•                  Loss on purchase commitments of cable modem components as we adjusted our inventories to reflect the decrease in forecasted product demand; and

 

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•                  Write down of component inventories to market value.

 

Operating Expenses

 

SG&A.  The decrease in SG&A was due to a decrease in cash transfer and exchanges between entities under common control to $3,000 in fiscal 2001 from $9,260,000 in fiscal 2000.  Our subsidiaries, Regent and Lotus World, engaged in extensive transactions with companies owned and managed by prior management.  These transactions included advances, lease expense for the use of facilities, payroll expense for the use of employees, consulting expense, and other office expense.  This decrease was offset by the following:

 

•                  $3,122,000 increase in allowance for doubtful accounts to $4,477,000 in fiscal 2001 from $1,355,000 in fiscal 2000. For 2001 details, see “Comparison of Fiscal 2002 to Fiscal 2001.”  Fiscal 2000 allowance related to a promissory note with our former subsidiary USS Online of $1,300,000 principal and $55,000 accrued interest.

•                  $1,663,000 increased amortization of deferred stock compensation;

•                  $1,000,000 increase legal and accounting fees associated with Correlant’s contemplated IPO; and

•                  Increased salary expense associated with an increased staff to support Correlant’s contemplated IPO.

 

D&A.  We sold 656,000 shares of our Correlant stock, which reduced our ownership percentage from 65% to 62%.  As a result of the ownership decrease, the associated amortization of goodwill decreased.  Depreciation expense increased slightly as capital expenditures increased to support our growing staff and to support Correlant’s contemplated IPO.

 

R&D.  The increase in R&D expense for fiscal 2001 as compared to fiscal 2000 was primarily attributable to the following factors:

 

•                  $5,500,000 increase in amortization of deferred stock compensation; and

•                  Increased salary expense associated with a 52% increase in headcount to support the growing demand for current and anticipated future products.

 

Impairment of assets.  We evaluated our long-lived assets as of June 30, 2001 and concluded the carrying value of all our assets exceeded the expected future cash flows from the use of our assets.  Therefore, there was no impairment of assets during fiscal 2001.  During fiscal 2000, we incurred an impairment of assets related to the following:

 

•                  Our $3,106,000 investment in USS Online.  As of June 30, 2000, we determined the investment was impaired and wrote it off; and

•                  Write off of obsolete property and equipment with a net book value of $380,000.

 

Total other income (expense)

 

We experienced net other expense during fiscal 2001 as previously described at “Comparison of Fiscal 2002 to Fiscal 2001.”  We experienced other income during fiscal 2000 primarily due to the $50,512,000 gain realized from the sale of 3,657,000 shares of Correlant stock.  This was slightly offset by a loss on the sale of a joint venture.  On June 28, 1999 we entered into an agreement with TCL Holdings (BVI) Co., Ltd. (“TCL BVI”) to establish TCL International (US), Inc., a 50-50 joint venture. At June 30, 2002, TCL BVI’s parent company owned 14.6% of our outstanding common stock.  During fiscal 2000 we invested $4,814,000 in the joint venture. The purpose of the joint venture was to develop and market a set top box (“STB”) for the China market.  The STB accessed the Internet via a television and was marketed to households with no computer Internet access.  Once the STB was installed, the joint venture planned to provide Internet access for a monthly fee.  However, because technology for computer Internet access was deployed so quickly in China, there was virtually no demand for the STB once the joint venture completed the product development.  As such, the joint venture ceased operations.  On June 16, 2000 we sold our stock in TCL International to a related party for a note in the amount of $560,000, which was deemed to be the fair value of our portion of the winding down joint venture.  We recorded a loss of $4,254,000 on the disposition. The remaining other income (expense) related to interest income earned on our cash and investments and interest expense.

 

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Comparison of Fiscal 2000 to Fiscal 1999

 

The following table summarizes certain aspects of our results of operations for fiscal 2000 compared to fiscal 1999 (in thousands):

 

		Year ended June 30,
		2000			1999			$ Change			% Change
		(Restated)			(Restated)
Revenues		$	71,839		$	3,733		$	68,106		1,824	%
Gross profit		14,607			463			14,144			3,055	%
As a percentage of revenues		20		%	12		%
Selling, general and administrative		16,132			3,835			12,297			321	%
Depreciation and amortization		14,763			3,796			10,967			289	%
Research and development		7,479			711			6,768			952	%
Impairment of assets		3,486			—			3,486			N/A
Total other income (expense), net		46,424			1,084			45,340			N/M
Provision (benefit) for income taxes		21,099			9			21,090			N/M
N/M – Not Meaningful

 

Revenues

 

The significant increase in overall revenues for fiscal 2000 as compared to fiscal 1999 was primarily attributable to the following factors:

 

•                  The acquisition of Correlant.  Fiscal 2000 included 12 months of Correlant’s activity compared to three months of Correlant’s activity during fiscal 1999;

•                  Correlant’s cable modems received the DOCSIS 1.0 certification in April, 1999;

•      The growth of Correlant’s customer base from one major customer to three major customers; and

•                  The increased demand for Correlant’s cable modems as the DOCSIS certified cable modem moved to mass production.

 

Gross Profit

 

The increase in gross profit dollars for fiscal 2000 as compared to fiscal 1999 was directly attributable to the increased revenues.  The increase in gross profit percentage was a result of shipping low volume and sample cable modems during fiscal 1999, which bear a higher cost than large volume cable modems.

 

Operating Expenses

 

SG&A.  The increase in SG&A expense for fiscal 2000 as compared to fiscal 1999 was due to the following factors:

 

•                  $9,260,000 cash transfer and exchanges between entities under common control during fiscal 2000 as compared to $1,143,000 in fiscal 1999.  Our subsidiaries, Regent and Lotus World, engaged in extensive transactions with companies owned and managed by prior management.  These transactions included advances, lease expense for the use of facilities, payroll expense for the use of employees, consulting expense, and other office expense.

•      The acquisition of Correlant;

•                  $1,355,000 increase in allowance for doubtful accounts as previously described at “Comparison of Fiscal 2001 to Fiscal 2000;” and

•      $401,000 increased amortization of deferred stock compensation.

 

D&A.  The increase in D&A was due to the acquisition of Correlant.  Fiscal 2000 amortization is slightly

 

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decreased from annualized fiscal 1999 amortization.  This is a result of selling 3,657,000 shares of our Correlant stock, which reduced our percentage ownership from 81% to 65%.  As a result of the ownership decrease, the associated amortization of goodwill decreased.

 

R&D.  The increase in R&D expense for fiscal 2000 as compared to fiscal 1999 was primarily attributable to the following factors:

 

•      The acquisition of Correlant;

•      $1,625,000 increased amortization of deferred stock compensation; and

•                  Increased salary expense associated with a 55% increase in headcount to support the growing demand for current and anticipated future products.

 

Impairment of assets.  We evaluated our long-lived assets as of June 30, 2000 and incurred an impairment of assets as described at “Comparison of Fiscal 2001 to Fiscal 2000.”  We evaluated our long-lived assets as of June 30, 1999 and concluded the carrying value of all our assets exceeded the expected future cash flows from the use of our assets.  Therefore, there was no impairment of assets during fiscal 1999.

 

Total other income (expense)

 

Our increase in net other income was primarily due to the $50,512,000 gain realized from the sale of Correlant stock slightly offset by a loss on the sale of our joint venture during fiscal 2000 as described at “Comparison of Fiscal 2001 to Fiscal 2000.”  Additionally, we sold 72% of our interest in USS Online during fiscal 2000.  Therefore, our equity earnings in affiliated entity decreased to $177,000 in fiscal 2000 from $1,075,000 in fiscal 1999.

 

Liquidity and Capital Resources

 

The following table summarizes our liquidity position and cash flows as of and for the year ended June 30, 2002 (in thousands):

 

		As of or for The Year Ended June 30, 2002
Cash and cash equivalents		$	32,647
Short-term investments		4,977
Working Capital		46,962
Cash used by operating activities		(5,799		)
Cash provided by investing activities		16,217
Cash provided by financing activities		9

 

As of June 30, 2002, our principal source of liquidity included cash and cash equivalents and short-term investments of $37,624,000.  We used $5,799,000 to fund operating activities during fiscal 2002.  The majority of our fiscal 2002 net loss from continued operations was substantially offset by non-cash expenses including amortization of goodwill, and deferred stock compensation and impairment of assets.  The remaining cash used in operating activities was to pay vendors according to current payment terms, partially offset by a decrease in inventory and collection on accounts receivable and accounts receivable from related parties.  The largest use of operating cash was to pay down accounts payable to a related party as a result of the change in Correlant’s business model.  We expect future cash provided (used) by operating activities to fluctuate, primarily as a result of fluctuations in our operating results, the timing of product shipments, accounts receivable collections, inventory management and the timing of vendor payments.

 

For fiscal 2002, our principal investing activities included: (1) selling a controlling portion of interest in our subsidiary Arescom; (2) net sales of short-term investments; and (3) repayment of notes receivable from a related party.  Cash provided by investing activities was partially offset by capital expenditures to accommodate our expanding research and development technology infrastructure.

 

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Cash and Working Capital Requirements

 

At June 30, 2002, we had working capital of $46,962,000 compared to $24,447,000 at June 30, 2001.  The increase in working capital was primarily due to the sale of our controlling interest in Arescom and the cancellation of Correlant’s line of credit, which required $5,500,000 of restricted cash.

 

For the 12 months following the date of this filing, our cash and working capital requirements will be primarily to fund operations as well as operations of our subsidiary, GoVideo.  This may include research and development, capital expenditures and cash acquisitions that we may undertake. We expect our cash and cash equivalents on hand and cash generated from operations will be sufficient to meet our cash requirements for the 12 months following the date of this filing. However, should our capital requirements exceed cash available from operations we cannot assure that additional sources of financing would be available to us on commercially favorable terms, or at all.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at June 30, 2002, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

		Payments Due by Period
		Total			Less Than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
Operating lease obligations		$	1,808		$	379		$	815		$	614		$	—
Capital lease obligations		—			—			—			—			—
Inventory purchase obligations		—			—			—			—			—
Total contractual cash obligations		$	1,808		$	379		$	815		$	614		$	—

 

Substantially all our operating lease obligations are building leases.

 

Off-Balance Sheet Arrangements

 

At June 30, 2002, we did not have any relationship with unconsolidated entities or financial partnerships, which other companies have established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Business Outlook

 

Following the hostile takeover of the Board of Directors of the Company on June 29, 2001, new management of the Company began a thorough review of all aspects of the business operations of the Company and its subsidiaries.  Since the takeover, we have engaged in numerous transactions to restructure and refocus our business.

 

Since the takeover, our primary strategy for business operations has been to restructure our unprofitable businesses, acquire undervalued companies (such as GoVideo) and focus on profitable growth.  We aggressively sold, restructured or shutdown our businesses which were either not consistently generating cash from operations or which could have required future significant cash investments to become consistently cashflow positive.  As a result of this effort, we currently have one subsidiary with operations (GoVideo) and one subsidiary with no operations (Correlant) but with significant cash and other assets.  We seek to identify market opportunities that will complement current operations, create and accelerate the growth and success of GoVideo and to implement new business plans to improve the returns on these businesses.

 

We plan to further improve the efficiencies of our consolidated operations and accelerate growth by utilizing our competitive advantages. We believe our competitive advantages include, but are not limited to, the following:

 

•                  Significant experience of current management in the communications and consumer electronics industry;

•                  Business opportunities in China and Asia through the strength of our relationships with significant shareholders, including TCL.  TCL is an affiliated company of TCL International (HKSE: 1070), a

 

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leading multimedia consumer electronics product manufacturer, with a strong brand presence in China and Asia.  TCL International’s core products include televisions, mobile handsets, personal computers, audio-visual equipment as well as information technology services.  Under its highly recognized and well-established TCL brand, it is one of the strongest players in the TV and mobile handset marketplace in China. Headquartered in China, it operates a number of highly efficient manufacturing bases in Asia.  On November 3, 2003, TCL International and Thomson (Euronext Paris: 18453; NYSE: TMS) signed a memorandum of understanding to form a joint venture company named TCL-Thomson Electronics for the development, manufacturing and distribution of television sets and related products and services. The joint venture’s objectives are to consolidate its global TV leader position, offer a complete and high-quality product range from basic to high-end innovative products, address all key markets competitively by leveraging an efficient cost structure, and seize development opportunities in the fast-growing Chinese market.

•                  GoVideo brand recognition; and

•                  The ability to increase market share by introducing TCL products into the US using our subsidiary – GoVideo’s – existing distribution channels.

 

As we look ahead to the rest of fiscal 2004 and beyond, we are planning for growth in annual revenues as a result of revenues generated from GoVideo.  And although consumer electronics historically have lower gross margins than our past gross margins realized from cable modems and cable modem-related products, we expect gross margin dollars to increase as a result of increased revenue.  Our strategy will remain within our core competency of telecommunications and consumer electronics as we attempt to gain strength, momentum and market share in the US and abroad.

 

Our future results of operations and the other forward-looking statements contained in this filing, including this MD&A, involve a number of risks and uncertainties–in particular, the statements regarding plans to cultivate new businesses that complement existing consumer electronics business, revenue and gross margin.  In addition to various factors that we have discussed above, a number of other factors could cause actual results to differ materially from our expectations.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires estimates and assumptions that affect the reported amounts and disclosures.

 

We believe the following, among others, to be critical accounting policies.  That is, they are both important to the portrayal of our financial condition and results of operations, and they require critical management judgments and estimates about matters that are inherently uncertain. Although we believe our judgments and estimates are appropriate and correct, actual future results may differ from our estimates.

 

•                  Revenue recognition.  We recognize revenue upon passage of title of our product in accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (SAB 101), as amended by SAB 101A and 101B.  We do not provide a product warranty.  The warranty liability for defective cable modems is the responsibility of our third-party manufacturer.

 

•                  Bad debt reserves.  We conduct business and extend credit based on an evaluation of our customers’ financial condition generally without requiring collateral. Exposure to losses on trade receivables is expected to vary by customer due to the financial condition of each customer. We monitor exposure to credit losses and maintain allowances for anticipated losses considered necessary under the circumstances. Delinquent notes and trade accounts receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The allowance is determined through an analysis of the aging of accounts receivable and assessments of risk based on historical trends and an evaluation of the impact of current and projected economic conditions.  We evaluate the past-due status of our notes and related parties and trade receivables based on contractual terms of sale. If the financial condition of our customers were to deteriorate, resulting in an impairment of ability to make payments, additional allowances may be required.

 

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•                  Related party transactions.  We have significant related party transactions and agreements; many of which are complex.  We believe such transactions have been accounted for at fair value.  We utilized our best estimate of the value of these transactions and agreements.  Had alternative assumptions been used, the values obtained may have been different.

 

•                  Inventories.  Inventories consist primarily of integrated circuits and other components to be used in the manufacture of cable modems.  Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out basis.  We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.  Due to the aforementioned change in Correlant’s business model and the timing of Correlant’s product life cycle, the inventory was fully reserved at June 30, 2002. It remained fully reserved until the shutdown of Correlant’s historical operations in the cable modem and cable modem-related market.

 

•                  Investments.  Our investments consist primarily of debt securities.  Investments are stated at fair value based on quoted market prices obtained from an independent banker.  Investments are classified as available-for-sale based on management’s intended use.  As of June 30, 2002 the cost of our investments approximated fair value.  Currently we do not have any equity investments in publicly traded companies.  During the period covered by this Annual Report, we held noncontrolling interests in private companies with no active market, which required fair values to be estimated.  We recorded an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary.

 

•                  Valuation of goodwill.  We actively pursued the acquisition of businesses, which resulted in significant goodwill.  We assess the impairment of goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable.  Factors which trigger a goodwill impairment review include, but are not limited to, the following: (1) significant negative industry or economic trends; (2) current, historical or projected losses that indicate continuing losses; and (3) a significant decline in our market capitalization relative to net book value.  When we determine there is an indicator the carrying value of the goodwill may not be recoverable, we measure impairment based on estimates of future cash flow.  These estimates include assumptions about future conditions within the Company as well as the entire industry.

 

•                  Income taxes.  We recorded a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized in the future.  We considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. If we determine that we will not realize all or part of our net deferred tax assets in the future, we will make an adjustment to the deferred tax assets, which will increase income tax expense in the period of such determination.

 

Recently Issued Accounting Standards

 

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3). The Company will be required to adopt the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS 146 also states the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. The Company will adopt SFAS 146 on January 1, 2003. The adoption of SFAS 146 in not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

 

In November 2002, the FASB issued FASB Interpretation (FIN) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).  FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the

 

26

 

obligation it assumes under that guarantee. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002, and are applicable to the Company’s product warranty liability and other guarantees.  The adoption of FIN 45 is not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

 

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation–Transition and Disclosure (SFAS 148), which amends SFAS 123.  SFAS 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects an entity’s accounting policy decisions with respect to stock-based employee compensation have on reported net income in both annual and interim periods. SFAS 148 is effective for annual periods ending after December 15, 2002 and interim periods beginning after December 15, 2002.  The adoption of the disclosure requirements of SFAS 148 will not have a material effect on the Company’s financial position, results of operations, or cash flows.

 

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. (FIN 46), which establishes accounting guidance for consolidation of a variable interest entity (VIE), formerly referred to as special purpose entities. FIN 46 applies to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a VIE. FIN 46 provides guidance for determining when an entity (Primary Beneficiary) should consolidate a VIE that functions to support the activities of the Primary Beneficiary. The Company has no contractual relationship or other business relationship with a VIE, and therefore the adoption of FIN46 will not have an effect on its financial position, results of operations, or cash flows.

 

In January 2003, the EITF published EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21), which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting, if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 will have a material impact on its financial position, results of operations, or cash flows.

 

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149).  SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities.  SFAS 149 is effective for contracts entered into or modified after June 30, 2003.  The Company does not expect SFAS 149 to have a material impact on its financial position, results of operations, or cash flows.

 

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150).  SFAS 150 represents the first phase of the FASB’s project to clarify the accounting treatment of certain instruments that possess characteristics of both liabilities and equity.  SFAS 150 generally requires that freestanding financial instruments that obligate the issuer to redeem the holders’ shares, or are indexed to such an obligation, and are settled in cash or settled with shares meeting certain conditions be treated as liabilities.  The provisions of SFAS 150 are effective immediately for instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003, with the exception of mandatorily redeemable instruments of non-public companies, which become subject to SFAS 150 for fiscal periods beginning after December 15, 2003.  The Company does not expect SFAS 150 to impact the classification of its outstanding preferred stock instruments upon the Company’s adoption effective July 1, 2003.

 

Certain Factors That May Affect Future Results

 

Forward Looking Statements.  This Annual Report on Form 10-K contains certain statements that are forward looking within the meaning of Section 27A of the Securities and Exchange Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks and uncertainties.  Any

 

27

 

statements contained herein (including, without limitation, statements to the effect that the Company or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” or “will” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof), that are not statements of historical fact should be construed as forward looking statements.   All statements that address operating performance, events or developments that our management expects or anticipates to incur in the future, including statements relating to sales and earnings growth or statements expressing general optimism about future operating results, are forward-looking statements.  These forward-looking statements are based on our management’s current views and assumptions regarding future events and operating performance.  Many factors could cause actual results to differ materially from estimates contained in our management’s forward-looking statements including the factors listed at pages 27 - 29.   The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, competitive pressures, inadequate capital, unexpected costs, lower revenues, net income and forecasts, the possibility of fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans and loss of key executives, among other things.  Because of these and other factors that may affect our operating results, past performance should not be considered an indicator of future performance and investors should not use historical results to anticipate results or trends in future periods.

 

The restatement and reaudit of our financial statements and the potential for review of our financial disclosure could materially impact our business and results of operations.  Following the replacement of prior management, the new management began reviewing various transactions undertaken by old management prior to June 29, 2001.  During its preliminary investigation, new management identified certain material transactions undertaken by prior management that impact reported financial and operating results with respect to its consolidated financial statements for the fiscal years ended June 30, 2001, 2000 and 1999.  Due to the preliminary results, the Company dismissed the then existing independent accountants, hired new independent accountants and re-audited all periods under investigation.  Accordingly, the Company was unable to file its Form 10-K for the period ending June 30, 2002 until April 2004.

 

As a result of the restatement and reaudit of our financial statements for fiscal 2001, 2000 and 1999 and the resulting delay in filing SEC reports, the SEC or other governmental authorities may choose to review our SEC filings.  If we are required to respond to the SEC or other governmental authorities or otherwise take actions in response to, arising out of, or relating to the restatement and reaudit of our financial statements, such actions may require significant attention and resources of management and, regardless of the outcome, could materially impact our business and results of operations.

 

If we become subject to such heightened scrutiny, this could adversely affect investor confidence, our ability to access the capital markets and cause the trading price for our securities to decline. In addition, we cannot assure you that we will not have to further restate earnings or further revise our reports for prior periods as a result of any SEC review.  Any such restatement could further impact investor confidence, our ability to access the capital markets and the trading price of our securities.

 

We are exposed to the risks associated with the recent decision to cease cable modem-related business by Correlant, our subsidiary. The Company is actively seeking a viable business model for Correlant that would maximize our shareholders’ interest. Even if a viable business model is found that will correspond with Correlant’s available cash size, there is still no guarantee the model will succeed.

 

The Company’s business operation is facing very tough competition. The Company’s current subsidiary GoVideo plays a unique niche in a highly competitive industry: consumer electronics. This industry is empirically facing a trend of declining gross margin resulted from emerging global market and competition. While GoVideo is profitable in fiscal 2003, the competitive nature of the industry may negatively affect the Company’s earning if GoVideo is unable to quickly adapt to the technological and market changes of the industry.

 

We may not be able to produce sufficient quantities of our products as we obtain components from, and depend on, a limited number of key suppliers.  All of our TV and DVD player products contain one or more components that are available from a single supply source and other components that are available from limited sources.  We depend on these sources to meet our production requirements.  We do not have any long term supply contracts.  Although we do not presently anticipate a disruption in this source of supply, if it is necessary for us to obtain these key components from an alternative supplier, it could take several months before we would begin receiving adequate supplies, and during this time we would be unable to satisfy our customers’ demands.  In such event,

 

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prolonged delays could result in the cancellation of orders and the loss of customers.

 

Our new products may not be well accepted.  Our future success depends on GoVideo’s ability to continue to design and develop and win acceptance of its products and services, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology, and subjective and changing consumer preferences.

 

The introduction or expected introduction of new products or technologies may depress sales of existing products and technologies. This may result in declining prices and inventory obsolescence. As GoVideo maintains a substantial investment in product inventory, declining prices and inventory obsolescence could have a material adverse effect on our business and financial results.

 

Our stock price may not come back.  The Company’s stock was removed from OTC Bulletin Board as a result of the Company’s failure to timely submit the Form 10-K for the year of 2002. The current trading of the Company’s stock is sporadic and minimal and there is no established public trading market for our common stock. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, in particular, and that have often been unrelated to the operating performance of these companies. These factors, as well as general economic and political conditions, may materially adversely affect the market price of our common stock in the future. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees.

 

Our executive officers and key personnel are critical to our business and the loss of their services could disrupt our operations and our customer relationships.  Our success depends to a significant degree upon the continuing contributions of our key management, technical, marketing and sales employees.  There can be no assurance that we will be successful in retaining our key employees or that we can attract and retain additional skilled personnel as required. The loss of the services of key personnel could significantly harm our results of operations and business.

 

Because of these and other factors affecting our operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

 

Interest Risk.   Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio.  We place our investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer.  We are averse to principal loss and ensure the safety and preservation of invested funds by limiting default risk, market risk, and reinvestment risk.  We minimize our risk by investing in only the safest and highest credit quality securities and by constantly positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor.  Our portfolio includes only corporate debt securities and municipal bonds.

 

Foreign Currency Risk.   Until January 31, 2002 a large portion of our business was transacted in Taiwan.  However, the functional currency of our Taiwan branch was the US dollar.  Only a small number of transactions were denominated in the Taiwan dollar and exposed to foreign currency exchange rate risk.  Subsequent to January 31, 2002, as part of the change in Correlant’s business model, we closed our Taiwan branch and all transactions are now denominated in the US dollar.  Therefore, we do not have any hedging or similar foreign currency contracts.  To date, we have not experienced any material foreign currency exchange rate gains or losses associated with transactions denominated in the Taiwan dollar and do not expect any significant changes in foreign currency exposure in the near future.

 

Item 8.  Financial Statements

 

The information required by Item 8 is included on pages F-1 to F-39.

 

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Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

(a)           The Company previously reported the dismissal of Larson, Allen, Weishair & Co. as its independent accountants and the appointment of Hein & Associates LLP (“Hein”) as its new independent accountants in current reports on Form 8-K and 8-K/A as filed with the Commission on March 26, March 27 and April 12, 2002.

 

The Company previously reported the dismissal of Ernst & Young LLP as the independent accountant of Correlant, a “significant subsidiary” (as defined in Rule 1-02 of Regulation S-X) of the Company, and the engagement of Hein as the new independent accountant of Correlant on April 23, 2002 as approved by the Board, in the Company’s current reports on Form 8-K and 8-K/A as filed with the Commission on April 25 and June 4, 2002.

 

(b)           In connection with the change in accountants referenced above, there were no disagreements with the former accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountants, would have caused them to make reference to the subject matter of the disagreement in connection with their reports. In connection with the change in accountants referenced above, there were no “reportable events” of the type described in Item 304(a)(1)(v).

 

Item 9A.  Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2002, the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in our Exchange Act filings.

 

Changes in internal control over financial reporting

 

Except as set forth below, during fiscal 2002, there were no significant changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

As previously reported, following the replacement of prior management on June 29, 2001, new management began an extensive undertaking to review various transactions undertaken by and involving old management prior to June 29, 2001.  As a consequence of its preliminary review, effective March 25, 2002, the Company terminated its audit relationship with its then existing independent accountants and replaced such firm with new independent accountants. As previously reported, during its preliminary investigation, new management of the Company identified various transactions involving a former subsidiary and other transactions undertaken by prior management which impacted reported financial and operating results with respect to its consolidated financial statements for the fiscal years ended June 30, 2001, 2000 and 1999 and ultimately concluded that a reaudit of the financial statements for the fiscal years ended June 30, 2001, 2000 and 1999 was required. Effective July 24, 2002, the Company engaged its new independent accountants, to perform such reaudit and the Company concluded that it must restate these prior periods.  During the course of its review and investigation of various transactions undertaken by and involving old management, and its completion of such restatement and reaudit, new management of the Company has established its own systems of internal controls over financial reporting.

 

PART III

 

Item 10.  Directors and Executive Officers of the Registrant

 

(A) Lotus Pacific Directors

 

The Company has five Directors elected in three separate classes. One Director serves as a Class I Director, and will serve for a term which was scheduled to expire at the 2002 Annual Meeting of stockholders, or until his successor is duly elected and qualified or until his death, resignation or removal. One director serves as a

 

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Class II Director, and will serve for a term which was scheduled to expire at the 2003 Annual Meeting of stockholders, or until his successor is duly elected and qualified or until his death, resignation or removal. Three Directors serve as Class III Directors, and each will serve for a term which was scheduled to expire at the 2004 Annual Meeting of stockholders, or until their successors are duly elected and qualified or until their death, resignation or removal. The following table sets forth certain information with respect to the directors and executive officers of the Company as of March 31, 2004.

 

Name		Age		Office
LI, Dongsheng		45		Chairman of the Board and Class III Director
YAN, Vincent Yong		41		President, Chief Executive Officer, Class II Director
LIU, James Jian		48		Class III Director
LIN, Zuoquan		40		Class I Director
LIN, Jih-Ming		52		Class III Director

 

Mr. Dongsheng Li was elected as a Class III Director of the Company on June 29, 2001. Mr. Li also has served as Chairman of the board of directors of the Company’s subsidiary, Correlant, since February 2003.  Mr. Li has been Chairman of the board of directors and President of TCL Corporation (formerly TCL Holdings Co., Ltd.), a People’s Republic of China company (and TCL’s parent company), since 1996. Mr. Li is also the Chairman of the board of directors of TCL International Holdings, Ltd.  Mr. Li has 20 years of experience in the telecommunication equipment and consumer electronics industry. Mr. Li holds a Bachelor degree in Engineering from South China University of Technology.

 

Mr. Vincent Yong Yan was elected as a Class II Director of the Company on June 29, 2001. Mr. Yan has been the President, CEO and Secretary of the Company since June 29, 2001. Mr. Yan was the CFO of the Company from June 29, 2001 until November 2002.  Mr. Yan also has served as a Vice President, director and member of the Executive Committee of the board of directors of Correlant since February 2003.  Mr. Yan has been Executive Director and Chief Financial Officer of TCL International Holdings, Ltd., a publicly traded consumer electronics and information technology company since 1999. Prior to joining TCL, Mr. Yan served as PRC Country Manager of Tulip Computers (Asia) Ltd., a subsidiary of a European computer manufacturer. Mr. Yan has over ten years of experience in the computer and consumer goods industries. Mr. Yan holds an MBA from Stanford University and a Masters degree in Computer Science from Peking University.

 

Mr. James Jian Liu was appointed as a Class III Director of the Company on August 6, 2001. Mr. Liu also has served as a director of Correlant since February 2003. Mr. Liu served as President of JBL International Inc., an apparel agent in New York, New York, from January 1996 to the present.  He earned his BA degree from Nanjing University, China.

 

Professor Zuoquan Lin was appointed as a Class I Director on March 25, 2002. Professor Lin also has served as a director of Correlant since February 2003. He is currently the Dean of the Department of Information Science, a position he has held since 1998, and is the Director of the Networking Research and Development Center at Peking University, China, having held the position since 1999. His main areas of research include computer software, artificial intelligence, network economy and management information system. Professor Lin also is currently an independent consultant in enterprise strategy and information technology. From 1995 to 1997, he was the Director of the Institute of Computer Sciences at Shantou University, China.  Professor Lin holds a Ph.D. in computer science from Bei Hang Univerity in Beijing, China.

 

Mr. Jih-Ming Lin was elected a Class III Director of the Company on June 29, 2001. Mr. Lin has been Vice President of Techlab Tech Inc., a Taiwanese semiconductor manufacturer, since 1998. From 1992 to 1998, Mr. Lin served as Vice President of National Advantages Computer, Inc., a computer products manufacturer. Mr. Lin has 16 years of experience in the semiconductor industry. Mr. Lin is a graduate of Defense Medical Industry in Taiwan.

 

(B) Lotus Pacific Executive Officers

 

Name		Age		Office
YAN, Vincent Yong		41		President, Chief Executive Officer, Class II Director
DAVIS, Steve		35		Chief Financial Officer

 

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See discussion related to Mr. Yan above.

 

Mr. Davis was appointed as the Company’s Chief Financial Officer in March 2004 and will serve until his successor is appointed and approved.  Mr. Davis previously served as the Company’s Controller since October 2002.  Mr. Davis also has served as Vice President of Correlant since March 2003 and Chief Financial Officer of the Company’s subsidiary Opta Systems, LLC, dba GoVideo, since July 2003.  Prior to joining the Company, Mr. Davis served as Controller and Chief Financial Officer for a number of start-up or financially distressed companies including BuyGolf.com, iWear Corp and Aviation Distributors, Inc. from July 1998 until October 2002.   Prior to this Mr. Davis was with Ernst & Young LLP for eight years, from September 1990 to July 1998, most recently as Senior Manager.

 

None of the members of the Board of Directors or executive officers of the Company are related to one another.

 

(C)  Section 16(a) Beneficial Ownership Reporting Compliance

 

During fiscal 2002, the following directors had delayed filings of Form 3: Li Dongsheng and Vincent Yan (10 days), and James Jian Liu (20 days). The delay was due to the fact that when the current management took over the Company in June 2001, it needed time to contract a professional agent to do the filing for the Company.

 

The following four directors did not tender their Form 4 when their association with the Company was terminated: Robert Lo, Chris Ching, Chung-I Chiang, and William Hu.

 

(D) Code of Ethics

 

The Company has adopted a code of ethics that applies to all employees, executive officers and all members of our finance department, including the principal accounting officer.  The Company will provide a copy of our code of ethics to any person, free of charge, upon written request sent to our principal executive office.

 

(E)  Audit Committee

 

The Company has a separately designated standing Audit Committee of the Company’s Board of Directors established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. Jian Liu and Zuoquan Lin are the members of our Audit Committee.  The Audit Committee shall represent the Board of Directors in discharging its responsibility relating to the accounting, reporting and financial practices of the Company and its subsidiaries and shall have general responsibility for surveillance of the systems of internal controls, which management and the Board of Directors have established, the performance and selection of independent auditors, and our audit and financial reporting processes.

 

Item 11.  Executive Compensation

 

The following table sets forth for the periods presented the compensation for services in all capacities to the Company of the persons who were the (i) the chief executive officer of the Company, and (ii) other executive officers of the Company who received over $100,000 in compensation during the fiscal year (collectively, the “Named Officers”).

 

Summary Compensation Table

 

		Annual Compensation												Long Term Compensation
Name and Principal Position		Year		Salary			Bonus			Other Annual Compensation		Restricted Stock Awards				Securities Underlying Options		LTIP Payouts		All Other Compensation
Vincent Y Yan (1)		2002		$	120,000		—			—		—				—		—		—
President, Chief		2001		120,000			—			—		—				—		—		—
Executive Officer		2000		N/A			—			—		—				—		—		—
CFO
William G. Hu (2)		2002		N/A			—			—		—				—		—		—
CEO		2001		$	120,000		—			—		—				—		—		—
		2000		N/A			—			—		—				—		—		—
Jeremy Wang (3)		2002		N/A			—			—		—				—		—		—
President		2001		$	160,000		—			—		—				—		—		—
		2000		120,000			—			—		—				—		—		—
David Li		2002		N/A			—			—		—				—		—		—
CFO		2001		$	120,000		$	90,000		—		—				—		—		—
		2000		66,607			—			—		—				—		—		—
Hsing Chih Tuan		2002		$	140,250		$	4,000		—		—				—		—		—
President - Correlant		2001		165,000			5,000			—		—				—		—		—
		2000		114,045			—			—		—				—		—		—
Max Lu(4)		2002		Unknown			Unknown					—				—		—		—
President - Arescom		2001		$	168,000		—			—		—				—		—		—
		2000		$	163,384		—			—		—				—		—		—

 

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(1) Vincent Yan has an employment contract with the Company signed on June 29, 2001. The contract was automatically extended for a year on June 30, 2003.

 

(2) Reflects annual salary paid during the portion of fiscal 2001 while employed by the Company. Employment was terminated on June 29, 2001.

 

(3) Reflects annual salary paid during the portion of fiscal 2001 while employed by the Company.   Employment was terminated December, 2000.

 

(4)  Due to the sale of Arescom, this information is unavailable for fiscal 2002.

 

Stock Options

 

No current executive officer or director of the Company holds any stock options. No stock option grants were made during fiscal 2002. No stock appreciation rights were granted during fiscal 2002.

 

Option Exercises and Holdings

 

No current Executive Officer or director of the Company holds any option, and no options were exercised during fiscal 2002.

 

Director Compensation

 

For fiscal 2002, non-employee directors of the Company were each paid $1,000 for each regular meeting of the Board of Directors which they attended and $800 for each special or committee meeting of the Board of Directors which they attended, plus, in each case, actual out-of-pocket expenses for attendance. Non-employee directors were eligible to receive an option to purchase 5,000 shares of the Company’s common stock for each fiscal year that they serve as Directors. For fiscal 2002, no directors received cash payments or stock options for their service on the Board of the Directors.

 

Directors who are also employees of the Company do not receive cash payments or stock options for their service on the Board of the Directors.

 

Employment Contracts, Termination of Employment, and Change in Control Agreements

 

None of the other employees besides Mr. Yan has any employment or severance agreement with the Company and their employment may be terminated at any time at the discretion of the Board of Directors.

 

On June 29, 2001, the Company entered into a one-year employment agreement with Mr. Yan for the positions of President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company. This agreement may be extended for successive one-year periods by the Company and Mr. Yan. For his services, Mr. Yan is paid an annual salary of $120,000 and an annual bonus to be determined in the discretion of the Special Committee of the Board of Directors of the Company. A copy of the employment contract with Vincent Yan was attached in the Company’s Form 10-K filed on October 12, 2001.  During fiscal 2002, the employment agreement entered into between the Company and Vincent Yan, CEO and President of the Company, was extended for one year without any changes.

 

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Compensation Committee Interlocks and Insider Participation

 

The compensation for executive officers of the Company is reviewed and determined on an annual basis by the Compensation Committee of the Company’s Board; the Compensation Committee was approved by the Board in March 2004.  The members of the Compensation Committee, Jian Liu and Zuoquan Lin, are independent directors and are not employees of the Company.  Neither of them are or were officers or employees of Lotus Pacific or any of its subsidiaries.

 

Before the Compensation Committee was created, compensation was determined by three members of the Board of Directors, Jian Liu and Zuoquan Lin who are independent directors and are not employees of the Company, and Li Dongsheng, Chairman of the Board.

 

Stock Price Performance Graph

 

The line graph below compares the cumulative total shareholder return on our Lotus Pacific common stock with the cumulative total return for the Standard & Poor’s SmallCap 600 Index, and an index of peer group companies selected by us for the period from June 30, 1998 through June 30, 2002.  The graph assumes the value of the investment in our Lotus Pacific common stock and each index was $100 at June 30, 1998.  It also assumes that all dividends paid by those companies included in the indexes were reinvested.  No cash dividends have been declared on our Lotus Pacific common stock.

 

Comparison of 5 Year Cumulative Total Return*

Among Lotus Pacific, Inc, the Standard & Poor’s SmallCap 600 Index,

And a Peer Group

 

* $100 invested on June 30, 1998 in stock or index — including reinvestment of dividends.  Fiscal year ending June 30.

 

		June 30,
		1998			1999			2000			2001			2002
Lotus Pacific		$	100.00		$	103.70		$	97.53		$	9.38		$	0.59
S&P SmallCap 600		100.00			355.35			403.57			443.72			443.15
Peer Group		100.00			80.30			151.12			13.01			2.97

 

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The peer group is composed of the publicly-traded common stock of two companies that sell cable modems and cable-modem related equipment.  We believe the peer group is representative of the industry in which our most significant subsidiary, Correlant, operated during the years presented in this report.  Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information with respect to the number of shares of Common Stock beneficially owned as of March 31, 2004 by (i) all persons who are beneficial owners of five percent or more of the Company’s Common Stock, (ii) the Company’s executive officers named in the Summary Compensation Table above, (iii) each director and nominee for director of the Company, and (iv) all current executive officers and directors as a group as of March 31, 2004:

 

		Shares of Stock Beneficially Owned (1)		Percentage of Class (1)
Lotus International Holdings Ltd.(2) Suite 13 First Fl., Oliaji Trade Center  Francis Rachel Street  Victoria, Mahe Republic Of Seychelle		12,000,000		35.3	%
TCL Industries Holdings (HK) Ltd.(3) 13/F TCL Tower  8 Tai Chung Road  Tsuen Wan, Hong Kong		9,606,671		17.4	%
LI, Dongsheng		—		—
YAN, Vincent Yong		—		—
LIU, James Jiam		—		—
LIN, Zuoquan		—		—
LIN, Jih-Ming		—		—
DAVIS, Steve		—		—
All directors and executive officers as a group (consisting of 6 persons)		—		—

 

(1) All information is as of February 29, 2004 and was determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, based solely upon information furnished by the persons listed or contained in filings made by them with the Securities and Exchange Commission.

(2) Lotus International Holdings Ltd. is controlled by TCL Industries Holdings (HK) Ltd.

(3) TCL Industries Holdings (HK) Ltd. is an affiliate of TCL Holdings Group.

 

Item 13.  Certain Relationships and Related Transactions

 

To the knowledge of the Company, during fiscal 2002, Lotus Pacific had no related party transactions of the kind described in Item 404 of Regulation S-K.

 

Subsequent to fiscal 2002, Lotus Pacific entered into the following transactions required to be reported under Item 404 of Regulation S-K:

 

Effective January 30, 2003, Lotus Pacific and TCL, a Lotus Pacific stockholder with holdings of greater than 10% of Lotus Pacific’s outstanding shares, settled all disputes with prior independent accountants of the Company concerning their audits of the Company for fiscal 2001 and prior. The prior auditors deny that they are liable for any damages to Lotus Pacific, but consented to the settlement to avoid the costs of litigation.  Pursuant to an agreement dated March 24, 2003 between Lotus Pacific and TCL, Lotus Pacific and TCL agreed on the allocation of the settlement funds, whereby TCL Industries received $6,500,000 in cash, Lotus Pacific received $3,500,000 in cash and Lotus Pacific will be entitled to receive up to an additional $3,500,000 in cash held in an escrow account, plus interest accrued therein.  In connection with the agreement, Lotus Pacific and TCL agreed

 

35

 

to forbear from bringing claims against each other with respect to the allocation of funds or otherwise.

 

On September 30, 2003, Lotus Pacific sold its entire equity interest in TCL Digital to TCL Information for a cash price of approximately $5,600,000 US dollars.   The Company invested $5,280,000 US dollars to acquire the sold equity in TCL Digital. TCL Information is an affiliate of TCL, a stockholder of the Company.  Li Dongsheng and Vincent Yan, directors of the Company, are directors and officers of TCL International, a publicly traded company on the Hong Kong Stock Exchange (HKSE: 1070.HK), an affiliate of TCL.

 

On February 17, 2003, the Lotus Pacific Board of Directors approved the repurchase of approximately 623,000 shares of Lotus Pacific common stock at $0.30 per share from Gordon Lum.  Mr. Lum was appointed as a Class II Director of the Company on August 6, 2001.  In connection with the stock repurchase, Mr. Lum resigned from the Board of Directors.

 

Item 14 – Principal Accounting Fees and Services

The following is a summary of the fees billed to us by Hein for professional services rendered from the date Hein was engaged.  Hein was engaged March 25, 2002 to audit the year ended June 30, 2002 and July 24, 2002 for the reaudit of the years ended June 30, 2001, 2000 and 1999.

 

 

Audit Fees. Consists of fees billed for professional services rendered for the audit and restatement of our consolidated financial statements and review of our interim consolidated financial statements included in quarterly reports and services that are normally provided by Hein in connection with statutory and regulatory filings or engagements.

 

Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit fees.” These services include employee benefit plan audits, accounting consultations in connection with acquisitions, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.

 

Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice, and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defense, mergers and acquisitions, and international tax planning.

 

Policy Related to Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors.  Our Audit Committee’s has a policy of pre-approving all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

 

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PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

(a)	Documents filed as part of this report.
1.	Financial Statements
		(i)	Report of Hein & Associates LLP,  Independent Auditors
		(ii)	Consolidated Balance Sheets.
		(iii)	Consolidated Statements of Operations.
		(iv)	Consolidated Statements of Stockholders’ Equity.
		(v)	Consolidated Statements of Cash Flows.
		(vi)	Notes to Consolidated Financial Statements.
	2.	Financial Statement Schedules
		All schedules are omitted because they are not applicable or the required information is shown in the financial statements or related notes.
	3.	Exhibits

 

Exhibit Number		Description of Exhibit		Method of Filing
3.1		Certificate of Amendment of Certificate of Incorporation dated as May 25, 1999		Incorporated by reference to Exhibit 3.1 to Form 10/A, filed June 17, 1999
3.2		Certificate of Amendment of Certificate of Incorporation dated as June 15, 1998		Incorporated by reference to Exhibit 3.1 to Form 10, filed October 27, 1998
3.3		Certificate of Incorporation, as amended		Incorporated by reference to Exhibit 3.2 to Form 10, filed October 27, 1998
3.4		Amended and Restated Bylaws		Incorporated by reference to Exhibit 3.3 to Form 10-K, filed October 13, 2000
3.5		Amendment to Bylaws		Incorporated by reference to Exhibit 99.1 to Form 8K, filed July 2, 2001
10.1		2000 Equity Incentive Plan		Incorporated by reference to Exhibit A to Proxy Statement on Schedule 14A filed April 4, 2000
10.2		Agreement dated September 30, 2000, between the registrant and TurboNet Communications (now Correlant Communications, Inc.)		Incorporated by reference to Exhibit 10.10 to Form 10-K, filed October 13, 2000
10.3		Lotus Pacific Inc., Executive Employment Agreement		Incorporated by reference to Exhibit 10.11 to Form 10-K, filed October 15, 2001
10.4		Opta Systems, LLC dba GoVideo Executive Employment Agreement		Filed herewith
10.5		Exchange Agreement between Registrant and ARESCOM Inc. dated December 11, 2001		Filed herewith
10.6		Stock Purchase Agreement between Registrant and Solomon Extreme International Ltd. dated December 11, 2001		Filed herewith
10.7		Acquisition Agreement of TCL Digital dated January 18, 2003		Filed herewith
10.8		Opta LLC Interest Purchase Agreement between Registrant and Carmco		Filed herewith

 

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		Investment, LLC, dated April 17, 2003
10.9		Sale agreement of TCL Digital dated December 20,2003		Filed herewith
10.10		Current Lease – GoVideo Office Lease		Filed herewith
10.11		Current Lease – Go Video Lease for Commercial Space		Filed herewith
16.1		Letter re Change in Certifying Accountant		Incorporated by reference to Exhibit 16.1 to Form 8-K, filed April 12, 2002
16.2		Letter re Change in Certifying Accountant		Incorporated by reference to Exhibit 16.2 to Form 8-K, filed June 4, 2002
21		List of Subsidiaries		Filed herewith
31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Filed herewith
31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Filed herewith
32.1		Certification of Chief Executive Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith
32.2		Certification of Chief Financial Officer Pursuant to Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith

 

(b)  Reports on Form 8-K.

 

During the fourth quarter ended June 30, 2002, the registrant filed the following reports on Form 8-K:

 

• Form 8-K/A Amendment No. 2 as filed April 12, 2002, regarding changes in Registrant’s independent accountants.

 

• Form 8-K as filed April 24, 2002, regarding changes in the independent accountants for Correlant.

 

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Signatures

 

Pursuant to the requirements of Section 13 and 15(d) 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.

 

Signature			Title		Date
/s/ YAN, Vincent Yong			President, Chief Executive Officer, Director		April 15, 2004
YAN, Vincent Yong
/s/ DAVIS, Steve			Chief Financial Officer (Principal Accounting Officer)		April 15, 2004
DAVIS, Steve

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

 

Signature			Title		Date
/s/ LI, Dongsheng			Chairman of the Board		April 15, 2004
LI Dongsheng.
/s/ YAN, Vincent Yong			President, Chief Executive Officer, Director		April 15, 2004
YAN, Vincent Yong.
/s/ LIU, Jian			Director		April 15, 2004
LIU, Jian
/s/ LIN, Zouquan			Director		April 15, 2004
LIN, Zouquan

 

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