As filed with the Securities and Exchange Commission on November 28, 2000
Registration No. --------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TENGTU INTERNATIONAL CORP.
---------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
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(State or jurisdiction of incorporation or organization)
6799
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(Primary Standard Industrial Classification Code Number)
77-0407366
------------------------------------
(I.R.S. Employer Identification No.)
206-5050 Kingsway, Burnaby, B.C., Canada V5H 4H2 604-438-9827
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(Address, including zip code, and
telephone number, including area code, of
registrant's principal executive offices)
Hecht & Steckman, P.C., 60 East 42nd Street, Suite 5101, New York,
New York 10165-5101
212-490-3232
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(Name, address, including zip code, and telephone number,
including area code of agent for service)
From time to time after the effective date of this Registration Statement
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(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933 please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(8) OFFERING PRICE PER UNIT (3) AGGREGATE OFFERING PRICE REGISTRATION FEE
--------------------------- ------------------- -------------------------- ------------------------ ----------------
<S> <C> <C> <C> <C>
I. Common Stock, $.01 par
value(2)................... 39,420,00 $.46875 $18,478,125 $4878.22
II. Common Stock, $.01 par
value underlying
Commitment Warrants(4)....... 1,200,000 $0.745 $ 894,000 $236.02
III. Common Stock, $.01 par
value underlying
Purchase Warrants (5)........ 4,380,000 $.46875 $ 2,053,125 $542.03
IV. Common Stock, $.01 par
value underlying
Convertible Debenture(6)..... 3,000,000 $0.50 $ 1,500,000 $396.00
V. Common Stock, $.01 par
value underlying
Warrants issued to Top
Eagle (7).................... 1,500,000 $1.00 $1,500,000 $396.00
VI. Common Stock, $.01 par
value underlying
Warrants issued to
Orion Capital Incorporated (8).. 100,000 $.50 $ 50,000 $ 13.20
VII. Common Stock, $.01 par
value pledged to Orion Capital
Incorporated (9)................ 1,000,000 $.46875 $ 468,750 $123.75
VIII. Common Stock, $.01 par
value (10)...................... 500,000 $.46875 $ 234,375 $ 61.88
Totals 51,100,000 $25,178,375 $6,647.09
<FN>
(1) In the event of a stock split, stock dividend or similar transaction
involving our common stock, in order to prevent dilution, the number of shares
registered shall automatically be increased to cover the additional shares in
accordance with Rule 416(a) under the Securities Act of 1933.
(2) Issuable pursuant to our Investment Agreement with Swartz Private Equity,
L.L.C. ("Swartz"). Under the Investment Agreement, for each share of our $.01
par value per share common stock issued to Swartz pursuant to a put right,
Swartz will pay the us the lesser of (1) the market price for each share, minus
$.075, or (2) 92% of the market price for each share, except that Swartz must
pay at least the designated minimum per share price, if any, we specify in a
notice provided to Swartz prior to a put. Market price is defined as the lowest
closing bid price for our common stock during the 20 business day pricing period
immediately following a put date. The maximum amount of our common stock to be
purchased by Swartz under the Investment Agreement is $30,000,000. See "The
Investment Agreement" and "Selling Securityholders."
(3) The aggregate offering price of shares of our common stock is estimated
solely for purposes of calculating the registration fees, as determined in
accordance with Rule 457, as follows:
-- For the common stock indicated in rows I., VII. and VIII., above, in
accordance with Rule 457(c), the aggregate offering price of shares of
our common stock is estimated using the average of the high and low
sales prices reported by the over-the-counter Bulletin Board for the
common stock on November 24, 2000, which was $.46875 per share;
-- For the common stock underlying warrants in rows II., III. and VI,
above, the filing fee is based upon the higher of (i) the average of
the high and low sales prices reported by the over-the-counter Bulletin
Board for the common stock on November 24, 2000 or (ii) the exercise
price of such warrants pursuant to Rule 457(g);
<PAGE>
(4) Represents shares of common stock issuable to Swartz upon exercise of an
outstanding Commitment Warrant issued pursuant to our Investment Agreement
with Swartz. The Commitment Warrants bear an initial exercise price of
$0.745 per share. The initial exercise price is subject to adjustment every six
(6) months and is tied to the lowest closing price for the five trading days
preceding the adjustment.
(5) Represents shares of our common stock issuable to Swartz upon exercise of
warrants issuable to Swartz under our Investment Agreement with
Swartz. Pursuant to the Investment Agreement, we are required to issue to Swartz
warrants to purchase a number of shares of common stock equal to 10% of the
number of shares that we sell to Swartz in puts under the Investment Agreement
at exercise prices equal to 110% of the market price when the warrant is issued.
The exercise price is subject to adjustment every six (6) months and is tied to
the lowest closing price for the five trading days preceding the adjustment.
(6) Represents shares of our common stock issuable upon conversion of a
$1,500,000 Convertible Debenture issued to Top Eagle Holdings, Ltd. under Rule
506, due December 23, 2003. Until December 23, 2000, the conversion price os
$.50 per share. After December 23, 2000, the conversion price becomes $1.00 per
share. After December 23, 2001, the conversion price becomes $2.00 per share.
After December 23, 2002, the conversion price becomes $4.00 per share.
(7) Represents shares of our common stock issuable upon the exercise of
1,500,000 warrants issued to Top Eagle Holdings, Ltd. in a Rule 506 offering.
The warrants expire on December 23, 2002. Until December 23, 2000, the exercise
price is $1.00 per share. After December 23, 2000, the exercise price becomes
$2.00 per share. After December 23, 2001, the exercise price becomes $4.00 per
share.
(8) Represents shares of our common stock issuable upon exercise of 100,000
warrants issued to Orion Capital Incorporated in connection with a $500,000 loan
made to us on November 15, 2000. The warrants have a five year term and are
exercisable at $.50 per share.
(9) Represents shares of our common stock outstanding and held by the following
five of our officers and/or directors which has been pledged to Orion Capital
Incorporated as security for a loan made to us: Pak Kwan Cheung, Jing Lian,
Xiaofeng Lin, Zhang Fan Qi and Hai Nan.
(10) Represents shares of our common stock to be offered by us to consultants
and service providers promptly and on a continuous basis for a period in excess
of 30 days from the date of effectiveness of this registration statement.
</FN>
</TABLE>
<PAGE>
PROSPECTUS
51,100,000 SHARES
$.01 PAR VALUE PER SHARE COMMON STOCK
TENGTU INTERNATIONAL CORP.
This prospectus relates to:
(1) the resale by Top Eagle Holdings, Ltd. of up to 4,500,000 shares of
our $.01 par value per share common stock issuable upon conversion of a
$1,500,000 Convertible Debenture and upon exercise of 1,500,000 warrants, both
of which were issued in connection with a financing transaction in December,
1999.
(2) the resale by Orion Capital Incorporated of 100,000 shares of our
$.01 par value per share common stock issuable upon exercise of 100,000 warrants
granted in connection with a loan made to us on November 17, 2000.
(3) the resale by Orion Capital Incorporated of 1,000,000 shares of our
$.01 par value per share common stock, owned by the following of our officers
and/or directors, which was pledged as security for a loan made to us by Orion
Capital Incorporated: Pak Kwan Cheung, Jing Lian, Xiaofeng Lin, Zhang Fan Qi and
Hai Nan.
(4) the offering, by us, of up to 500,000 shares of our $.01 par value
per share common stock in exchange for public relations and investor relations
services.
(5) the resale by Swartz Private Equity, L.L.C. ("Swartz") of up to
45,000,000 shares of our $.01 par value per share common stock.
Pursuant to our Investment Agreement with Swartz dated October 25, 2000
(the "Investment Agreement"), we have established an equity line under which we
have the right to sell up to $30 million of our $.01 par value per share common
stock to Swartz in "puts" at a price equal to the lesser of (1) the market price
for each share, minus $.075, and (2) 92% of the market price for each share,
except that Swartz must pay at least the designated minimum per share price, if
any, that we specify in a notice provided to Swartz prior to a put. Market price
is defined as the lowest closing bid price for our Class A common stock during
the 20 business day pricing period immediately following the date on which we
notify Swartz of our intention to commence a put.
Swartz may sell the stock purchased from us on the over-the-counter
Bulletin Board or in negotiated transactions. Of the shares offered,
-- up to 39,420,000 shares are issuable to Swartz based on the
Investment Agreement, and
-- up to 1,200,000 shares are issuable upon the exercise of the
outstanding Commitment Warrant issued to Swartz under the Investment
Agreement.
-- up to 4,380,000 shares issuable upon the exercise of the Purchase
Warrants issuable to Swartz under the Investment Agreement.
We will not receive the proceeds of any of the shares sold by Swartz. However,
we may receive up to $30 million from the sale of shares to Swartz, and we may
receive additional proceeds from the sale to Swartz of shares issuable upon the
exercise of any warrants that may be exercised by Swartz.
1
<PAGE>
The offering to Swartz is being made on a firm commitment basis. See
"Determination of the Offering Price" on page 16.
Our common stock is traded on the over-the-counter Bulletin Board under
the symbol "TNTU."
Investing in our common stock involves certain risks. See "RISK
FACTORS" beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is November 27, 2000.
2
<PAGE>
TABLE OF CONTENTS
PART I
Table of Contents........................................................... 3-4
Prospectus Summary.......................................................... 5-7
Risk Factors................................................................7-15
Use of Proceeds............................................................. 16
Determination of Offering Price ............................................ 16
Dilution ..................................................................16-17
Selling Security Holders ..................................................17-22
Plan of Distribution ......................................................22-23
Description of Securities to Be Registered.................................23-25
Interests of Named Experts and Counsel.....................................25-26
Information with Respect to the Registrant ................................26-53
(a) Description of Business .....................................26-35
(b) Description of Property .....................................35-36
(c) Legal Proceedings ........................................... 36
(d) Market Price of and Dividends on the
Registrants Common Equity and Related
Stockholder Matters ......................................... 36
(e) Index to Financial Statements and
Financial Statements .......................................F1-F44
(f) Selected Financial Data ..................................... 37
(g) Supplementary Financial Information.......................... 37
(h) Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................................37-44
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................................... 44
(j) Quantitative and Qualitative Disclosures
about Market Risk............................................44-45
(k) Directors and Executive Officers.............................45-47
(l) Executive Compensation.......................................48-51
(m) Security Ownership of Certain Beneficial
Owners and Management........................................51-52
(n) Certain Relationships and Related Party
Transactions.................................................52-53
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities............................................. 53
3
<PAGE>
PART II
Other Expenses of Issuance and Distribution ............................... 54
Indemnification of Directors and Officers ................................. 55
Recent Sales of Unregistered Securities ...................................55-56
Index to Exhibits and Financial Statement Schedules .......................56-58
Undertakings .............................................................. 58
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY TENGTU INTERNATIONAL CORP. OR SWARTZ
PRIVATE EQUITY, L.L.C. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
PURSUANT TO THIS PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS SINCE THE DATE OF THIS
PROSPECTUS OR THAT THE INFORMATION CONTAINED IN IT IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
4
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of the pertinent information regarding this
Offering. This summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. The Prospectus should be read in its entirety, especially the
risks of investing in our common stock discussed under "RISK FACTORS," as this
summary does not constitute a complete recitation of facts necessary to make an
investment decision. References in this prospectus to the "Company", "We", "Our"
and "Us" refer to Tengtu International Corp., a Delaware corporation.
The Offering
Common Stock
offered * 51,100,000 shares
Common Stock Outstanding
Prior to this Offering 24,176,321 shares
Common Stock Outstanding
After this Offering 75,276,321 shares
Offering Price The shares being registered hereunder are being
offered by Swartz, Top Eagle Holdings, Ltd. and
Orion Capital Incorporated from time to time
at the then current market price or such
other price as they may negotiate. The
shares to be offered by us are to be
exchanged for public relations and investor
relations services at the then current
market rate.
Dividend Policy We do not anticipate paying dividends on our
Common Stock in the foreseeable future.
Use of Proceeds The shares offered herein are being sold by
Swartz, Top Eagle Holdings, Ltd. and Orion
Capital Corp. and exchanged by us for services, and,
as such, we will not receive any of the proceeds of
this Offering other than services rendered to us.
(See "Use of Proceeds").
Material Risk Factors This Offering involves a high degree of risk,
elements of which include possible lack of
profitability, default on our funding commitment,
legal and other uncertainties of doing
business in China and with the Chinese
Government, and competition. There is a risk
to investors due to the speculative nature
of this investment, historical losses from
operations, a shortage of capital, lack of
dividends, dilution factors, control by present
shareholders and economic conditions in general.
There is a material risk that we may have
insufficient funding to engage in any or all of the
activities we have proposed (See "Risk Factors"
and "Dilution").
* Assumes the issuance of 39,420,000 Put Shares and the exercise by Swartz of
5,580,000 warrants to acquire common shares. Includes up to 6,100,000 shares to
be offered by us and the Selling Securityholders other than Swartz - Top Eagle
Holdings, Ltd. and Orion Capital Incorporated.
5
<PAGE>
THE COMPANY
Tengtu International Corp., through a joint venture in mainland China,
and subsidiaries in mainland China and Hong Kong,
-- develops and markets educational software for the Chinese schools,
-- markets and sells hardware and performs systems integration services
for the Chinese schools, and
-- provides animation and multimedia services in China.
We were incorporated on May 6, 1988 in the State of Delaware under the
name Galway Capital Corporation. The name was subsequently changed to Tower
Broadcast, Inc. and then Tengtu International Corp. on May 24, 1996 to better
reflect our business operations. Our principal offices are located at 206-5050
Kingsway, Buraby, B.C., Canada M5H 4H2, and our phone number is 604-438-9729.
THE INVESTMENT AGREEMENT WITH SWARTZ
On October 25, 2000, we entered into an Investment Agreement with
Swartz Private Equity, L.L.C. ("Swartz") under which we, from time to time, have
the option to issue Swartz shares of our common stock up to a maximum aggregate
offering amount of $30,000,000. Under the Investment Agreement, shares are
issued to Swartz, and Swartz pays for the shares in transactions referred to as
"Puts." We have the right, at our sole discretion, to put shares of our $.01 par
value per share common stock, to Swartz, which Swartz must purchase, for a
dollar amount of up to $2,000,000 in each Put, subject to additional limitations
on the timing of our exercise of Put rights and on the number of shares Swartz
is obligated to purchase. Our right to Put shares to Swartz is for a period of
36 months beginning on the effective date of the registration statement of which
this prospectus is a part.
The purchase price to be paid for the Put Shares by Swartz is equal to
the lesser of (i) the Market Price (as defined below), minus $.075, or (ii) 92%
of the Market Price. The "Market Price" for each Put equals the lowest closing
bid price of the our common stock on the principal trading exchange or market
for our common stock during the Pricing Period (as defined below) for the
applicable Put. The "Pricing Period" means, unless otherwise shortened under the
terms of the Investment Agreement, the period beginning on the business day
immediately following the Put Date (as defined below) and ending on and
including the date which is 20 business days after such Put Date. The "Put Date"
is the date that is specified in a written notice delivered to Swartz (the "Put
Notice") in which we notify Swartz of our intention to commence a Put. We have
the option, on the date we notify Swartz of a Put, to designate a minimum price
for the shares to be purchased by Swartz in the Put which is no greater than the
lesser of 80% of the closing bid price of our common stock on the day preceding
the notice or the closing bid price on that day minus $.125. If we designate a
minimum price, Swartz must pay at least that price for our common stock.
For each Put, Swartz will receive an amount of warrants (the "Purchase
Warrants") equal to 10% of the number of Put Shares purchased. The exercise
price of the Purchase Warrants shall initially be an amount equal to the Market
Price for the applicable Put, with semi-annual reset provisions.
As compensation for entering into the Investment Agreement, we granted
to Swartz a warrant to purchase 1,200,000 shares of our common stock (the
"Commitment Warrants"). The initial exercise price for the Commitment Warrants
is $0.745 per share; if the date of exercise is more than six months after the
date of issuance, the exercise price is the lesser of (i) the exercise price
then in effect or (ii) an amount equal to the lowest closing bid price of our
stock for the five trading days ending on each six month anniversary of the date
of issuance.
The Put Shares have demand registration rights and both the Purchase
Warrants and Commitment Warrants have piggyback registration rights, semi-annual
reset provisions and a 5-year term.
For a detailed discussion of the Investment Agreement, see "Selling
Securityholders."
6
<PAGE>
SUMMARY FINANCIAL DATA
The information set forth below for the years ended June 30, 2000 and
1999 and for the three months ended September 30, 2000, are derived from our
audited consolidated financial statements and the unaudited interim consolidated
financial statements, respectively, included elsewhere in this prospectus.
Unless indicated otherwise, all financial information and dollar amounts in this
prospectus are in U.S. dollars.
<TABLE>
<CAPTION>
12 MONTHS ENDED 3 MONTHS ENDED
------------------------------------------- -------------------
JUNE 30, 2000 JUNE 30, 1999 June 30, 1998 September 30, 2000
------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
total assets $ 2,407,842 $ 1,911,912 $ 2,871,926 $2,080,239
total sales 358,026 624,121 3,233,170 1,143,446
income (loss) from (4,701,285) (1,886,399) (4,402,014) (597,835)
continuing operations
income (loss) from continuing (.23) (.10) (.23) (.025)
operations per common share
dividends declared per 0 0 0 0
common share
</TABLE>
RISK FACTORS
Prospective investors should carefully consider the specific factors
set forth below, as well as the other information contained in this prospectus,
before deciding to invest in the common stock offered hereby.
WE HAVE ONLY BEEN AN OPERATING BUSINESS FOR A SHORT TIME AND
IT MAY BE DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS
While we were organized in May, 1988, we have only been an operating
company since May, 1996 and are subject to all of the business risks associated
with a new enterprise, including, but not limited to, risks of unforeseen
capital requirements, failure of market acceptance, failure to establish
business relationships, and competitive disadvantages as against larger and more
established companies. The effect of any or all of these risks could affect the
trading price of our common stock and you may lose all or part of your
investment
WE HAVE HAD OPERATING LOSSES AND THESE OPERATING LOSSES MAY CONTINUE
We have experienced sustained significant operating losses that have
resulted in substantial consumption of our cash reserves. The majority of our
research, development and engineering activities are dedicated to the
development of new software. As a result, we are not generating sufficient
revenue from the sales of our existing products to cover the expenses associated
with the development of new products and the costs of distribution, which in the
case of our Total Solution product requires the training of teachers and
installers in the Peoples Republic of China ("PRC"). For the fiscal years ended
June 30, 2000 and June 30, 1999, we had a net loss of $4.7 million and $1.9
million, respectively. For the three months ended September 30, 2000, we had a
net loss of $597,835.
Educational software requires extensive continuing development which
may result in continuing operating losses notwithstanding any greatly increased
sales of our products or the products of others for which we act as the PRC
distributor. There is no assurance that the profits from our existing products
or from acting as the distributor of Microsoft (China) Ltd.'s products used in
the PRC K-12 market will be sufficient to offset the software development costs
and related costs unique to the PRC, such as training of teachers and employees
of our distributors.
OUR AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
JUNE 30, 2000 CONTAIN "GOING CONCERN" LANGUAGE
The independent auditor's report for our financial statements for the
year ended June 30, 2000 states that because of the significant operating loss
of $4.7 million, negative cash flows from operations of $1.2 million and a
working capital deficit of $2.9 million, that as of June 30, 2000, there is
substantial doubt about our ability to continue as a going concern. A
"going-concern" opinion indicates that the financial statements have been
prepared assuming we will continue as a going-concern. Management is addressing
the going concern opinion with a plan of equity and debt financing, anticipated
near-term profits from the sale of our Total Solution product, profits from
future sales of our products, our Microsoft distributorship and sales from our
Edsoft Platforms (H.K.), Ltd. subsidiary.
7
<PAGE>
WE ARE IN DEFAULT ON OUR COMMITMENT TO FUND BEIJING TENGTU UNITED
ELECTRONICS DEVELOPMENT CO., LTD.
We have a 57% ownership interest in Beijing Tengtu United Electronics
Development Co., Ltd. ("Tengtu United"), our joint venture with Beijing Tengtu
Culture & Education Development Co., Ltd. (Tengtu China"). A major consideration
for our 57% ownership interest in the Tengtu United joint venture was our
commitment to provide $12 million in capital funding pursuant to an amended and
restated joint venture agreement with Tengtu China. To date, we have only
furnished $6.7 million of the $12 million commitment. Due to our operating
losses and the lack of proper funding to Tengtu United, it is now being funded
by one of the shareholders of Tengtu China, Beijing Oriental Lian Fa Technology
and Trade Group, Co. Ltd. ("Oriental Lian Fa"). Although Zhang Fan Qi, one of
our directors, is also the controlling shareholder of Oriental Lian Fa, there is
no assurance that Oriental Lian Fa will, through Tengtu China, continue to fund
Tengtu United, especially if we do not promptly satisfy the balance of our
funding commitment to Tengtu United, of which there is no assurance. If Tengtu
United has no funding, then our ability to operate in the PRC K-12 educational
market would be materially and adversely affected.
DEPENDENCE ON FINANCING
Our long-term ability to meet our liquidity requirements and to
continue operations will depend on the following:
-- our ability to raise additional capital, including our ability to
draw down money pursuant to the Swartz equity line;
-- our ability to raise additional capital - we may need additional
funds both prior to and after the Swartz equity line is available
to accelerate our development and marketing plans. Our inability
to obtain necessary capital or financing to fund these needs
could adversely affect our business, results of operations and
financial condition. Additional financing may not be available
when needed or may not be available on terms acceptable to us. If
additional funds are raised by issuing equity securities,
stockholders may incur dilution. If adequate funds are not
available, we may be required to delay, scale back or eliminate
one or more of our development or marketing programs or otherwise
limit the development or marketing of our products, which may
affect our business, results of operations and financial
condition and reduce the value of your investment.
-- our ability to profitably market our Total Solution product and
generate profits from our distributorship arrangements with
Microsoft (China), Ltd. and others;
-- Edsoft Platforms (H.K.), Ltd.'s ability to generate a profit;
-- our ability to develop new products for or related to the PRC
K-12 market and then produce, market and/or distribute those
products at a profit; and
-- our ability to promptly fund the balance of our commitment to
Tengtu United.
Our future working capital and capital expenditure requirements may
vary materially from those now planned depending on numerous factors, including:
-- our ability to sell and install our Total Solution product at a
profit;
-- our ability to market and distribute our Digital Library System
and the General School Networking System products;
-- our ability to develop and market new software products to be
used by or directly related to the PRC K-12 market;
-- the ability of our TIC Beijing Digital Pictures Co., Ltd. ("TIC
Beijing") subsidiary to transform itself from a highly skilled
post-production facility into a meaningful and profitable
producer or packager of programs for the K-12 educational and
entertainment market in the PRC; and
-- our ability to upgrade our staff, products and services as a
systems integrator and software developer to enable us to also
become an Application Service Provider/Internet Content Provider
to put us in the position to become a leading provider of
products and services over the internet to PRC children between 5
and 18 and their parents.
8
<PAGE>
WE MAY BE UNABLE TO OBTAIN SUFFICIENT FUNDS FROM THE EQUITY LINE AGREEMENT
WITH SWARTZ TO MEET OUR LIQUIDITY NEEDS
To continue operations, we must obtain sufficient funds from the equity
line agreement with Swartz. However, the amount of money we can obtain under the
equity line is limited by the future market price and volume of trading of our
common stock. If the price of our common stock remains at its current level, or
trading volume in our common stock is low, we may be unable to obtain sufficient
funds to meet our liquidity needs, including the balance of our commitment to
Tengtu United and the capital needed to make TIC Beijing a meaningful producer
of animation and educational digital products. Although we have obtained short
term bridge loans, these loans, to date, are insufficient to meet our financing
and liquidity needs.
WE INCUR SIGNIFICANT EXPENSES TO SUPPORT OUR NEW PRODUCT DEVELOPMENT
In order to support anticipated growth and new product development, we
expect to incur significantly increased operating expenses and capital
expenditures in the future. We expect to continue to incur significant expenses
in the near future, primarily as a result of the following:
-- increased research and development associated with keeping our
existing educational software products competitive and developing
new products for the rapidly developing PRC K-12 market;
-- expansion of direct distribution of products related to the
national roll-out of the Total Solution and Microsoft (China),
Ltd. products for the PRC K-12 market, expansion of our products
in Hong Kong through Edsoft Platforms (H.K.), Ltd. and then
Southeast Asia;
-- our plan to attempt to become an Application Service
Provider/Internet Service Provider; and
-- our plan to transform TIC Beijing into a major producer rather
than a provider of only post-production technical services.
Research and development expenditures for the fiscal year ended June 30, 2000
and 1999 were minimal, primarily as a result of insufficient capital. Tengtu
China, our 43% joint venture partner in Tengtu United funded almost all of
Tengtu United's development costs in the past 9 months. The future level of
research and development expenditures will depend on significant profits or
financings, of which there is no assurance, delays or changes in PRC central and
local governmental policies and approval procedures, technological and
competitive developments and strategic marketing decisions.
LEGAL UNCERTAINTIES UNDER THE CURRENT CHINESE LEGAL ENVIRONMENT
The Chinese legal system is based on written statutes and, unlike
common law systems, decided legal cases in China have little precedential value.
In 1979, China began the process of developing its legal system by undertaking
to promulgate a comprehensive system of laws. Its development is an ongoing
process. On December 29, 1993, the National People's Congress promulgated the
Company Law of The People's Republic of China. The Company Law, the rules and
regulations promulgated under and legal prescriptions relating to Chinese
companies, provide the core of the legal framework governing the corporate
behavior of companies such as our subsidiaries and joint venture and their
respective directors, shareholders and participants. Because these laws,
regulations and legal requirements are relatively new, their interpretation and
enforcement involve significant uncertainty. Although we believe considerable
progress has been made in the promulgation of laws and regulations dealing with
economic matters such as corporate organization and governance, foreign
investment, commerce and taxation, the legal effect of various arrangements,
contracts and actions, or lack thereof, such as (i) impact of our inability to
date to fully fund the $12,000,000 commitment to Tengtu United, (ii) the
enforceability of the provisions of our strategic alliance with Microsoft
(China), Ltd., and (iii) the enforceability of TIC Beijing co-production
agreements and (iv) the legal effect and scope of our various licenses, cannot
be determined with certainty at this time. Also, at the present time PRC
governmental policies have taken on more importance than rules of law. PRC
governmental policies are subject to rapid change, which could adversely affect
our operations in the PRC. In view of the foregoing, Chinese counsel has not
been retained to pass on these matters.
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FINANCIAL UNCERTAINTIES UNDER THE CURRENT PRC BUDGETARY CONSTRAINTS
At the present time, many PRC schools, especially those in the rural
areas, do not have sufficient funds to purchase the appropriate computer
hardware and/or establish a local area network. Also, at the present time, the
PRC central government, and most of the provincial and local governments, are
unwilling to raise taxes to adequately fund the institution of information
technology in all of the PRC schools, which the central government has mandated
must have at least one computer classroom by the end of 2005. With respect to
that category of potential purchasers of our Total Solution product, which is
also marketed in the PRC as the Network Classroom, we have worked out the
following program with the PRC government in an attempt to enable the schools to
purchase the necessary infrastructure to utilize our computer software. The PRC
central government will fund a portion of the costs. The PRC provincial and
local governments will also fund a portion. Together, we estimate that the
governmental sources will fund approximately 50%-60% of these costs. We have
been advised that bank financing will be available for the difference, if the
banks are satisfied that they will be repaid. In that connection, the central
government has recently authorized certain provinces and local governments
within those provinces to assess an information technology use tax on the
parents of school children to fund information technology in the PRC school
system. Because this involves an annual tax per student, we, and the PRC central
government believe that the Chinese families, especially with the PRC one child
per family rule, have sufficient funds and motivation to pay this tax. The
inability to properly fund the necessary infrastructure would have a material
and adverse effect on our sale of the Network Classroom, the Digital Library and
other educational software products that we may develop.
With respect to schools that already have the necessary infrastructure,
the use of our software will be dependent on appropriate teacher training. In
addition to Microsoft (China), Ltd.'s commitment to provide such training, the
PRC central government is administering a program bringing in teachers from the
rural areas and training them on computer use, in general, and the Network
Classroom, in particular. In the event that the PRC government were to
discontinue this program, there would be an insufficient number of trained
teachers to operate the Network Classroom and/or teach other teachers at their
school on how to operate the Network Classroom, which would adversely affect our
potential sales of educational software to the PRC schools.
ADDITIONAL RULES OF DOING BUSINESS IN CHINA
Through one of our subsidiaries and joint venture, we conduct a
substantial portion of our operations in the PRC subject to licenses granted by
the PRC government. Accordingly, we are subject to special considerations and
significant risks not typically associated with investment in equity securities
of United States and Western European companies. These include the risks
associated with, among others, the political, economic, and legal environments
and foreign currency exchange. As a result, the development, production and
distribution of our products in the PRC may be adversely affected by changes in
the political and social conditions in the PRC and by, among other things,
changes in governmental policies and changes in key personnel at the PRC
Ministries of Information Technology and Education which are responsible for
administering our licenses.
ONE OF THE TORCH PROJECTS HAS NOT YET BEEN FORMALLY AWARDED TO TENGTU UNITED
The General School Networking System is a "Torch Project" that was
awarded to Tengtu China by the PRC Government. However, the PRC Government has
not yet given its formal written approval of the General School Networking
System to Tengtu United. While Tengtu United anticipates that it will receive
formal written approval, there is no assurance this approval will be obtained.
TENGTU CHINA'S ELECTRONIC PUBLISHING LICENSE HAS NOT FORMALLY BEEN RENEWED
Tengtu China's electronic publishing license was granted by the Chinese
Bureau of News on December 1, 1998, is for one year, and is renewable each year
thereafter upon approval from the PRC Government. A renewal application has been
filed and is still pending as of November, 2000. While Tengtu China has received
verbal assurances that the license has been renewed, no formal written renewal
has been received. Therefore, there is no guarantee that the verbal renewal is
effective. In addition, until we raise additional capital, we will not be able
to participate in any meaningful way in electronic publishing activities.
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DEPENDENCE UPON PRC GOVERNMENT FUNDING
The PRC Ministry of Education under the auspices of the National Center
for Audio/Visual Education ("NCAVE"), Tengtu China and Legend Computer Group
entered into a cooperation agreement on September 20, 2000 known as the "Relief
for Disadvantaged Regions Project." Under this cooperation agreement, the NCAVE
is obligated to direct the purchase of 5,000 units of Tengtu United's Total
Solution by PRC schools. However, there can be no guarantee that this commitment
will continue or that the necessary funds will continue to be available for this
purpose.
LACK OF SIGNIFICANT COMPUTER INFRASTRUCTURE
One of the reasons for our prior operating losses was that the software
programs we developed could not be sold in sufficient volume because there was
no application software platform in the PRC schools to enable teachers and
students to utilize those programs. In addition, we found that the school
systems lacked adequate computer hardware, networks and appropriate teacher
familiarity and training. As a result, Tengtu United is working with the PRC
Ministries of Education and Information Technology to assist in developing an
educational computer infrastructure, especially in the rural areas of the PRC,
which have a population of approximately 1.2 billion people. There is no
assurance that, within the immediate future, a significant portion of the PRC
school system will be able to develop the appropriate educational software
infrastructure to enable developers and/or distributors of educational software
to operate profitably.
OUR CURRENT ALLIANCES COULD ADVERSELY AFFECT REVENUES
The terms of our current alliances may require us and our partners to
share revenues and expenses from joint activities, or for us to grant our
partners licenses to manufacture, market, and sell our products. While the
leveraging of our resources through these alliances may have a favorable effect
on our financial condition the sharing of revenues may have a negative effect on
our results of operations.
WE HAVE LIMITED EXPERIENCE IN DIRECTLY SELLING AND MARKETING OUR PRODUCTS IN THE
PRC AND HONG KONG AND MAY NOT BE ABLE TO EXPAND AND SUPERVISE A DIRECT SALES AND
MARKETING FORCE THAT CAN MEET OUR CUSTOMERS' NEEDS
Outside the Beijing, China metropolitan area, the PRC central
government is currently either purchasing the Total Solution directly, or,
through its recommendation of the product, working directly with the PRC
provincial and local governmental education departments. We have limited
experience in direct marketing, sales and distribution and the educational
software market is new and developing in the PRC. Our future profitability will
depend, in part, on our ability to expand and supervise a direct sales and
marketing force, or distributors to sell educational software and other products
and services to our customers, and the training and reliability of distributors
if the PRC government ceases to assist in the marketing and sale of our
products. In that event, we may not be able to attract and retain qualified
salespeople or be able to build an efficient and effective sales and marketing
force. Failure to attract or retain qualified salespeople or to build an
efficient and effective sales and marketing force in the PRC could negatively
impact sales of our products, thus reducing our revenues and profitability.
Conducting business in foreign countries will expose us to the risks of
dealing with foreign governmental policies, regulations, tariffs, import and
export restrictions, transportation, currency translations and taxes and local
regulations. Consummation of such foreign marketing activities could lead to
unanticipated and fluctuating expenses and revenues and sales and marketing
dislocations that are beyond our ability to control, and which could negatively
impact sales of our products, thus reducing our revenues and profitability.
NO INTELLECTUAL PROPERTY PROTECTION
The Business Software Alliance estimated in 1999 that 91 percent of the
software used in PRC was pirated or stolen. There are two distinct markets for
educational software: (i) individuals and families and (ii) the educational
system. Software piracy is currently largely confined to the market for
individual and families because at the current time PRC governmental agencies
insist on the use of only authorized products. If their audits of a school
disclose the use of pirated software, we have been advised that governmental
funding will be cut off and, thus, that school system will be unable to fulfill
the requirement of at least one computerized classroom per school by 2005.
Absent those governmental audits, software piracy will continue to be a major
risk because there is a lack of sufficient law enforcement and regional
protection.
Also, recently we became aware that certain Microsoft (China), Ltd.
components to the Total Solution were being improperly sold into the K-12 market
by some of the Microsoft (China), Ltd. channel managers in contravention of the
terms of the strategic alliance between us and Microsoft (China), Ltd. Although
we believe PRC governmental agencies and Microsoft (China), Ltd. have taken the
necessary steps to ensure that we are its exclusive distributor for its products
to the PRC K-12 market, there is no assurance that this will not reoccur or that
other entities will be able to copy all or a portion of the products we produce
or distribute as software piracy is, and will continue to be, a major problem in
the PRC, absent a stringently applied governmental audit program of the school
systems.
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THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE
A large number of companies are involved, or are becoming involved, in
the development and commercialization of products directed to the PRC K-12
software market. With respect to the development and sale of application
software platforms to the K-12 market in mainland China, we are aware of the
following competitors: IBM China, Novell China and companies marketing Linux
based platforms. Although we believe that at the current time Tengtu
China/Tengtu United is considered the leading PRC developer of educational
software for the PRC K-12 market, in view of Tengtu United's limited capital,
there is no assurance that we will be able to maintain our position much longer.
We have no information as to the nature and extent of our competitors'
sales of application software platforms to the PRC K-12 market. There are a
number of domestic Chinese companies, as well as foreign companies, which
produce individual software programs which can be utilized by teachers and
students. We have no knowledge of their sales into the K-12 market at the school
and school district level, although we have been advised that these other
companies' sales of educational software in the PRC is negligible. Certain of
these programs are marketed by other companies directly to the students and
their parents, but this is not the market in which we are initially focusing.
Tengtu United's actual and potential competition, with respect to educational
software programs for use the PRC, consists of numerous Chinese and foreign
software manufacturers.
In view of the reduced cost of hardware and software necessary for many
types of animation, there are now a number of small independent companies with
low overhead which can produce computerized animation of almost equal quality at
lower costs than TIC Beijing. TIC Beijing is thus in the process of emphasizing
its ability to act as a producer in addition to its post-production services.
TIC Beijing recently leased its facilities and personnel until September 2001 to
an unaffiliated third party. However, it has retained the exclusive use of these
facilities and personnel for two days each week and the right to the use of
these facilities and personnel when the lessee is not using them, thus, enabling
TIC Beijing to furnish any post-production services required by its strategic
alliances. There is no assurance that TIC Beijing or its strategic partners will
be able to raise the capital required to continue the development of its current
projects. There are many major producers of animation, including Walt Disney &
Co., who are larger, more experienced and better financed. In the event TIC
Beijing is unable to become a profitable producer, it is doubtful that it can
continue to compete successfully as a post-production facility.
The markets in which we compete and intend to compete are undergoing,
and are expected to continue to undergo, rapid and significant technological
change, and we expect competition to intensify as technological advances in such
fields are made and other companies seek to enter the PRC markets we service.
Several of our competitors have developed or may develop educational
software products that are similar in design and capability to our existing
products, or products under development, for markets other than the PRC. We
further anticipate that additional products for similar applications will be
developed and marketed by our competitors. Further, many of our competitors and
potential competitors have substantially greater resources, research and
development staffs, capabilities and facilities than we do for developing,
manufacturing and marketing educational software products. For Tengtu United to
remain competitive, we must continue to enhance and improve our existing
products: the Total Solution, the General School Networking System and Digital
Library System and develop acceptable and useful new products for the PRC K-12
market, of which there is no assurance.
POSSIBLE PAYMENT PROBLEMS
Some U.S.-based companies engaged in business in the PRC have
experienced problems in collecting money and/or in getting money out of the PRC.
We believe that because education is such a high priority under the current
political environment, payment for our products and services should not be a
problem. However, if the political climate should change, the inability to
promptly collect for our products or services could materially and adversely
affect our operations.
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WE DEPEND ON OUR KEY PERSONNEL
Because of the specialized, technical nature of our business, we are
highly dependent upon our ability to retain our current personnel, including,
but not limited to, Pak Kwan Cheung, our founder and presently our Chairman of
the Board. In addition, we believe that Jing Lian, a vice president and
director, as well as Zhang Fang Qi, are also key to our ability to successfully
do business in the PRC. The loss of any of these persons could have an adverse
effect on our business. We have no key man insurance. In addition, our ability
to effectively pursue our business strategy will depend upon, among other
factors, the successful recruitment and retention of additional highly skilled
and experienced software programmers, managerial, marketing, and accounting
personnel who can function effectively in the PRC. In some cases, the market for
these skilled employees is highly competitive, which makes it difficult to
attract and retain key employees. We cannot assure you that we will be able to
retain or recruit such personnel, and the inability to do so could materially
and adversely affect our business, financial condition and results of
operations.
CERTAIN CURRENT STOCKHOLDERS OWN A LARGE PORTION OF OUR VOTING STOCK WHICH
COULD INFLUENCE DECISIONS THAT WOULD ADVERSELY AFFECT NEW INVESTORS
Our officers, directors, and affiliates beneficially own or control
approximately 30% of our outstanding common stock with Pak Kwan Cheung,
Chairman and Chief Executive Officer controlling approximately 16% of the
common stock outstanding. These stockholders may be able to influence matters
requiring stockholder approval and thereby, our management and affairs. Matters
that typically require stockholder approval include:
-- election of directors;
-- mergers or consolidations; and
-- sales of all or substantially all of our assets.
This concentration of ownership could delay or prevent another person
or persons from acquiring control or causing a change in control, even if such
change would increase the price of our common stock. Preventing a change in
control in favorable circumstances may affect your ability to sell your
securities at a higher price.
WE HAVE OPTIONS, WARRANTS AND RESTRICTED SECURITIES OUTSTANDING WHICH MAY CAUSE
DILUTION OF OUR SHAREHOLDERS AND ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK
As of November 27, 2000, we had outstanding 2,800,000 warrants.
1,500,000 of those warrants have an exercise price of $0.50. The exercise price
of those warrants is to increase to $1.00 after December 21, 2000, $2.00 after
December 21, 2001 and $4.00 after December 21, 2002. 1,200,000 of those warrants
were issued to Swartz and have an exercise price of $.745 which is to be reset
every six months.
As of November 27, 2000, we also had outstanding 2,600,000 options with
exercise prices ranging from $0.218-$0.968. We have reserved additional shares
for issuance pursuant to options. If the holders exercise these stock options
and warrants, it will dilute the percentage ownership interest of our current
shareholders. In addition, the terms upon which we would be able to obtain
additional money through the sale of our stock may be negatively affected by the
existence of these warrants and options because new investors may be concerned
about the impact upon the future market price of our common stock if these
warrants and options were exercised and the underlying stock sold.
In addition, as of November 27, 2000 we had outstanding a $1,500,000
principal amount convertible debenture. Each $1.00 principal amount is
convertible into shares of our common stock at the rate of $0.50 per share until
December 21, 2000. For each of the following twelve month periods, the rate of
conversion increases to $1.00 then $2.00 and then $4.00 per share. If converted
on November 15, 2000, the Convertible Debenture would have been convertible into
3 million shares of our common stock. If the holder converts its convertible
debenture into our common stock, it will dilute the percentage ownership
interest of our current shareholders.
Top Eagle Holdings, Ltd., the holder of the convertible debenture and a
warrant exercisable for 1,500,000 shares of common stock have certain
registration rights under a registration rights agreement with us.
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YOU WILL SUFFER DILUTION BECAUSE OF OUR INVESTMENT AGREEMENT WITH SWARTZ
The common stock issuable to Swartz upon exercise of our put rights
will be issued at a price equal to the lesser of (i) the market price for each
share of our common stock minus $.075 or (ii) 92% of the market price for each
share of our common stock, unless we exercise our right to designate a price in
advance, in which case the price can be no greater than the lesser of (iii) 80%
of the closing bid price on the day preceding delivery of notice of our
intention to put shares to Swartz or (iv) the closing bid price on the day
preceding that date minus $0.125. Accordingly, the exercise of our put rights
may result in substantial dilution to the interests of the other holders of our
common stock. Depending on the price per share of our common stock during the
three year period of the investment agreement with Swartz, we may need to
register additional shares for resale to access the full amount of financing
available. If we are unable to register the additional shares of common stock,
we may experience delays in, or be unable to, access some of the $30 million
available pursuant to our put rights.
In addition the assumed price at which you will purchase shares is
substantially higher than the net tangible book value per outstanding share of
common stock. You will therefore incur immediate and substantial dilution in the
net tangible book value of the shares that you purchase.
THE SALE OF MATERIAL AMOUNTS OF OUR COMMON STOCK COULD REDUCE THE PRICE OF OUR
COMMON STOCK AND ENCOURAGE SHORT SALES
If and when we sell shares of our common stock to Swartz pursuant to
our put rights, if and to the extent that Swartz sells the common stock, our
common stock price may decrease due to the additional shares in the market. If
the price of our common stock decreases, and if we decide to exercise our right
to put shares to Swartz, we will be required to issue more shares of our common
stock for any given dollar amount invested by Swartz, subject to a designated
minimum put price specified by us. This may encourage short sales, which could
place further downward pressure on the price of our common stock.
OUR STOCK PRICE IS VOLATILE
The following items, among others, could cause the market price of the
common stock to fluctuate substantially:
-- results of our sales efforts in the PRC,
-- financing for TIC Beijing production projects,
-- our competitors' sales of competitive products in the PRC,
-- evidence of the acceptance of our products or our competitors,
-- technological innovations or new products introduced by us or our
competitors,
-- changes in governmental regulations,
-- changes in governmental personnel,
-- developments in our proprietary and distribution rights or those
of our competitors,
-- litigation,
-- fluctuations in our operating results, and
-- changes in market conditions for K-12 educational and animation
software.
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These fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the common stock.
Historically, the market price of the common stock has been volatile.
Our quarterly and annual operating revenues, expenses, and operating
results may fluctuate. They have varied widely in the past, and we expect they
will continue to fluctuate in the future. Fluctuations in quarterly and annual
results will also adversely impact management's ability to accurately project
the available revenue necessary for growing our sales and revenue through
internal funding. Because we have a limited operating history and our future
operating results may be below the expectations of securities analysts and
investors, the market price of our common stock may decline.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future.
LISTING ON OTC BULLETIN BOARD; LIMITED TRADING MARKET
Our common stock is quoted on the over-the-counter Bulletin Board and
therefore, has only a limited trading market. There can be no assurance that a
more active trading market will develop or, if developed, that it will be
maintained. No prediction can be made as to the effect, if any, that the sale of
shares of common stock or shares of common stock issuable to Swartz upon
exercise of the Commitment Warrants or Purchase Warrants or the availability of
such securities for sale will have on the market price of our common stock from
time to time.
In addition, as the trading price of our common stock is less than
$5.00 per share, trading in our common stock is subject to the requirements of
Rule 15g-9 promulgated under the Exchange Act. Under this rule, broker-dealers
who recommend such low-priced securities to persons other than established
customers and accredited investors must satisfy special sales practice
requirements, including a requirement that they make an individualized written
suitability determination for the purchase and receive the purchaser's written
consent prior to the transaction. Our common stock is also subject to the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, which
requires additional disclosure in connection with any trades involving a stock
defined as a "penny stock" (generally, any equity security not traded on an
exchange or quoted on Nasdaq that has a market price of less than $5.00 per
share, subject to certain exceptions), including the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the associated risks. Such requirements could severely limit the
market liquidity of the common stock and the ability of purchasers in this
offering to sell their securities in the market.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements made in this prospectus constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to the safe harbor
provisions of the Reform Act. Forward-looking statements may be identified by
the use of terminology such as may, will, expect, anticipate, intend, believe,
estimate, should, or continue or the negatives of these terms or other
variations on these words or comparable terminology. To the extent that this
prospectus contains forward-looking statements regarding the financial
condition, operating results, business prospects or any other aspect of our
company, you should be aware that our actual financial condition, operating
results and business performance may differ materially from that projected or
estimated by us in the forward-looking statements. We have attempted to
identify, in context, some of the factors that we currently believe may cause
actual future experience and results to differ from their current expectations.
These differences may be caused by a variety of factors, including but not
limited to adverse economic conditions, intense competition, including entry of
new competitors, ability to obtain sufficient financing to support our
operations, progress in research and development activities, variations in costs
that are beyond our control, changes in capital expenditure budgets for cable
companies, adverse government regulation, inadequate capital, unexpected costs,
lower sales and net income, or higher net losses than forecasted, price
increases for equipment, inability to raise prices, failure to obtain new
customers, the possible fluctuation and volatility of our operating results and
financial condition, inability to carry out marketing and sales plans, loss of
key executives, and other specific risks that may be alluded to in this
prospectus.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale by Swartz, Top
Eagle Holdings, Ltd. or Orion Capital Incorporated (referred to herein as the
"Selling Securityholders") of the shares offered under this prospectus. We will,
however, receive:
-- services in exchange for the shares that we offer to service
providers,
-- the sale price of any common stock we sell to Swartz under our
Investment Agreement with Swartz,
-- the exercise price of the Swartz warrants, if exercised by
Swartz, and if not exercised pursuant to the cashless exercise
provisions of those warrants,
-- the exercise price of the warrants issued to Top Eagle Holdings,
Ltd, if exercised by Top Eagle Holdings, Ltd;
-- the conversion price of the convertible debenture issued to Top
Eagle Holdings, Ltd., if converted by Top Eagle Holdings, Ltd.,
and
-- the exercise price of the warrants issued to Orion Capital
Incorporated, if exercised by Orion Capital Incorporated.
Subject to effective registration and applicable volume and other
limitations, we can sell a maximum of $30,000,000 of our common stock to Swartz.
We cannot provide a specific breakdown of the use of proceeds that we will
receive from the Selling Securityholders as the amounts we will receive from
Swartz may vary greatly depending upon the price of our common stock and the
volume of trading in our common stock. However, assuming we receive at least
this amount from the Selling Securityholders, we expect to use $5,300,000 of the
net proceeds to fund the remainder of our commitment to Tengtu United under the
joint venture agreement with Tengtu China. If sufficient net proceeds are
available, we also expect to use monies received form the Selling
Securityholders for software development, working capital, marketing and other
general corporate purposes.
We will have significant discretion in the use of the net proceeds received
form the Selling Securityholders. Investors will be relying on the judgment of
our management regarding the application of those proceeds.
DETERMINATION OF OFFERING PRICE
The shares being registered herein to be sold by the Selling
Securityholders will not be sold by us, and are therefore being sold at the
market price as of the date of sale or such other price as may be negotiated in
a private sale. The shares to be offered by us in exchange for services will be
exchanged at the then current market rate. Our common stock is traded on the
over-the-counter Bulletin Board under the symbol "TNTU." On November 24, 2000
the reported closing price for our common stock on the over-the-counter Bulletin
Board was $.4375.
DILUTION
Purchasers of common stock offered hereby will suffer an immediate and
substantial dilution in the net tangible book value per share. Dilution is the
amount by which the offering price paid by the purchasers of the shares of
common stock will exceed the net tangible book value per share of common stock
after the offering. The net tangible book value per share of common stock is
determined by subtracting total liabilities from the total book value of the
tangible assets and dividing the difference by the number of shares of common
stock deemed to be outstanding on the date the book value is determined.
As of September 30, 2000, we had 24,176,321 shares of common stock
issued and outstanding with a net tangible book value of -($3,946,525) or
-($.163) per share. The following table sets forth the dilution (excess of
assumed purchase price per share over net tangible book value per share) to be
incurred by investors acquiring common stock. This dilution effect will not be
reflected in our financial statements.
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Assumed Purchase Price (1) $.4375
Net tangible book value per share at ($.163)
September 30, 2000
Increase to net tangible book value per(2) $0.00
per share attributable to the cash
payments made by purchasers of the
shares being offered
Dilution to Purchasers of Common Stock $.275
Dilution to Purchasers as Percentage 62.7%
of Purchase Price
(1) Assumes a purchase price of $.4375. The closing price of our common stock on
the over-the-counter Bulletin Board on November 24, 2000 was $.4375.
(2) There is no increase to the net tangible book value of our shares from this
offering because we will not receive any proceeds from these sales.
SELLING SECURITYHOLDERS
Common stock registered for resale under this prospectus constitutes
approximately 213% of our issued and outstanding common shares as of November
27, 2000. The shares offered by this prospectus are being offered by the
following Selling Securityholders: Swartz Private Equity, L.L.C., Top Eagle
Holdings, Ltd. and Orion Capital Incorporated.
SWARTZ
------
This prospectus covers 35,000,000 shares of common stock issuable to
Swartz under the Investment Agreement and shares issuable upon exercise of the
warrants we previously issued to Swartz. Swartz is engaged in the business of
investing in publicly-traded equity securities for its own use.
Swartz does not beneficially own any of our common stock or any other
of our securities as of the date of this prospectus other than 1,200,000 shares
underlying the warrants we issued to Swartz in connection with the closing of
the Investment Agreement. Other than its obligations to purchase common stock
under the Investment Agreement and the warrant, it has no other commitments or
arrangements to purchase or sell any of our securities.
Swartz is an "underwriter" within the meaning of the Securities Act of
1933, as amended, in connection with the sale of these shares. Swartz has not
had any relationship with us, any predecessor or affiliate within the past three
years.
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The Tengtu-Swartz Investment Agreement
OVERVIEW
On October 25, 2000, we entered into an Investment Agreement with
Swartz Private Equity, L.L.C. The Investment Agreement entitles us to issue and
sell up to $30 million of our common stock to Swartz, subject to a formula based
on our stock price and trading volume, from time to time over a three year
period following the effective date of this registration statement. We refer to
each election by us to sell stock to Swartz as a "Put."
Each time we sell shares to Swartz, we will also issue five (5) year
warrants (referred to as "purchase warrants") to Swartz in an amount equal to
10% of the number of shares in the Put. Each purchase warrant will be
exercisable at 110% of the market price for the applicable Put. The purchase
warrants have anti-dilution and reset provisions as described below.
In addition, as consideration for making its financing commitment to
us, Swartz was also issued a warrant to purchase 1,200,000 shares of common
stock initially exercisable at $.745 per share until October 25, 2005, which is
referred to as the "commitment warrant." The commitment warrant has
anti-dilution and reset provisions as described below.
PUT RIGHTS
We may begin exercising Puts on the date of effectiveness of this
registration statement and continue for the shorter of a three year period, or
until we have Put amounts of common stock to Swartz totaling $30 million. To
exercise a Put, we must have an effective registration statement on file with
the Securities and Exchange Commission covering the resale to the public by
Swartz of any shares that it acquires under the Investment Agreement. Also, we
must give Swartz at least 10, but not more than 20, business days advance notice
of the date on which we intend to exercise a particular Put right. The notice
must indicate the date we intend to exercise the Put and the maximum number of
shares of common stock we intend to sell to Swartz. At our option, we may also
specify a maximum dollar amount (not to exceed $2 million) of common stock that
we will sell under the Put. We may also specify a minimum purchase price per
share at which we will sell shares to Swartz. The minimum purchase price cannot
exceed the lesser of 80% of the closing bid price of our common stock on the day
prior to the date we give Swartz notice of the Put or such closing bid price
minus $.125.
The number of shares of common stock sold to Swartz in any Put may not
exceed the lesser of (i) the maximum put amount set forth in an Advance Put
Notice to Swartz, (ii) 1,500,000 shares of our common stock, (iii) $2,000,000
worth of our common stock, (iv) 15% of the aggregate daily reported trading
volume of our common stock, excluding block trades of 20,000 or more shares of
our common stock, during the 20 business days after the date of our Put notice,
excluding any trading days in which the common stock trades below a minimum
price, if any, that we specify in our Put notice, (v) 15% of the aggregate daily
reported trading volume of our common stock, during the 20 days before the Put
Date, or (vi) a number of shares that, when added to the number of shares
acquired by Swartz under the Investment Agreement during the 61 days preceding
the Put Date, would exceed 9.99% of our total number of shares of common stock
outstanding (as calculated under Section 13(d) of the Securities Exchange Act of
1934, as amended).
Swartz will pay us a percentage of the market price for each share of
common stock in a Put. The market price of the shares of common stock during the
20 business days immediately following the date we exercise a Put is used to
determine the purchase price Swartz will pay and the number of shares we will
issue in return. This 20 day period is referred to in the Investment Agreement
as the "pricing period." For each share of common stock, Swartz will pay us the
lesser of:
-- the market price for each share, minus $.075; or
-- 92% of the market price for each share.
The Investment Agreement defines market price as the lowest closing bid
price for our common stock during the 20 business day pricing period. However,
if we designate a minimum price in our Put notice, Swartz must pay at least that
price and the above formula will not apply. If the price of our common stock is
below the greater of the price we designate plus $.075, or the price we
designate divided by .92 during any of the 20 days during the pricing period,
that day is excluded from the 15% volume limitation described above. Therefore,
the amount of cash that we can receive for that Put may be reduced if we elect
to designate a minimum price per share and our stock price declines.
We must wait a minimum of five business days after the end of the 20
business day pricing period for a prior Put before exercising a subsequent Put.
We may, however, give advance notice of our subsequent Put during the pricing
period for the prior Put. We can only exercise one Put during each pricing
period.
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WARRANTS
Within five business days after the end of each pricing period, we are
required to issue and deliver to Swartz a warrant to purchase a number of shares
of our common stock equal to 10% of the common shares issued to Swartz in the
applicable Put. Each warrant will be exercisable at a price that will initially
equal 110% of the market price for the applicable Put. Each warrant will be
immediately exercisable and have a term beginning on the date of issuance and
ending five years later.
LIMITATIONS AND CONDITIONS TO OUR PUT RIGHTS
Our ability to Put shares of our common stock, and Swartz's obligation
to purchase the shares, is subject to the satisfaction of certain conditions.
These conditions include:
-- satisfaction all obligations under the agreements entered into
between us and Swartz in connection with the Investment Agreement;
-- our common stock being listed and traded on Nasdaq, the
over-the-counter Bulletin Board, or an exchange;
-- our representations and warranties in the Investment Agreement must
be accurate as of the date of each Put;
-- reservation for issuance a sufficient number of shares of our common
stock to satisfy our obligations to issue shares under any Put and upon
exercise of warrants;
-- the registration statement for the shares we will be issuing to
Swartz must remain effective as of the Put date and no stop order with
respect to the registration statement is in effect;
-- shareholder approval is required by the Investment Agreement if the
number of shares Put to Swartz, together with any shares previously Put
to Swartz, would equal 20% of all shares of our common stock that would
be outstanding upon completion of the Put.
Swartz is not required to acquire and pay for any additional shares of
our common stock once it has acquired $30 million worth of Put Shares.
Additionally, Swartz is not required to acquire and pay for any shares
of common stock with respect to any particular Put for which, between
the date we give advance notice of an intended Put and the date the
particular Put closes:
-- we announced or implemented a stock split or combination of our
common stock;
-- we paid a dividend on our common stock;
-- we made a distribution of all or any portion of our assets or
evidences of indebtedness to the holders of our common stock; or
-- we consummated a major transaction, such as a sale of all or
substantially all of our assets or a merger or tender or exchange offer
that results in a change in control. We may not require Swartz to
purchase any subsequent Put shares if:
-- we, or any of our directors or executive officers, have engaged in a
transaction or conduct related to our operations that resulted in:
-- a Securities and Exchange Commission enforcement action,
administrative proceeding or civil lawsuit; or
-- a civil judgment or criminal conviction or for any other offense
that, if prosecuted criminally, would constitute a felony under
applicable law;
-- the aggregate number of days which this registration statement is
not effective or our common stock is not listed and traded on Nasdaq,
the O.T.C. Bulletin Board or an exchange exceeds 120 days;
-- we file for bankruptcy or any other proceeding for the relief of
debtors; or
-- we breach covenants contained in the Investment Agreement.
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COMMITMENT AND TERMINATION FEES
If we do not Put at least $2,000,000 worth of common stock to Swartz
during one year period following the effective date of this registration
statement, we must pay Swartz a non-usage fee. This fee equals the difference
between $200,000 and 10% of the value of the shares of common stock we Put to
Swartz during the one year period.
If the Investment Agreement is terminated, we must pay Swartz the
greater of (i) the non-usage fee described above, or (ii) the difference between
$200,000 and 10% of the value of the shares of common stock Put to Swartz during
all Puts to date.
SHORT SALES
The Investment Agreement prohibits Swartz and its affiliates from
engaging in short sales of our common stock unless Swartz has received a Put
notice and the amount of shares involved in the short sale does not exceed the
number of shares we specify in the Put notice.
CANCELLATION OF PUTS
We must cancel a particular Put if:
-- we discover an undisclosed material fact that would amount to a
material misstatement or omission from this prospectus;
-- the registration statement registering resales of the common stock
becomes ineffective; or
-- our shares of common stock are either delisted from, or no longer
trading on, Nasdaq, the over-the-counter Bulletin Board or an exchange.
If we cancel a Put, it will continue to be effective, but the pricing
period for the Put will terminate on the date we notify Swartz that we are
canceling the Put. Because the pricing period will be shortened, the number of
shares Swartz will be required to purchase in the canceled Put may be smaller
than it would have been had we not canceled the Put.
TERMINATION OF THE INVESTMENT AGREEMENT
We may terminate our right to initiate further Puts or terminate the
Investment Agreement at any time by providing Swartz with written notice of our
intention to terminate. However, any termination will not affect any other
rights or obligations we have concerning the Investment Agreement or any related
agreement.
CAPITAL RAISING LIMITATIONS
During the term of the Investment Agreement and for a period of sixty
(60) days after the termination of the Investment Agreement, we are prohibited
from issuing certain debt or equity securities, and from entering into any
private equity line agreements similar to the Swartz Investment Agreement
without obtaining Swartz's prior written approval.
We have agreed to give Swartz a Right of First Refusal during this same
period, the term of the Investment Agreement plus sixty (60) days. Under the
right of first offer, we must give at least ten (10) days written notice to
Swartz of a proposed transaction at least ten (10) days prior to the transaction
closing. Swartz may elect to participate in the transaction during this ten (10)
day period.
Neither of the above restrictions apply to the following items and we
may engage in and issue securities in the following transactions without
notifying or obtaining approval from Swartz;
-- in connection with a merger, consolidation, acquisition, or sale of
assets;
-- in connection with a strategic partnership or joint venture, the
primary purpose of which is not simply to equity capital;
-- in connection with our disposition or acquisition of a business,
product or license;
-- upon exercise of options by employees, consultants or directors;
provided that no more than 1,000,000 option per year are issued to
consultants and no more than 250,000 options per consultant;
-- in an underwritten public offering of our common stock;
-- upon conversion or exercise of currently outstanding options,
warrants or other convertible securities;
-- under any option or restricted stock plan for the benefit of
employees, directors or consultants;
-- upon the issuance of debt securities with no equity feature for
working capital purposes; or
-- the issuance of up to $2 million of convertible debt or equity
securities which are convertible at a fixed price that is not less than
75% of the closing price of our common stock on the date of the closing
or purchase of the convertible security.
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SWARTZ'S RIGHT OF INDEMNIFICATION
We have agreed to indemnify Swartz, including its owners, employees,
investors and agents, from all liability and losses resulting from any
misrepresentations or breaches we make in connection with the Investment
agreement, the registration rights agreement, other related agreements, or this
registration statement. We have also agreed to indemnify these persons for any
claims based on violation of Section 5 of the Securities Act caused by the
integration of the private sale of our common stock to Swartz and the public
offering pursuant to the registration statement.
EFFECT ON OUTSTANDING COMMON STOCK
The issuance of common stock under the Investment Agreement will not
affect the rights or privileges of existing holders of common stock except that
the issuance of shares will dilute the economic and voting interests of each
shareholder. See "Risk Factors" and "Dilution."
As noted above, we cannot determine the exact number of shares of our
common stock issuable under the Investment Agreement and the resulting dilution
to our existing shareholders, which will vary with the extent to which we
utilize the Investment Agreement, the market price of our common stock, and
exercise of the related warrants. The potential effects of any dilution on our
existing shareholders include the significant dilution of the current
shareholders' economic and voting interests in us.
The Investment Agreement provides that we cannot issue shares of common
stock that would exceed 20% of the outstanding stock on the date of a Put unless
and until we obtain shareholder approval of the issuance of common stock.
TOP EAGLE HOLDINGS, LTD.
------------------------
This prospectus covers 4,500,000 shares of common stock issuable upon
the conversion of a convertible debenture and exercise of warrants issued to Top
Eagle Holdings, Ltd. ("Top Eagle") on December 23, 1999.
Top Eagle paid $1,500,000 in exchange for a four year Floating
Convertible Debenture ("Debenture") convertible into shares of our common stock
and a separate Common Stock Warrant ("Warrant") for the purchase of 1,500,000
shares of our common stock. Top Eagle is a British Virgin Islands company that
is wholly owned by Yugang International Limited, a Hong Kong company engaged in
the trading of audio visual products and components, industrial equipment,
automobile parts, agricultural products, raw materials and other products in the
Central and Western parts of China.
The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
The Hong Kong and Shanghai Banking Corporation plus two percent. The Debenture
is convertible into our common stock at a conversion price of $.50 during the
first year, $1.00 during the second year, $2.00 during the third year and $4.00
on any date thereafter. The unpaid balance of principal and interest outstanding
at maturity, if any, may be converted by the holder into our common stock at the
then existing market price minus twenty percent.
The Warrant gives the holder the right to purchase 1,500,000 shares of
our common stock at $1.00 per share during the first year, $2.00 per share
during the second year and $4.00 thereafter. The Warrant shall become void three
years after issuance.
In connection with the purchase of the Debenture and Warrant, we
entered into an Investor Rights Agreement with Top Eagle which provides the
holder(s) of the Debenture, Warrant and or the shares issued upon conversion or
exercise thereof, with registration and certain other rights. The 4,500,000
shares included in this prospectus are being registered pursuant to Top Eagle's
piggyback registration rights pursuant to the Investor Rights Agreement.
Top Eagle has not had any relationship with us, any predecessor or
affiliate within the past three years.
Top Eagle has not yet converted the Debenture or Exercised the Warrant.
If it were to do so prior to December 23, 2000, it would own 4,500,000 shares of
our common stock which would represent 15.5% of our stock then outstanding,
assuming no purchases by Swartz. If it were to do so after December 23, 2000, ,
but before December 23, 2001, Top Eagle would own 3,000,000 shares of our common
stock which would represent approximately 11% of our common stock then
outstanding, assuming no purchases by Swartz.
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ORION CAPITAL INCORPORATED
--------------------------
Orion Capital Incorporated ("Orion") is a Toronto, Canada based
personal holding and investment company.
On November 17, 2000, we entered into a loan agreement with Orion (the
"Loan Agreement") under which Orion loaned us $500,000 until December 31, 2001,
with an interest rate of 10%. In connection with the loan, we granted Orion a
warrant to purchase 100,000 shares of our common stock with an exercise price of
$.50. The following of our officers and/or directors pledged a total of
1,000,000 shares of our common stock owned by them as security for the loan: Pak
Kwan Cheung, Jing Lian, Xiaofeng Lin, Zhang Fan Qi and Hai Nan. We have agreed
with Orion to register the 1,000,000 shares pledged under the Loan Agreement.
Orion has not yet exercised the warrant issued under the Loan
Agreement. If it were to do so, it would own 100,000 shares of our common stock
which would represent less than 1% of our common stock then outstanding. If we
were to default in the payment of principal or interest under the Loan
Agreement, Orion would be entitled to sell some or all of the pledged shares to
satisfy any amounts we own it under the Loan Agreement.
Orion has not had any relationship with us, any predecessor or
affiliate within the past three years.
PLAN OF DISTRIBUTION
The shares of common stock to be offered directly by us are to be used
as compensation to outside providers of public relations and investor relations
services. We are currently reviewing a proposed contract from a provider of
these services which calls for payment in the form of freely tradeable stock in
lieu of cash payments. In order to conserve cash for our operations, we plan to
use our stock to pay for public relations and investor relations services.
The Selling Securityholders, and the service providers to whom we offer
our common stock, may sell the common stock directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agents or may acquire common stock as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices, which may be changed. The
Selling Securityholders may effect the distribution of the common stock in one
or more of the following methods:
-- ordinary brokers transactions, which may include long or short
sales;
-- transactions involving cross or block trades or otherwise on the
open market;
-- purchases by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts under this prospectus;
-- "at the market" to or through market makers or into an existing
market for the common stock;
-- in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents;
-- through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); or
-- any combination of the above, or by any other legally available
means.
In addition, the Selling Securityholders, and service providers to whom
we offer our common stock ("service providers"), or their successors in interest
may enter into hedging transactions with broker-dealers who may engage in short
sales of common stock in the course of hedging the positions they assume with
the Selling Securityholders. The Selling Securityholders or service providers or
successors in interest may also enter into option or other transactions with
broker-dealers that require delivery by such broker-dealers of the common stock,
which common stock may be resold thereafter under this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the common stock may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders, service
providers and/or the purchasers of common stock for whom such broker-dealers may
act as agent or to whom they may sell as principal, or both (which compensation
as to a particular broker-dealer may be in excess of customary commissions).
Swartz is an underwriter within the meaning of Section 2(11) of the
Securities Act and Top Eagle, Orion, us, and any broker-dealers acting in
connection with the sale of the common stock by this prospectus, may be deemed
to be an underwriter within the meaning of Section 2(11) of the Securities Act.
Therefore, any commissions or any profits realized by Swartz, Top Eagle, Orion
or us on the resale of common stock as principals, may be underwriting
compensation under the Securities Act. Neither we nor the Selling
Securityholders can presently estimate the amount of such compensation. We do
not know of any existing arrangements between the Selling Securityholders or
service providers and any other shareholder, broker, dealer, underwriter or
agent relating to the sale or distribution of the common stock.
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We and the Selling Securityholders, service providers and any other
persons participating in a distribution of our common stock will be subject to
applicable provisions of the Securities Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which may
restrict certain activities of, and limit the timing of purchases and sales of
securities by, us and the Selling Securityholders and other persons
participating in a distribution of securities. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions.
Any securities covered by this prospectus that qualify for sale under
Rule 144 under the Securities Act may be sold under that Rule rather than under
this prospectus.
We cannot assure you that the Selling Securityholders will sell any or
all of the shares of common stock offered by the Selling Securityholders.
In order to comply with the securities laws of certain states, if
applicable, the Selling Securityholders will sell the common stock in
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states, we and the Selling Securityholders may not sell or
offer the common stock unless the shares of common stock have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
We have agreed to indemnify Swartz, including its owners, employees,
investors and agents, from all liability and losses resulting from any
misrepresentations or breaches we make in connection with the Investment
Agreement and other related agreements, or this registration statement. We have
also agreed to indemnify these persons for any claims based on violation of
Section 5 of the Securities Act caused by the integration of the private sale of
our common stock to Swartz and the public offering pursuant to this registration
statement.
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We are authorized to issue 100,000,000 shares of our $.01 par value per
share common stock, of which 24,176,321 shares were issued and outstanding as of
November 27, 2000. Our common stock has the following characteristics:
1. Voting Rights - each share of our common stock is entitled to one
vote at a meeting of shareholders. Pursuant to our Certificate of
Incorporation and By-Laws, a majority of the votes present, in person
or by proxy, are necessary to take action; except that any "Business
Combination Transaction" requires a vote of 80% of all outstanding
shares. "Business Combination Transaction" is defined in our
Certificate of Incorporation as:
(a) any merger or consolidation of the Corporation or any
Subsidiary with (i) an Interested Stockholder or (ii) any other
Person (whether or not itself an Interested Stockholder) which
is, or after such merger or consolidation would be, an Affiliate
or Associate of an Interested Stockholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with, or proposed by or on behalf of, an
Interested Stockholder or an Affiliate or Associate of an
Interested Stockholder, of any of our assets or our subsidiaries'
assets constituting not less than 5% of our total assets as
reported in our consolidated balance sheet as of the end of the
most recent quarter with respect to which such balance sheet has
been prepared; or
(c) the issuance or transfer by us or any of our subsidiaries (in
one transaction or a series of transactions) of any of our
securities, or the securities of a subsidiary, to, or proposed by
or on behalf of an Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof)
constituting not less than 5% of our total assets as reported in
our consolidated balance sheet as of the end of the most recent
quarter with respect to which such balance sheet has been
prepared; or
(d) the adoption of any plan or proposal for our liquidation or
dissolution, or any spin-off or split-up of any kind of us or any
subsidiary, proposed by or on behalf of an Interested Stockholder
or an Affiliate or Associate of an Interested Stockholder; or
(e) any reclassification of securities (including any reverse
stock split), or recapitalization of the Company, or any merger
or consolidation of us with any subsidiary or any other
transaction (whether or not with or into or otherwise involving
an Interested Stockholder) which has the effect, directly or
indirectly, of increasing the percentage of the outstanding
shares of (i) any class of equity securities of the Corporation
or any Subsidiary or (ii) any class of our securities or those of
any subsidiary convertible into our equity securities or those of
any subsidiary, represented by securities of such class which are
directly or indirectly owned by an Interested Stockholder and all
of its Affiliates and Associates.
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2. Liquidation Rights - pursuant to our Certificate of Incorporation,
on any dissolution, liquidation or winding up of our affairs, after
there shall have been paid to or set aside for the holders of all
outstanding shares of preferred stock the full preferential amount to
which they are respectively entitled to receive, pro rata in accordance
with the number of shares of each class outstanding, all of our
remaining assets will be available for distribution to its common stock
holders. Presently, we do not have any shares of preferred stock
outstanding.
3. Preemption Rights - there are no preemption rights with respect to
our common stock.
4. Liability to Further Calls or Assessment by the Registrant and for
Liabilities of the Registrant Imposed on its Stockholders under State
Statutes - under Delaware law, our common stock is non-assessable.
Therefore, once our stock is paid for, there can be no further calls or
assessment by us for our liabilities.
5. Transfer Agent - the transfer agent for our common stock is U.S.
Stock Transfer Corp., 1745 Gardena Avenue, Glendale, CA 91204-2991.
SWARTZ WARRANTS
Pursuant to our Investment Agreement with Swartz, Swartz is the holder
of warrants to purchase our common stock, and will be issued additional warrants
at various periods during the term of the Investment Agreement.
As consideration for making its financing commitment to us, Swartz was
issued a warrant to purchase 1,200,000 shares of our common stock initially
exercisable at $.745 per share until October 25, 2005, which is referred to as
the "commitment warrant." The commitment warrant has an exercise price reset
provision. At each six month anniversary of issuance of the commitment warrant,
we are to calculate a "reset price" which is equal to the average closing price
of our common stock for the five trading days preceding each six month
anniversary date. If the commitment warrant is exercised after the first six
months following the date of issuance, the exercise price is to be the lower of
the initial exercise price or the lowest reset price which has been calculated
to date.
We may also be required to issue "additional warrants" to Swartz in the
future under the terms of the Investment Agreement. On each six month
anniversary of the Investment Agreement, during its term, we will be obligated
to issue additional warrants to Swartz if the number of shares represented by
the commitment warrant, plus the number of shares represented by any additional
warrants do not equal a certain percentage of the total number of our fully
diluted common stock. That percentage is initially 4% and shall decline by .5%
on each six month anniversary of the Investment Agreement.
The additional warrants, if any, will have an initial exercise price
equal to the then current exercise price of the commitment warrants, a term of
five years and an exercise price reset provision. At each six month anniversary
of issuance of the additional warrant, we are to calculate a "reset price" which
is equal to the average closing price of our common stock for the five trading
days preceding each six month anniversary date. If the commitment warrant is
exercised after the first six months following the date of issuance, the
exercise price is to be the lower of the initial exercise price or the lowest
reset price which has been calculated to date.
In connection with each Put to Swartz under the Investment Agreement,
we are required to issue and deliver to Swartz a warrant to purchase a number of
shares of our common stock equal to 10% of the number of common shares issued to
Swartz in the applicable Put (the "purchase warrants"). Each purchase warrant
will be exercisable at a price that will initially equal to the market price for
the shares in the applicable Put. Each purchase warrant will be immediately
exercisable and have a term beginning on the date of issuance and ending five
years later.
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The purchase warrants have an exercise price reset provision. At each
six month anniversary of issuance of the purchase warrant, we are to calculate a
"reset price" which is equal to the average closing price of our common stock
for the five trading days preceding each six month anniversary date. If the
purchase warrant is exercised after the first six months following the date of
issuance, the exercise price is to be the lower of the initial exercise price or
the lowest reset price which has been calculated to date.
Each of the above Swartz warrants contains anti-dilution provisions as
well as a cashless exercise feature. Under the cashless exercise provision,
Swartz may convert a premium of market price of our shares over the exercise
price and use it to exercise the warrants. The Swartz warrants provide that
Swartz may exercise a number of warrants equal to the following formula:
X=Y(A-B/A) where X is the number of shares that may be obtained upon exercise, A
is the average closing price of our common stock in the five days prior to
exercise and B is the warrant exercise price.
TOP EAGLE WARRANTS
In connection with its purchase from us of a $1,500,000 convertible
debenture on December 23, 1999, Top Eagle received 1,500,000 warrants with an
initial exercise price of $1.00. The warrant has a three year term and the
exercise price is to increase to $2.00 on the first anniversary of issuance and
$4.00 on the second anniversary of issuance. The Top Eagle warrant contains
anti-dilution provisions.
ORION WARRANTS
In connection with its loan to us of $500,000 on November 17, 2000,
Orion Capital Incorporated was granted a warrant to purchase 100,000 shares of
our common stock with an exercise price of $.50. The Orion warrant has a five
year term, anti-dilution provisions and piggyback registration rights.
INTERESTS OF NAMED EXPERTS AND COUNSEL
EXPERTS
The Consolidated Financial Statements of Tengtu International Corp. in
this registration statement have been audited by Moore Stephens, P.C., 331
Madison Avenue, New York, New York 10017, independent certified public
accountants, to the extent, and for the periods set forth in their reports
thereon, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
COUNSEL
The following common stock and options to purchase our common stock are
held by Hecht & Steckman, P.C. and its principals and attorneys. Hecht &
Steckman, P.C. acted as counsel to us in connection with this registration
statement and issued the opinion herein as to the legality of our securities.
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Stock Ownership
Charles J. Hecht, Esq. - 159,600
Lawrence Steckman, Esq. - 50,400
Staff & Attorneys - 3,000
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Total Stock 213,000
Options Outstanding
Hecht & Steckman, P.C.- 145,000 - strike price $.325
Darren Ofsink, Esq.- 2,000 - strike price $.325
Hecht & Steckman, P.C. - 150,000 - strike price $.9375
-------
Total Options 297,000
INFORMATION WITH RESPECT TO THE REGISTRANT
(a) DESCRIPTION OF BUSINESS
BACKGROUND INFORMATION ON THE COMPANY
AND ITS SUBSIDIARIES
ORGANIZATIONAL HISTORY
We are now known as Tengtu International Corp. We were incorporated on
May 6, 1988, in the State of Delaware, under the name of Galway Capital
Corporation. We were formed as a development stage enterprise for the purpose of
seeking potential business ventures. Other than our activities in seeking
potential business ventures, we ceased operations during fiscal year 1990 -1991,
and were inactive until May, 1996. On August 20, 1993, we changed out name to
Tower Broadcast, Inc. in order to search for a suitable merger or reorganization
candidate. On March 20, 1996, under the name Tower Broadcast, Inc., we were
cleared by the National Association of Securities Dealers for an unpriced
quotation on the over-the-counter Bulletin Board. We sought such clearance
because successful negotiation of one or more acquisition or joint-venture
opportunities seemed imminent and management foresaw a resultant need to raise
capital.
On May 24, 1996, in connection with a change in management, we changed
our name to Tengtu International Corp. This name change was accomplished to
reflect our intended business direction and affiliation with certain Chinese
firms in the Chinese educational software industry. In the Chinese language,
"Teng" is a verb meaning "to grow, carry out or execute properly" and "tu" is a
noun generally meaning a "vision."
There have been several changes in our management and control from the
time of our formation in 1988. We were incorporated by Patrick C. Brooks and our
initial management and directors consisted of Patrick C. Brooks and Stephanie A.
Brooks. Patrick C. Brooks and Stephanie A. Brooks continued in their positions
until February, 1995. On February 16, 1995, Patrick C. Brooks resigned as a
director and President and Chief Financial Officer, and Stephanie A. Brooks
resigned as a director and Secretary. On the same date, Mark A. DiSalvo became a
director and President and Chief Financial Officer, and Leah DiSalvo became a
director and Secretary. On January 16, 1996, William C. Pierce was also elected
as a director.
On May 31, 1996, Mark DiSalvo resigned as a director and President and
Chief Financial Officer, Leah DiSalvo resigned as a director and Secretary and
William C. Pierce resigned as a director. On that date, Pak Kwan Cheung was
elected Chairman of the Board of Directors and President and Chief Executive
Officer, Stephen Dadson was elected a director and appointed as Secretary, John
Donald Watt was elected a director and appointed Treasurer, and Francis Fox and
Gordon Reid were elected directors.
In June, 1996, Francis Fox resigned as a director and Jing Lian and Hai
Nan became directors. In or about January, 1997, Michael Corneillissen became
President and a director. On March 14, 1997, Stephen Dadson was removed as
Secretary and as a director and Michael Corneillissen was removed a President
and a director by our Board of Directors in order to clear a management impasse
and promote more efficient management.
On April 25, 1997, Barry Clark and Millard Roth were elected directors.
Barry Clark was also appointed as President and Millard Roth as a Vice
President. In June, 1997, Michael Nikiforuk was elected a Director of the
Company. On January 19, 1998, Mr. Roth's consulting agreement was terminated by
the Company and Mr. Roth was no longer a Director or Vice President of the
Company after that date. On August 31, 1999, Zhang Fan Qi was elected as a
director of the Company. On September 15, 2000 Michael Nikiforuk was appointed
Executive Vice President of Corporate Affairs and John Watt was appointed Vice
President of the Multimedia Division.
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THE BUSINESS OF THE COMPANY
Our operations are now carried out through a joint venture, Beijing
Tengtu United Electronics Development, Co. Ltd. ("Tengtu United"), and three
subsidiaries, TIC Beijing Digital Pictures Co., Ltd. ("TIC Beijing")(wholly
owned by us), Edsoft Platforms (Canada) Ltd(60.2% owned by us) and Edsoft
Platforms (H.K.) Limited (wholly owned by Edsoft Platforms (Canada) Ltd. and
therefore, 60.2% owned by us). These companies engage in the following lines of
business in China: systems integration, development and marketing of educational
and entertainment software, animation and multimedia. On October 6, 2000, Iconix
International, Inc. ("Iconix") (which was 44% owned by us but in which we had
only a 30% voting interest) was sold for $5,000,000 (Canadian). Barry Clark, who
was the President of Iconix, and former employees of Iconix will own
approximately 8% of the stock in the acquiring company.
The shareholders, other than us, in Edsoft Platforms (Canada) Ltd. are:
Goodwill Technologies, Ltd., a British Virgin Islands ("BVI") company (17.7%)
and Wing Fat Hong, Ltd., a BVI company (22.1%). A shareholders agreement grants
the two minority shareholders one representative each on the five person Board
of Directors of Edsoft Platforms (Canada) Ltd. and also provides that the two
principals of Wing Fat Hong, Ltd. shall be employed by Edsoft Platforms (Canada)
Ltd. as its Executive Vice President and Vice President of Administration and
Corporate Development. Those persons are no longer serving as officers of
Edsoft. Gregory Mavroudis, who was appointed our Vice President of Business
Development on September 15, 2000, is now the responsible officer pursuant to
our consulting agreement with 1334945 Ontario Limited, a company owned by Mr.
Mavroudis, pursuant to which Mr. Mavroudis' services are retained.
Consent of a majority of the members of the Edsoft Platforms (Canada)
Ltd. Board of Directors is necessary for the following actions: amendment of the
charter, issuance of stock, mergers, asset sales, consolidations or exchanges of
Edsoft Platforms (Canada) Ltd. shares, issuance of dividends, dissolution of the
company or a subsidiary, changes in legal counsel or auditors, changes in
corporate structure, changes in lines of business, bonus and incentive
compensation, incurring indebtedness or expenditures in excess of U.S.$50,000 in
the ordinary course of business and incurring expenditures in excess of
U.S.$10,000 outside of the ordinary course of business.
TENGTU UNITED
Tengtu United is based in Beijing, China, and is 57% owned by us. The
remaining 43% is owned by Beijing Tengtu Culture & Education Development Co.,
Ltd. ("Tengtu China"), our joint venture partner, which is owned by the
following four Chinese companies: Legend Computer Group, Taiji Computer
Corporation, Great Wall Computer Group and Beijing Oriental Lian Fa Technology &
Trade Group, Co. Ltd. Zhang Fan Qi, one of our directors, is the Chairman of
Beijing Oriental Lian Fa Technology & Trade Group Co., Ltd. The other three
companies are controlled by either the Chinese Academy of Science or the Chinese
Ministry of Electronics. Tengtu United had two full time employees as of
September 30, 2000.
Current Chinese government policy requires that all government
contracts involving educational software for use in the Chinese schools be with
other Chinese governmental entities or Chinese-owned entities. Therefore, all of
Tengtu United's business with any government entity is done in Tengtu China's
name. Tengtu China has 16 employees engaged in marketing Tengtu United's Network
Classroom product and 8 engineering technical employees who, in addition to
product development, assist in marketing Tengtu United's products.
Tengtu United develops educational and entertainment software for sale
to kindergarten through grade 12 ("K-12") schools in China. The potential market
for such software consists of almost 800,000 Chinese schools with over 200
million students. Tengtu United commenced operations in the first quarter of
1997 and has developed over 30 CD-ROM titles. The majority of the software
titles developed by Tengtu United are designed to assist students to prepare for
Chinese high school and university entrance examinations. These software titles
are available by subject matter such as physics, mathematics and chemistry. The
remainder of Tengtu United's software titles are animated entertainment games
for children.
Pursuant to our joint venture agreement with Tengtu China, we committed
an additional $6,000,000 in funding to Tengtu United for the fiscal year ended
June 30, 1998 to develop the application platforms needed by the K-12 market. At
that time, Tengtu United realized that the software titles developed by it could
not be sold in sufficient volume because there was no application software
platform to enable the Chinese teachers and students to utilize these programs
and also because of the existence of software piracy. Accordingly, Tengtu
United's marketing focus changed from sales of individual titles through Chinese
retail channels to direct marketing of a "Total Solution" to the school systems,
including the necessary application software platform and the development and
implementation of governmental audit and other programs to ensure that the
schools only use authorized software.
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Our current principal products are the Network Classroom, The Web
School and the Distance Learning Project. The Network Classroom is a multimedia
electronic classroom that permits the teacher to utilize computers at each
student's and the teacher's desks as the principal teaching and learning medium.
The application software platform includes audio broadcasting, classroom
discussion, rush-answering, electronic hand raising, video broadcasting,
dialogue between the teacher and individual students or the entire class,
distance coaching, electronic examinations and screen monitoring.
The Web School is an Internet classroom whose main functions are free
forum, free home page making, question answering and chat rooms, the use of a
distance learning platform to search for information and to use virtual internet
access. The Distance Learning Project is to permit Chinese rural/disadvantaged
areas, with an estimated population of 1.2 billion, that do not have access to
the Internet, or where the access cost is too expensive to utilize satellite
dishes and other non-internet devices to download and export information and
teaching resources. The project includes the development of the required
software and installation of the required hardware. The two principal functions
are classroom teaching via live broadcasting and the digital broadcasting of
digitized teaching materials. Also, our technical and engineering personnel are
focused on developing programs and products to enhance the application software
program such as the necessary technology to permit the downloading of content
from satellites for use by the Network Classroom.
In November, 2000 we sent $700,000 to Tengtu United pursuant to our
funding commitment, but $5.3 million of that commitment remains outstanding.
Because we were unable to fulfill our funding commitment to Tengtu United, it
was forced to downsize its operations and research and development activities in
1998 and 1999 causing substantial disruption of its business plan. This lack of
funding combined with the low sales for non-pirated educational software in
China sold through traditional retail channels led to most of the operating
losses reflected in our financial statements.
Since August 1999, Tengtu China has provided substantially all of the
operating and research funds for Tengtu United. Despite its downsizing, Tengtu
United, with the assistance of Tengtu China, has continued to work with the
Chinese Ministries of Education and Information Technology to find ways to
enable Chinese schools to incorporate information technology into teaching. The
Chinese Minister of Education has advised us that our Network Classroom is the
only recommended PRC multimedia classroom. However, the Chinese provincial and
local educational agencies are not required to buy our Network Classroom.
As a result of a lack of computer hardware in many of the Chinese
schools, we have sometimes been required to provide systems integration services
to the Chinese schools, including the hardware and software of other companies,
which results in a far lower profit margin than the sale of the software
components we produce. For example in the quarter ended September 30, 2000 more
than 50% of Tengtu United revenues were as a result of three systems integration
contracts entered into in the end of July 2000. Tengtu United expects to
generate most of its future revenues from software sales of its products bundled
with certain Microsoft (China), Ltd. software products. We believe that at the
present time there are enough local companies or governmental agencies willing
and able to provide systems integration where the school does not have the
necessary infrastructure. Tengtu United expects to be able to transfer many
books onto CD ROM which can be easily accessed and shared once the schools have
the necessary infrastructure to be able to use software titles and there is a
way of preventing piracy of this type of product so that we can realize revenues
and profits on those sales.
Tengtu China is one of only eight companies that has been granted an
electronic publishing license in China and believes that it is the only
privately owned company in China with a license to publish educational software.
The license, which was granted by the Chinese Bureau of News on December 1,
1998, is for one year, and is renewable each year thereafter upon approval from
the Chinese Government. A renewal application has been filed and is still
pending as of November, 2000. Upon receipt of sufficient financing, of which
there is no assurance, we intend to enter into a strategic alliance, joint
venture or other cooperative endeavor with the Tengtu Electronics Publishing
House division of Tengtu China relating to Chinese based educational and game
materials to be published outside of China, foreign materials to be localized
for distribution into China and to locate key strategic partners for the
electronic publishing division of Tengtu China.
Tengtu United also is continuing its work on two "Torch Projects"
awarded by the Chinese Ministries of Education and Information Technology. Torch
Projects are national initiatives aimed at improving the quality of education
designated by the Chinese government. The two Torch Projects are the development
of a Digital Library System and a General School Computer Networking System,
which includes the Network Classroom. The Digital Library System is to be a
computerized database and catalog of educational books and reference materials.
The purpose of the General School Computer Networking System is to introduce
computer networking to Chinese schools to enable them to realize greater
computer efficiency and sharing of computer software, including such programs as
the Web School and Digital Library.
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As of June 30, 1999, Tengtu United's software sales performance had
been poor because the educational software market had not yet developed in China
as we anticipated due to two factors. First, many Chinese schools, especially
those in rural areas, lack adequate computer hardware, networks and software
platforms and Chinese teachers lack computer training. Second, there was
substantial piracy of the educational software programs developed by us.
However, Tengtu United has turned some of these problems into a business
opportunity. Tengtu United has acted as a systems integrator in selling computer
hardware, systems and systems integration services to Chinese schools that do
not have the necessary infrastructure to support the use of information
technology in teaching. It has also worked to develop programs with the Chinese
National Center for Audio/Visual Education of the Ministry of Education (the
"NCAVE"), the division of the Chinese government responsible for ensuring that
every Chinese elementary, middle and high school has at least one computerized
classroom by December 31, 2005. In particular, these programs address three
concerns: (1) the need for a mechanism to ensure the development and maintenance
of educational computer software by eliminating software piracy, (2) the
unbalanced and very scattered educational framework in China and (3) enabling
the many Chinese schools which do not have the necessary infrastructure to
finance the acquisition of the necessary hardware and software without raising
taxes.
In August, 1999, Tengtu United and Tengtu China entered into a
"Cooperation Agreement" with the Microsoft (China) Co., Ltd. ("Microsoft China")
which generally provides as follows:
1. Microsoft China will license proprietary operating software to
Tengtu United;
2. Microsoft China will appoint Tengtu United as its selling
representative for its products in the Chinese K-12 school market;
3. Microsoft China is to contribute funds for marketing Tengtu United's
software products in an amount to be agreed upon;
4. Microsoft China is to provide technical assistance, installation,
training and technical support to Tengtu China with respect to installation of
its products under the Torch Program;
5. Microsoft China is to provide funding to Tengtu United to establish
one or more educational product demonstration centers;
6. Microsoft China's publishing division, pursuant to a copyright
license agreement, will license Tengtu United to sell Microsoft China's
educational software in China;
7. The parties understand that this Agreement provides only a framework
and substantial implementation plans are subject to further agreement.
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We realize revenue from the sales of our software combined with certain
Microsoft China products. The "Total Solution" is a bundled package of software
marketed under the name of "Tengtu-Microsoft Total Solution" to K-12 Schools. We
are Microsoft China's exclusive selling representative for the K-12 market in
mainland China.
Both Tengtu United's and Microsoft China's software is integrated on
one CD, with a serial number, with both companies' names on the CD. Microsoft
China produces the joint CD and ships these CDs to Tengtu United on a COD basis.
The programs that are visible to the end users developed by Tengtu United and
Microsoft China have been converted to Chinese characters. Each party pays its
own translation costs. Certain of the Microsoft China programs, which are not
visible and commonly known as "back room" programs, may not be translated.
Tengtu United ships the CDs received from Microsoft China to either the
school districts directly, or, where applicable, to its local marketing
partners, which install the CD and any related hardware. Tengtu United and
Microsoft China are available at no charge to consult on the installation of the
programs.
Microsoft China is supposed to train and subsidize the cost of training
for the designee for each school at a facility established by Legend Computer
Group, one of the four owners of Tengtu China, and an authorized Microsoft China
distributor in China.
CURRENT TENGTU UNITED BUSINESS DEVELOPMENTS
Tengtu China, acting for the benefit of Tengtu United, has established
a close working relationship with the NCAVE, the department of the Ministry of
Education responsible for implementing the Chinese government directive of a
computerized classroom in every school by the end of 2005. This division now
recommends the Total Solution as the multimedia electronic classroom to be
installed as part of this government directive. We believe, at the present time,
that the Total Solution is the only recommended product of this type by the
NCAVE. As part of this cooperation, and due to the NCAVE's determination that
the Total Solution was the best product for the K-12 classrooms in China, the
NCAVE has agreed that by January 20, 2001 it will direct Chinese schools to
purchase 3,000 units of the Total Solution as part of "Operation Morning Sun,"
of which approximately 1,600 have been shipped to date. In addition, under the
Relief for Disadvantaged Regions Project, the NCAVE is obligated to direct the
purchase of an additional 5,000 units of the Total Solution. The Ministry of
Education, as well as the provincial education departments, have the right to
audit the school districts and individual schools. The Ministry of Education has
advised us that if it finds that a school is utilizing an unauthorized version
of a designated software program, such as a copy of our Network Classroom, or
the Microsoft China components to the Total Solution, it will cut off
information technology funding to that school.
At the present time, the Chinese national and provincial governments
provide between 40% and 60% of the funding for information technology to the
Chinese schools. Because of current Chinese national priorities, we believe that
the national and provincial governments have no present plans to raise the tax
rate to fully fund the initiative of having a computerized classroom in every
school by the end of 2005. A program developed by Tengtu China with the Chinese
national government envisions that the national government and the provincial
departments of education will continue to fund approximately 60% of the costs of
the appropriate infrastructure, which includes, hardware, software, cabling and
installation, and necessary software to have an appropriate computer classroom
in every school. The balance will be made up by a special user tax imposed by
the Chinese provinces and local schools on each family that has a child in the
K-12 schools. The estimated user tax will be approximately US$10-$15 per year,
per student. China has a one-family one-child policy. The Chinese government
believes that not only is it appropriate but fair that the families with a child
in K-12 pay this tax. Also, we believe that the Chinese policy of one child per
family, combined with the governmental policy and cultural emphasis on the
importance of education with an affordable user tax is the best solution to this
potential barrier to having a computerized classroom in all K-12 schools by the
end of 2005. To date, the Chinese central government has issued a directive to
five provinces authorizing them to impose the use-tax. Chinese banks have
advised us and the Ministry of Education that with the local use-tax plan in
effect, they will be in a position to provide necessary financing because there
will now be sufficient funds from the use-tax over the expected life of the
computer equipment to finance the acquisition of the necessary materials.
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An additional initiative of the Chinese government is "self-reliance."
Out of slightly less than 800,000 K-12 schools, there are approximately 60,000
schools that have the appropriate hardware installation sufficient to support
the Total Solution, in general, and our Network Classroom, in particular. Those
schools can purchase the Total Solution directly from us or at a lower price
from the Ministry of Education. However, if they elect to purchase from the
Ministry of Education, they may not get immediate use of the software because
there are currently insufficient Total Solution units available to satisfy the
demand. This is, in part, due to our insufficient financing to date. We believe
that our Investment Agreement with Swartz Private Equity, L.L.C. may provide
sufficient capital and cash flow to satisfy the demand for the Total Solution,
which includes the requirement that we purchase the Microsoft China components
before the bundling and then the sale of the Total Solution.
Sales of the Total Solution are generally recorded after our product is
accepted by the purchaser. Because Tengtu United views these contracts as the
first of a series of a potential series of many sales, it has delayed invoicing,
when requested, until installation is complete. Because the software offered by
Tengtu United is new to the Chinese school system, we believe that many schools
and school districts will observe how the Tengtu United Total Solution is
working before deciding whether to place an order. Also, we want to be in a
position to sell the follow-up software titles to the initial purchasers of the
start-up package.
As part of its Total Solution project, Tengtu United has also entered
into agreements with two Chinese hardware manufacturers to supply their products
to the Chinese K-12 schools. The first is with Legend Computer Group ("Legend"),
a minority owner of Tengtu China, our joint venture partner, and also the
largest hardware manufacturer in China. The second is with Taigu Computer
Company ("Taigu"), which manufactures inexpensive desktop computers specifically
for use in schools. Under these agreements, Legend, Taigu and Tengtu United are
marketing partners recommending each other's products and if Tengtu United's
software is sold as part of a package, the marketing partner is charged a
wholesale price.
If the end user school buys software directly from Tengtu United, it is
invoiced the retail price. However, Tengtu United has found it is more cost
effective and logistically more efficient to market to governmental agencies and
distributors which are invoiced a wholesale price. While most orders received
have been shipped, installation has not been completed for many schools because
the schools and distributors do not have adequate technical personnel. We
believe that this installation bottleneck has now been solved.
The Total Solution now makes available, via intranet and Internet, a
comprehensive set of tools not only for computerized class instruction, but for
school office administration and the management of educational and multimedia
resources. Designed specifically to accommodate broadband Internet connections
via satellite and cable, the Total Solution software is now a vehicle for
distance learning. Tengtu China is developing the software which will enable the
schools in disadvantaged Chinese regions to use a satellite dish to download
content for use in the Network Classroom.
EDSOFT PLATFORMS (CANADA) LTD.
AND EDSOFT PLATFORMS (H.K.) LIMITED
In July, 1999, we formed a joint venture company, Edsoft Platforms
(Canada) Ltd., in which we have a 60% interest, to market and sell educational
software (including software developed in China by Tengtu United) through Edsoft
Platforms (H.K.) Limited ("Edsoft"), a Hong Kong company wholly owned by Edsoft
Platforms (Canada) Ltd., tailored to the educational market in Hong Kong. In
July, 1999, Edsoft Platforms (Canada) Ltd. received an investment of
H.K.$2,000,000 from private investors in the form of a loan. That loan is
included in our financial statements on the line item titled "Related Party
Loans Payable."
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After June 30th, 2000, Edsoft underwent a major restructuring in order
to capitalize on previous sales efforts of its Multimedia Digital Classroom
software in Hong Kong, and begin execution of its long-term e-education business
strategy . This strategy facilitates a change in Edsoft's business direction
from a systems integrator to an Application Service Provider and
Internet Content Provider.
Edsoft has recently completed modification of Tengtu China's Network
Classroom software for the Hong Kong market which is sold as the "Digital
Classroom" under an exclusive agreement with Tengtu China. Edsoft has also begun
reference-site selling Web based e-education services during the quarter ended
September 30th, 2000.
"Web Schools," the code name for Edsoft's e-education line of products
and services, was developed in co-operation with Netopia Inc. (NASDAQ: NTPA) and
Youthline USA, Inc. (NASDAQ: YLNE). Netopia contributes the web and e-commerce
server infrastructure with customization for the Southheast Asian markets and
Youthline, USA provides daily updated e-learning content, teaching tools and
news.
"Web Schools" offers an integrated information management, teaching and
service support solution to schools in Hong Kong and other Chinese and English
speaking areas of Southeast Asia, exclusive of mainland China. This system is
designed to have the following components to enable Edsoft to charge a monthly
fee, rather than selling the individual hardware and software components. The
current modules are: Title on Demand; Video on Demand; School Information
System; E-learning; School Administration Integration; Library System; E-store
and Parent Information System.
Title and Video on Demand are prototypes and are being developed as a
finished product to be integrated with "Web Schools" by Tengtu Electronic
Publishing, a company owned by Tengtu China. The Hong Kong Education Department
has its own information system ("SAMS") which is accessed and integrated by Web
Schools through the use of an Application Programming Interface ("API") provided
by Edsoft and Netopia, Inc. The School Administration component has been
developed and the software for the Distance Learning component is under
development by Tengtu China.
The Parent Information System which includes video, audio, secure
information via the Web is the foundation of our first version of Web Schools.
It is now part of a prototype and on-going development with the assistance of
several of the top schools in Hong Kong along with select groups of parents and
students.
Edsoft estimates that it will take approximately three months at a cost
of approximately $500,000 to localize those components which are not in the
appropriate Chinese dialect.
Web Schools will be deployed from this flexible architecture of a
unique interactive portal in Hong Kong that has seven important benefits: (1)
schools can plug in their existing data on student academic records; (2)
Information Technology teachers can create and maintain a school Web site
without any technical expertise or program requirements; (3) parents may access
secure information on their child's progress; (4) e-commerce and e-store enables
parents that wish to order educational materials online; (5) the system provides
an Application Program Interface with the existing IT architecture of the Board
of Education in Hong Kong; (6) the portal delivers both general and
education-specific content from Hong Kong and abroad to teachers, students and
parents; and (7) a large database provides tutorials, online exercises and
educational games for all grades.
Edsoft is in discussion with several potential partners to enter into
additional strategic alliances and joint ventures to provide capital and web
service and technology expertise to enhance the functionality and expedite the
commercial deployment of Web Schools.
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TIC BEIJING
TIC Beijing is our wholly-owned subsidiary which commenced operations
in July, 1997. It now has two full-time employees. TIC Beijing's primary
business is to provide information technology services to the education and
entertainment industries in China, focusing on animation and multimedia.
Specifically, TIC Beijing has the capability to produce two and three
dimensional animation, digital integration for television post-production and
digital visual effects for movies. TIC Beijing provides its services to major
television stations including Central China Television ("CCTV") and Beijing
Television.
Recently, relatively inexpensive hardware and software for animation
became available, making it very difficult for TIC Beijing, with its expensive
equipment and larger and more expensive staff, to compete for most of the
post-production work now available in China. In August 2000, TIC Beijing rented
out its facilities and employees to an unaffiliated company for thirteen months
at RMB 100,000 per month, to cover its fixed expenses, and reduced its payroll.
Under this agreement, TIC Beijing has the right to use its equipment on two full
days each week and during the other five days, when the lessee is not using the
equipment. TIC Beijing believes that this is a sufficient amount of time to
enable it to provide its share of the required contribution under its existing
strategic alliance and to service its existing contractual arrangements. TIC
Beijing has hired Kevin Huang Pu, China's first independent producer, as its
manager, to expand its business to include pre-production, co-production of
television shows, distribution of foreign television programs and co-production
of television cartoons. This expansion will require an additional investment of
approximately U.S.$3 million. Governmental approval is required for the
distribution and broadcast of foreign programs and it is initially contemplated
that TIC Beijing will partner with entities already approved by the Chinese
government, consisting of government and Chinese owned entities, until it can
obtain approval, of which there is no assurance.
TIC Beijing's services are marketed by its own in-house marketing staff
with contacts in the Chinese television and advertising industry and through
attendance at trade shows and conferences.
TIC Beijing has a license to operate its business from the Chinese
government, which was granted by the Chinese Bureau of News on October 11, 1997
and is valid until October 10, 2017, and which is reviewed each year in
accordance with standard Chinese government policy. There is no other
significant government approval or regulation of its business.
TIC Beijing has entered into an arrangement with the Guongdong Southern
Natural Museum Co., Ltd., which is providing a portion of the production cost,
to produce and market an initial total of 28 episodes of science programs. It is
contemplated that additional episodes will follow. TIC Beijing has also entered
into a joint venture with Boomstone Entertainment, Inc. and Crawleys i Inc. to
initially co-produce 26 episodes of an animated television series, "Germs," to
commence on the receipt of appropriate financing, of which there is no
assurance. Distribution for Germs is planned for Asia, North America and Europe.
The joint venture is also to develop and market ancillary products to Germs and
other animation series.
ebiztengtu.com, Inc.
On March 6, 2000, we formed ebiztengtu.com, Inc. in Delaware as a
wholly owned subsidiary to focus on internet related businesses but to date that
subsidiary has been inactive.
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COMPETITION
With respect to the development and sale of application software
platforms to the K-12 market in mainland China, we are aware of the following
competitors: IBM China, Novell China and companies marketing Linux based
platforms. We have no information as to the nature and extent of their sales of
application software platforms to the K-12 market. There are a number of
domestic Chinese companies, as well as foreign companies, which produce
individual software programs which can be utilized by teachers and students. We
have no knowledge of their sales into the K-12 market at the school and school
district level. Certain of these programs are marketed by other companies
directly to the students and their parents, but this is not the market in which
we are currently focusing. Tengtu United's competition, with respect to
educational software programs for use in China, consists of numerous Chinese and
foreign software manufacturers.
Edsoft's competition consists of the following. First, a local dealer
in Hong Kong, SunTech, sells a product similar to the Digital Classroom which
was adapted from a similar product sold in mainland China. Second, there are a
number of internet based web initiatives in Hong Kong which are similar to
portions of Web Schools. None of the web initiatives however, offer all segments
offered by Web Schools.
TIC Beijing's competition consists of five local Beijing studios and a
number of newly-formed independent post-production entities. However, none of
these studios have both two and three dimensional animation and post-production
facilities. In addition, TIC Beijing is the only studio that is foreign owned
and believes it has easier access to foreign technology. Because of the
reduction of the cost of hardware and software needed to produce animation,
there are a number of small independent companies which have the capability to
produce animation work, which does not require two- and three-dimensional
animation, at a substantially lower cost than TIC Beijing. TIC Beijing therefore
is now planning to become a producer, instead of only a post-production service
provider, to re-establish its position as a leader in the Chinese animation
industry. In addition, we plan to establish a connectivity and content
partnership for TIC Beijing so as to migrate Internet based applications for the
entertainment and multimedia industries.
EMPLOYEES
Exclusive of subsidiaries and our joint venture, we have 2 full time
employees and six independent contractors. None of our revenues are derived from
operations in the United States.
ENFORCEABILITY OF CIVIL LIABILITIES
AGAINST FOREIGN PERSONS
Although we are incorporated in the State of Delaware, seven out of our
eight directors are not residents of the United States. Only one officer is a
resident of the United States. Therefore, investors wishing to sue our officers
and directors can probably not effect service of process within the United
States on those persons who are non-resident, and may have difficulty enforcing
judgments obtained in U.S. courts against those foreign persons based upon the
civil liability provisions of the U.S. federal securities laws. We have made no
determination as to any such investor's ability to bring an original action in
an appropriate foreign court to enforce liabilities against any non-resident of
the United States based upon the U.S. federal securities laws or the investor's
ability to enforce, in an appropriate foreign court, judgements of U.S. courts
based upon the civil liability provisions of the U.S. federal securities laws.
34
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1
under the Securities Act for the common stock offered by this prospectus. We
have not included in this prospectus all the information contained in the
registration statement and you should refer to the registration statement and
its exhibits for further information.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits
and schedules filed with it, at the SEC's public reference facilities in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You
may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The SEC maintains a Web site (http://www.sec.gov.) that
contains the registration statement, reports, proxy and information statements
and other information regarding registrants that file electronically with the
sec such as us.
You may also read and copy any reports, statements or other information
that we have filed with the sec on Forms 10, 10-K, 10-Q and 8-K at the addresses
indicated above and you may also access them electronically at the web site set
forth above. These SEC filings are also available to the public from commercial
document retrieval services.
(b) DESCRIPTION OF PROPERTY
We do not own any significant physical properties. We have entered into
a number of operating leases for office space. The minimum rental payments on
these leases are as follows:
YEAR ENDING
JUNE 30,
--------
2001 $ 66,075
2002 51,340
--------
TOTAL $117,415
========
35
<PAGE>
Rent expense for the years ended June 30, 2000, 1999 and 1998 has been
charged as follows:
YEAR ENDED JUNE 30,
-------------------
2000 1999 1998
-------- -------- ---------
General and administrative expense $ 62,671 $ 54,551 $ 790,065
Research and development 0 0 110,810
Selling expense 6,281 8,900 79,531
Cost of sales 33,945 52,114 72,257
---------- ---------- ----------
Total rent expense $ 102,897 $ 115,565 $1,052,663
========== ========== ==========
(c) LEGAL PROCEEDINGS
We are not currently a party to any pending legal proceeding, nor do we
know of any proceeding that any governmental authority may be contemplating
against us.
(d) MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The principal market where our common equity is traded is the
over-the-counter Bulletin Board. The high and low bid prices of our common stock
for each quarter within the last two fiscal years, and subsequent interim
periods, were:
HIGH/ASK LOW/BID
-------- -------
4th Quarter 1997 - 1/2 1/8
1st Quarter 1998 - 3/8 1/8
2nd Quarter 1998 - 3/16 1/16
3rd Quarter 1998 - -- --
4th Quarter 1998 - .09 1/16
1st Quarter 1999 - 9/16 .09
2nd Quarter 1999 - 1/4 1/8
3rd Quarter 1999 - 1/4 1/8
4th Quarter 1999 - 4 3/16 1/4
1st Quarter 2000 - 4 7/8 1 7/8
2nd Quarter 2000 - 2 11/16 .95
3rd Quarter 2000 - 1.80 9/16
The high and low bid prices for our common stock on November 24, 2000
were: $.50 and $.4375.
The above over-the-counter market high and low bid quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions. These high and low bid quotations
were obtained from America Online.
As of October 17, 2000 there was one class of common equity held by
approximately 2526 holders of record, including those held in street name. No
dividends have been declared during the last two fiscal years or the subsequent
interim period.
There are no restrictions which affect or are likely to affect our
ability to pay dividends in the future. However, we do not expect to pay
dividends in the foreseeable future.
Assuming that the maximum number of shares are issued under the
registration statement, the following chart summarizes the effect on the
holdings of all current 5% shareholders, each director and all directors as a
group:
<TABLE>
<CAPTION>
CURRENT AMOUNT OF CURRENT % OF % OF COMMON STOCK
COMMON STOCK COMMON STOCK BENEFICIALLY OWNED
DIRECTOR OR 5% HOLDER BENEFICIALLY OWNED BENEFICIALLY OWNED AFTER ISSUANCE
----------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Pak Kwan Cheung (1) 4,370,750 13.52% 5.8%
Director
Jing Lian (2) 1,170,750 3.6 1.6
Director
John D. Watt (3) 112,000 * *
Director
Michael Nikiforuk (4) 225,000 * *
Director
Zhang Fan Qi 1,035,714 3.2 1.4
Director
Gordon Reid (5) 271,448 * *
Director
Barry Clark (6) 700,000 2.2 *
Director
<FN>
(1) Includes 300,000 Common Shares subject to options that are exercisable
within 60 days.
(2) Includes 300,000 Common Shares subject to options that are exercisable
within 60 days.
(3) Includes 75,000 Common Shares subject to options that are exercisable within
60 days.
(4) Includes 75,000 Common Shares subject to options that are exercisable within
60 days.
(5) Includes 75,000 Common Shares subject to options that are exercisable within
60 days.
(6) Includes 300,000 Common Shares subject to options that are exercisable
within 60 days.
</FN>
</TABLE>
36
<PAGE>
(e) FINANCIAL STATEMENTS
Financial Statements are included on pages F-1 through F-44.
The Table of Contents to the Financial Statements is as follows:
Independent Auditor's Report - June 30, 2000 F-1
Consolidated Financial Statements - June 30, 2000
Balance Sheet as of June 30, 2000 F-2
Statements of Operations for the Years Ended
June 30, 2000 and 1999 F-3
Statements of Stockholders' Deficit for the Years
Ended June 30, 2000 and 1999 F-4
Statements of Cash Flows for the Years Ended
June 30, 2000 and 1999 F-5
Notes to Financial Statements F-6 TO F-20
Independent Auditor's Report - June 30, 1999 F-21
Consolidated Financial Statements - June 30, 1999
Balance Sheet as of June 30, 1999 F-22
Statements of Operations for the Years Ended
June 30, 1999 and 1998 F-23
Statements of Stockholders' Deficit for the Years
Ended June 30, 1999 and 1998 F-24
Statements of cash flows for the years ended
June 30, 1999 and 1998 F-25
Notes to Financial Statements F-26 TO F-38
Unaudited Consolidated Balance Sheet as of September 30, 2000 F-39
Unaudited Consolidated Statements of Operations for the Quarters
Ended September 30, 2000 and 1999 F-40
Unaudited Consolidated Statements of Stockholders' F-41
Deficit for the Quarters Ended June 30, 2000 And
1999
Unaudited Consolidated Statements of Cash Flows for the Quarters F-42
Ended September 30, 2000 and 1999
Unaudited Summary of Accounting Policies and Notes to
September 30, 2000 Consolidated Unaudited Financial Statements F-43 TO F-44
<PAGE>
Tengtu International Corp. and Subsidiaries
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Tengtu International Corp.
We have audited the accompanying consolidated balance sheet of Tengtu
International Corp. And its subsidiaries as of june 30, 2000 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the two fiscal years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial. Statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tengtu
International Corp. And its subsidiaries as of June 30, 2000, and the results of
their operations and their cash flows for each of the two fiscal years in the
period then ended in conformity with united states generally accepted accounting
principles.
The accompanying statements have been prepared assuming that the company will
continue as a going concern. As discussed in note 2, the company incurred a net
loss of $4,701,285 for the year ended June 30, 2000, used cash in operations of
$1,185,677, and, as of that date, had a working capital deficiency of
$2,886,444. These conditions raise substantial doubt about the company's ability
to continue as a going concern. Management's plans in regard to these matters
are also discussed in note 2. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
August 28, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 919,091
Accounts receivable, net of
Allowance for doubtful accounts
Of $200,097 36,009
Due from related party 170,123
Prepaid expenses 3,715
Inventories 18,071
Other receivables 5,588
------------
Total Current Assets 1,152,597
============
PROPERTY AND EQUIPMENT 967,840
------------
OTHER ASSETS
Notes receivable 71,940
Advance to director 60,011
License fees 125,000
Other assets 30,454
------------
287,405
------------
TOTAL ASSETS $ 2,407,842
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,690,658
Accrued expenses 419,160
Related party loan payable 100,000
Due to related party consultants 1,415,026
Other liabilities 414,197
------------
Total Current Liabilities 4,039,041
------------
OTHER LIABILITIES
Related party loans payable 255,490
Convertible debenture, net of discount 1,194,334
------------
1,449,824
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.01
per share;authorized 10,000,000 shares;
issued -0- shares common stock,
par value $.01 Per share; authorized
100,000,000 shares;
issued 23,890,607 shares 238,907
Additional paid in capital 11,871,444
Accumulated deficit (15,184,374)
Accumulated Other Comprehensive Income (Loss):
Cumulative translation adjustment (6,216)
------------
(3,080,239)
Less: treasury stock, at cost,
78,420 common shares (784)
------------
Total Stockholders' Deficit (3,081,023)
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 2,407,842
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
2000 1999
------------ ------------
<S> <C> <C>
SALES $ 358,026 $ 624,121
COST OF SALES 506,864 769,608
------------ ------------
GROSS LOSS (148,838) (145,487)
------------ ------------
OPERATING EXPENSES
Research and development -0- 1,440
General and administrative 1,537,833 699,582
Related party consultants 1,492,813 774,870
Bad debts (recovery) expense (8,984) 143,347
Advertising 28,991 19
Selling 74,819 52,671
Depreciation 58,698 43,217
------------ ------------
3,184,170 1,715,146
------------ ------------
OTHER INCOME (EXPENSE)
Equity earnings in investee (80,147) (65,274)
Interest income 22,641 3,923
Interest expense (1,311,372) -0-
Other income 2,240 35,585
Other expense (29,839) -0-
------------ ------------
(1,396,477) (25,766)
------------ ------------
LOSS BEFORE MINORITY INTERESTS (4,729,485) (1,886,399)
MINORITY INTERESTS IN SUBSIDIARY'S
EARNINGS (LOSS) (28,200) -0-
------------ ------------
NET LOSS $ (4,701,285) $ (1,886,399)
============ ============
NET LOSS PER COMMON SHARE [BASIC AND DILUTED] (0.23) (0.10)
WEIGHTED AVERAGE NUMBER OF SHARES 20,863,271 18,813,545
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT INCOME (LOSS)
------ ------ ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance-June 30,1998 19,297,107 $ 192,972 $ 9,394,651 $ (8,596,690) $ (9,335)
Issuance of common stock
related to deferred
compensation 180,500 1,805 8,258 0 0 0
Amortization of deferred
compensation related to
stock options and common
stock for services -- 0 0 0 0 0
Other comprehensive income:
Foreign currency adjustment -- 0 0 $ 2,583 0 2,583
Comprehensive income:
Net loss -- 0 0 (1,886,399) (1,886,399) 0
----------
Comprehensive Income (1,883,816)
-----------
---------- ------------ ------------ ------------ ------------
Balance-June 30, 1999 19,477,607 194,777 9,402,909 (10,483,089) (6,752)
Issuance of common stock 963,000 9,630 166,095 0 0 0
Issuance of common stock
for promissory notes 330,000 3,300 68,640 0 0 0
Issuance of common stock
For services 3,120,000 31,200 733,800 0 0 0
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES -- 0 0 0 0 0
PAID-IN CAPITAL RELATED TO
BENEFICIAL CONVERSION
FEATURE-DEBENTURE -- -- 1,153,846 0 0 0
PAID-IN CAPITAL RELATED TO
DETACHABLE WARRANT-
DEBENTURE -- -- 346,154 0 0 0
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- 0 0 $ 536 0 536
COMPREHENSIVE INCOME:
NET LOSS -- -- -- (4,701,285) (4,701,285) --
------------
COMPREHENSIVE INCOME $ (4,700,749)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE-JUNE 30,2000 23,890,607 238,907 11,871,444 $(15,184,374) $ (6,216)
========== ============ ============ ============ ============
TREASURY UNAMORTIZED
STOCK AT DEFERRED STOCKHOLDERS'
COST COMPENSATION DEFICIT
---- ------------ -------
BALANCE-JUNE 30,1998 $ (784) $ (476,563) $ 504,251
ISSUANCE OF COMMON STOCK
RELATED TO DEFERRED
COMPENSATION 0 0 10,063
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES 0 293,750 293,750
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT 0 0 2,583
COMPREHENSIVE INCOME:
NET LOSS 0 0 (1,886,399)
COMPREHENSIVE INCOME
------------ ------------ ------------
BALANCE-JUNE 30, 1999 (784) (182,813) (1,075,752)
ISSUANCE OF COMMON STOCK 0 0 175,725
ISSUANCE OF COMMON STOCK
FOR PROMISSORY NOTES 0 0 71,940
ISSUANCE OF COMMON STOCK
FOR SERVICES 0 0 765,000
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES 0 182,813 182,813
PAID-IN CAPITAL RELATED TO
BENEFICIAL CONVERSION
FEATURE-DEBENTURE 0 0 1,153,846
PAID-IN CAPITAL RELATED TO
DETACHABLE WARRANT-
DEBENTURE 0 0 346,154
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT 0 0 536
COMPREHENSIVE INCOME:
NET LOSS -- -- (4,701,285)
COMPREHENSIVE INCOME
----------- ------------ ------------
BALANCE-JUNE 30,2000 $ (784) $ 0 $ (3,081,023)
=========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
NET LOSS $(4,701,285) $(1,886,399)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 266,614 292,808
PROVISION FOR (RECOVERY OF) BAD DEBT (8,984) 143,081
LOSS ON INVESTMENT AT EQUITY 80,147 65,274
NONCASH COMPENSATION EXPENSE ON
SHARES ISSUED FOR SERVICES 947,813 303,813
NONCASH INTEREST EXPENSE-CONVERTIBLE DEBENTURE 1,194,334 -0-
CHANGES IN OPERATING ASSETS
AND LIABILITIES:
DECREASE(INCREASE)IN OPERATING ASSETS:
ACCOUNTS RECEIVABLE 22,398 (76,644)
DUE FROM RELATED PARTY 138,208 (2,762)
PREPAID EXPENSES 26,188 5,307
INVENTORIES 16,377 191,164
ADVANCES TO SUPPLIERS -0- 122,415
OTHER RECEIVABLES - CURRENT 7,758 13,382
DUE FROM INVESTEE -0- 50,000
ADVANCE TO DIRECTOR (30,011) (30,000)
OTHER ASSETS 28,390 (44,307)
INCREASE (DECREASE)IN OPERATING LIABILITIES:
ACCOUNTS PAYABLE 90,249 87,615
ACCRUED EXPENSES 14,384 53,019
DUE TO RELATED PARTY CONSULTANTS 355,477 481,124
OTHER LIABILITIES 366,267 (1,768)
--------------------------
NET CASH USED BY OPERATING ACTIVITIES (1,185,677) (232,878)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY AND EQUIPMENT (42,535) (63,959)
--------------------------
NET CASH USED BY INVESTING ACTIVITIES (42,535) (63,959)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM LOANS 1,858,064 -0-
CASH RECEIVED FOR SHARES ISSUED 175,725 -0-
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,033,789 -0-
--------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,038) 2,583
--------------------------
INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS 803,539 (294,254)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 115,552 409,806
--------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 919,091 $ 115,552
==========================
</TABLE>
F-5
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Tengtu International Corp. (The "Company") was incorporated in Delaware
On May 6, 1988 as Galway Capital Corporation for the purpose of seeking
Potential ventures. After operating as a development stage enterprise
through 1991, the Company became inactive and remained so until may
1996, when control of it was acquired by several individuals. On May
24, 1996 the Company changed its name to Tengtu International Corp. The
Company's main activities, which are carried out through its
subsidiaries and investee, are the development and marketing of
educational software and other forms of electronic publishing in China,
Hong Kong and Canada.
2. Going Concern
As shown in the accompanying financial statements, the Company incurred
a net loss of $4,701,285 for the year ended June 30, 2000, used cash in
operations of $1,185,677, and, as of that date, had a working capital
deficiency of $2,886,444. Those factors, as well as a continued
downsizing of operations in its largest operating subsidiary for the
year ended June 30, 2000, create an uncertainty about the Company's
ability to continue as a going concern.
Management has developed a plan to alleviate these factors to enable
the Company to continue as a going concern. The plan includes a series
of equity and debt financing. Currently, the Company has signed term
sheets with two separate organizations that would, if finalized into
contracts, provide the Company with $5,000,000 of debt financing and up
to $30,000,000 in equity capital. Another term sheet has been signed
with a different entity that would, if contracted, act as a placement
agent, on a best efforts basis, to sell $5,000,000 of the company's
common shares. Additionally, the Company's Canadian investee has signed
a draft agreement with a potential purchaser of the investee's assets.
If the deal is consummated, the Company would receive approximately
$650,000. The Company has also entered into agreements with a number of
its related party consultants (see note 10) to defer payment of their
respective fees until the company completes a major financing
transaction, either through equity or debt.
The ability of the Company to continue as a going concern is dependent
on the success of its plan. The financial statements do not include any
adjustments that might be necessary if the company is unable to
continue as a going concern.
3. Significant Accounting Policies
a) Principles of Consolidation
The consolidated financial statements include the accounts of the
company and subsidiaries over which it owns more than a 50% equity
interest. For the year ended June 30, 2000, the consolidated financial
statements include two new subsidiaries, significant intercompany
balances and transactions have been eliminated on consolidation.
F-6
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
a) Principles of Consolidation (Continued)
The Company contributed capital of $6,000,000 to a subsidiary in which
the minority has a 43% interest. No portion of the $6,000,000 has been
allocated to the minority as the joint venture agreement that concerns
the subsidiary assigns all rights to that contribution to the company.
In accordance with Accounting Research Bulletin 51, the company has
charged to income the loss applicable to the minority interests that is
in excess of the minorities' interests in the equity capital of the
subsidiaries, including any guarantees or commitments from minority
shareholders for further capital contributions.
In the case of its joint venture subsidiary, the Company and the
minority interest holder agreed that the contribution of software and
hardware by the minority interest to the joint venture had no fair
market value at the time of the contribution. The joint venture,
therefore, assigned a $0 value to these assets. The minority also
contributed a contract to the joint venture that gives the joint
venture the right to provide the Chinese public school system with
certain educational materials, including software and textbooks. A
value of $0 was assigned to the contract by the joint venture, as it
could not create a reliable model of revenue streams or cash flows
associated with the contract at the time of the contribution.
b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at June 30, 2000, and reported amounts of revenues and
expenses during each of the two fiscal years then ended. Actual results
could differ from those estimates.
c) Revenue Recognition
Revenue from the sale of hardware is recognized when the products are
delivered to the customer. Revenue from the sale of software products,
which do not require any significant production, modification or
customization for the Company's targeted users and do not have multiple
elements, is recognized in accordance with paragraphs 7 and 8 of sop
97-2. These paragraphs require four conditions to be present in order
to recognize revenue: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred, (3) the company's fee is fixed and
determinable and (4) collectibility is probable.
Revenue from software license fees is recognized on a straight-line
basis over the term of the license.
F-7
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
c) Revenue Recognition (Continued)
Hardware and software are delivered to customers at or at approximately
the same time. Software is generally installed within approximately two
weeks of delivery.
The hardware sold includes personal desktop computers, printers,
network servers, monitors, modems, hard drives and other storage media
and cables. The Company's software cannot be installed until the
hardware is delivered. Therefore, a delay in delivery of hardware will
delay the recognition of software sales revenues.
d) Inventories
Inventories are priced at the lower of cost, on a weighted-average
basis, or market and consist primarily of computer hardware and
software.
e) Long-lived Assets
Property and equipment are stated at cost. Depreciation is provided
primarily by the straight-line method over the estimated useful lives
of the assets. Other long-lived assets are amortized using the
straight-line method over the contract life or the useful life,
whichever is shorter.
f) Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
g) Income Taxes
The Company accounts for income taxes in accordance with statement of
financial accounting standards ("SFAS") No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to determine
deferred tax assets and liabilities. The deferred assets and
liabilities are determined based upon the differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that are expected to be in effect
when the differences are assumed to reverse.
F-8
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
g) Income Taxes (Continued)
The Company files a consolidated return with its subsidiaries that are
eligible to be consolidated. Separate provisions for income tax are
calculated for subsidiaries that are not eligible for consolidation
into the U. S. federal income tax return.
h) Loss per Share
Loss per common and common equivalent share is computed based on the
weighted average number of common shares outstanding. Due to the
antidilutive effect of the assumed exercise of outstanding common stock
equivalents at June 30, 2000 and 1999, loss per share does not give
effect to the exercise of these common stock equivalents in either
year, but they may dilute earnings per share in the future.
i) Advertising Expense
The Company expenses advertising costs as incurred.
j) Impairment
The Company evaluates its long-lived assets to determine whether later
events and circumstances warrant revised estimates of useful lives or a
reduction in carrying value due to impairment.
k) Foreign Currency Transactions/Translation
The functional currency of the Company's subsidiary and joint venture
in China is the renminbi. The Company's Canadian subsidiary uses the
Canadian dollar as its functional currency and its hong kong subsidiary
uses the Hong Kong dollar as its functional currency. Foreign
transaction gains and losses in the functional currencies are
immaterial. Transactions denominated in other than the functional
currencies are insignificant and therefore, foreign currency
transaction gains and losses in non-functional currencies are also
immaterial.
Assets and liabilities of the financial statements of foreign
subsidiaries and joint venture are translated into U.S. dollars
utilizing the exchange rate at the balance sheet date, and revenues and
expenses are translated using average exchange rates in effect during
the year. Translation adjustments are accumulated and recorded as a
separate component of stockholders' equity.
F-9
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
k) Foreign Currency Transactions/Translation (Continued)
Foreign currency transactions are translated into the functional
currency at the exchange rate prevailing on the date of the
transaction. Material gains and losses from foreign currency
transactions are reflected in the financial period in which the
exchange rate changes.
The Chinese government imposes significant exchange restrictions on
transferring funds out of China for purposes unrelated to business
operations. These restrictions have not had a material impact on the
company because it has not engaged in any significant transactions that
are subject to the restrictions.
l) Accumulated Other Comprehensive Income
Accumulated other comprehensive income represents the change in equity
of the company during the periods presented from foreign currency
translation adjustments,
m) Stock-based Compensation
On July 1, 1996, the Company adopted the disclosure requirements of
Financial Accounting Standards SFAS No. 123, "Accounting for
Stock-Based Compensation" for stock options and similar equity
instruments (collectively, "options") issued to employees; however, the
Company will continue to apply the intrinsic value based method of
accounting for options issued to employees prescribed by Accounting
Principles Board ("APB") opinion no. 25, "Accounting for Stock Issues
to Employees" rather than the fair value based method of accounting
prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions
in which an entity issues its equity instruments to acquire goods or
services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably
measurable.
n) Software Costs
Software development costs are capitalized if they are incurred after
technological feasibility has been established. Purchased software is
capitalized if it has an alternative future use. Research and
development costs for new products or enhancement of existing software
and purchased software that do not meet these requirements are expensed
as incurred. Capitalized costs are amortized over the lesser of five
years or the useful life of the related product.
F-10
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000 is comprised as follows:
Computer hardware $ 131,590
Computer software 9,057
Furniture and fixtures 53,770
Automobiles 206,553
Office equipment 95,528
Leasehold improvement 29,061
Idle equipment 73,305
Production equipment 1,258,445
---------
Total at cost 1,857,309
Less: accumulated depreciation (889,469)
----------
Net property and equipment $ 967,840
==========
Depreciation charged to operations for the years ended June 30, 2000
and 1999 was $266,614 and $292,808, respectively, of which $207,916 and
$214,601 was included in cost of sales for the years ended June 30,
2000 and 1999, respectively.
5. LICENSE FEES
On June 21, 2000, the Company entered into a license agreement with
Netopia, Inc. The agreement grants the Company a fee-bearing,
non-exclusive license right to promote and otherwise market Netopia's
web site product and service to the Company's customers. The agreement
shall continue in perpetuity until terminated by either party. The cost
of the agreement of $125,000 is being amortized on a straight line
basis over five years. No amortization was recorded for the year ended
June 30, 2000 due to the short amortization period of nine days.
6. LONG TERM DEBT
On December 23, 1999, the Company received cash of $1,500,000 in
exchange for a four year Floating Convertible Debenture ("Debenture")
convertible into shares of Tengtu's $.01 par value common stock
("Common Stock") and a separate Common Stock Warrant ("Warrant") for
the purchase of 1,500,000 shares of Common Stock. The purchaser of the
Debenture and Warrant is Top Eagle Holdings Limited, a British Virgin
Islands company ("Top Eagle"). The Debenture is due December 15, 2003
and provides for accrual of interest beginning December 15, 2000 at a
rate equal to the best lending rate of the Hong Kong and Shanghai
Banking Corporation plus two percent (approximately 9% at June 30,
2000). The Debenture is convertible into Tengtu's Common Stock at a
conversion price of $.50 during the first year,$1.00 during the second
year $2.00 during the third year and $4.00 on any date thereafter. The
unpaid balance of principal and interest outstanding at maturity, if
any, may be converted by the holder into the Company's common stock at
the then existing market price minus twenty percent.
F-11
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Warrant gives the holder the right to purchase 1,500,000 shares of
the Company's Common Stock at $1.00 per share during the first year,
$2.00 per share during the second year and $4.00 thereafter. The
Warrant shall become void three years after issuance. In connection
with the purchase of the Debenture and Warrant. The Company and Top
Eagle entered into an Investor Rights Agreement which provides that on
or before June 15, 2000, Top Eagle may purchase additional convertible
debentures for up to $3.5 million and receive additional warrants on
substantially the same terms. Top Eagle did not exercise these rights.
The Investor Rights Agreement also provides the holder(s) of the
Debenture, Warrant and or the shares issued upon conversion or exercise
thereof with registration and certain other rights. The effective
interest rate of the debenture is 8.5%.
Because no portion of the price paid by Top Eagle was for the Warrants,
the Warrants were assigned a value by the Company and the Debenture was
discounted by that amount. The financial statements reflect entries of
$346,154 for a discount to the Debenture and paid in capital for the
Warrant. This value was assigned as follows. On the date that the
Debenture and Warrant were sold to Top Eagle, the Company's stock was
trading at $1.60 per share and the Warrant was exercisable at $1.00.
Therefore, the Warrant had a value between $0 and $.60 per share. The
Company chose to value the Warrant at $.30 per share. The gross amount
of the Debenture and Warrant were therefore $1.5 million (Debenture)
plus $450,000 (Warrant - $.30 X 1,500,000) for a total of $1.95
million. Of the $1.95 million, the Warrant represents 23.08%
($450,000/$1.95 million). The discount to the Debenture was calculated
by multiplying the percentage of the total represented by the Warrant
(23.08%) by the total proceeds received from the sale ($1.5 million).
The discount to the Debenture was therefore equal to $346,154 and the
Debenture was discounted to $1,153,846 ($1.5 million - $346,154).
On the date the Debenture was issued, the conversion price was $.50 and
the market price was $1.60. The conversion feature was valued at the
full adjusted amount of the Debenture, after valuation of the Warrant,
of $1,153,846. Because the Debenture was immediately convertible, the
full discount was charged to interest expense for the year ended June
30, 2000.
A group of private investors, in July 1999, advanced approximately
$250,000 into Edsoft Platforms (Canada), Inc., one of the Company's
subsidiaries, as a shareholder's loan, bearing a 10% interest rate. One
half of the loan can be converted into common shares of the Company at
$3 per share if the loan is not paid in full at the maturity date of
July 27, 2002.
7. Income Taxes
For the current year, none of the Company's operating subsidiaries will
be included in its federal income tax return as these are all foreign
entities and are therefore ineligible for consolidation. The Company
has accumulated approximately $9,055,000 of operating losses that may
be used to offset future federal taxable income. The utilization of the
losses expires in years from 2005 to 2020.
F-12
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. Income Taxes (Continued)
Due to an ownership change in the year ended June 30, 1996, annual
utilization of approximately $265,000 of the losses is expected to be
limited to an estimated $60,000 by current provisions section 382 of
the internal revenue code, as amended.
As the Company is not liable for either current or deferred income
taxes for the years ended June 30, 2000 and 1999, respectively, no
provision is shown on the statement of operations. For U.S. tax
purposes, the Company has recorded a deferred tax asset of
approximately $3,079,000 at June 30, 2040 and $1,813,000 at June 30,
1999 due principally to net operating losses. A valuation allowance of
an identical amount has been recorded as the Company believes that it
is more likely than not that the losses will not be utilized. The
allowance has the effect of reducing the carrying value of the deferred
tax asset to $0. The valuation allowance increased approximately
$1,266,000 and $327,000 during the years ended June 30, 2000 and 1999,
respectively. The Company's Hong Kong subsidiary has recorded a
deferred tax asset of approximately $55,400, totally offset by a
valuation allowance due to the uncertainty of realization.
The Company is a U.S. company that operates through a branch office in
Canada. As a U.S. company, it is required to file an income tax return
and report those branch operations. The income tax returns have
generated the above net operating losses.
The net operating losses for the Company's Chinese joint venture and
subsidiaries total approximately $6,700,000. Net operating losses in
china can be carried forward for five years. The Company's Chinese net
operating losses expire between 2002 and 2005. The net operating loss
for the Hong Kong subsidiary is approximately $365,000 and expires only
if there is an ownership change.
8. Concentration of Credit Risk
The Company operates through subsidiaries located principally in
Beijing, China, Hong Kong and an investee in Toronto, Canada; the
administrative office is in Vancouver, Canada. The Company grants
credit to its customers in these geographic regions.
The Company performs certain credit evaluation procedures and does not
require collateral. The Company believes that credit risk is limited
because the Company routinely assesses the financial strength of its
customers, and based upon factors surrounding the credit risk of its
customers, establishes an allowance for uncollectible accounts and, as
a consequence, believes that its accounts receivable credit risk
exposure beyond such allowances is limited.
The Company established an allowance for doubtful accounts at June 30,
2000 of $200,097. The Company believes any credit risk beyond this
amount would be negligible.
At June 30, 2000, the company had approximately $815,700 of cash in
banks uninsured.
The Company does not require collateral or other securities to support
financial instruments that are subject to credit risk.
F-13
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. Concentration of Credit Risk (Continued)
As of June 30, 2000, three customers, each with more than 10% accounted
for approximately 40% of accounts receivable. At June 30, 1999, no
customer accounted for at least 10% of accounts receivable.
For the fiscal years ended June 30, 2000 and 1999 no customer accounted
for more than 10% of total sales.
9. Commitments and Contingencies
a) The Company has entered into a number of operating leases for office
space. The minimum rental payments on these leases are as follows:
YEAR ENDING
JUNE 30,
-------
2001 $ 66,075
2002 51,340
---------
TOTAL $ 117,415
=========
Rent expense for the years ended June 30, 2000 and 1999 has been
charged as follows:
YEAR ENDED JUNE 30,
2000 1999
---- ----
General and administrative expense $ 62,671 $ 54,551
Selling expensetrative expense 6,281 8,900
-------- --------
Cost of sales 33,945 52,114
-------- --------
Total rent expense $102,897 $115,565
======== ========
The Company has contracts with various executives and consultants. The
minimum cash compensation due under these contracts is as follows:
YEAR ENDING
JUNE 30,
--------
2001 $248,400
2002 218,400
2003 128,400
2004 128,400
2005 42,800
--------
$766,400
========
F-14
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. Commitments and Contingencies (Continued)
b) The Company leased office space under an operating lease
expiring in July 2001. In May 1998, the Company terminated its
lease agreement and rent expense of approximately $538,000 was
accrued as of June 30, 1998, representing the remainder of the
lease payments due under such lease. The liability of $538,000
is included in accounts payable at June 30, 2000.
c) The Company is committed to contribute $6,000,000 to the joint
venture and to begin making deferred compensation payments to
its related party consultants [See Note 3] upon the completion
of its next major financing. However, the timing of the
payment of the deferred compensation and additional
contributions is discretionary and not defined in any
agreement. The Company's board of directors has not defined a
"major financing transaction," and such definition will be
wholly within its discretion.
10. Related Party Transactions
Due to the continued downsizing of the staff of the joint venture [See
Note 2], the operations of the venture during the year ended June 30,
2000 were carried out by the minority interest holder. At June 30, the
joint venture had a receivable balance of $170,123. At June 30, 1999,
the joint venture had a receivable balance from the minority interest
holder of $293,287. The Company advanced $30,000 to one of the officers
during the year.
During 2000 and 1999, respectively, the Company incurred consulting and
related expenses of approximately $1,493,000 and $776,000 from officers
and directors of the Company or its subsidiaries or companies
controlled by these officers and directors. No payments have been made
for the amounts incurred in either fiscal year.
Of the total expenses incurred, approximately $182,800 in 2000 and
$243,750 for 1999 represent the value of common shares issued for
services to two officers. The officers entered into agreements with the
company in the year ended June, 30, 1997 that entitled them to receive
500,000 and 100,000 shares, respectively, at the date the agreements
were signed. Deferred compensation of $731,250 was recorded in the year
ended June 30, 1997, and is being amortized over the three year term of
each agreement.
In January 2000, the Company and Comadex Industries, Ltd. entered into
a consulting agreement for the employment of Pak Cheung as the
Company's Chairman and CEO. Pursuant to that agreement Comadex received
3,000,000 common shares for past services rendered, resulting in a
charge to related party consultants expense of $750,000. If Pak Cheung
is able to raise $3,000,000 or more in capital for the Company or a 50%
or more owned joint venture or subsidiary, Comadex shall receive an
option to purchase 1,000,000 shares of the Company's common stock at
the closing price on the day the capital is received by the Company.
F-15
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. Related Party Transactions (Continued)
On September 9, 1999 a Company director loaned $100,000 to the Company.
The loan bears interest at 6% per annum and is due in twelve months.
The loan is convertible at the option of the Company director at the
rate of $.35 per share, or into an aggregate of 285,714 shares of the
Company's common stock. The loan is guaranteed by another director of
the Company. At the date of the loan, the Company's common stock was
trading at $.25 per share, therefore the loan does not contain a
beneficial conversion feature.
11. Stock Options
The Company's Board of Directors approved two stock option plans for
its employees, consultants and directors totaling 5,000,000 shares. The
first stock option plan was approved on December 29, 1998 for two (2)
million shares. The second stock option plan was approved on August 31,
1999 for three (3) million shares. Both plans were approved by the
shareholders of the company.
The maximum number of shares granted to any individual under the two
stock option plans is 300,000 shares. The following were granted stock
options under the first plan in March 1999 (1997 plan):
Pak Cheung, Chairman and CEO 300,000 shares
Barry Clark, President and Director 300,000 shares
Jack Lian, Director 300,000 shares
Hai Nan, Director 300,000 shares
Xiao Feng Lin, President, Tengtu United 300,000 shares
Greg Mclelland, Vice President 150,000 shares*
Simon Hui, Vp Finance and Controller 75,000 shares
Michael Meakes, VP - Iconix 50,000 shares
Other Employees 300,000 shares **
Gordon Reid, Director 75,000 shares
John Watt, Director 75,000 shares
Michael Nikiforuk, Director 75,000 shares
----------------
Total 2,300,000 shares
================
Simon Hui (75,000 shares) and other employees (180,000 shares)
exercised options during the year ended June 30, 2000.
* On April 8, 1997, the Company entered into an agreement with
Gregory McLelland to provide consulting services and to
serve as an officer of the Company. The term of the
agreement is three years. The agreement provides a $125,000
annual salary, 100,000 shares of common stock upon signing
of the agreement and options to purchase 50,000 shares of
common stock annually for three years.
F-16
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. Stock Options (Continued)
**To various employees of Tic Beijing and Tengtu United who
are not officers or directors of the Company.
The shortfall in the 1997 plan was made up from shares included in the
1999 plan.
The following were granted stock options under the 1999 plan and
exercised them during the year ended June 30, 2000:
Simon Hui, VP Finance and Controller 75,000 shares
All of the stock options granted under the 1997 plan, except for
150,000 issued to Greg McLelland (see above and the following
paragraph), had an exercise price greater than the market price on the
date of grant, and therefore, no compensation expense has been
recognized for these options. The contractual life of the options under
both plans cannot exceed ten years from the date of the grant. The
board of directors determines the life, but has not yet done so for the
options granted.
For the year ended June 30, 2000 certain employees exercised their
options to purchase a total of 330,000 shares for $71,940. The shares
were purchased by issuing promissory notes to the company. The notes
mature in five years. The notes are interest free in the first year and
have an interest rate of 3% a per annum for each subsequent year that
the notes are outstanding. Partial or full repayment may be due prior
to maturity if the employee sells part or all of the shares purchased.
The repayment is equal to the ratio of the shares sold over the total
shares purchased.
On August 1, 1999, the Company entered into a one year contract with a
marketing consultant. As part of its fee, the consultant received three
warrants from the company, each representing 50,000 shares of the
Company. Each of the warrants is exercisable for five years at the
following dates and prices: a) warrant 1 - August 1, 1999 at $.75 per
share; b) warrant 2 - February 1, 2000 at $1.50 per share and c)
warrant 3 - August 1, 2000 at $3.00 per share.
The following table summarizes information concerning currently
outstanding and exercisable stock options and warrants:
WEIGHTED
AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISABLE AT
PRICE JUNE 30, 2000 LIFE JUNE 30, 2000
----- ------------- ---- -------------
Options $ .218 2,045,000 8.5 years 2,045,000
Warrants $ .750 50,000 4.08 years 50,000
Warrants $ 1.50 50,000 4.58 years 50,000
Greg McLelland was granted options on April 8, 1997 to purchase 150,000
shares of common stock at one-third of the market price of the stock at
the date of the grant. The options are vested equally over three years,
beginning with the year ended June 30, 1997. At June 30, 2000, there is
no remaining contractual life. Because the exercise price of the
options was below the market price at the date of the grant, the
Company has recorded deferred compensation expense of $150,000 in
accordance with APB Opinion No. 25 and related interpretations. The
deferral is being recognized ratably over three years, with $50,000
being charged to operations for the year ended June 30, 1999.
F-17
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. Stock Options (Continued)
Had the Company elected to recognize compensation expense for all
options granted using the fair value method prescribed by SFAS 123, the
Company's net loss and net loss per share would be the pro forma
amounts indicated below:
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Net Loss as Reported $ (4,701,285) $ (1,886,399)
Pro Forma Net Loss $ (2,176,401)
Loss Per Share as Reported $ (.10)
Pro Forma Loss Per Share $ (.11)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted
average fair value of stock options granted to employees used in
determining pro forma amounts is estimated at $1.31 for Mr. McLelland's
150,000 options and $.15 for the remaining 1,850,000, for the year
ended June 30, 1999.
The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model for the pro forma amounts
with the following weighted average assumptions:
JUNE 30, 1999
-------------
Risk Free Interest Rate 4.5
Expected Life 2.0
Expected Volatility 13.7
Expected Dividends NONE
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments",
requires disclosing fair value to the extent practicable for financial
instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences
of realization or settlement.
F-18
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. Fair Value of Financial Instrument (Continued)
For certain financial instruments, including cash and cash equivalents,
trade receivables and payable, and short-term debt, it was assumed that
the carrying amount approximated fair value because of the near term
maturities of such obligations. The fair value of long-term debt was
determined based on current rates at which the company could borrow
funds with similar remaining maturities, which amount approximates its
carrying value.
13. Statements of Cash Flows Supplemental Disclosures
For the year ended June 30, 2000 the Company issued 3,120,000 shares of
common stock in lieu of cash payments for certain services rendered.
The value of such services was $765,000. The Company also issued
330,000 shares of common stock to employees exercising their stock
options. The total price of the shares was $71,940 and was paid by the
employees via promissory notes given to the Company.
There were no cash payments of interest expense for the years ended
June 30, 2000 and 1999.
14. Authoritative Pronouncements
The FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities.
SFAS No. 133 requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the
derivative and how it is designated, for example, gains or losses
related to changes in the fair value of a derivative not designated as
a hedging instrument are recognized in earnings in the period of the
change, while certain types of hedging may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction.
SFAS No. 133, as amended by SFAS No. 138, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Initial
application of SFAS No. 133 should be as of the beginning of a fiscal
quarter; on that date, hedging relationships must be designated anew
and documented pursuant to the provisions of SFAS No. 133. The
provisions of SFAS No. 133 are not to be applied retroactively to the
financial statements of prior periods. Due to the Company's limited use
of derivative financial instruments, adoption of Statement No. 133 is
not expected to have a significant effect on the company's consolidated
result of operations, financial position, or cash flows.
In March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". Among other issues,
this interpretation clarifies (a) the definition of employees for the
purposes of applying opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of
stock compensation awards in a business combination. The Company has
adopted this pronouncement.
F-19
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. Allowance For Bad Debts
FOR THE
YEAR CHARGED CHARGED TO
ENDED BALANCE- TO OTHER BALANCE-
JUNE 30, BEGINNING EXPENSE ACCTS. DEDUCTIONS ENDING
------- --------- ------- ------ ---------- ------
1999 $ 66,900 $143,081 $-- $-- $209,081
2000 $ 209,081 $(8,984) $-- $-- $200,097
16. Subsequent Events
On April 1, 2000, the Company entered into a contract with a consultant
which terminates on April 1, 2002. Under the terms of the contract the
consultant will receive $10,000 per month, 250,000 common shares of the
company under a vesting schedule which coincides with that of the
contract, and two options to purchase the Company's common stock for $1
per share. Both options represent 37,500 shares. The first option will
be granted by December 1, 2000 and the second option after December 1,
2000 and before April 1, 2001.
17. Equity Investment
The Company owns approximately 44% of the common shares of Iconix
International, Inc. ("Iconix") and accounts for this investment on an
equity basis. The following is summarized financial information of
Iconix as of June 30, 2000 and for each of the two fiscal years in the
period ended June 30, 2000.
JUNE 30,
2000 1999
---- ----
Current Assets $ 69,998
========
Noncurrent Assets $206,492
========
Current Liabilities $221,656
========
Noncurrent Liabilities $ - 0 -
========
Net Sales 613,082 1,720,751
======== =========
Gross Profit 262,086 402,952
======== =========
Income from
Continuing Operations (602,845) (55,385)
========= =========
Net Income (Loss) (602,845) (55,385)
========= =========
18.Presentation
Certain amounts in the June 30, 1999 financial statements have been
reclassified to correspond with the June 30, 2000 presentation.
F-20
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 30, 1999
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Tengtu International Corp.
We have audited the accompanying consolidated balance sheet of Tengtu
International Corp. and its subsidiaries as of June 30, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tengtu
International Corp. And its subsidiaries as of June 30, 1999, and the results of
their operations and their cash flows for each of the two fiscal years in the
period then ended in conformity with United States generally accepted accounting
principles.
The accompanying statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2, the Company incurred a net
loss of $1,940,024 for the year ended June 30, 1999 and, as of that date, had a
working capital deficiency of $2,420,503. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 2. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Moore Stephens, P.C.
Certified Public Accountants
New York New York
September 26, 1999, except for Note 2 as to which the date is November 15, 1999.
F-21
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 115,552
Accounts receivable, net of allowance for
doubtful accounts of $209,981 50,625
Due from related party 323,287
Prepaid expenses 29,903
Inventories 34,448
Other receivables 13,346
-----------
Total Current Assets 567,161
PROPERTY AND EQUIPMENT, net 1,205,760
INVESTMENTS - at equity 80,147
OTHER ASSETS 58,844
-----------
TOTAL ASSETS $ 1,911,912
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,475,409
Accrued expenses 404,776
Due to related party consultants 1,059,549
Other liabilities 47,930
-----------
Total Current Liabilities 2,987,664
-----------
COMMITMENTS [Note 8]
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.01 Per share;authorized
10,000,000 shares; issued -0- shares
Common stock, par value $.01 Per share; authorized
100,000,000 shares; issued 19,477,607 shares 194,777
Additional paid in capital 9,220,096
Accumulated deficit (10,483,089)
Accumulated Other Comprehensive Income (Loss):
Cumulative translation adjustment (6,752)
-----------
(1,074,968)
Less: Treasury stock, at cost, 78,420 common shares (784)
-----------
Total Stockholders' Deficit (1,075,752)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,911,912
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-22
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
SALES $ 624,121 $ 3,233,170
COST OF SALES 769,608 3,010,160
------------ ------------
GROSS INCOME (LOSS) (145,487) 213,010
------------ ------------
OPERATING EXPENSES
Research and development 1,440 511,889
General and administrative 1,474,452 3,410,907
Bad debts 143,347 66,898
Advertising 19 128,709
Selling 52,671 298,396
Depreciation 43,217 97,858
Write down of goodwill -0- 180,000
------------ ------------
1,715,146 4,694,657
------------ ------------
OTHER INCOME (EXPENSE)
Equity earnings in investee (65,274) 18,967
Interest income 3,923 22,578
Other income 35,585 38,088
------------ ------------
(25,766) 79,633
------------ ------------
NET LOSS $ (1,886,399) $(4,402,014)
============ ============
NET LOSS PER COMMON SHARE
[Basic and Diluted] $ (.10) $ (.23)
WEIGHTED AVERAGE NUMBER OF SHARES 19,317,382 18,813,545
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-23
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME(LOSS) DEFICIT INCOME(LOSS)
------ ------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE-JUNE 30,1997 18,797,107 $ 187,972 $ 9,399,678 $ (4,194,676) $ (15,631)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES
AT FAIR VALUE-JUNE 19, 1998 500,000 5,000 (5,000) -0- -0- -0-
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS ISSUED IN
YEAR ENDED JUNE 1997 -- -0- -0- -0- -0- -0-
OTHER -- -0- (27) -0- -0- -0-
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- -0- -0- $ 6,296 -0- 6,296
COMPREHENSIVE INCOME:
NET LOSS -- -0- -0- (4,402,014) (4,402,014) -0-
-------------
COMPREHENSIVE INCOME $(4,395,718)
---------- --------- ------------ ============= ------------ -------------
BALANCE-JUNE 30,1998 19,297,107 192,972 9,394,651 (8,596,690) (9,335)
ISSUANCE OF COMMON STOCK
RELATED TO DEFERRED
COMPENSATION 180,500 1,805 8,258 -0- -0- -0-
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES -- -0- -0- -0- -0- -0-
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- -0- -0- $ 2,583 -0- 2,583
COMPREHENSIVE INCOME:
NET LOSS -- -- -- (1,886,399) (1,886,399) --
-------------
COMPREHENSIVE INCOME $ (1,883,816)
---------- --------- ------------ ============= ------------ -------------
BALANCE-JUNE 30, 1999 19,477,607 $ 194,777 $ 9,402,909 $(10,483,089) $ (6,752)
========== ========= ============ ============ =============
TREASURY UNAMORTIZED STOCK-
STOCK A DEFERRED HOLDERS'
COST COMPENSATION EQUITY
---- ------------ ------
BALANCE-JUNE 30,1997 $ (784) $ (770,313) $ 4,606,246
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES
AT FAIR VALUE-JUNE 19, 1998 -0- -0- -0-
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS ISSUED IN
YEAR ENDED JUNE 1997 -0- 293,750 293,750
OTHER -0- -0- (27)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -0- -0- 6,296
COMPREHENSIVE INCOME:
NET LOSS -0- -0- (4,402,014)
--------- ------- -----------
COMPREHENSIVE INCOME
BALANCE-JUNE 30,1998 (784) (476,563) 504,251
ISSUANCE OF COMMON STOCK
RELATED TO DEFERRED
COMPENSATION -0- -0- 10,063
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES -0- 293,750 293,750
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -0- 2,583
COMPREHENSIVE INCOME:
NET LOSS -- -- (1,886,399)
---------- ----------- ------------
COMPREHENSIVE INCOME
BALANCE-JUNE 30, 1999 $ (784) $ (182,813) $ (1,075,752)
========= =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-24
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30,
1999 1998
------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
NET LOSS $(1,886,399) $(4,402,014)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 292,808 289,613
PROVISION FOR BAD DEBT 143,081 66,900
NONCASH COMPENSATION EXPENSE ON GRANTING OF STOCK OPTIONS 0 50,000
INVESTMENT - AT EQUITY 65,274 (3,560)
NONCASH COMPENSATION EXPENSE ON SHARES ISSUED FOR SERVICES 303,813 243,750
WRITE-DOWN OF GOODWILL 0 180,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN OPERATING ASSETS:
ACCOUNTS RECEIVABLE (76,644) 79,738
PREPAID EXPENSES 5,307 559,611
INVENTORIES 191,164 248,840
ADVANCES TO SUPPLIERS 122,415 180,908
OTHER RECEIVABLES 13,382 88,097
DUE FROM INVESTEE 50,000 (50,000)
ADVANCE 0 50,228
DUE FROM RELATED PARTY (32,762) (258,819)
OTHER ASSETS (44,307) 14,147
INCREASE (DECREASE) IN OPERATING LIABILITIES:
ACCOUNTS PAYABLE 87,615 1,084,875
ACCRUED EXPENSES 53,019 (256,879)
DUE TO RELATED PARTY CONSULTANTS 481,124 518,931
DUE TO RELATED PARTY 0 (49,756)
OTHER LIABILITIES (1,768) (24,430)
----------- -----------
NET CASH (USED) BY OPERATING ACTIVITIES (232,878) (1,389,820)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY AND EQUIPMENT (63,959) (945,135)
CHANGE FROM CONSOLIDATION TO EQUITY ACCOUNTING FOR INVESTEE 0 (43,669)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (63,959) (988,804)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,583 3,867
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (294,254) (2,374,757)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 409,806 2,784,563
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 115,552 $ 409,806
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
THE COMPANY ISSUED COMMON STOCK VALUED AT $10,063
IN EXCHANGE FOR SERVICES FOR THE YEAR ENDED JUNE 30, 1999.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-25
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Tengtu International Corp. (The "Company") was incorporated in Delaware
on May 6, 1988 as Galway Capital Corporation for the purpose of seeking
potential ventures. After operating as a development stage enterprise
through 1991, the Company became inactive and remained so until May
1996, when control of it was acquired by several individuals. On May
24, 1996 the company changed its name to Tengtu International Corp. The
Company's main activities, which are carried out through its
subsidiaries and investee are the development and marketing of
educational software and other forms of electronic publishing in China
and Canada.
2. GOING CONCERN
As shown in the accompanying financial statements, the Company incurred
a net loss of $1,886,399 for the year ended June 30, 1999 and, as of
that date, had a working capital deficiency of $2,420,502. Those
factors, as well as a significant downsizing of operations in its
largest operating subsidiary for the year ended June 30, 1999, create
an uncertainty about the company's ability to continue as a going
concern.
Management has developed a plan to alleviate these factors to enable
the Company to continue as a going concern. The plan includes an
injection of $250,000 into the Company, allocated approximately
$150,000 as equity and $100,000 as debt; the majority of the funds was
received by october 28, 1999. Additionally, the Chinese government has
granted the minority owner of one of the Company's subsidiaries in
China an exclusive license to upgrade the computer systems in grades
kindergarten through twelve in the Chinese public school system. This
project is intended to be carried out through the Company's subsidiary.
In order to exploit this license, the minority owner has entered into
three market development agreements, including one with Microsoft
(China) Co., Ltd., to provide computer software and hardware to the
schools. To help fund this project, the minority owner of the Company's
subsidiary has received bank loans of approximately $4,600,000, which
were received in two installments in September and November 1999. It is
anticipated that the Company's subsidiary will receive advances if
these monies from the minority owner of the subsidiary on an as needed
basis. Additionally, the Company has entered into agreements with a
number of its related party consultants (see Note 10) to defer payment
of their respective fees until the Company completes a major financing
transaction, either through equity or debt (see additional plans - Note
17a).
The ability of the Company to continue as a going concern is dependent
on the success of its plan. The financial statements do not include any
adjustments that might be necessary if the company is unable to
continue as a going concern.
F-26
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and subsidiaries over which it owns more than a 50% equity
interest. Significant intercompany balances and transactions have been
eliminated on consolidation.
The Company contributed capital of $6,000,000 to a subsidiary in which
the minority has a 43% interest. No portion of the $6,000,000 has been
allocated to the minority as the joint venture agreement that concerns
the subsidiary assigns all rights to that contribution to the Company.
In accordance with Accounting Research Bulletin 51, the Company has
charged to income the loss applicable to the minority interests that is
in excess of the minorities' interests in the equity capital of the
subsidiaries, including any guarantees or commitments from minority
shareholders for further capital contributions.
In the case of its joint venture subsidiary, the Company and the
minority interest holder agreed that the contribution of software and
hardware by the minority interest to the joint venture had no fair
market value at the time of the contribution. The joint venture,
therefore, assigned a $0 value to these assets. The minority also
contributed a contract to the joint venture that gives the joint
venture the right to provide the Chinese public school system with
certain educational materials, including software and textbooks. A
value of $0 was assigned to the contract by the joint venture as it
could not create a reliable model of revenue streams or cash flows
associated with the contract at the time of the contribution.
F-27
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at June 30, 1999, and reported amounts of revenues and
expenses during each of the two fiscal years then ended. Actual results
could differ from those estimates.
c. Revenue Recognition
Revenue from the sale of hardware is recognized when the products are
delivered to the customer. Revenue from the sale of software products,
which do not require any significant production, modification or
customization for the Company's targeted users and do not have multiple
elements, is recognized in accordance with paragraphs 7 and 8 of SOP
97-2. These paragraphs require four conditions to be present in order
to recognize revenue: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred, (3) the company's fee is fixed and
determinable and (4) collectibility is probable. Revenue from software
license fees is recognized on a straight line basis over the term of
the license.
Hardware and software are delivered to customers at or at approximately
the same time. Software is generally installed within approximately two
weeks of delivery.
The hardware sold includes personal desktop computers, printers,
network servers, monitors, modems, hard drives and other storage media
and cables. The Company's software cannot be installed until the
hardware is delivered. Therefore, a delay in delivery of hardware will
delay the recognition of software sales revenues.
d. INVENTORIES
Inventories are priced at the lower of cost, on a weighted-average
basis, or market and consist primarily of computer hardware and
software.
e. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
primarily by the straight-line method over the estimated useful lives
of the assets, which range from two to ten years.
F-28
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f. GOODWILL
Goodwill represented the excess of cost of an acquired subsidiary over
the fair value of net assets acquired, and was amortized on the
straight-line basis over ten years. [See Note 5].
g. CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
h. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to determine deferred
tax assets and liabilities. The deferred assets and liabilities are
determined based upon the differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that are expected to be in effect when the
differences are assumed to reverse.
The Company files a consolidated return with its subsidiaries that are
eligible to be consolidated. Separate provisions for income tax are
calculated for subsidiaries that are not eligible for consolidation
into the U.S. Federal income tax return.
i. LOSS PER SHARE
Loss per common and common equivalent share is computed based on the
weighted average number of common shares outstanding. Due to the
antidilutive effect of the assumed exercise of outstanding common stock
equivalents at June 30, 1999 and 1998, loss per share does not give
effect to the exercise of these common stock equivalents in either
year, but they may dilute earnings per share in the future.
j. ADVERTISING EXPENSE
The Company expenses advertising costs as incurred.
k. IMPAIRMENT
The Company evaluates its long-lived assets to determine whether later
events and circumstances warrant revised estimates of useful lives or a
reduction in carrying value due to impairment. [See Note 5].
F-29
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
l. FOREIGN CURRENCY TRANSACTIONS/TRANSLATION
The functional currency of the Company's subsidiary and joint venture
in China is the Renminbi. The Company's Canadian subsidiary uses the
Canadian dollar as its functional currency. Foreign transaction gains
and losses in the functional currencies are immaterial. Transactions
denominated in other than the functional currencies are insignificant
and therefore, foreign currency transaction gains and losses in
non-functional currencies are also immaterial.
Assets and liabilities of the financial statements of foreign
subsidiaries and joint venture are translated into u.S. Dollars
utilizing the exchange rate at the balance sheet date, and revenues and
expenses are translated using average exchange rates in effect during
the year. Translation adjustments are accumulated and recorded as a
separate component of stockholders' equity. Foreign currency
transactions are translated into the functional currency at the
exchange rate prevailing on the date of the transaction material gains
and losses from foreign currency transactions are reflected in the
financial period in which the exchange rate changes.
The Chinese government imposes significant exchange restrictions on
transferring funds out of China for purposes unrelated to business
operations. These restrictions have not had a material impact on the
Company because it has not engaged in any significant transactions that
are subject to the restrictions.
m. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income represents the change in equity
of the Company during the periods presented from foreign currency
translation adjustments.
n. STOCK-BASED COMPENSATION
On July 1, 1996, the Company adopted the disclosure requirements of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" for stock options and similar equity
instruments (collectively, "options") issued to employees; however, the
company will continue to apply the intrinsic value based method of
accounting for options issued to employees prescribed by accounting
principles board ("APB") Opinion No. 25, "Accounting for stock issues
to employees" rather than the fair value based method of accounting
prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions
in which an entity issues its equity instruments to acquire goods or
services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably
measurable.
F-30
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o. SOFTWARE COSTS
Software development costs are capitalized if they are incurred after
technological feasibility has been established. Purchased software is
capitalized if it has an alternative future use. Research and
development costs for new products or enhancement of existing software
and purchased software that do not meet these requirements are expensed
as incurred. Capitalized costs are amortized over the lesser of five
years or the useful life of the related product.
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 is comprised as follows:
COMPUTER HARDWARE $ 106,097
COMPUTER SOFTWARE 9,057
FURNITURE AND FIXTURES 45,479
AUTOMOBILES 206,553
OFFICE EQUIPMENT 89,369
LEASEHOLD IMPROVEMENT 27,137
IDLE EQUIPMENT 73,305
PRODUCTION EQUIPMENT 1,256,574
----------
TOTAL AT COST 1,813,571
LESS: ACCUMULATED DEPRECIATION (607,811)
----------
NET PROPERTY AND EQUIPMENT $1,205,760
==========
Depreciation charged to operations for the year ended June 30, 1999 and
1998 was $292,808 and $289,729, respectively, of which approximately
$214,601 and $191,871 was included in cost of sales for the year ended
June 30,1999 and June 30, 1998, respectively.
5. IMPAIRMENT OF GOODWILL
During the fiscal year ended June 30, 1998, the Company recorded an
impairment loss of $180,000 from the write down of goodwill. As a
result of the loss for the year ended June 30, 1998, and the necessary
revisions to the projected future undiscounted cash flows, there was no
longer justification for the carrying value of goodwill resulting from
the Company's investment in a joint venture of $200,000 ($100,000 cash
and 2,000,000 common shares valued at $.05 per share) purchased in June
1996. Fair value of goodwill was based on the present value of
estimated expected future cash flows from the related assets. As of
June 30, 1998, goodwill of $200,000 and related accumulated
amortization of $20,000 was written off.
F-31
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES
For the current year, none of the Company's operating subsidiaries will
be included in its federal income tax return as these are all foreign
entities and are therefore ineligible for consolidation.
The Company has accumulated approximately $5,330,000 of operating
losses that may be used to offset future federal taxable income. The
utilization of the losses expires in years from 2005 to 2019. Due to an
ownership change in the year ended June 30, 1996, annual utilization of
approximately $265,000 of the losses is expected to be limited to an
estimated $60,000 by current provisions of section 382 of the internal
revenue code, as amended.
As the Company is not liable for either current or deferred income
taxes for the years ended June 30, 1999 and 1998, respectively, no
provision is shown on the statement of operations. The Company has
recorded a deferred tax asset of approximately $1,813,000 at June 30,
1999 and $1,486,000 at June 30, 1998 due principally to net operating
losses. A valuation allowance of an identical amount has been recorded
as the Company believes that it is more likely than not that the losses
will not be utilized. The allowance has the effect of reducing the
carrying value of the deferred tax asset to $0. The valuation allowance
increased approximately $327,000 and $717,000 during the years ended
June 30, 1999 and 1998, respectively. The Company is a U.S. company
that operates through a branch office in Canada. As a U.S. company, it
is required to file an income tax return and report those branch
operations. The income tax returns have generated the above net
operating losses.
The net operating losses for the Company's Chinese joint venture and
subsidiaries, total approximately $6,230,000. Net operating losses in
china can be carried forward for five years. The Company's chinese net
operating losses expire between 2002 and 2004.
7. CONCENTRATION OF CREDIT RISK
The Company operates through subsidiaries located principally in
Beijing, China and an investee in Toronto, Canada; the administrative
office is in Vancouver, Canada. The Company grants credit to its
customers in both geographic regions.
The Company performs certain credit evaluation procedures and does not
require collateral. The Company believes that credit risk is limited
because the Company routinely assesses the financial strength of its
customers, and based upon factors surrounding the credit risk of its
customers, establishes an allowance for uncollectible accounts and, as
a consequence, believes that its accounts receivable credit risk
exposure beyond such allowances is limited.
F-32
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company established an allowance for doubtful accounts at June 30,
1999 of $209,981. The Company believes any credit risk beyond this
amount would be negligible.
At June 30, 1999, the Company had approximately $96,700 of cash in
banks uninsured. The Company did not have balances in excess of the
federally insured amounts in U.S. banks. The Company does not require
collateral or other securities to support financial instruments that
are subject to credit risk.
For the fiscal years ended June 30, 1999 and 1998 no customer accounted
for more than 10% of total sales.
8. COMMITMENTS AND CONTINGENCIES
a. The Company has entered into a number of operating leases for office
space. The minimum rental payments on these leases are as follows:
YEAR ENDING
JUNE 30,
-----------
2000 $ 80,810
2001 66,075
2002 51,340
---------
TOTAL $ 198,225
=========
Rent expense for the years ended June 30, 1999 and 1998 has been charged as
follows:
YEAR ENDED JUNE 30,
1999 1998
---- ----
GENERAL AND ADMINISTRATIVE EXPENSE $ 54,551 $ 790,065
RESEARCH AND DEVELOPMENT 0 110,810
SELLING EXPENSE 8,900 79,531
COST OF SALES 52,114 72,257
---------- ----------
TOTAL RENT EXPENSE $ 115,565 $1,052,663
========== ==========
F-33
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has contracts with various executives and consultants. The
minimum cash compensation due under these contracts is as follows:
YEAR ENDING
JUNE 30,
--------
2000 273,750
-------
b. The Company leased office space under an operating lease expiring in
July 2001. In May 1998, the Company terminated its lease agreement and
rent expense of approximately $538,000 was accrued as of June 30, 1998,
representing the remainder of the lease payments due under such lease.
The liability of $538,000 is included in accrued expenses at June 30,
1999 and is part of rent expense within the statement of operations for
the year ended June 30, 1998.
c. The Company is committed to contribute $6,000,000 to the joint
venture (see Note 5) and to begin making deferred compensation payments
to its related party consultants (see Notes 2 and 10) upon the
completion of its next major financing. However, the timing of the
payment of deferred compensation and additional contributions is
discretionary and not defined in any agreement. The Company's board of
directors has not defined a "major financing transaction," and such
definition will be wholly within its discretion.
9. RELATED PARTY TRANSACTIONS
In the normal course of business with the joint venturer, the Company
generated a receivable balance of $293,287, which represents the net
balance of advances to and from the company during the year ended June
30, 1999. The Company advanced $30,000 to one of the officers during
the year.
During 1999 and 1998, respectively, the Company incurred consulting and
related expenses of approximately $787,400 and $952,700 from officers
and directors of the Company or its subsidiaries or companies
controlled by these officers and directors. Approximately $249,500 of
the amount incurred in fiscal year 1998 was paid during the same year.
No payments have been made for the amounts incurred in fiscal year
1999.
Of the total expenses incurred, approximately $243,750 for both 1999
and for 1998 represents the value of common shares issued for services
to two officers. The officers entered into agreements with the Company
in the year ended june 30, 1997 that entitled them to receive 500,000
and 100,000 shares, respectively, at the date the agreements were
signed. Deferred compensation of $731,250 was recorded in the year
ended June 30, 1997, and is being amortized over the three year term of
each agreement.
F-34
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTIONS
The Company's Board of Directors approved two stock option plans for
its employees, consultants and directors totaling 5,000,000 shares. The
first stock option plan was approved on December 29, 1998 for two (2)
million shares. The second stock option plan was approved on August 31,
1999 for three (3) million shares. Both plans were approved by the
shareholders of the company. The maximum number of shares granted to
any individual under the two stock option plans is 300,000 shares. The
following were granted stock options under the first plan in March,
1999 (1997 plan), but have not yet exercised the options.
Pak Cheung, Chairman and CEO 300,000 shares
Barry Clark, President and Director 300,000 shares
Jack Lian, Director 300,000 shares
Hai Nan, Director 300,000 shares
Xiao Feng Lin, President, Tengtu United 300,000 shares
Greg McLelland, Vice President 150,000 shares*
Simon Hui, VP Finance and Controller 75,000 shares
Michael Meakes, VP - Iconix 50,000 shares
Other Employees 300,000 shares**
Gordon Reid, Director 75,000 shares
John Watt, Director 75,000 shares
Michael Nikiforuk, Director 75,000 shares
TOTAL 2,300,000 shares
* On April 8, 1997, the Company entered into an agreement with Gregory
McLelland to provide consulting services and to serve as an officer of
the Company. The term of the agreement is three years. The agreement
provides a $125,000 annual salary, 100,000 shares of common stock upon
signing of the agreement and options to purchase 50,000 shares of
common stock annually for three years.
** To various employees of Tic Beijing and Tengtu United who are not
officers or directors of the Company.
The shortfall in the 1997 plan was made up from shares included in the
1999 plan.
The following were granted stock options under the 1999 plan but have
not yet exercised the options:
Simon Hui, VP Finance and Controller 75,000 shares
All of the stock options granted under the 1997 plan, except for
150,000 issued to Greg McLelland (see above and the following
paragraph), had an exercise price greater than the market price on the
date of grant, and therefore, no compensation expense has been
recognized for these options. The contractual life of the options under
both plans cannot exceed ten years from the date of grant. The Board of
Directors determines the life, but has not yet done so for the options
granted.
The following table summarized information concerning currently
outstanding and exercisable stock options.
F-35
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTIONS (CONTINUED)
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE AT
EXERCISE PRICE AT JUNE 30, 1999 CONTRACTUAL LIFE JUNE 30, 1999
-------------- ---------------- ---------------- -------------
$.25 150,000 8.0 YEARS 150,000
.218 1,850,000 9.5 YEARS 1,850,000
Greg McLelland was granted options on April 8, 1997 to purchase 150,000
shares of common stock at one-third of the market price of the stock at
the date of grant. The options are vested equally over three years,
beginning with the year ended June 30, 1997. At June 30, 1999, there is
no remaining contractual life. Because the exercise price of the
options was below the market price at the date of grant, the Company
has recorded deferred compensation expense of $150,000 in accordance
with APB Opinion No. 25 And related interpretations. The deferral is
being recognized ratably over three years, with $50,000 being charged
to operations for the years ended June 30, 1999 and 1998. Had the
company elected to recognize compensation expense for all options
granted using the fair value method prescribed by SFAS 123, the
Company's net loss and net loss per share would be the pro forma
amounts indicated below:
YEARS ENDED JUNE 30,
--------------------
1999 1998
---- ----
NET LOSS AS REPORTED $ (1,886,399) $ (4,402,014)
PRO FORMA NET LOSS (2,176,401) (4,416,348)
LOSS PER SHARE AS REPORTED (.10) (.23)
PRO FORMA LOSS PER SHARE (.11) (.23)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted
average fair value of stock options granted to employees used in
determining pro forma amounts is estimated at $1.31 for Mr. McLelland's
150,000 options and $.15 for the remaining 1,850,000.
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model for the pro forma amounts
with the following weighted average assumptions:
F-36
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTIONS (CONTINUED)
JUNE 30, 1999 JUNE 30, 1997
------------- -------------
RISK FREE INTEREST RATE 4.5 6.5
EXPECTED LIFE 2.0 1.8
EXPECTED VOLATILITY 13.7 16.2
EXPECTED DIVIDENDS NONE NONE
11. AUTHORITATIVE PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting comprehensive income" and SFAS No. 131, "Disclosures about
segments of an enterprise and related information". Both are effective
for financial statements for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
SFAS No. 131 changes how operating segments are reported in the annual
financial statements and requires the reporting of selected information
about operating segments in interim financial reports issued to
shareholders.
Both standards have been adopted in these financial statements. In
February 1998, the FASB issued SFAS No. 132, "Employers disclosure
about pensions and other postretirement benefits", which is effective
for fiscal years beginning after December 15, 1997. The modified
disclosure requirements are not expected to have a material impact on
the Company's results of operations, financial position or cash flows.
The fasb issued SFAS No. 133 "Accounting for derivative instruments and
hedging activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities.
SFAS No. 133 Requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the
derivative and how it is designated, for example, gains or losses
related to changes in the fair value of a derivative not designated as
a hedging instrument is recognized in earnings in the period of the
change, while certain types of hedging may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction.
SFAS No. 133 Is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Initial application of SFAS No. 133
Should be as of the beginning of a fiscal quarter; on that date,
hedging relationships must be designated anew and documented pursuant
to the provisions of SFAS No. 133. Earlier application of all the
provisions of SFAS No. 133 is not to be applied retroactively to the
financial statements of prior periods. The company will evaluate the
new standard to determine any required new disclosures or accounting.
F-37
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. SUBSEQUENT EVENT
a. In July, 1999, the Company incorporated a holding company, Edsoft
Platforms (Canada) Inc. ("Edsoft") in which it owns 55%. Edsoft owns
100% of a newly incorporated company, Edsoft Platforms (H.K.) Limited
which markets educational software in Hong Kong. The Company will
contribute technology and a group of private investors, in July 1999,
has advanced approximately $250,000 into edsoft as a shareholder's
loan, bearing a 10% interest rate. One half of the loan can be
converted into common shares of the Company at $3 per share if the loan
is not paid in full after 3 years.
13. LITIGATION
In December 1998 one of the Company's Chinese subsidiaries reached a
court settlement with one of its suppliers that requires the subsidiary
to return approximately $93,500 of inventory to the supplier. This
amount has been removed from inventory and the liability is included in
accounts payable at June 30, 1999.
14. PRESENTATION
Certain amounts in the June 30, 1998 financial statements have been
reclassified to correspond with the June 30, 1999 presentation.
15. SUBSEQUENT EVENT (UNAUDITED)
a. EQUITY FINANCING
The Company is negotiating for additional equity financing of
approximately $5,000,000, which will be contributed to Edsoft Platforms
(H.K.) Limited (see Note 12). The potential investor will then own
approximately 20% of that company.
16. ALLOWANCE FOR BAD DEBTS
FOR THE
YEAR ENDED BALANCE- CHARGED TO CHARGED TO BALANCE-
JUNE 30, BEGINNING EXPENSE OTHER ACCTS. DEDUCTIONS ENDING
-------- ------- ------- ------------ ---------- ------
1998 $ -- $ 66,900 $ -- $ -- $ 66,900
1999 $ 66,900 143,081 -- -- 209,981
F-38
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
AS AT AS AT
SEPT 30,2000 JUNE 30, 2000
(UNAUDITED)
----------- -------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 707,044 919,091
ACCOUNTS RECEIVABLE, NET OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS
OF $200,097 75,989 36,009
DUE FROM RELATED PARTY 96,890 170,123
PREPAID EXPENSES 14,779 3,715
INVENTORIES 0 18,071
OTHER RECEIVABLES 14,803 5,588
----------------------------
TOTAL CURRENT ASSETS 909,505 1,152,597
----------------------------
PROPERTY AND EQUIPMENT, NET 902,208 967,840
----------------------------
OTHER ASSETS
NOTES RECEIVABLE 71,940 71,940
ADVANCE TO DIRECTOR 67,511 60,011
LICENSE FEES 118,750 125,000
OTHER ASSETS 10,325 30,454
----------------------------
268,526 287,405
----------------------------
TOTAL ASSETS $ 2,080,239 2,407,842
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 1,710,440 $ 1,690,658
ACCRUED EXPENSES 442,890 419,160
RELATED PARTY LOAN PAYABLE 100,000 100,000
DUE TO RELATED PARTY CONSULTANTS 1,565,026 1,415,026
OTHER LIABILITIES 470,704 414,197
----------------------------
TOTAL CURRENT LIABILITIES 4,289,060 4,039,041
----------------------------
OTHER LIABILITIES
RELATED PARTY LOANS PAYABLE 255,490 255,490
CONVERTIBLE DEBENTURE, NET OF DISCOUNT 1,213,688 1,194,334
----------------------------
1,469,178 1,449,824
----------------------------
STOCKHOLDERS' DEFICIT
PREFERRED STOCK, PAR VALUE $.01 PER SHARE;
AUTHORIZED 10,000,000 SHARES;
ISSUED -0- SHARES
COMMON STOCK, PAR VALUE $.01 PER SHARE;
AUTHORIZED 100,000,000 SHARES;
ISSUED 23,890,607 SHARES 238,907 238,907
ADDITIONAL PAID IN CAPITAL 11,871,444 11,871,444
ACCUMULATED DEFICIT (15,782,209) (15,184,374)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
CUMULATIVE TRANSLATION ADJUSTMENT (5,357) (6,216)
----------------------------
(3,677,215) (3,080,239)
LESS: TREASURY STOCK, AT COST,
78,420 COMMON SHARES (784) (784)
----------------------------
TOTAL STOCKHOLDERS' DEFICIT (3,677,999) (3,081,023)
----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 2,080,239 2,407,842
============================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-39
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<S> <C>
SALES $ 1,143,446
COST OF SALES 1,035,967
------------
GROSS PROFIT 107,479
============
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE 382,472
RELATED PARTY CONSULTANTS 180,000
SELLING 73,765
DEPRECIATION AND AMORTIZATION 13,504
------------
649,741
------------
OTHER INCOME (EXPENSE)
INTEREST INCOME 5,436
INTEREST EXPENSE (61,009)
------------
(55,573)
------------
NET LOSS $ (597,835)
============
NET LOSS PER COMMON SHARE [BASIC AND DILUTED] $ (0.025)
WEIGHTED AVERAGE NUMBER OF SHARES 23,890,607
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-40
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME(LOSS) DEFICIT INCOME(LOSS)
------ ------ ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 2000 23,890,607 238,907 11,871,444 -- (15,184,374) (6,216)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- 0 0 859 0 859
COMPREHENSIVE INCOME:
NET LOSS -- -- -- (597,835) (597,835) --
------------
(596,976)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE SEPTEMBER 30, 2000 23,890,607 $ 238,907 $ 11,871,444 $(15,782,209) $ (5,357)
============ ============ ============ ============ ============
TREASURY UNAMORTIZED
STOCK AT DEFERRED STOCKHOLERS'
COST COMPENSATION DEFICIT
----------- ------------ ----------
BALANCE JUNE 30, 2000 (784) 0 (3,081,023)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT 0 0 859
COMPREHENSIVE INCOME:
NET LOSS -- -- (597,835)
------------ ------------ ------------
BALANCE SEPTEMBER 30, 2000 $ (784) $ 0 $ (3,677,999)
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-41
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
NET LOSS $(597,835)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 73,392
NONCASH INTEREST EXPENSE-
CONVERTIBLE DEBENTURE 19,354
CHANGES IN OPERATING ASSETS
AND LIABILITIES
DECREASE(INCREASE)ON OPERATING ASSETS:
ACCOUNTS RECEIVABLE (39,980)
DUE FROM RELATED PARTY 73,233
PREPAID EXPENSES (11,064)
INVENTORIES 18,071
OTHER RECEIVABLES - CURRENT (9,215)
ADVANCE TO DIRECTOR (7,500)
OTHER ASSETS 20,129
INCREASE (DECREASE)IN OPERATING LIABILITIES:
ACCOUNTS PAYABLE 19,782
ACCRUED EXPENSES 23,730
DUE TO RELATED PARTY CONSULTANTS 150,000
OTHER LIABILITIES 56,507
---------
NET CASH USED BY OPERATING ACTIVITIES (211,396)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY AND EQUIPMENT (1,510)
---------
NET CASH USED BY INVESTING ACTIVITIES (1,510)
---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 859
---------
INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS (212,047)
CASH AND CASH EQUIVALENTS,
BEGINNING OF QUARTER 919,091
---------
CASH AND CASH EQUIVALENTS, END OF QUARTER 707,044
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-42
<PAGE>
NOTES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary in order to make the
financial statements not misleading have been included. Results for the three
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in tengtu international corp. (The "Company") and subsidiary's
annual report on form 10-K for the fiscal year ended June 30, 2000.
The accompanying unaudited consolidated financial statements do not
contain comparative columns for the interim period ended September 30, 1999. The
company has only recently gained the capability of producing quarterly financial
statements, filing its first Form 10-Q for the fiscal quarter ended December 31,
1999.
1. Principles of Consolidation
In accordance with Cccounting Research Bulletin 51, the Company has
charged to income the losses applicable to the minority interests of
subsidiaries where such losses were in excess of the minorities' interests in
the equity capital of the joint venture and subsidiaries, including any
guarantees or commitments from minority owners for further capital
contributions.
2. Long-term Debt
On December 23, 1999, the Company received cash in the amount of
$1,500,000 in exchange for a four year floating convertible debenture
("debenture") convertible into shares of tengtu's $.01 par value common stock
("common stock") and a separate common stock warrant ("warrant") for the
purchase of 1,500,000 shares of common stock. The purchaser of the debenture and
warrant is Top Eagle Holdings Limited, a British Virgin Islands company ("Top
Eagle"). The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
the Hong Kong and Shanghai banking corporation plus two percent (approximately
9% as at September 30, 2000). The debenture is convertible into the Company's
common stock at a conversion price of $.50 during the first year, $1.00 during
the second year, $2.00 during the third year and $4.00 on any date thereafter.
The unpaid balance of principal and interest outstanding at maturity, if any,
may be converted by the holder into the Company's common stock at the then
existing market price minus twenty percent.
The warrant gives the holder the right to purchase 1,500,000 shares of
the Company's common stock at $1.00 Per share during the first year, $2.00 per
share during the second year and $4.00 thereafter. The warrant shall become void
three years after issuance. In connection with the purchase of the debenture and
warrant, the Company and Top Eagle entered into an investor rights agreement
which provides that on or before June 15, 2000, Top Eagle may purchase
additional convertible debentures for up to $3.5 million and receive additional
warrants on substantially the same terms. Top Eagle did not exercise these
rights. The investor rights agreement also provides the holder(s) of the
debenture, warrant and or the shares issued upon conversion or exercise thereof,
with registration and certain other rights. The effective interest rate of the
debenture is 8.5%.
Because no portion of the price paid by Top Eagle was for the warrants,
the warrants were assigned a value by the company and the debenture was
discounted by that amount. The interim financial statements reflect entries of
$346,154 for a discount to the debenture and paid in capital for the warrant.
This value was assigned as follows. On the date that the debenture and warrant
were sold to Top Eagle, the Company's stock was trading at $1.60 per share and
the warrant was exercisable at $1.00. Therefore, the warrant had a value between
$.00 And $.60 per share. The Company chose to value the warrant at $.30 per
share. The gross amount of the debenture and warrant were therefore $1.5 million
(debenture) plus $450,000 (warrant - $.30 X 1,500,000) for a total of $1.95
million. Of the $1.95 million, the warrant represents 23.08% ($450,000/$1.95
million). The discount to the debenture was calculated by multiplying the
percentage of the total represented by the warrant (23.08%) By the total
proceeds received from the sale ($1.5 million). The discount to the debenture
was therefore equal to $346,154 and the debenture was discounted to $1,153,846
($1.5 million - $346,154).
On the date the debenture was issued, the conversion price was $.50 And
the market price was $1.60. The conversion feature was valued at the full
adjusted amount of the debenture, after valuation of the warrant, of $1,153,846.
Because the debenture was immediately convertible, the full discount was charged
to interest expense for the fiscal year ended June 30, 2000.
3. Related Party Transactions
Due to the continued downsizing of the staff of the joint venture
(Tengtu United), the operations of the venture during the quarter ended
September 30, 2000 were carried out by the minority interest holder. At
September 30, 2000, the joint venture had a receivable balance of $96,980. At
June 30, 2000, the joint venture had a receivable balance from the minority
interest holder of $170,123. The Company advanced $7,500 to one of the officers
during the quarter.
During the quarter ended September 30, 2000, the Company incurred
consulting and related expenses of approximately $180,000 from officers and
directors of the company or its subsidiaries or companies controlled by these
officers and directors. Only $30,000 in payments have been made for the quarter.
In January 2000, the Company and Comadex Industries, Ltd. entered into
a consulting agreement for the employment of Pak Cheung as the Company's
Chairman and CEO. Pursuant to that agreement Comadex received 3,000,000 common
shares for past services rendered, resulting in a charge to related party
consultants expense of $750,000. If Pak Cheung is able to raise $3,000,000 or
more in capital for the Company or a 50% or more owned joint venture or
subsidiary, Comadex shall receive an option to purchase 1,000,000 shares of the
Company's common stock at the closing price on the day the capital is received
by the Company.
On September 9, 1999 a company director loaned $100,000 to the Company.
The loan bears interest at 6% per annum and is due in twelve months. The loan is
convertible at the option of the Company director at the rate of $0.35 Per
share, or into an aggregate of 285,14 shares of the Company's common stock. The
loan is guaranteed by another director of the company. At the date of the loan,
the Company's common stock was trading at $0.25 per share, therefore the loan
does not contain a beneficial conversion feature.
On April 1, 2000, the company entered into a contract with a consultant
which terminates in April, 2002. Under the terms of the contract the consultant
will receive $10,000 per month, 250,000 common shares of the Company under a
vesting schedule which coincides with that of the contract, and two options to
purchase the Company's common stock for $1 per share. Both options represent
37,500 shares. The first option will be granted by December 1, 2000, and the
second option after December 1, 2000 and before April 1, 2001.
4. H.K.$2,000,000 Loan to Edsoft Platforms (Canada) Ltd.
A group of private investors, in July 1999, advanced approximately
$250,000 into Edsoft Platforms (Canada), Inc., one of the Company's
subsidiaries, as a shareholder's loan, bearing a 10% interest rate. One half of
the loan can be converted into common shares of the Company at $3 per share if
the loan is not paid in full at the maturity date of July 27, 2002.
F-43
<PAGE>
5. License Fees
On June 21, 2000, the Company entered into a license agreement with
Netopia, Inc. The agreement grants the company a fee-bearing, nonexclusive
license right to promote and otherwise market netopia's web site product and
services to the Company's customers. The agreement shall continue in perpetuity
until terminated by either party. The cost of the agreement or $125,000 is being
amortized on a straight-line basis over five years. No amortization was recorded
for the year ended June 30, 2000 due to the short amortization period of nine
days.
6. Subsequent Events
A. On October 25, 2000, the Company entered into an investment
agreement with Swartz Private Equity, L.L.C. ("Swartz") (the "investment
agreement"). The investment agreement entitles the Company to issue and sell up
to $30 million of the Company's common stock to Swartz subject to a formula
based on the stock price and trading volume, from time to time over a three year
period, following the effective date of a registration statement on Form S-1.
The investment agreement defines each issuance and sale as a "put."
Under the investment agreement, Swartz will pay the Company a
percentage of the market price for each share of common stock during the 20
business days immediately following the date the Company elects to sell stock to
swartz in a put is used to determine the price swartz will pay and the number of
shares the Company will issue in return. For each share of common stock, Swartz
will pay the Company the lesser of:
- the "market price" for each share, minus $.075; or 92% of the
"market price" for each share.
The "market price is the lowest bid price during the 20 day period preceding a
put.
Each time the Company sells shares of its common stock to swartz, it
will also issue five year warrants to Swartz to purchase its common stock in an
amount corresponding to 10% of the number of shares in the put. Each warrant
will be exercisable at 110% of the market price for the applicable put.
As consideration for making its financing commitment to the Company,
Swartz was issued a warrant to purchase 1,200,000 shares of the Company's common
stock exercisable at $.745 per share until October 25, 2005.
b. On October 6, 2000, Iconix International, Inc.'s ("Iconix") assets
and business were sold for $3,333,000. The Company owns 44% of Iconix and is
expected to receive a gain from the sale over what it invested in Iconix of
$580,000 over the next 12 months. The Company has received $220,000 of the
proceeds of the Iconix sale to date.
F-44
<PAGE>
(f) SELECTED FINANCIAL DATA
THE FOLLOWING IS SELECTED SUMMARY FINANCIAL INFORMATION FOR THE PAST
FIVE YEARS OF OUR OPERATIONS PRESENTED ON A CONSOLIDATED BASIS.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30,
1996 1997 1998 1999 2000
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
total assets $750,576 $ 5,763,961 $2,871,926 $1,911,912 $2,407,842
total sales 0 2,135,066 3,223,170 624,121 358,026
income (loss) from (12,239) (3,929,390) (4,402,014) (1,886,399) (4,701,285)
continuing operations
income (loss) from continuing (.0001) (.22) (.23) (.10) (.23)
operations per common share
dividends declared per 0 0 0 0 0
common share
</TABLE>
(g) SUPPLEMENTARY FINANCIAL INFORMATION
Selected Quarterly Financial Data
The following supplementary financial information is provided for the
periods since we have been required to report on Form 10-Q.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000
-------------- ------------- ------------------
<S> <C> <C> <C>
NET SALES $ (115,410) $ 170,303 $1,413,446
GROSS PROFIT (LOSS) (115,410) (1,333) 107,479
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (838,073) (782,395) (597,835)
INCOME (LOSS) FROM CONTINUING (.04) (.03) (.025)
OPERATIONS PER COMMON SHARE
</TABLE>
(h) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our consolidated financial statements and the related notes, which are
included elsewhere in this prospectus.
OVERVIEW
Tengtu International Corporation was incorporated in Delaware on May 6,
1988 for the purpose of seeking potential ventures. After operating as a
development stage enterprise through 1991, the Company became inactive and
remained so until May, 1996, when control was acquired by us. The Company's
operations are carried out through a joint venture, Beijing Tengtu United
Electronics Development Co., Ltd. ("Tengtu United"), and four subsidiaries, TIC
Beijing Digital Pictures Co., Ltd. ("TIC Beijing" wholly owned by us), Edsoft
Platforms (Canada) Ltd. (60.2% owned by us) and Edsoft Platforms (H.K.) Limited
("Edsoft," 100% owned by Edsoft Platforms (Canada) Ltd. and therefore, 60.2%
owned by us).
These companies engage in the following lines of business in China and
Canada: systems integration, development and marketing of educational and
entertainment software, animation and multimedia. Our main focus is to provide
information technology solutions and multimedia content to the educational and
entertainment industries in mainland China and Hong Kong.
On July 22, 2000, the Chinese ministry of education officially endorsed
our "Total Solution" software package, sold by Tengtu United, for a General
Elementary/Secondary (K-12) School Network Information System for Chinese
schools. Our Total Solution makes available via intranet and internet a
comprehensive set of tools not only for computerized class instruction, but for
school administration and the management of educational and multimedia resources
as well. Designed specifically to accommodate broadband internet connections via
satellite and cable, the total solution software is an ideal tool for distance
learning.
Once the Total Solution project has been fully implemented with a
significant number of users in the Chinese school system, we plan to become an
asp (application service provider), and, through our licensing agreement with
Netopia, Inc., transform our education business model from its present state of
systems integrator/developer to high value added ASP/ICP (Application Service
Provider/Internet Content Provider).
37
<PAGE>
We sell our products to customers through our direct sales force and
indirectly through distribution channels. Hardware and software are delivered to
customers at approximately the same time. Software is generally installed within
approximately two weeks of delivery. The hardware sold includes personal desktop
computers, printers, network servers, monitors, modems, hard drives and other
storage media and cables. Our software cannot be installed until the hardware is
delivered. Therefore, a delay in delivery of hardware will delay the recognition
of software sales revenues.
We have delivered products to a limited number of customers in China
such as the Chinese Ministry of Education and marketing partners in China, in
lieu of direct sales to end-users. As a result, certain customers account for a
significant percentage of sales. Currently, the Chinese Ministry of Education
functions as our marketing partner which has committed to direct the purchase of
educational software packages from us.
Cost of sales include Microsoft and self-developed product costs,
salaries and related expenses for direct and indirect manufacturing personnel
and manufacturing overhead. Our gross margin varies among our products and our
overall gross margin will fluctuate from period to period as a result of shifts
in product mix, promotion pricing and our ability to introduce new products.
Research and development has been funded by Beijing Tengtu Culture &
Education Development Co. Ltd. ("Tengtu China") because we have not provided
sufficient funding to Tengtu united as required by our joint venture agreement
with Tengtu China.
Selling and administrative expenses consist primarily of salaries and
related expenses for personnel, sales commissions, travel expenses, marketing
programs, professional services, management information systems, human
resources, financing consulting costs and other corporate expenses. We expect
that, in support of our continued growth, the expansion of our sales efforts and
our operations as a public company, selling and administrative expenses will
continue to increase with sales for the foreseeable future.
Our consolidated financial statements are prepared in accordance with
U.S. Generally Accepted Accounting Principles. We believe that period-to-period
comparisons of our historical operating results should not be relied as being a
good indication of our future performance. Our prospect must be considered in
light of the risks experienced by companies in new and rapidly evolving markets
like ours. We have experienced sales growth in the quarter ended September 30,
2000, and we believe that sales will continue to grow.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS FOR THE FISCAL QUARTER ENDED
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
COMPARISONS OF RESULTS OF OPERATION FROM THE FISCAL QUARTER ENDED SEPTEMBER 30,
2000 AND THE CORRESPONDING PERIOD IN 1999 ARE NOT PROVIDED. WE RECENTLY GAINED
THE CAPABILITY OF PRODUCING QUARTERLY FINANCIAL STATEMENTS FOR THE FISCAL
QUARTER ENDED DECEMBER 31, 1999.
Liquidity and Capital Resources
For the fiscal quarter ended September 30, 2000, net cash used by
operating activities totaled $211,396, including a net loss of $597,835 and
depreciation and amortization of $73,392. Accounts receivable, prepaid expenses,
advance to director and other receivables increased by $39,980, $11,064, $7,500
and $9,215, respectively, primarily due to the increase in sales activities at
Edsoft, our new Toronto office and a $7,500 advance to a director. Noncash
interest expense increased by $19,354 due to amortization on the convertible
debenture issued to Top Eagle Holdings, Ltd. in December, 1999. Due from related
party, inventories and other assets decreased by $73,233, $18,071 and $20,129,
respectively, primarily due to a loan repayment from a related party, sale of
inventory and a reduction in rent deposits.
Accounts payable, accrued expenses, due to related party consultants
and other liabilities increased by $19,782, $23,730, $150,000, $56,507,
respectively, primarily due to deferral of legal and consultants fees and
accrual of interest expenses on related party loans.
To conserve cash, we have not been paying our senior management and
consultants. Therefore, amounts due to related party consultants and management
increased by another $150,000 during the quarter for a accumulated total of
$1,565,026. Under the terms of a board of directors resolution, payments to the
consultants and management will not be made until we are successful in a "major
financing transaction." A "major financing transaction" was not defined in the
resolution.
38
<PAGE>
Cash used by investing activities amounted to $1,510 primarily due to
an upgrade of production equipment for TIC Beijing operations.
There were no financing activities during the fiscal quarter ended
September 30, 2000. However, on October 25, 2000, we entered into an investment
agreement with Swartz Private Equity, L.L.C. which may provide equity financing
of up to $30 million to us over the next three years depending upon the volume
of trading in our common stock and the price at which it trades. A full
description of the transaction with Swartz Private Equity, L.L.C. is provided in
"Selling Securityholders" above.
Revenues
--------
Sales increased by 571.4% from $170,303 for the fiscal quarter ended
June 30, 2000 to $1,143,446 for the fiscal quarter ended September 30, 2000
primarily due to a significant increase in installations of the "Total Solution"
by Tengtu United in China and digital classroom by Edsoft in Hong Kong.
Gross Profit
------------
We recorded a gross profit of $107,479 for the fiscal quarter ended
September 30, 2000. This was an improvement from a gross loss of $1,333 for the
fiscal quarter ended June 30, 2000. We had a gross margin of 9.4%. The low gross
margin resulted from special promotion prices for the "Total Solution" and low
margins earned on system integration services.
Research and Development Expenses
---------------------------------
Research and development continued during the fiscal quarter ended
September 30, 2000 with the emphasis on product refocusing of the Tengtu
United's operations and modification of Tengtu United software for sale by
Edsoft in Hong Kong. Because we have not provided an additional $5,300,000 in
funding that we committed to Tengtu United, research and development expenses
were funded by Beijing Tengtu Culture & Education Development Co., Ltd. ("Tengtu
China"), our joint venture partner which is owned by the following four Chinese
companies: Legend Computer Group, Taiji Computer Corporation, Great Wall
Computer Group and Beijing Oriental Lian Fa Technology & Trade Group, Co. Ltd.
Zhang Fan Qi, one of the Company's directors, is the Chairman of Beijing
Oriental Lian Fa Technology & Trade Group Co., Ltd.
General and Administrative Expenses
-----------------------------------
General and administrative expenses decreased by 32.8%, from $569,372
for the fiscal quarter ended June 30, 2000, to $382,472 for the fiscal quarter
ended September 30, 2000, primarily due to professional fees and financing fees
incurred in the fiscal quarter ended June 30, 2000.
Related Party Consultants
-------------------------
Related party consultants expense decreased by 50.4%, from $362,813 for
the fiscal quarter ended June 30, 2000, to $180,000 for the fiscal quarter ended
September 30, 2000, primarily due to the amortization of the balance of deferred
compensation of $156,251 in the fiscal quarter ended June 30, 2000.
Selling Expenses
----------------
Selling expenses increased by 121.2% from $33,351 for the fiscal
quarter ended June 30, 2000, to $73,765 for the fiscal quarter ended September
30, 2000, primarily due to increased sales activities.
39
<PAGE>
Interest Expense
----------------
Interest expenses of $61,009 for the fiscal quarter ended September 30,
2000 was primarily the interest on the convertible debenture issued to Top Eagle
Holdings, Ltd. in december, 1999 and related party loans.
Business Update
---------------
Tengtu united continued to work diligently with Tengtu China to capture
market share in the Chinese educational software market. Tengtu United believes
it has cleared the previously existing installation bottleneck that had existed
with respect to installations of the "Total Solution" with the assistance of
Microsoft (China), Ltd. and has generated more than $1 million sales in the
fiscal quarter ended September 30, 2000. Tengtu United management believes that
the clearing of the installation bottleneck will enable it to accomplish
installations at 3,000 schools.
On September 20, 2000, Tengtu China entered into an agreement with the
Chinese Ministry of Education under the auspices of the National Center for
Audio/Visual Education ("NCAVE") called "Operation Morning Sun." Under Operation
Morning Sun, the NCAVE made a commitment to direct the purchase by the end of
the calendar year 2000 of 3,000 educational software packages which could result
in sales of approximately $5.4 million by Tengtu United.
In addition, the NCAVE, Tengtu China and Legend Computer Group entered
into a cooperation agreement on September 20, 2000 known as the "Relief for
Disadvantaged Regions Project." Under this cooperation agreement, the NCAVE is
to direct the purchase of 5,000 units of Tengtu United's Total Solution by
Chinese schools. The Chinese Ministry of Education, as well as the provincial
education departments, have the right to audit the school districts and
individual schools. The Ministry of Education has advised us that if it finds
that a school is utilizing an unauthorized version of a designated software
program, such as a copy of the Company's Network Classroom, or the Microsoft
components to the Total Solution, it will cut off information technology funding
to that school.
In the fiscal quarter ended September 30, 2000, Tengtu China entered
into three contracts for the provision of the following systems integration
services by Tengtu United: purchase and supply of software hardware and related
materials and network installation, testing and tuning. The first contract is
with Qwai Zhou Normal University Attached High School and Qwai Zhou Qin Hwa Yuen
Information Technology Development Co., Ltd. that agreement calls for payments
of RMB 170,000 to Tengtu China for Tengtu United software. The second contract
is with the Inner Mongolia 1st High School and calls for payments of RMB 1.95
million to Tengtu China for Tengtu United software and services. The third
contract is with Zhong Yau Normal College and calls for payment of RMB 1,525,347
to Tengtu China for Tengtu United software and services.
On July 22, 2000 the Chinese Ministry of Education officially endorsed
Tengtu United's "Total Solution" package for a General Elementary/secondary
(K-12) School Network Information System for China schools. We believe this
endorsement on the national level is evidence of the Ministry's support of our
mandate to play a major role in preparing China's educational infrastructure for
the 21st century. In addition, the we believe that this endorsement sends a
strong signal to all school boards in China that the ministry expects their full
and serious cooperation in implementing its plan, in which the Company is a key
component. Our Total Solution makes available via intranet and internet a
comprehensive set of tools not only for computerized class instruction, but for
school administration and the management of educational and multimedia resources
as well. Designed specifically to accommodate broadband internet connections via
satellite and cable, the Total Solution software is also an ideal tool for
distance learning.
Once the Total Solution project has been fully implemented with a
significant number of users in the Chinese school system, we plan to become an
ASP (application service provider), and, through our licensing agreement with
Netopia, Inc., transform our education business model from its present state of
systems integrator/software developer to a value added ASP/ICP (Application
Service Provider/Internet Content Provider).
Since our June 30, 2000 fiscal year end, Edsoft has undergone a
restructuring to focus on the sale of its Multimedia Digital Classroom coftware
in the Hong Kong market. Sales commenced in July, 2000 and Edsoft's management
believes that these sales will increase. Edsoft's management also believes that
Edsoft can benefit from our licencing agreement with Netopia, Inc.
40
<PAGE>
On August 8, 2000, TIC Beijing entered into a contract with Beijing Hwa
Yue Advertisement Co., Ltd. in which it agreed to lease its post- production
facilities and personnel until September 2001 for a total of RMB 1,270,000.
However, TIC Beijing has retained the exclusive use of these facilities and
personnel for two days each week and the right to the use of these facilities
and personnel when the lessee is not using them, thus, enabling TIC Beijing to
furnish any post-production required by its strategic alliances.
On October 6, 2000, Iconix (which was 44% owned by us but in which we
had only a 30% voting interest) was sold for $5,000,000 (Canadian). Barry Clark,
our president, who was the president of Iconix, and former employees of Iconix,
will own approximately 8% of the stock in the acquiring company. We are expected
to receive a gain from the sale over what we invested in iconix of $580,000 over
the next 12 months. We have received $220,000 of the proceeds of the Iconix sale
to date.
LIQUIDITY AND CAPITAL RESOURCES FOR THE FISCAL YEARS ENDED JUNE 30, 2000,
1999 AND 1998
------------------------------------------------------------------------
Fiscal Year Ended June 30, 2000
For the fiscal year ended June 30, 2000, net cash used by operating
activities totaled $1,185,677, including a net loss of $4,701,285, and
depreciation and amortization of $266,614. Accounts receivable, prepaid
expenses, inventories, and other assets decreased by $22,398, $26,188, $16,377
and $28,390 respectively, primarily due to a writedown of obsolete inventory,
scaling down and the product refocusing of Tengtu United operations during the
year. Advance to director increased, and due from related party decreased by
$30,000 and $168,208, respectively, primarily due to an advance to an officer
and a repayment of an advance from Tengtu United. Accounts payable, accrued
expenses, due to related party consultants and other liabilities increased by
$90,249, $14,384, $355,477 and $366,267, respectively. To conserve cash, we have
deferred payment to consultants and senior management until the next major
financing.
We recorded an $8,985 recovery of bad debt from an over-provision
recorded in the previous year. During the year, we issued common stock for
services totaling $947,813, realized the decrease of investment at equity of
$80,147, due to losses of our investee (Iconix) and recorded an interest expense
due to a beneficial conversion feature of $1,194,334 on the $1.5 million
convertible debenture issued to Top Eagle Holdings, Ltd. As described above.
Net cash used by investing activities amounted to $42,535 primarily due
to acquisitions of machinery and equipment for the start-up operations of Edsoft
Platforms (H.K.) Limited. Funds generated by financing activities during the
year included the $1.5 Million convertible debenture from Top Eagle, $258,064
from an Edsoft shareholder and $100,000 from a director. During the year, we
issued shares for $175,725.
We incurred a net loss of $4,701,285 for the year ended June 30, 2000,
and, as of that date, had a working capital deficiency of $2,786,444. These
factors, as well as a significant downsizing and product refocusing of
operations in ours largest operating entity (Tengtu United), create an
uncertainty about our ability to continue as a going concern. Management,
however, has developed a plan to alleviate these factors to enable us to
continue as a going concern. The plan includes a private placement of equity, or
a debenture with warrants attached for a total of $ 2 million short term
financing to provide working capital to us in the next two months and the $30
million equity line entered into with Swartz for the next 3 years.
During the fiscal year ended June 30, 2000, we continued a
restructuring and reduction of operating expenses to a minimum and deferred
payments of consulting and management fees. We issued a convertible debenture of
$1.5 million and received $250,000 ($150,000 for our shares and a $100,000 short
term loan) from a shareholder/director. On October 6, 2000, Iconix sold all of
its assets and we are expected to receive about $800,000 from the sale over the
next two years. Tengtu China Has continued to provide funding for Tengtu
United's operations. The total solution was being shipped and installed in China
and we believe that sales may increase significantly prior to the end of
calendar year 2000 by up to U.S.$5 To 10 million.
Our ability to continue as a going concern is dependant on the success
of the above plan.
Fiscal Year Ended June 30, 1999
For the fiscal year ended June 30, 1999, net cash used by operating
activities totaled $232,878, including net loss of $1,886,399, and depreciation
and amortization of $292,808. Prepaid expenses, inventories, advances to
suppliers and other receivables decreased by $5,307, $191,164, $122,415,
$13,382, respectively, primarily due to a writedown of obsolete inventory and
scaling down and product refocusing of tengtu united operations during the year.
41
<PAGE>
Accounts receivable, other assets, and advance to director increased by
$76,644, $44,307 and $30,000, respectively, primarily due to longer terms
extended to customers and an advance of $30,000 to an officer. Due from investee
(Iconix) decreased by $50,000 due to a loan repayment from the investee.
Accounts payable, accrued expenses and due to related party consultants
increased by $87,615, $53,019 and $481,124, slightly offset by other liabilities
by $1,788. To conserve cash, we deferred payments to consultants and senior
management. At the end of the fiscal year ended June 30, 1999, we set up a
provision for bad debt of another $ 143,081 for overdue receivables. During the
fiscal year ended June 30, 1999, we issued common stock for services of $303,813
and recorded the decrease of investment at equity of $65,274 due to the losses
of the investee (iconix).
Net cash used by investing activities amounted to $63,859 primarily due
to acquisitions of machinery and equipment for the animation center at tic
beijing. There were no funds generated by financing activities during the fiscal
year ended June 30, 1999.
Fiscal Year Ended June 30, 1998
For the fiscal year ended June 30, 1998, net cash used by operating
activities totaled $1,389,820, including a net loss of $4,402,014 and
deprecation and amortization of $ 289,613. Accounts receivable, prepaid
expenses, inventories, advances to suppliers and other receivables decreased by
$79,738, $559,611, $248,840, $180,908 and $ 88,097 respectively primarily due to
scaling down and product refocusing of tengtu united operations at the end of
the year.
Accounts payable increased by $1,084,875 and offset accrued expenses by
$256,879. To conserve cash, we deferred payments to consultants of $518,931.
Included in accrued expenses was a contingent liability of $538,544 payable to a
former landlord due to a breach of contract. At the end of the year, we wrote
down the balance of goodwill of $180,000, set up a provision for bad debt of
$66,900 for overdue receivables, issued common stock for services of $243,750
and expensed compensation costs on granting of stock options of $50,000. Net
cash used by investing activities amounted to $988,804 primarily due to
acquisitions of machinery and equipment for the TIC Beijing animation center.
There were no funds provided by financing activities during the year.
FISCAL YEAR 1998, 1999 AND 2000 COMPARATIVE OPERATING RESULTS
-------------------------------------------------------------
Revenues
--------
2000 1999 1998
-------- --------- -----------
358,026 624,121 3,223,170
We derived revenues from systems integration, educational and
entertainment software, and animation businesses. Sales declined by 42.6% from
fiscal 1999, following a decrease of 80.6% from fiscal 1998 primarily due to the
downsizing and product refocusing of Tengtu United's operations and the delay of
total solution shipments and installations.
Gross Profit (Loss)
-------------------
2000 1999 1998
-------- --------- -----------
(148,838) (145,487) 213,010
Negative gross profits in fiscal 2000 and fiscal 1999 were due to
smaller sales activities but large fixed overhead costs such as rent,
depreciation and management staff.
Research and Development Expenses
---------------------------------
2000 1999 1998
--------- ---------- ---------
0 1,440 511,889
42
<PAGE>
Research and development expenses were minimal in fiscal 2000 and
fiscal 1999 because they were funded by Tengtu China, our joint venture partner.
General and Administrative Expenses
-----------------------------------
2000 1999 1998
--------- ---------- -----------
1,537,833 699,582 2,587,607
General and administrative expenses increased by 119.8% from fiscal
1999 primarily due to approximately $300,000 in financing costs incurred for the
$1.5 million convertible debenture sold to Top Eagle Holdings, Ltd., Edsoft
Platforms (H.K.) Ltd. and Edsoft Platforms (Canada) Limited startup expenses and
the introduction of the Total Solution. The decrease of 73.0% from fiscal 1998
was primarily due to the significant downsizing and product refocusing of Tengtu
United's operations.
Related Party Consultants
-------------------------
2000 1999 1998
-------- -------- ---------
1,492,813 774,870 890,198
Related party consultants' expenses increased by 92.7% from fiscal 1999
primarily due to non-cash compensation expense of $750,000 and accrued
consultant fees of $80,000 for an officer. The decrease of 13.0% from fiscal
1998 was primarily due to the termination of a consultant's services. In 1998,
related party consultants expense was included in general and administrative
expenses.
Bad Debt
--------
2000 1999 1998
-------- -------- ---------
(8,964) 143,347 66,898
There was a bad debt recovery of $8,984 in fiscal 2000 from an
over-provision of $143,347 in fiscal 1999.
Advertising Expense
-------------------
2000 1999 1998
-------- -------- ----------
28,991 19 128,709
Advertising expenses were incurred to promote the total solution in
fiscal 2000. Advertising expenses were minimal in fiscal 1999 due to the
downsizing and product refocusing of Tengtu United's operations.
Selling Expense
---------------
2000 1999 1998
-------- --------- ----------
74,819 52,671 298,396
Selling expenses increased by 42.0% from fiscal 1999 primarily due to
the selling activities related to the introduction of the total solution.
Selling expenses decreased by 82.3% from fiscal 1998 primarily due to the
downsizing and product refocusing Tengtu United's operations.
43
<PAGE>
Depreciation and Amortization
-----------------------------
2000 1999 1998
--------- --------- ---------
58,698 43,217 97,858
Depreciation and amortization expenses increased by 35.8% from fiscal
1999 primarily due to the acquisitions of machinery and equipment for Edsoft
Platforms (H.K.) Limited operations. Depreciation and amortization expenses
decreased by 55.8% from fiscal 1998 primarily due to the downsizing and product
refocusing of Tengtu United's operations, resulting in reclassifying certain
equipment as idle at June 30, 1999.
Write Down of Goodwill
----------------------
2000 1999 1998
-------- --------- ---------
0 0 180,000
We recorded an impairment loss of $180,000 from the write down of
goodwill during the fiscal year ended June 30, 1998. As a result of the loss and
the necessary revisions to the projected future undiscounted cash flows, there
is no longer justification for the carrying value of goodwill resulting from our
investment in tengtu united of $200,000 ($100,000 cash and 2,000,000 common
shares valued at $.05 per share) purchased in June, 1998. As of June 30,1998,
goodwill of $200,000 and related accumulated amortization of $20,000 was written
off.
Other Income (Expense)
----------------------
2000 1999 1998
----------- ---------- ----------
(1,396,477) (25,766) 79,633
Other expenses of $1,396,477 in fiscal 2000 were primarily due to a
non-cash interest expense of $1,311,372 on the convertible debenture issued to
Top Eagle Holdings, Ltd. and other debt and an equity loss in investee (Iconix)
of $80,147. Other expenses of $25,766 in fiscal 1999 were primarily due to an
equity loss of $65,274 offset by other income of $35,585 attributable to sales
of technical support services and software copyrights.
Minority Interests in Subsidiary's Loss
---------------------------------------
2000 1999 1998
--------- -------- ---------
(28,200) 0 0
The minority interests in subsidiary's loss of $28,200 in fiscal 2000
were due to the start-up loss of Edsoft Platforms (H.K.), Ltd.'s and Edsoft
Platforms (Canada) Limited's operations.
(i) CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Our accountants have not resigned or declined to stand for re-election
and have not been dismissed in the past two fiscal years or during the
subsequent period.
(j) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We operate through subsidiaries located principally in mainland China
and Hong Kong; the administrative office is in Vancouver, Canada. We grant
credit to customers in both geographic regions.
We perform certain credit evaluation procedures and do not require
collateral. We believe that credit risk is limited because we routinely assess
the financial strength of our customers, and based upon factors surrounding the
credit risk of its customers, establish an allowance for uncollectible accounts
and, as a consequence, believe that our accounts receivable credit risk exposure
beyond such allowances is limited.
We established an allowance for doubtful accounts at September 30, 2000
of $200,997. We believe any credit risk beyond this amount would be negligible.
44
<PAGE>
At September 30, 2000, we had approximately $300,000 of cash in banks
uninsured. We haves balances in excess of the federally insured amounts in U.S.
Banks.
We do not require collateral or other securities to support financial
instruments that are subject to credit risk.
Because our subsidiaries are in mainland China and Hong Kong, our
accounts receivable are also subject to foreign currency exchange rate risk in
the U.S. dollar/Chinese yen and U.S. dollar/Hong Kong dollar. We do not hedge
these foreign currency exchange rate risks.
As of September 30, 2000, one customer accounted for 95.8% of total
sales.
MARKET RISK SENSITIVE INSTRUMENTS
---------------------------------
FINANCIAL INSTRUMENT CARRYING VALUE FAIR VALUE
-------------------- -------------- ----------
INSTRUMENTS ENTERED INTO FOR TRADING PURPOSES
NONE
INSTRUMENTS ENTERED INTO FOR
OTHER THAN TRADING PURPOSES
CASH AND CASH EQUIVALENTS
UNITED STATES $ 570,986 $ 570,986
FOREIGN 136,058 136,058
---------- ----------
TOTAL $ 707,044 $ 707,044
========== ==========
ACCOUNTS RECEIVABLE, NET
UNITED STATES $ 67,511 $ 67,511
FOREIGN 259,622 259,622
---------- ----------
$ 327,133 $ 327,133
TOTAL ========== ==========
ACCOUNTS PAYABLE
UNITED STATES $1,130,876 $1,130,876
FOREIGN 3,158,184 3,158,184
---------- ----------
TOTAL $4,289,060 $4,289,060
========== ==========
These financial instruments are short-term and are not subject to
significant market risk. Substantially all financial instruments are settled in
the local currency of each subsidiary, and therefore, we have no substantial
exposure to foreign currency exchange risk. Cash is maintained by each
subsidiary in its local currency.
(k) DIRECTORS AND EXECUTIVE OFFICERS
The following are the names, ages and current principal position(s) and
office(s), if any, with us of each of our current directors. Each of the
directors set forth below was nominated for re-election at our annual
shareholders meeting on November 27, 2000, and was elected on that
date.
CURRENT PRINCIPAL POSITION(S) AND
NAME AGE OFFICE(S)
---------------------- ---- ---------------------------------
PAK KWAN CHEUNG 50 CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF
EXECUTIVE OFFICER
JING LIAN 48 VICE PRESIDENT AND DIRECTOR
JOHN D. WATT 54 DIRECTOR AND EXECUTIVE VICE PRESIDENT
MICHAEL NIKIFORUK 46 DIRECTOR
GORDON CAMPBELL REID 60 DIRECTOR
ZHANG FAN QI 41 DIRECTOR
BARRY CLARK 59 PRESIDENT AND DIRECTOR
45
<PAGE>
The following is a description of the qualifications and experience of
each of our current directors:
PAK KWAN CHEUNG is the Chairman of the Board of Directors and Chief
Executive Officer. During the past five years, Mr. Cheung has served and
continues to serve as President of Bluelake Industries, Ltd., Seattle,
Washington, and Comadex Industries, Ltd. Vancouver, Canada. Both companies are
computer technology and software firms. Mr. Cheung has served as our Chairman of
the Board and Chief Executive Officer since June, 1996. Mr. Cheung received an
M.B.A. degree from University of British Colombia and was the founder of Comadex
Industries, Ltd., Vancouver, Canada, and Bluelake Industries, Ltd., Seattle,
Washington. Mr. Cheung also has 25 years experience in computer hardware,
software and systems integration.
JING LIAN is a member of our Board of Directors and a Vice-President.
During the past five years, Mr. Lian has been Vice-President of Bluelake
Industries, Ltd., Seattle, Washington. Mr. Lian has served as a director and
Vice President since June 1996. Mr. Lian is also currently the President of our
TIC Beijing Digital Pictures, Ltd. subsidiary and is the founder and Secretary
of the Chinese Educational Software Council. Mr. Lian received an M.S. degree in
computer science from Tsing Hua University, Beijing, China. Mr. Lian was a also
visiting scholar at the University of Washington, Seattle, Washington.
JOHN DONALD WATT is a member of our Board of Directors and Vice
President of our multimedia division. Mr. Watt has been President of John D.
Watt & Associates, Ottawa, Canada, from 1995 to the present. Mr. Watt has served
as a director since June, 1996 and was elected Vice President of the multimedia
division on September 15, 2000 by our Board of Directors.
MICHAEL NIKIFORUK, is a member of our Board of Directors and Executive
Vice President of Corporate Affairs. During the past five years, Mr. Nikiforuk
has been the Executive Vice President of Banro Explorations in Toronto, Canada
and has been responsible for equity financing and investor relations at
Transarctic Petroleum Corporation. Mr. Nikiforuk has served as a director since,
April, 1997 and was elected Executive Vice President of Corporate Affairs on
September 15, 2000 by our Board of Directors.
GORDON CAMPBELL REID is a member of our Board of Directors. During the
past five years, Mr. Reid has served as President of Gencon Investments, Ltd.
Mr. Reid has served as a director since June, 1996 and is also a Director of
Systech Retail Systems, Inc. and Lariat Property Corp.
ZHANG FAN QI is a member of our Board of DirecTors. During the past
five years, Zhang Fan Qi has served as Chairman of Beijing Oriental Lian Fa
Technology & Trade Group, Co. Ltd., an owner of 51% of Tengtu China, our joint
venture partner, and as the manager of the Ningpo Baoji Real Estate Company.
Zhang Fan Qi has served as a director since August, 1999.
BARRY CLARK is a member of our Board of Directors and its President.
During the past five years Mr. Clark was an executive Vice President of ISB,
Canada's largest outsourcing company, a Vice President of three divisions of
Unisys, Canada and President of B.D. Clark & Associates. Mr. Clark has 30 years
of experience in the information technology business with IBM Canada where he
was a Vice President for 15 years. Mr. Clark has been a director since April,
1997.
46
<PAGE>
The following are the names, ages and current principal position of our
executive and significant officers who do not also serve as directors and
therefore, are not listed above:
CURRENT PRINCIPAL POSITION(S) AND
NAME AGE OFFICE(S)
---------------------- ---- ---------------------------------
Gregory Mavroudis 38 Executive Vice President
Simon Hui 43 Vice President and Controller
Gregory Mavroudis, Executive Vice President (38)
On September 15, 2000, Mr. Mavroudis was elected Vice President of
Business Affairs. Since April, 2000, Mr. Mavroudis has acted as an independent
contractor to us and was largely responsible for obtaining our licencing
agreement with Netopia, Inc. and the reorganization of Edsoft Platforms (H.K.)
Ltd. From December, 1998 to October, 1999, Mr. Mavroudis was the Chief Operating
Officer of Ivynet, Inc. Ivynet, inc. is a publicly traded communications
company. For the previous four years, Mr. Mavroudis was the Director of Business
Development and Sales for True Spectra, Inc., which has developed and is
marketing a proprietary Internet imaging technology which enables faster
transmission of images over the internet.
Simon Hui, Vice President and Controller (43)
During the past five years, Mr. Hui has been employed as a the
Controller of the following companies in Canada: Bluestar Battery Systems, Ltd.
and Glas Aire Industries, Ltd. Mr. Hui also currently serves as a director of
our Edsoft Platforms (Canada), Ltd. and Edsoft Platforms (H.K.) Limited
subsidiaries. Mr. Hui began working with us as a full time employee as of June
30, 1997. Mr. Hui is a chartered accountant.
FAMILY RELATIONSHIPS
There are no family relationships among the Directors or Executive
Officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our Directors or Executive Officers
has:
(1) been general partner or executive officer of a business at the time
a bankruptcy petition was filed by, or against it, or a receiver, fiscal agent
or similar officer was appointed by a court for it or its property;
(2) been convicted in a criminal proceeding and are not currently a
named subject of a pending criminal proceeding (excluding traffic violations and
other minor offenses);
(3) been subject to an order, judgment or decree, permanently or
temporarily enjoining, barring, suspending or otherwise limiting their
involvement in any type of business, securities or banking activities; or
(4) been found by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission, or the Commodity Futures
Trading Commission, to have violated a federal of state securities or
commodities law.
COMPENSATION OF DIRECTORS
No cash compensation was paid to any of our directors during the fiscal
year ended June 30, 2000. Pursuant to a resolution passed by our Board of
Directors on April 27, 1997, each outside director, who is not an employee or
consultant to us, is entitled to the following compensation:
Annual Fee: $6,000
Each Board of Directors Meeting Attended: $ 500
Each Board of Directors Committee Meeting Attended: $ 250
No cash compensation pursuant to the April 27, 1997 resolution has been
paid to any director. For the fiscal year ended June 30, 1999, each member of
our Board of Directors received options to purchase our common stock in lieu of
a cash payment.
STOCK OPTIONS
Under our stock option incentive plan, directors may receive options to
purchase our common stock. No options may be granted at less than fair market
value on the date of the grant. No options were granted to directors for the
fiscal year ended June 30, 2000.
47
<PAGE>
(l) EXECUTIVE COMPENSATION
No cash compensation was paid to any of our executive officers during
the fiscal year ended June 30, 2000. On March 29, 1999, we adopted a deferred
compensation plan for future payment of past due amounts. Pursuant to the
deferred compensation plan, all compensation to executive officers is to be
deferred until we receive certain amounts of financing. At that time, we will
begin paying salaries or consulting fees at the agreed-upon rate and 90% of the
payments will be applied to current obligations and 10% to past due compensation
and fees which have been deferred. In the interim, we have advanced $30,000 to
jack lian, a director. The total payments deferred as of June 30, 2000 is
$1,415,026.
SUMMARY COMPENSATION TABLE
The following table provides information relating to compensation for
the fiscal years ended June 30, 1998, 1999 and 2000 for our chief executive
officer and compensation payable to another highly compensated executive officer
whose total salary and bonus (as determined pursuant to sec rules) exceeded
$100,000 (determined by reference to fiscal 2000) (collectively, the "named
executive officers"). The amounts shown include compensation for services in all
capacities provided to us. With respect to the chief executive officer, the
salary listed represents an amount he is entitled to receive as his compensation
has been deferred. With respect to the vice president listed, it should be noted
that the salary listed has been annualized and that we began paying compensation
to him in April, 2000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL ------------------------
COMPENSATION SECURITIES
NAME AND FISCAL --------------------- RESTRICTED STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS ($) OPTIONS (#) COMPENSATION ($)
------------------ -------- ---------- --------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
PAK KWAN CHEUNG(1) 2000 $128,400 $ 0 $750,000 (2) $ 0 $ 0
CHIEF EXECUTIVE 1999 0(2) 0 65,400 (3) 0
OFFICER 1998 0(2) 0 0 0
GREGORY MAVROUDIS(4) 2000 $120,000 $ 0 $ 0 (5) $ 0 $ 0
VICE PRESIDENT 1999 0 0 0 0 0
1998 0 0 0 0 0
<FN>
(1) Pak Kwan Cheung's services are retained by us through a consulting
contract with Comadex Industries, Inc. entered into as of November,
1999. Comadex Industries, Ltd. has not been paid any monies during the
fiscal year ended June 30, 2000 under the contract. The amount listed
represents compensation it is entitled to under the agreement.
(2) Pursuant to the contract between us and Comadex Industries, Inc., all
past due compensation to Pak Kwan Cheung was discharged in exchange for
3,000,000 shares of Company common stock with a value of $.25 per share
on the date of the grant.
(3) 300,000 options to purchase our common stock were granted to Pak Kwan
Cheung during the fiscal year ended June 30, 1999 with an exercise
price equal to the fair market value at the time of $.218 per share.
(4) Gregory Mavroudis' services have been retained by us through a
consulting agreement with 1334945 Ontario Limited dated April 1, 2000.
(5) The consulting agreement with 1334945 Ontario Limited calls for the
issuance of 250,000 stock over the term of the agreement, 25,000 shares
of which are to vest on the six month anniversary of the agreement.
</FN>
</TABLE>
EMPLOYMENT OR CONSULTING CONTRACTS WITH EXECUTIVE OFFICERS AND DIRECTORS
COMADEX INDUSTRIES LTD.
Effective October 15, 1999, we entered into a consulting agreement
with Comadex Industries, Ltd. ("Comadex") to retain the services of Pak Kwan
Cheung as our Chairman of the Board of Directors and Chief Executive Officer.
The agreement may be summarized as follows:
(1) Comadex will receive a base salary of $10,700 per month,
commencing November 30, 1999, inclusive of the Canadian General Services Tax;
48
<PAGE>
(2) Beginning October 15, 2000, the Compensation Committee of the
Board of Directors can increase the base salary up to a maximum of $10,000 per
year;
(3) For past due services of Mr. Cheung, the principal of Comadex,
from July 1996 through October 15, 1999, and the seven weeks thereafter, Comadex
shall be paid the rate of $10,000 per month, and is to receive 3,000,000 shares
of restricted stock, which was the amount determined by the Compensation
Committee. Our Common Stock was trading at approximately $.10 per share in
October 1999;
(4) Comadex shall receive an incentive option of 1,000,000 shares if
Mr. Cheung is primarily responsible for raising $3,000,000 in equity by November
15, 2000. The exercise price shall be equal to the closing price of our Common
Stock on the closing date of the financing obtained by Mr. Cheung. In the case
of a convertible security, the exercise price shall be determined as of the date
that security is converted into equity;
(5) Comadex shall receive an incentive of 1% of the capital raised in
excess of $3,000,000 by Mr. Cheung for us or any company subsidiary that is 50%
or more owned by us;
(6) Comadex shall receive 1% of our net profits if we exceeds pre-set
profit targets and our audited pre-tax profits exceed that target(s). No such
targets have been set as of March 15, 2000 by the Board of Directors;
(7) Comadex shall receive certain payments in the event the agreement
is terminated without cause or if we are merged into or acquired by another
company.
B.D. CLARK & ASSOCIATES
On March 21, 1997, B.D. Clark & Associates agreed to provide one of
its officers to assume the position of President to perform, inter alia, the
following tasks: development and field implementation of strategies for our
product lines, marketing, development of profit and revenue plan objectives. The
term of the agreement is three years. Although it has expired as of March, 2000,
B.D. Clark & Associates appointee is still the acting President. The agreement
provides for a base fee of $240,000 in cash, with the possibility of an
additional $260,000 in cash and stock as a performance bonus upon the attainment
of certain objectives by us, and 500,000 shares of Company stock upon signing
the agreement.
GREGORY MCLELLAND
On April 8, 1997, we entered into an agreement with Gregory McLelland
to provide consulting services and to serve as an officer. The term of the
agreement is three years. The agreement provides a $125,000 annual salary,
100,000 shares of common stock upon signing of the agreement and options to
purchase 50,000 shares of common stock annually for three years. The agreement
also provides for the possibility of performance and incentive bonuses.
JING LIAN
We and Jing Lian entered into an agreement effective January 1, 1996
for Mr. Lian to serve as a Vice President at an annual salary of $80,000. The
agreement also provides for the possibility of performance and incentive
bonuses.
JOHN D. WATT & ASSOCIATES, LTD.
On November 17, 1996 we retained John D. Watt & Associates, Ltd. to
identify and develop strategic alliances to support our operational needs with
suppliers of multimedia educational, animation and children's entertainment
products and to develop government contacts for financing and the establishment
of technology and training centers. The agreement with John D. Watt &
Associates, Ltd. provides for compensation of U.S.$10,000 per month.
HAI NAN
On September 26, 1998, we entered into an agreement for consulting
services with Hai Nan to assist us in developing its educational software
business in China. The agreement with Hai Nan provides for compensation of
$40,000 per year.
49
<PAGE>
1334945 ONTARIO LIMITED
On April 1, 2000, we entered into a consulting agreement with 1334945
Ontario Limited ("Ontario") to retain the services of Gregory Mavroudis,
Ontario's principal, as its Vice President of Business Development. The
agreement may be summarized as follows:
(1) The agreement has a term of two years with a probationary period
ending on September 30, 2000. We had the option to terminate the agreement at
the end of the probationary period with notice provided by September 1, 2000. We
elected not to terminate the agreement;
(2) Ontario is to receive U.S.$10,000 per month for the term of the
agreement;
(3) Ontario is to receive 250,000 shares of Company stock of which
25,000 shares is to vest at the six month anniversary of the agreement, 112,500
at the twelve-month anniversary and an additional 112,500 at the twenty four
month anniversary;
(4) Ontario is to receive options to purchase 37,500 Company shares
within 90 days of the six month anniversary of the agreement and an additional
37,500 options between 90 and 180 days after the six month anniversary of the
agreement. The agreement also provides for additional options once a new stock
option plan is adopted by our Board of Directors;
(5) We may terminate the agreement at any time for cause and with a
penalty without cause; and
(6) Both Ontario and Mavroudis are subject to non-competition,
non-solicitation and confidentiality obligations.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
-----------------------------------------------
The following members of the Compensation Committee of our Board of
Directors served as our officers or employees during the fiscal year ended June
30, 2000:
Name Position
-------------------- ------------------------------
Jing Lian President, TIC Beijing Digital Pictures Co., Ltd.
Barry Clark President of the Company and Iconix International, Inc.
PERFORMANCE CHARTS
-----------------
The following charts show the cumulative performance for our Common
Shares over the last four years compared with the performance of the Nasdaq
Composite and software Industry Group Performance Composite. The first chart
assumes $100 invested as of September 3, 1996 in our common stock and in each of
the named indices. The performance shown is not necessarily indicative of future
performance.
Tengtu Nasdaq Industry
Date Return Index Index
---------------------- ----------------- -----------------------------
100 100 100
6/30/97 16 126 141
6/30/98 4 166 226
6/30/99 3 235 315
6/30/00 23 347 419
50
<PAGE>
Tengtu Change
Stock from prior Calculated
Date Price period % chg. Return
---------------------- -------------- ------------------------------------------
9/3/96 5 Base 100
6/30/97 0.82 -4.18 -83.60% 16
6/30/98 0.19 -0.63 -76.83% 4
6/30/99 0.13 -0.06 -31.58% 3
6/30/00 1.01 0.88 676.92% 23
Nasdaq Change
Composite from prior Calculated
Date Index period % chg. Return
---------------------- ----------------- ---------------------------------------
9/3/96 1142 Base 100
6/30/97 1442 300 26.27% 126
6/30/98 1895 453 31.41% 166
6/30/99 2686 791 41.74% 235
6/30/00 3967 1281 47.69% 347
Industry
Group Change
Performance from prior Calculated
Date Software period % chg. Return
---------------------- ----------------- ---------------------------------------
9/3/96 243 Base 100
6/30/97 342 99 40.74% 141
6/30/98 549 207 60.53% 226
6/30/99 764 215 39.16% 315
6/30/00 1017 253 33.12% 419
(m) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information furnished to us with
respect to the beneficial ownership of our common shares by each executive
officer named below, director and nominee, and by all directors and executive
officers as a group, each as of June 30, 2000. Unless otherwise indicated, each
of the persons listed has sole voting and dispositive power with respect to the
shares shown as beneficially owned.
TITLE AMOUNT AND NATURE OF PERCENT OF
OF CLASS NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
-------- ---------------------------- -------------------- ----------
$.01 par Pak Cheung (1) 4,370,750 13.52
common
$.01 par Jing Lian (2) 1,170,750 3.6
common
$.01 par John D. Watt (3) 112,000 *
common
$.01 par Michael Nikiforuk (4) 225,000 *
common
$.01 par Zhang Fan Qi 1,035,714 3.2
common
$.01 par Gordon Reid (5) 271,448 *
common
$.01 par B.D. Clark & Associates, Inc. (6) 700,000 2.2
common
$.01 par Simon Hui 150,000 *
common
51
<PAGE>
* Less than one percent
(1) Includes 300,000 Common Shares subject to options that are exercisable
within 60 days.
(2) Includes 300,000 Common Shares subject to options that are exercisable
within 60 days.
(3) Includes 75,000 Common Shares subject to options that are exercisable
within 60 days.
(4) Includes 75,000 Common Shares subject to options that are exercisable
within 60 days.
(5) Includes 75,000 Common Shares subject to options that are exercisable
within 60 days.
(6) B.D. Clark & Associates is owned equally by Barry Clark, our President,
and his wife. Includes 300,000 Common Shares subject to options that
are exercisable within 60 days.
The following table shows certain information with respect to all
persons who are not executive officers, directors or nominees, known by us to
beneficially own more than five percent of our outstanding common stock.
<TABLE>
<CAPTION>
TITLE NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
-------- -------------------------------- -------------------- ----------
<S> <C> <C> <C>
Debenture Top Eagle Holdings, Ltd. - c/o (1) 4,500,000 13.92
and warrant Yugang Int'l Ltd., Room 3301-4,
26 Harbour Rd., Hong Kong
<FN>
(1) Top Eagle Holdings, Ltd. currently holds a debenture convertible into
our common stock and warrants to purchase 1,500,000 shares of our
common stock. If Top Eagle Holdings, Ltd. were to convert its debenture
and exercise all of its warrants prior to December 23, 2000, it would
own 4,500,000 shares of our common stock. After December 23, 2000, the
conversion price of the convertible debenture increases from $.50 to
$1.00.
</FN>
</TABLE>
(n) CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Due to the continued downsizing of the staff of Tengtu United, our
joint venture, the operations of the venture during the fiscal year ended June
30, 2000 were substantially financed by our joint venture partner, Tengtu China.
Zhang Fan Qi, a Company director, is a principal of Beijing Oriental Lian Fa
Technology & Trade Group Co., Ltd., which is a 51% owner of Tengtu China. As a
result of Tengtu China financing Tengtu United's operations, Tengtu United has a
receivable balance of $170,123 as of June 30, 2000. At June 30, 1999, the joint
venture had a receivable balance from Tengtu China of $293,287.
Zhang Fan Qi has also capitalized and registered Tengtu Electronic
Publishing, a Chinese company which could be the basis for a proposed joint
venture with us or strategic alliance, at an approximate cost of $240,000.
In July, 1999, Zhang Fan Qi purchased 750,000 shares of Company
common stock for $150,000. On September 9, 1999 Zhang Fan Qi, a Company
director, loaned $100,000 to us. The loan had an interest rate of 6% per annum
and was due in twelve months. The loan was convertible at the option of Zhang
Fan Qi at the rate of $.35 per share, or into an aggregate of 285,714 shares of
our common stock. At the date of the loan, our common stock was trading at $.25
per share, therefore the loan does not contain a beneficial conversion feature.
Zhang Fan Qi elected to convert the loan.
52
<PAGE>
We advanced $30,000 to Jing Lian, who serves as an officer and
director, during the year. During 2000 and 1999, respectively, we incurred
consulting and related expenses of approximately $1,492,003 and $774,900 from
officers and directors of the Company or its subsidiaries or companies
controlled by these officers and directors. No payments have been made for the
amounts incurred in either fiscal year. Of the total expenses incurred,
approximately $182,800 in 2000 and $243,750 for 1999 represent the value of
common shares issued for services to two officers. The officers entered into
agreements with the Company in the year ended June, 30, 1997 that entitled them
to receive 500,000 and 100,000 shares, respectively, at the date the agreements
were signed. Deferred compensation of $731,250 was recorded in the year ended
June 30, 1997, and is being amortized over the three year term of each
agreement.
In January, 2000, we and Comadex Industries, Ltd. entered into a
consulting agreement for the employment of Pak Kwan Cheung as our Chairman and
CEO as described above.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
We have agreed to indemnify Swartz, including its owners, employees,
investors and agents, from all liability and losses resulting from any
misrepresentations or breaches we make in connection with the Investment
agreement, the registration rights agreement, other related agreements, or this
registration statement. We have also agreed to indemnify these persons for any
claims based on violation of Section 5 of the Securities Act of 1933 caused by
the integration of the private sale of our common stock to Swartz and the public
offering pursuant to the registration statement.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
53
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of this Offering are estimated as follows:
Attorneys Fees $150,000
Accountants Fees $ 5,000
Registration Fees $ 6,650
Blue Sky Fees (including counsel fees) $ 8,000
Transfer Agent Fees $ 2,500
Printing $0
Advertising $0
Other Expenses $0
--------
TOTAL $172,150
========
54
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Article 8 of our By-Laws, we are authorized to indemnify
and hold harmless any person who was or is a director, consultant, officer,
incorporator, employee or agent of the Company, or such other person acting at
the request of the foregoing, from and against liability incurred as a result of
the fact that he or she is or was director, consultant, officer, incorporator,
employee or agent of the Company, or such other person acting at the request of
the foregoing. The permitted indemnification is to the full extent permitted by
the Delaware General Corporation Law ("GCL"). Under the GCL, a corporation may
indemnify any of the foregoing persons as long as he or she was acting, in good
faith, in the best interests of the corporation, and the corporation does not
have reason to believe that the actions taken were unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore unenforceable.
We presently do not have any Directors and Officers liability
insurance.
RECENT SALES OF UNREGISTERED SECURITIES
We sold the following unregistered securities in the past three years
in reliance upon exemptions from registration provided by Section 4(2) of the
Securities Act of 1933.
On July 20, 1999, we sold 750,000 shares of its common stock, $.01
par value per share, to Zhang Fan Qi, a Company Director for $250,000 in cash.
The sale was made pursuant to an exemption from registration under the
Securities Act of 1933, as amended (the "Act") provided by Section 4(2) thereof.
The facts relied upon for an exemption under Section 4(2) of the Act
are as follows:
1. The securities were offered and sold in a private transaction
without general solicitation or advertisement;
2. Zhang Fan Qi is a sophisticated investor, and one of our directors,
who has such knowledge and experience in financial or business matters that he
is capable of evaluating the merits and risks of this investment in the
securities and protecting his interests in connection with the investment;
3. Zhang Fan Qi had a preexisting business relationship with us and
certain of its officers, directors or controlling persons of a nature and
duration that enabled him to be aware of the character, business acumen and
financial circumstances of such persons;
4. Zhang Fan Qi made his own due diligence investigation and executed
an investment representation letter stating that the securities were acquired
with an investment intent and not with a view to their distribution or resale.
On December 23, 1999, we received an investment of U.S.$1,500,000 in
exchange for a four year Floating Convertible Debenture ("Debenture")
convertible into shares of Tengtu's $.01 par value common stock and a separate
Common Stock Warrant ("Warrant") for the purchase of 1,500,000 shares of common
stock. The purchaser of the Debenture and Warrant was Top Eagle Holdings
Limited, a British Virgin Islands company ("Top Eagle") that is wholly owned by
Yugang International Limited, a Hong Kong company engaged in the trading of
audio visual products and components, industrial equipment, automobile parts,
agricultural products, raw materials and other products in the Central and
Western parts of China.
The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
The Hong Kong and Shanghai Banking Corporation plus two percent. The Debenture
Is convertible into Tengtu's Common Stock at a conversion price of U.S.$.50
during the first year, U.S.$1.00 during the second year, U.S.$2.00 during the
third year and U.S.$4.00 on any date thereafter. The unpaid balance of principal
and interest outstanding at maturity, if any, may be converted by the holder
into Tengtu Common Stock at the then existing market price minus twenty percent.
The Warrant gives the holder the right to purchase 1,500,000 shares of Tengtu
common stock at U.S.$1.00 per share during the first year, U.S.$2.00 per share
during the second year and U.S.$4.00 thereafter. The Warrant shall become void
three years after issuance.
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In connection with the purchase of the Debenture and Warrant, Tengtu
and Top Eagle entered into an Investor Rights Agreement which provides The
holder(s) of the Debenture, Warrant and or the shares issued upon conversion or
exercise thereof, with registration and certain other rights.
The sale of the Debenture and Warrant were accomplished pursuant to
Rule 506 of Regulation D relying on the fact that Top Eagle meets the definition
of an accredited investor.
Effective October 15, 1999, we entered into a consulting agreement with
Comadex Industries, Ltd. ("Comadex") to retain the services of Pak Kwan Cheung
as our Chairman of the Board of Directors and Chief Executive Officer. The
agreement also provided for past due compensation for past services rendered
over a three year period in the amount of 3,000,000 shares of our common stock.
The sale of 3,000,000 shares was accomplished in reliance upon Section
4(2) of the Securities Act of 1933. The facts relied upon for the exemption are
that Pak Kwan Cheung is an accredited investor by virtue of his position as an
executive officer and director of the Company.
On November 17, 2000, we entered into a Loan Agreement with Orion
Capital Incorporated ("Orion") under which Orion loaned us $500,000 until
December 31, 2000, with an interest rate of 10%. In connection with the loam, we
granted Orion a warrant to purchase 100,000 shares of our common stock with an
exercise price of $.50. The issuance of the warrants was accomplished in
reliance upon Section 4(2) of the Securities Act. The facts relied upon for the
exemption are that Orion Capital Incorporated is an accredited investor.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Index of Exhibits required by Item 601 of regulation S-K:
1. Exhibit (3.1) - Articles of Incorporation (filed as part of
our Form 10 filed on May 25, 2000 and incorporated herein by
reference);
2. Exhibit (3.2) - By-Laws (filed as part of our Form 10 filed
on May 25, 2000 and incorporated herein by reference);
3. Exhibit (5.1) - Opinion re: Legality of the securities
being registered.
4. Exhibit (10) - Material contracts;
10.1 - Tengtu International Corp. Investment Agreement with
Swartz Private Equity, L.L.C. dated October 25, 2000 (filed as
part of our Form 10-Q filed on November 14, 2000 and
incorporated herein by reference);
10.2 - English Translation of Agreement between National
Center for Audio Visual Education and Tengtu Culture and
Education Electronics Development Co., Ltd. dated September
20, 2000 - referred to as "Operation Morning Sun" (filed as
part of our Form 10-Q filed on November 14, 2000 and
incorporated herein by reference);
10.3 - English Translation of Cooperation Agreement among the
Chinese National Center for Audio/Visual Education of the
Ministry of Education, Tengtu China and Legend Group (filed as
part of our Form 10-Q filed on November 14, 2000 and
incorporated herein by reference);
10.4 - English Translation of Qwai Zhou Normal University
Attached High School Thousand Mega Campus Network System
Agreement with Tengtu China and Qwai Zhou Qin Hwa Yuen
Information Technology Development Co., Ltd. dated July 28,
2000 (filed as part of our Form 10-Q filed on November 14,
2000 and incorporated herein by reference);
10.5 - English Translation of Zhong Yau Normal College Campus
Network Contract with Tengtu China dated September 10, 2000
(filed as part of our Form 10-Q filed on November 14, 2000 and
incorporated herein by reference);
10.6 - English Translation of Inner Mongolia 1st High School
Campus Network Contract with Tengtu China dated August 25,
2000 (filed as part of our Form 10-Q filed on November 14,
2000 and incorporated herein by reference);
10.7 - English Translation of Equipment Lease contract between
TIC Beijing Digital Pictures Co., Ltd and Beijing Hwa Yue
Advertisement Co., Ltd. dated August 8, 2000 (filed as part of
our Form 10-Q filed on November 14, 2000 and incorporated
herein by reference);
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10.8 - 1999 Non-Qualified Stock Option Incentive Plan (filed
as part of our Form 10 filed on May 25, 2000 and incorporated
herein by reference),
10.9 - English Translation of Microsoft Cooperation Agreement
(filed as part of our Form 10 filed on May 25, 2000 and
incorporated herein by reference),
10.10 - Consulting Agreement between Tengtu and B.D. Clark and
Associates, Ltd. (filed as part of our Form 10 filed on May
25, 2000 and incorporated herein by reference),
10.11 - Tengtu United Joint Venture Agreement and the
amendment thereto (filed as part of our Form 10 filed on May
25, 2000 and incorporated herein by reference),
10.12 - Iconix agreement with Dell Products, L.P. (filed as
part of our Form 10 filed on May 25, 2000 and incorporated
herein by reference),
10.13 - Employment agreement between Tengtu and Jing Lian
(filed as part of our Form 10 filed on May 25, 2000 and
incorporated herein by reference),
10.14 - Consulting agreement between Comadex Industries, Ltd.
and Tengtu (filed as part of our Form 10 filed on May 25, 2000
and incorporated herein by reference),
10.15 - Top Eagle Holdings, Ltd. Convertible Debenture and
Warrant Purchase Agreement (filed as part of our Form 8-K
dated December 23, 1999 and incorporated herein by reference),
10.16 - Top Eagle Holdings, Ltd. Investor Rights Agreement
(filed as part of our Form 8-K dated December 23, 1999 and
incorporated herein by reference),
10.17 - Top Eagle Holdings, Ltd. Convertible Debenture (filed
as part of our Form 8-K dated December 23, 1999 and
incorporated herein by reference),
10.18 - Top Eagle Holdings, Ltd. Common Stock Warrant (filed
as part of our Form 8-K dated December 23, 1999 and
incorporated herein by reference),
10.19 - Independent Contractor Agreement among us, 1334945
Ontario Limited and Gregory Mavroudis dated April 1, 2000
(filed as part of our Form 10-K dated September 28, 2000 and
incorporated herein by reference),
10.20 - Letter of Intent for Cooperation between Guandong
Southern Natural Museum Co., Ltd. and Tic Beijing (filed as
part of our Form 10-K dated September 28, 2000 and
incorporated herein by reference),
10.21 - License Agreement between us and Netopia, Inc. dated
June 21, 2000 (filed as part of our Form 10-K dated September
28, 2000 and incorporated herein by reference).
5. Exhibit (11.1) - Statement re: Computation of Per Share
Earnings;
6. Exhibit (13.1) - Annual Report on Form 10-K for the fiscal
year ended June 30, 2000;
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9. Exhibit (21.1) - List of Subsidiaries;
10. Exhibit (23.1) - Consent of counsel to the use of the
opinion annexed at Exhibit (5.1) is contained in the opinion
annexed at Exhibit (5.1); Consent of accounts for use of their
report;
12. Exhibit (27.1) - Financial Data Schedules.
(b) The following financial statements are incorporated in this
filing above:
1. Tengtu International Corp. and Subsidiaries audited
financial statements for the fiscal year ended June 30, 2000;
2. Tengtu International Corp. and Subsidiaries audited
financial statements for the fiscal year ended June 30, 1999;
3. Tengtu International Corp. and Subsidiaries unaudited
financial statements for the fiscal quarter ended September
30, 2000.
UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of
the Securities Act;
ii. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement(or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Burnaby,
British Columbia, Canada, on November 24, 2000.
TENGTU INTERNATIONAL CORP.
By:/s/ PAK KWAN CHENUG
-------------------
Pak Kwan Cheung
Chairman of the Board of
Directors and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been filed by the following persons in the capacities
and on the dates indicated.
/S/ SIMON HUI
--------------------------------- November 24, 2000
Simon Hui
Vice President and Controller
/S/ BARRY CLARK
--------------------------------- November 21, 2000
Barry Clark
President and Director
/S/ MICHAEL NIKIFORUK
--------------------------------- November 22, 2000
Michael Nikiforuk
Director
/S/ JOHN D. WATT
--------------------------------- November 24, 2000
John D. Watt
Executive Vice President and
Director
/S/ JING LIAN
--------------------------------- November 22, 2000
Jing Lian
Vice President and Director
/S/ GORDON REID
--------------------------------- November 24, 2000
Gordon Reid
Director
/S/ ZHANG FAN QI
--------------------------------- November 24, 2000
Zhang Fan Qi
Director
/S/ HAI NAN
--------------------------------- November 24, 2000
Hai Nan
Director
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