FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------- to ---------
Commission file Number 000-29957
TENGTU INTERNATIONAL CORP.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0407366
--------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
206-5050 Kingsway
Burnaby, B.C. Canada V5H 4H2
-----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code - (604) 438-9827
Securities registered pursuant to Section 12(b) of the Act:
Not applicable.
Securities registered pursuant to Section 12(g) of the Act:
$.01 par value per share common stock
-----------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant - as of June 30, 2000 -
$14,793,126.
1
<PAGE>
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------ ------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 23,890,607 shares
outstanding as of September 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder, the following documents if incorporated by reference
and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (c) of the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980).
None of the above documents is incorporated by reference.
PART I
ITEM 1. BUSINESS
------- --------
BACKGROUND INFORMATION ON THE COMPANY AND ITS SUBSIDIARIES
----------------------------------------------------------
ORGANIZATIONAL HISTORY
The corporation now known as Tengtu International Corp. (the "Company")
was incorporated on May 6, 1988, in the State of Delaware, under the name of
Galway Capital Corporation. The Company was formed as a development stage
enterprise for the purpose of seeking potential business ventures. The Company
ceased operations during fiscal year 1990 -1991, and was inactive until May,
1996, other than its activities in seeking a potential business ventures. On
August 20, 1993, the Company changed its name to Tower Broadcast, Inc. in order
to assist it in searching for a suitable merger or reorganization candidate. On
March 20, 1996, the Company, under the name Tower Broadcast, Inc., was cleared
by the National Association of Securities Dealers for an unpriced quotation on
the over-the-counter electronic bulletin board. The Company 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, the Company, in connection with a change in
management, changed its name to Tengtu International Corp. This name change was
accomplished to reflect the Company's intended business direction and its
affiliation with certain Chinese firms in the Chinese educational software
industry.
There have been several changes in the management and control of the
Company from the time of its formation in 1988. The Company was incorporated by
Patrick C. Brooks and the initial management and directors of the Company were
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 of the Company and its President and
Chief Financial Officer and Stephanie A. Brooks resigned as a director of the
Company and its Secretary. On the same date, Mark A. DiSalvo became a director
and President and Chief Financial Officer of the Company and Leah DiSalvo became
a director and Secretary of the Company. On January 16, 1996, William C. Pierce
was also appointed as a director of the Company.
2
<PAGE>
On May 31, 1996, Mark DiSalvo resigned as a director and President and
Chief Financial Officer of the Company, Leah DiSalvo resigned as a director and
Secretary of the Company and William C. Pierce resigned as a director of the
Company. On that date, Pak Kwan Cheung was elected and appointed as Chairman of
the Company's Board of Directors and as its President and Chief Executive
Officer, Stephen Dadson as a director and the Company's Secretary, John Donald
Watt, as a director and the Company's Treasurer and Francis Fox and Gordon Reid
as directors.
In June, 1996, Francis Fox resigned as a Company director and Jing Lian
and Nan Hai became directors of the Company. In or about January, 1997, Michael
Corneilissen became President and a director of the Company. On March 14, 1997,
Stephen Dadson was removed a Secretary and as a director of the Company and
Michael Corneillesen was removed a President and a director of the Company by
the Company's Board of Directors in order to clear a management impasse and
promote more efficient management of the Company.
On April 25, 1997, Barry Clark and Millard Roth were appointed as
directors. Barry Clark was also appointed as the Company President and Millard
Roth as a Vice President. In June, 1997, Michael Nikiforuk was appointed as 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.
Since August 31, 1999, the management and control of the Company have
remained the same.
THE BUSINESS OF THE COMPANY
---------------------------
The Company's operations are carried out through a joint venture,
Tengtu United Electronics Development, Co. Ltd. ("Tengtu United"), and four
subsidiaries, TIC Beijing Digital Pictures Co., Ltd. ("TIC Beijing")(wholly
owned by the Company), Iconix International, Inc. ("Iconix")(44% owned by the
Company which constitutes a 30% voting interest as explained below under the
heading "ICONIX"), Edsoft Platforms (Canada) Ltd(60.2% owned by the Company) and
Edsoft Platforms (H.K.) Limited (wholly owned by Edsoft Platforms (Canada) Ltd.
and therefore, 60.2% owned by the Company). 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.
The largest shareholders, other than the Company, in Iconix are
(percentages reflect ownership of common stock unless otherwise stated):
Ayelsworth Park Holdings Inc., a Canadian corporation (4.7%), Plum Hollow
Investments Inc., an Ontario, Canada corporation (4.7%), Capital Partners Fund
I, an Ontario, Canadian limited partnership (100% of convertible preferred
shares), B.D. Clark Investments Inc., an Ontario, Canada corporation (10.3%),
Greg McLelland (10.3%), James G. Poole (10.3%) and William C. Harker (2.3%).
B.D. Clark Investments Inc. is a company owned and controlled by Barry
Clark, a Company director and its President. James G. Poole provides
financial consulting and accounting services to Iconix as an independent
contractor. Greg McLelland is an officer of Iconix.
Pursuant to a shareholders' agreement among the Iconix shareholders,
the consent of Capital Partners I is required for certain corporate actions
including, a change in the number of directors, articles of incorporation or
by-laws, a fundamental corporate change, the issuance, redemption, purchase or
other acquisition of shares in Iconix, declaration of dividends or
distributions, entering into contracts outside of the ordinary course of
business, any capital expenditure in excess of $100,000, appointment of
auditors, hiring of senior management with a compensation package in excess of
$100,000, establishment of subsidiaries and transactions with affiliates.
Under this shareholders' agreement, all shareholders, including
minority shareholders, have preemptive rights with respect to certain offerings
of stock in Iconix. In addition, Capital Partners I has the right to nominate
one of Iconix' six directors. None of the other minority shareholders may
nominate a director, however, Barry Clark, Greg McLelland, James Poole and Chris
Dundas, each of which is a minority shareholder, either individually, or through
a corporation they own or control, are Iconix directors. Pak Cheung, the
Company's Chief Executive Officer and Chairman of the Board of Directors is also
an Iconix director.
3
<PAGE>
The shareholders, other than the Company, 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%). An agreement among the
Company and these shareholders 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 shall
be employed by Edsoft Platforms (Canada) Ltd. as its Executive Vice President
and Vice President of Administration and Corporate Development.
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 $10,000
outside of the ordinary course of business.
TENGTU UNITED
-------------
Tengtu United is based in Beijing, China and is 57% owned by the
Company. The remaining 43% is owned by Tengtu China, which is unaffiliated with
the Company and 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, a
Tengtu director, 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 June 30, 2000 and approximately 25 independent
contractors working on software development.
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 approximately 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.
The Company had 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. 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 teachers and students to utilize
these programs. Accordingly, the marketing focus changed from sales of
individual titles through the Chinese retail channels to direct marketing of a
"Total Solution" to the school systems. The Company has not yet fulfilled its
additional commitment. Tengtu United was therefore 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 weak market for educational software in China sold through traditional
retail channels led to most of the losses reflected in Tengtu United's financial
statements. 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. Tengtu China has also provided Tengtu
United assistance with research and development. Tengtu United and Tengtu China
are continuing their significant role in China's initiative to establish an
electronic publishing infrastructure with the Chinese Ministry of Education and
Ministry of Information Technology. 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. Tengtu
4
<PAGE>
China is one of only eight companies that has been granted an electronic
publishing license in China and believes that it is the only 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 September, 2000.
With respect to the development and sale of application software
platforms to the K-12 market in mainland China, the Company is aware of the
following competitors: IBM China, Novell China and companies marketing Linux
based platforms. The Company has 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. The Company has 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 the Company is initially focusing. Tengtu United's competition,
with respect to educational software programs for use in China, consists of
numerous Chinese and foreign software manufacturers.
Tengtu United now focuses on the sale of educational software and
hardware systems to Chinese schools to strengthen the market for its software
products and exploit synergies with Iconix and its UserNet(TM) product discussed
below.
With the assistance of Tengtu China, Tengtu United is continuing its
work with the Chinese Ministries of Education and Information Technology to
advise them on computerized education and teaching and to assist in implementing
computerized education in the Chinese schools. 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. 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. Iconix' UserNet(TM)
software could be used in this project.
As of June 30, 1999, Tengtu United's software sales performance had
been poor because the educational software market has not yet developed as the
Company had anticipated. Specifically, Chinese schools lack adequate computer
hardware, networks and software platforms and Chinese teachers lack computer
training. However, Tengtu United has turned some of these problems into a
business opportunity by selling computer hardware, systems and systems
integration services to Chinese schools. In doing so, Tengtu United is also
creating a market for its software titles. Another reason for the Company's poor
software sales performance is computer software piracy, a major problem in
China.
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 Inc.'s publishing division, pursuant to a copyright
license agreement, will license Tengtu United to sell Microsoft's educational
software in China;
5
<PAGE>
7. The parties understand that this Agreement provides only a framework
and substantial implementation plans are subject to further agreement.
Tengtu realizes revenue from the sales of its software and a markup on
providing its "Total Solution," a bundled package of software marketed under the
name of Tengtu-Microsoft Total Solution to K-12 Schools. Tengtu is Microsoft
China's exclusive selling representative for the K-12 market in mainland China.
Both the Company's and Microsoft'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
translation costs. Certain of the Microsoft 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 trains and subsidizes the cost of training for the designee for
each school.
Sales are only recorded after the Total Solution is accepted by the
purchaser. Because Tengtu United views these contracts as the first of a series
of a potential series of many contracts, it has delayed invoicing, when
requested, until installation is complete. Because the software and hardware
offered by Tengtu United are new to the Chinese school system, the Company
believes that many schools and school districts will observe how Tengtu United
Total Solution is working before deciding whether to place an order. Also, the
Company wants 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, the Company's joint venture partner, and also
the largest hardware manufacturer in China. The second with is 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. Tengtu United has found it is more cost effective and
logistically more efficient to market to distributors who 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. The Company believes that this installation
bottleneck has now been solved as set forth below.
CURRENT TENGTU UNITED BUSINESS DEVELOPMENTS
Tengtu United continues to work with Tengtu China to capture market
share in China in the K-12 educational market. The Company believes that the
K-12 educational market is maturing and has significant growth opportunities.
The Company also believes that it is in an excellent position to capitalize on
its expertise and past experience to become a meaningful participant in this
market. Microsoft China and Tengtu United have cooperated to come up with a
solution to the Total Solution installation bottleneck and Tengtu United
believes that the problem has been solved. Tengtu United therefore believes it
can now generate more significant sales commencing September, 2000. Tengtu
United's management projects approximately U.S.$5 million in sales for the last
two quarters of the calendar year 2000.
6
<PAGE>
The Ministry of Education of the People's Republic of China has now
officially endorsed the Company's Total Solution package for a General
Elementary/Secondary (K-12) School Network Information System for China's
schools. The Company considers this endorsement on the national level to be very
important and further evidence of the Ministry of Education's support of the
Tengtu United's mandate to prepare China's educational infrastructure for the
21st century. The Company also believes that the endorsement sends a strong
signal to all school boards in China that the Ministry of Education expects
their full and serious cooperation in implementing its plan to modernize the
Chinese schools, in which Tengtu United is or will be a key component.
In September, 2000, the Ministry of Education itself placed an order
for the Total Solution for 8,000 schools and has committed to have the Total
Solution installed in remote areas. The Company plans cooperation with the
Ministry of Education in expediting the implementation of the Total Solution.
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, Tengtu's Total Solution software is now an ideal tool
for distance learning. With this addition, the Company has entered into a
license agreement with Internet technology leader, Netopia, Inc., so that it can
provide China's and Hong Kong's K-12 schools with a unique suite of customized
Internet solutions for e-education that supports the Company's e-commerce
objectives. The Total Solution is an IT based foundation that can easily be
linked to Netopia's customizable web platforms. The common objective of this
relationship is to create an e-educational portal of unprecedented size
and functionality as the Company and Netopia roll out their products and
services to China's 800,000 K-12 schools, encompassing 200 million students and
their families.
The goal of the Company in entering into the Netopia, Inc. license
agreement is for each school to have its own individual website that integrates
applications for teaching and learning, home/school communication and resource
sharing. In addition, each school is to have access to a complete suite of
Internet solutions customized to meet its specific e-commerce needs. This
product offering will act as a pipeline for transporting merchandise orders,
distance-learning courses, parent/grandparent registration charges and a host of
similar subscription fees.
Once the Total Solution project has been fully implemented with a
significant number of users in the school system, the Company plans to become an
ASP (Application Service Provider), and, through its strategic partnership with
Netopia, Inc., transform its education business model from its present state of
systems integrator/developer to high value added ASP/ICP (Application Service
Provider/Internet Content Provider).
TIC BEIJING
-----------
TIC Beijing is a wholly owned subsidiary of the Company which commenced
operations in July, 1997 and has ten employees. Two of the employees are
responsible for marketing, five are responsible for production and engineering
and three perform administrative functions. 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. TIC Beijing
continues to seek to expand its business to include pre-production,
co-production of television shows, distribution of foreign television programs
and co-productions of television cartoons. This expansion will require an
additional investment of approximately $3 million. Governmental approval is
required for the distribution and broadcast of foreign programs.
TIC Beijing's services are marketed by its own in-house marketing staff
with contacts in the Chinese television industry and through attendance at trade
shows and conferences.
7
<PAGE>
TIC Beijing's competition consists of five local Beijing studios.
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 at a lower cost than TIC Beijing. TIC
Beijing therefore is now planning to become a producer, instead of only a
service provider, to continue its position as a leader in the Chinese animation
industry. In addition, the Company plans to establish a connectivity and content
partnership for TIC Beijing so as to migrate Internet based applications for the
entertainment and multimedia industries.
TIC Beijing has a license to operate its business from the Chinese
government, which was granted by the 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 planed for Asia, North America and Europe.
The joint venture is also to develop and market ancillary products to Germs and
other animation series.
ICONIX
------
Iconix is a Toronto, Canada based company in which the Company had a
44% interest as of June 30, 2000. The preferred shares in Iconix, held by a
third party investor, Capital Partners I, are entitled to approximately 32% of
the combined voting power of all classes of Iconix stock. The Company owns
approximately 44% of the Iconix common stock which represents the remaining 68%
of the combined voting power of all classes of Iconix stock. Therefore, the
Company holds a 30% voting interest in Iconix. Iconix and its UserNet(TM)
product were acquired from Unisys Canada in May, 1997 for $214,000 [Canadian].
Iconix recently entered into an agreement to sell all of its
assets which is expected to close at the end of September, 2000. If this
transaction closes, the Company is expected to receive approximately
U.S.$650,000 for its share of Iconix.
Iconix has two employees and eleven independent contractors. The
independent contractors provide executive services, finance services, sales,
installation, technical and customer educational services.
Iconix develops and markets middleware network management software
exclusively for the K-12 educational software market worldwide. Iconix'
UserNet(TM) product allows non-technical school staff to manage complex computer
networks with an easy to use tool set. All computing resources, including
personal computers, printers, internet resources, software applications and
userfiles can be centrally managed through UserNet(TM), resulting in savings in
costs and administrative task time. Iconix has sold approximately 750 upgrades
since May 1997. Iconix had new sales of approximately 750 UserNet. The initial
cost for UserNet(tm) is $3,495 and Iconix charges a per hour/per diem cost to
install UserNet(tm) and familiarize the persons who will utilize the equipment.
There is a $500 annual charge for the use of the UserNet(tm) hotline.
Iconix is planning to introduce a Mandarin Chinese version of UserNet
to bundle with Tengtu United's software titles. The demonstration version of the
Mandarin version is now complete. By bundling UserNet with Tengtu United's
CD-ROM based courses in Mandarin, Tengtu United and Iconix are attempting to
become the major software supplier to the more than 800,000 Chinese schools with
over 200 million students. Both Iconix and Tengtu United plan to make use of TIC
Beijing's services to provide leading edge sound, multimedia and entertainment
content to their K-12 software.
8
<PAGE>
In March, 1999, Capital Partners I, a Canadian Corporation, invested
$999,600 (Canadian) in Iconix in exchange for 588 convertible preferred shares.
These funds have been used to finance Iconix' current activities as well as for
additional marketing and product development. To date, Iconix has expended
approximately $250,000 of that funding in defining and developing network
interface software for Novell Networks with NDS directories and for Windows 2000
ACTIVE directory services and anticipates spending another $250,000 for
development of these new products prior to December 31, 2000.
If Capital Partners I were to convert all of its preferred shares, it
would own 32% of Iconix' common stock and the Company would own 30%.
UserNet is marketed and distributed through Iconix' sales force and
through its web site at WWW.ICONIX.COM. Its sales force consists of three
independent contractors, working under Greg McLelland, Iconix' President, who
each devote substantially all of its time to marketing UserNet and its updated
versions. Iconix' UserNet name is a registered trademark in Canada and the
UserNet source code is copyrighted.
EDSOFT PLATFORMS (CANADA) LTD. AND EDSOFT PLATFORMS (H.K.) LIMITED
------------------------------------------------------------------
In July, 1999, the Company formed a joint venture company, Edsoft
Platforms (Canada) Ltd. ("Edsoft"), in which the Company has a 60% interest, to
market and sell educational software (including UserNet and software developed
in China by Tengtu United) through Edsoft Platforms (H.K.) Limited, a Hong Kong
company wholly owned by Edsoft, tailored to the educational market in Hong Kong.
In July, 1999, Edsoft received an investment of H.K.$2,000,000 from private
investors in the form of a loan. That loan is included in the Company's
financial statements on the line item titled "Related Party Loans Payable."
Edsoft is in the process of attempting to raise an additional U.S.$5 million in
working capital.
After June 30, 2000, Edsoft Platforms (H.K.) Limited underwent a major
restructuring in order to focus on sales of Multimedia Digital Classroom
software in Hong Kong. Sales commenced in July, 2000 and Edsoft Plaforms (H.K.)
Limited management expects that they will increase. The Company plans to involve
Edsoft Platforms (H.K.) Limited in its relationship with Netopia, Inc.,
described above, in order to enhance its growth and profitability.
ebiztengtu.com, Inc.
--------------------
On March 6, 2000, the Company formed ebiztengtu.com, Inc. in Delaware,
as a wholly owned subsidiary to focus on internet related businesses.
EMPLOYEES
The Company, exclusive of subsidiaries, has two full time employees
and four independent contractors.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
For the fiscal years ended June 30, 1998, 1999 and 2000, the Company
operated through its subsidiaries in China.
9
<PAGE>
ITEM 2. PROPERTY
------- --------
The Company does not own any significant physical properties. 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, 1999 and 1998 has been
charged as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
The Company is not currently a party to any pending legal proceeding,
nor does the Company know of any proceeding that any governmental authority may
be contemplating against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
No matter was submitted to a vote of the security holders during the
fourth quarter of the Company's fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY and RELATED STOCKHOLDER MATTERS
------- ---------------------------------------------------------------------
The principal market where the Company's common equity is traded is the
Nasdaq OTC Bulletin Board. The high and low bid prices of the Company's 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
These 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 June 30, 2000 there was one class of common equity held by
approximately 1000 holders of record, including those held in street name. No
dividends have been declared by the Company during the last two fiscal years.
There are no restrictions which affect or are likely to affect the Company's
ability to pay dividends in the future.
RECENT SALES OF UNREGISTERED SECURITIES
On July 20, 1999, the Company sold 750,000 shares of its common stock,
$.01 par value per share, to Zhang Fan Qi, a Company Director for $150,000 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.
11
<PAGE>
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 director of the
Company, 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 the
Company 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, the Company received an investment of
U.S.$1,500,000 in exchange for a four year Floating Convertible Debenture
("Debenture") convertible into shares of The Company's $.01 par value common
stock and a separate Common Stock Warrant ("Warrant") for the purchase of
1,500,000 shares of common stock. The purchaser of the Debenture and Warrant was
Top Eagle Holdings Limited, a British Virgin Islands company ("Top Eagle") that
is wholly owned by Yugang International Limited, a Hong Kong company engaged in
the trading of audio visual products and components, industrial equipment,
automobile parts, agricultural products, raw materials and other products in the
Central and Western parts of China.
The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
The Hong Kong and Shanghai Banking Corporation plus two percent. The Debenture
is convertible into The Company's Common Stock at a conversion price of U.S.$.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 Company 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
Company 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.
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 U.S.$3.5 million and receive additional warrants on
substantially the same terms. Top Eagle did not exercise its right to purchase
additional debentures. 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 Debenture and Warrant were offered and sold in reliance upon an
exemption from registration provided by Section 4(2) of the Act and Regulation D
promulgated thereunder. The facts relied upon for an exemption under Section
4(2) of the Act and Regulation D promulgated thereunder are as follows:
1. Top Eagle is an "accredited investor" as defined in Rule 501 of
Regulation D;
2. The Debenture and Warrant were offered and sold in a private
transaction without general solicitation or advertisement; and
3. Top Eagle executed an investment representation letter stating that
the Debenture and Warrant were acquired with an investment intent and not with a
view to their distribution or resale.
The full details of the Top Eagle investment are set forth in the
Company's December 23, 1999 Form 8-K which is incorporated herein by reference.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
------- -----------------------
The following is selected summary financial information of the Company
for the past five years of operations presented on a consolidated basis as
required by Section 301 of Regulation S-K.
<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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS of FINANCIAL CONDITION and RESULTS
of OPERATION
------- -----------------------------------------------------------------------
Liquidity and Capital Resources
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, the Company has deferred payment to consultants
and senior management until the next major financing.
The Company recorded an $8,985 recovery of bad debt from an
over-provision recorded in the previous year. During the year, the Company
issued common stock for services totaling $947,813, realized the decrease of
investment at equity of $80,147, due to losses of the Company's 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 shareholder director as described in Item 5
above. During the year, the Company issued shares for $175,725.
The Company 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 its largest operating entity (Tengtu United), create an
uncertainty about the Company's ability to continue as a going concern.
Management, however, has developed a plan to alleviate these factors to enable
the Company to continue as a going concern. The plan includes a private
placement of equity or convertible debenture of $ 2 to 5 million short term
financing to provide working capital to the Company in the next 6 months and
obtaining a $30 million equity line for the next 3 years. The equity line is
currently being negotiated by the Company which entered into a letter of intent
with respect thereto in September, 2000. The Company has also entered into
letters of intent with several investors to provide the above short term
financing.
13
<PAGE>
During the fiscal year ended June 30, 2000, the Company continued the
restructuring and the reduction of operating expenses to a minimum and deferred
payments of consulting and management fees. The Company issued a convertible
debenture of U.S. $1.5 million and received U.S. $250,000 (U.S. $150,000 for the
Company's shares and U.S. $100,000 short term loan) from a shareholder/director.
Iconix has entered into a letter of intent to sell all of its assets
and the Company is expected to receive about U.S. $650,000 in the next 12 months
from the sale if completed by the end of September, 2000.
Tengtu China has continued to provide funding for Tengtu United's
operations. The Total Solution is being shipped and installed in China and the
Company believes that sales may increase significantly prior to the end of
calendar year 2000 by up to U.S.$5 to 10 million.
The ability of the Company 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.
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, the Company deferred payments to its consultants and senior
management. At the end of the fiscal year ended June 30, 1999, the Company set
up a provision for bad debt of another $ 143,081 for overdue receivables. During
the fiscal year ended June 30, 1999, the Company 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 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, the Company 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, the Company 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.
14
<PAGE>
Fiscal Year 1998, 1999 and 2000 Comparative Operating Results
Revenues
--------
2000 1999 1998
-------- --------- -----------
358,026 624,121 3,223,170
The Company derived its 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
Research and development expenses were minimal in fiscal 2000 and
fiscal 1999 because they were funded by Tengtu China, the Company's 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.
15
<PAGE>
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.
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
The Company 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 the Company's 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.
16
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in the Management's Discussion and Analysis section above.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, levels of activity,
performance or achievement of the Company, or industry results, to be materially
different from any future results, levels of activity, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in the United States, China and Canada; the ability of the Company to
implement its business strategy; the Company's access to financing; the
Company's ability to successfully identify new business opportunities; the
Company's ability to attract and retain key executives; the Company's ability to
achieve anticipated cost savings and profitability targets; changes in the
industry; competition; the effect of regulatory and legal restrictions imposed
by foreign governments; the effect of regulatory and legal proceedings and other
factors discussed the Company's Form 10 and 10-Q filings. As a result of the
foregoing and other factors, no assurance can be given as to the future results
and achievements of the Company. Neither the Company nor any other person
assumes responsibility for the accuracy and completeness of these statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 each geographic region.
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.
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 $209,981. 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 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.
Because the Company's subsidiaries and investee operate in China, Hong
Kong, and Canada, its accounts receivable are also subject to foreign currency
exchange rate risk in the U.S. dollar/Chinese yen, U.S. dollar/Hong Kong dollar,
and U.S. dollar/Canadian dollar. These foreign currency exchange rate risks are
not hedged by the Company.
17
<PAGE>
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 793,847 793,847
Foreign 125,244 125,244
--------------- -----------
Total 919,091 919,091
=============== ===========
Accounts receivable, net
United States 0 0
Foreign 36,009 36,009
--------------- -----------
Total 36,009 36,009
=============== ===========
Accounts payable
United States 1,053,595 1,053,595
Foreign 637,063 637,063
--------------- -----------
Total 1,690,658 1,690,658
=============== ===========
The 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, the Company has no
substantial exposure to foreign currency rule exchange risk. Cash is maintained
by each subsidiary in its local currency.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------- -------------------------------------------
Tengtu International Corp. and Subsidiaries
CONTENTS
PAGE
----
Independent Auditor's Report F-1
Consolidated Financial Statements:
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
<PAGE>
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 (30,611) (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 tot he 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 lasses 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 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)
========== ========= ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
TREASURY UNAMORTIZED STOCK-
STOCK A DEFERRED HOLDERS'
COST COMPENSATION EQUITY
---- ------------ ------
<S> <C> <C> <C>
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>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
------- ------------------------------------------
On June 4, 1997, the Company engaged Deloitte & Touche, LLP as its
independent accountant. On September 17, 1997 Deloitte & Touche LLP resigned.
The reasons for the resignation are set forth in the Company's September 24,
1997 Form 8-K, which is hereby incorporated by reference.
As set forth in the Company's January 20, 1998 Form 8-K, which is
hereby incorporated by reference, on January 20, 1998, the Company retained
Moore Stephens, P.C. as its new independent auditor.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- --------------------------------------------------
Directors, Executive Officers, Promoters and Control Persons
The current Directors and Officers of the Company are:
Pak Kwan Cheung, Chairman of the Board and Chief Executive Officer (50)
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 a Chairman of the Board
and C.E.O. of the Company 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.
Barry Clark, Director and President (59)
During the past five years Mr. Clark was an Executive Vice President of
ISM, 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.
Nan Hai, Director (43)
During the past five years Nan Hai served as the President of Taiji
Computer Corporation, one of the joint venture participants in Tengtu United.
Taiji Computer Corporation is a computer technology company. Nan Hai currently
serves as a director of the Company's joint venture partner, Tengtu China as
well as a director of Tengtu United. Nan Hai has served as a Director of the
Company since June, 1996.
Jing Lian, Director and Vice-President (48)
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 of the Company since June 1996. Mr. Lian is also
currently the President of the Company's TIC Beijing subsidiary. 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, Director (54)
During the past five years, Mr. Watt has been a businessman and was a
Director General of Federal Department of Communications, Hull, Quebec, Canada.
Mr. Watt served as President of the Kerr-Watt Group, Ottawa, Canada, from
October 1990 to October 1992. Mr. Watt has been President of John D. Watt &
Associates, Ottawa, Canada, from November 1992 to the present. Mr. Watt has also
served as a director for Law Protection Benefits, Canada, from December 1994 to
the present. Mr. Watt has served as a Director of the Company since June, 1996
and was elected Vice President of the Multimedia Division on September 15, 2000
by the Company's Board of Directors.
Michael Nikiforuk, Director (46)
During the past five years, Mr. Nikiforuk has been the Executive Vice
President of Banro Explorations in Toronto, Canada. Mr. Nikiforuk has served as
a Director of the Company since, April, 1997 and was elected Executive Vice
President of Corporate Affairs on September 15, 2000 by the Company's Board of
Directors.
Gordon Campbell Reid, Director (60)
During the past five years, Mr. Reid has served as President of GenCon
Investments, Ltd. Mr. Reid has served as a Director of the Company since June,
1996 and is also a director of Systech Retail Systems, Inc.
Zhang Fan Qi, Director (41)
During the past five years, Zhang Fan Qi has served as Chairman of
Beijing Oriental Lian Fa Technology & Trade Group, Co. Ltd., one of the members
of Tengtu China, the Company's 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.
<PAGE>
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 the Company and was largely responsible for the Company obtaining
its strategic partnership with Netopia, Inc. and the reorganization of Edsoft
Platforms (H.K.) Ltd. From December, 1998 to October, 1999, Mr. Mavroudis was
Vice President of Operations of IvyNet, Inc. IvyNet, Inc. is a 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.
There are no persons nominated to become future directors of the
Company. There are no persons chosen to become Executive Officers not currently
serving as such. There currently are no employees aside from the Executive
Officers listed above and below.
SIGNIFICANT EMPLOYEES AND CONSULTANTS
Gregory McLelland, International Marketing and Distribution (34)
During the past five years, Mr. McLelland has worked as a General
Manager of Iconix International, an education courseware division of Unisys,
Canada, which became a subsidiary of the Company. He has also worked at Lexmark,
Canada, where he was responsible for banking and finance, and IBM Canada, where
he was a Marketing Representative with the IBM advanced Function Printing Unit
responsible for servicing the Ontario government.
Simon Hui, 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.,
Glas Aire Industries, Ltd., Yorkfit Micro Memory, Ltd., and Westeel a division
of Janock Steel Fabricating Co. Mr. Hui also currently serves as a director of
the Company's Edsoft Platforms (Canada), Ltd. and Edsoft Platforms (H.K.)
Limited subsidiaries. Mr. Hui began working with the Company 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.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, no Director or Executive Officer of the
Company 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.
ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
----------------------------------
No compensation was paid to any executive officers of the Company
during the fiscal year ended June 30, 2000. On March 29, 1999, the Company
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 the Company receives certain amounts of
financing. At that time, the Company 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, the Company has advanced $60,000 to Jack Lian, a Company
Director. The total payments deferred as of June 30, 2000 is $1,415,026.
COMPENSATION OF DIRECTORS
-------------------------
No cash compensation was paid to any directors of the Company during
its past three fiscal years. Options were granted to members of the Board of
Directors as set forth below.
Pursuant to a resolution passed by the Company's Board of Directors on
April 27, 1997, each outside director, who is not an employee or consultant to
the Company, 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.
CONSULTING AND EMPLOYMENT AGREEMENTS
------------------------------------
The material terms of the consulting and employment agreements between
the Company and the above directors and officers who have agreements with the
Company.
COMADEX INDUSTRIES LTD.
-----------------------
Effective October 15, 1999, the Company entered into a consulting
agreement with Comadex Industries, Ltd. ("Comadex") to retain the services of
Pak Kwan Cheung as the Company's 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 $10,000 per month, commencing
November 30, 1999, plus 7% of his base salary for the Canadian General Services
Tax;
(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.
<PAGE>
Tengtu's 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 Tengtu's
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 Tengtu or any Tengtu subsidiary that is
50% or more owned by Tengtu.
(6) Comadex shall receive 1% of Tengtu's net profits if Tengtu exceeds
pre-set profit targets and Tengtu's 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 Tengtu is 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 of the Company to perform, inter
alia, the following tasks: development and field implementation of strategies
for the Company's 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 of the Company. 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 the Company, and
500,000 shares of Company stock upon signing the agreement.
GREGORY MCLELLAND
-----------------
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. The agreement also provides for the possibility of performance and
incentive bonuses.
JING LIAN
---------
The Company and Jing Lian entered into an agreement effective January
1, 1996 for Mr. Lian to serve as a Vice President of the Company 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 the Company retained John D. Watt & Associates,
Ltd. to identify and develop strategic alliances to support the Company's
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.
NAN HAI
-------
On September 26, 1998, the Company entered into an agreement for
consulting services with Nan Hai to assist the Company in developing its
educational software business in China. The agreement with Mr. Hai provide for
compensation of $40,000 per year.
<PAGE>
1334934 ONTARIO LIMITED
-----------------------
On April 1, 2000, the Company entered into a consulting agreement with
1334934 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. The Company had the option to terminate the
agreement at the end of the probationary period with notice provided by
September 1, 2000. The Company 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 the Company's Board of Directors;
(5) The Company 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.
STOCK OPTION GRANTS
-------------------
The 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 by the Company's shareholders on December 29, 1998 for
two (2) million shares. The second stock option plan was approved by the
Company's shareholders on August 31, 1999 for three (3) million shares. 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 (1997
Plan). Each of the following options has an exercise price of $.218.
Pak Cheung, Chairman and CEO 300,000 shares
Barry Clark, President and Director 300,000 shares
Jack Lian, Director 300,000 shares
Nan Hai, 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
Sub-total 2,300,000 shares
The shortfall in the 1997 Plan was made up from shares included in the
1999 Plan.
* The exercise price of Mr. McLelland's options is $.25.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS and MANAGEMENT
-------- --------------------------------------------------------------
<TABLE>
<CAPTION>
1. Security Ownership of Management - as of June 30, 2000:
---------------------------------------------------------------------------------------------------------
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
TITLE BENEFICIAL BENEFICIAL PERCENT
OF CLASS OWNER OWNER OF CLASS
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$.01 par Pak Cheung - 7089 Frederick Ave. 3,870,750 16.2
common Burnaby, B.C. Canada V5J 3X8
$.01 par Jing Lian - 3806 169th Street 870,750 3.6
common Lynnwood, WA 98037
$.01 par John Watt - 335 Nepean Street 37,000 .15
common Ontario, Ottawa Canada
$.01 par Hai Nan - c/o the Company - 206-5050 800,000 3.3
common Kingsway, Burnaby, B.C. V5H 4H2
$.01 par Michael Nikiforuk - 155 University Ave. 150,000 .62
common Suite 1450, Toronto, Ontario M5H 3B7
$.01 par Zhang Fan Qi - c/o the Company, 206- 750,000 3.1
common 5050 Kingsway, Burnaby B.C. V5H 4H2
$.01 par Gordon Reid - 29 Riverbrook Road 196,448 .81
common Nepean, Ontario Canada K2H7W7
$.01 par B.D. Clark & Associates, Inc. 400,000 1.7
common 2253 Shardawn Mews, Missisauga,
Ontario, Canada L5C 1W6 **
$.01 par Simon Hui - c/o the Company, 205- 150,000 .62
common 5050 Kingsway, Burnaby B.C. V5H 4H2
<FN>
------------------------------------------------------------------------------------------------------
** Owned equally by Barry Clark and his wife, Brenda C. Clark.
</FN>
</TABLE>
2. SECURITY OWNERSHIP OF ALL 5% BENEFICIAL OWNERS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
TITLE BENEFICIAL BENEFICIAL PERCENT
OF CLASS OWNER OWNER OF CLASS
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$.01 par Pak Cheung - 7089 Frederick Ave. 3,870,750 16.2
common Burnaby, B.C. Canada V5J 3X8
$.01 par Geomat Holdings, Inc. - Charlotte House 1,540,000 6.4
common PON 4825, Nassau NP, Bahamas
Debenture
and warrant Top Eagle Holdings, Ltd. - c/o 4,500,000 18.8**
Yugang Int'l Ltd., Room 3301-4,
26 Harbour Rd., Hong Kong
--------------------------------------------------------------------------------
<FN>
* To the Company's knowledge, no shareholder of Geomat Holdings, Inc. is an
officer or director of the company. The Company has been advised that Basil
Shackelford is the President of Geomat Holdings, Ltd., who also possesses
Geomat's voting and investment powers.
** Top Eagle Holdings, Ltd. currently holds a debenture convertible into the
Company's common stock and 1,500,00 warrants. If Top Eagle Holdings, Ltd.
were to convert its debenture and exercise all of its warrants prior to
December 21, 2000, it would own 4,500,000 shares of the Company's common
stock. After December 21, 2000, the conversion price of the convertible
debenture increases from $.50 to $1.00.
</FN>
</TABLE>
<PAGE>
WARRANTS OUTSTANDING
--------------------
As of June 30, 2000, the following warrants are outstanding:
Holder Amount Exercise Price
------ ------ --------------
Top Eagle Holdings, Ltd. 1,500,000 $ .50 per share*
The Cavior Organization 50,000 $1.50 per share**
The Cavior Organization 50,000 $3.00 per share
* The exercise price for these options increases to $1.00 after December 21,
2000, $2.00 after December 21, 2001 and $4.00 after December 21, 2002.
** The Cavior Organization provides public relations and marketing services to
the Company. The warrants were issued in connection with a one year contract
entered into on August 1, 1999.
ITEM 13. CERTAIN RELATIONSHIPS and RELATED PARTY TRANSACTIONS
-------- ----------------------------------------------------
Due to the continued downsizing of the staff of Tengtu United, the
operations of the venture during the fiscal year ended June 30, 2000 were
carried out by Tengtu China. As a result, Tengtu United has a receivable balance
of $170,123. At June 30, 1999, the joint venture had a receivable balance from
Tengtu China 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 $1,492,003 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 tern 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 at the closing price on the day the capital is received by the
Company.
On September 9, 1999 Zhang Fan Qi, 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. 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. Zhang Fan Qi has elected to convert the loan.
Zhang Fan Qi, a Director of the Company, is the controlling shareholder
of Beijing Oriental Lian Fa Technology & Trade Group Co., Ltd. ("Oriental Lian
Fa") which owns 51% of Tengtu China. Zhang Fan Qi has been instrumental in
having Tengtu China provide operating capital to Tengtu United. Zhang Fan Qi has
also capitalized and registered Tengtu Electronic Publishing, a Chinese company
to be used for a proposed joint venture with the Company, at an approximate cost
of $240,000.
As compensation to Zhang Fan Qi, the Company's Board of Directors
elected to purchase a 10% interest in Tengtu China from Oriental Lian Fa at its
fair market value. The documentation for the purchase has not yet been signed by
the parties.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-------- ----------------------------------------------------------------
(a) 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. Iconix International, Inc. financial statements for the fiscal year
ended June 30, 2000.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Index of Exhibits required by Item 601 of regulation S-K:
1. Exhibit (3)(i) - Articles of Incorporation (filed as part of
the Company's Form 10 filed on May 25, 2000 and incorporated
herein by reference);
2. Exhibit (3)(ii) - By-Laws (filed as part of the Company's Form
10 filed on May 25, 2000 and incorporated herein by reference);
3. Exhibit (9) - Voting Trust (filed as part of the Company's
Form 10 filed on May 25, 2000 and incorporated herein by
reference);
4. Exhibit (10) - Material contracts;
- 1999 Non-Qualified Stock Option Incentive Plan (filed as
part of the Company's Form 10 filed on May 25, 2000 and
incorporated herein by reference),
- English Translation of Microsoft Cooperation Agreement
(filed as part of the Company's Form 10 filed on May 25,
2000 and incorporated herein by reference),
- Consulting Agreement between Tengtu and B.D. Clark and
Associates, Ltd. (filed as part of the Company's Form 10
filed on May 25, 2000 and incorporated herein by reference),
- Tengtu United Joint Venture Agreement and the amendment
thereto (filed as part of the Company's Form 10 filed on May
25, 2000 and incorporated herein by reference),
- Iconix agreement with Dell Products, L.P. (filed as part
of the Company's Form 10 filed on May 25, 2000 and
incorporated herein by reference),
- Employment agreement between Tengtu and Jing Lian (filed
as part of the Company's Form 10 filed on May 25, 2000 and
incorporated herein by reference),
- Consulting agreement between Comadex Industries, Ltd. and
Tengtu (filed as part of the Company's Form 10 filed on May
25, 2000 and incorporated herein by reference),
<PAGE>
- UserNetTM Software Acquisition Agreement (filed as part of
the Company's Form 10 filed on May 25, 2000 and incorporated
herein by reference),
- Top Eagle Holdings, Ltd. Convertible Debenture and Warrant
Purchase Agreement contained in the Company's December 23,
1999 Form 8-K,
- Top Eagle Holdings, Ltd. Investor Rights Agreement
contained in the Company's December 23, 1999 Form 8-K,
- Top Eagle Holdings, Ltd. Convertible Debenture contained
in the Company's December 23, 1999 Form 8-K,
- Top Eagle Holdings, Ltd. Common Stock Warrant contained in
the Company's December 23, 1999 Form 8-K,
- Independent Contractor Agreement among the Company,
1334945 Ontario Limited and Gregory Mavroudis dated April 1,
2000,
- Letter of Intent for Cooperation between Guandong Southern
Natural Museum Co., Ltd. and Tic Beijing,
- License Agreement between the Company and Netopia, Inc.
dated June 21, 2000.
- Edsoft Platforms (H.K.) Ltd. Shareholders' Agreement dated
May, 2000.
5. Exhibit(16) - Letter re: Change in Certifying Accountant
(filed as part of the Company's Form 10 filed on May 25, 2000 and
incorporated herein by reference);
6. Exhibit (21) - List of Subsidiaries (filed as part of the
Company's Form 10 filed on May 25, 2000 and incorporated herein
by reference);
7. Exhibit(99) - Additional Exhibits
- Tengtu International Corp. and Subsidiaries audited
financial statements for the fiscal year ended June 30,
2000,
- Tengtu International Corp. and Subsidiaries audited
financial statements for the fiscal year ended June 30, 1999
- Iconix International, Inc. financial statements for the
fiscal year ended June 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto authorized.
TENGTU INTERNATIONAL CORP.
--------------------------
(Registrant)
By:/s/
------------------------------
Pak Kwan Cheung, Chairman of the Board of Directors
and Chief Executive Officer
Date: September 27, 2000
By:/s/
------------------------------
Simon Hui, Controller
Date: September 27, 2000
By: /s/
------------------------------
Barry Clark, President and Director
Date: September 27, 2000
By: /s/
------------------------------
Jing Lian, Director
Date: September 27, 2000
By: /s/
------------------------------
Nan Hai, Director
Date: September 27, 2000
By: /s/
------------------------------
Michael Nikiforuk, Director and Executive Vice President
Date: September 27, 2000
By: /s/
------------------------------
John D. Watt, Director and Executive Vice President
Date: September 27, 2000
By: /s/
------------------------------
Gordon Reid, Director
Date: September 27, 2000
By: /s/
------------------------------
Zhang Fan Qi
Date: September 27, 2000
Supplemental Information to be Furnished With Reports Filed pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act
No annual report or proxy materials have been sent to securitiyholders,
but are to be furnished subsequent to the filing of this Form 10-K.
<PAGE>
