FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...........to...............
Commission File Number .....N/A
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)
Suite 3825
First Canadian Place, 100 King Street West
Toronto, Ontario, Canada M5X 1E3
--------------------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(416) 368-8400
--------------------------------------------------------------
(Registrant's telephone number, including Area Code)
--------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report)
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 preceding 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 No X
-------- --------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PREVIOUS FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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 X
-------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: there were 24,090,607 shares
outstanding as of June 29, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Tengtu International Corp. and Subsidiaries
Consolidated Balance Sheet
for the quarter Ended March 31, 2000
(UNAUDITED)
AS AT AS AT AS AT AS AT
MAR 31, 2000 DEC 31, 1999 SEPT 30, 1999 JUNE 30, 1999
------------ ------------ ------------- -------------
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,311,103 1,592,330 315,822 115,552
Accounts receivable, net of allowance for
doubtful accounts of $209,112 22,617 69,726 69,424 50,625
Due from related party 304,053 294,063 289,080 323,287
Prepaid expenses 36,102 37,627 47,262 29,903
Inventories 17,633 38,517 38,592 34,448
Other receivables 22,023 27,011 26,131 13,346
------------ ------------ ------------ ------------
Total Current Assets 1,713,531 2,059,274 786,311 567,161
PROPERTY AND EQUIPMENT, net 1,031,567 1,072,005 1,125,491 1,205,760
INVESTMENTS - at equity 0 0 84,640 80,147
OTHER ASSETS 13,144 13,144 13,144 58,844
------------ ------------ ------------ ------------
TOTAL ASSETS $ 2,758,242 3,144,423 2,009,586 1,911,912
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,035,000 1,822,767 1,892,892 1,880,185
Due to related party consultants 1,487,140 1,299,549 1,179,549 1,059,549
Other liabilities 47,774 47,732 47,732 47,930
------------ ------------ ------------ ------------
Total Current Liabilities 3,569,914 3,170,048 3,120,173 2,987,664
------------ ------------ ------------ ------------
SHAREHOLDERS' LOAN 361,455 361,455 357,935 0
------------ ------------ ------------ ------------
CONVERTIBLE DEBENTURE 1,500,000 1,500,000 0 0
Less: Discount on Convertible Debenture (324,389) (346,154)
------------ ------------ ------------ ------------
1,175,611 1,153,846 0 0
------------ ------------ ------------ ------------
STOCKHOLDERS' DEFICIT
Common stock, par value $.01 per share;
authorized 100,000,000 shares;
issued 23,557,607 shares
Preferred stock, par value $.01 per share;
authorized 10,000,000 shares;
issued -0- shares 235,577 235,577 194,777 194,777
Additional paid in capital 10,355,484 10,319,546 9,347,158 9,220,096
Paid in capital -
convertible debenture 1,153,846 1,153,846 0 0
Paid in capital - warrant 346,154 346,154 0 0
Accumulated deficit (14,401,979) (13,563,906) (10,976,558) (10,483,089)
Cumulative translation adjustment (37,036) (31,359) (33,115) (6,752)
------------ ------------ ------------ ------------
(2,347,954) (1,540,142) (1,467,738) (1,074,968)
Less: Treasury stock, at cost,
78,420 common shares (784) (784) (784) (784)
------------ ------------ ------------ ------------
Total Stockholders' Deficit (2,348,738) (1,540,926) (1,468,522) (1,075,752)
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT 2,758,242 3,144,423 2,009,586 1,911,912
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31,2000
(UNAUDITED)
Year to Date Quarter Ended Dec 31 Sept 30
Mar 31, 2000 Mar 31, 2000 1999 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SALES $ 187,723 24,498 95,724 67,501
COST OF SALES 335,228 139,908 121,025 74,295
------------------------------------------------------------
GROSS INCOME(LOSS) (147,505) (115,410) (25,301) (6,794)
------------------------------------------------------------
OPERATING EXPENSES
Research and development 0 0 0 0
General and administrative 2,470,018 696,266 1,302,436 471,316
Advertising 0 0 0 0
Selling 41,468 11,822 12,819 16,827
Depreciation and amortization 12,033 4,588 4,018 3,427
------------------------------------------------------------
2,523,519 712,676 1,319,273 491,570
------------------------------------------------------------
OTHER INCOME (EXPENSE)
Equity earnings in investee (84,640) 0 (89,133) 4,493
Interest income 12,385 11,778 205 402
Other income 0 0 0 0
Interest expense-
convertible debenture (1,175,611) (21,765) (1,153,846) 0
------------------------------------------------------------
(1,247,866) (9,987) (1,242,774) 4,895
------------------------------------------------------------
NET LOSS $ (3,918,890) (838,073) (2,587,348) (493,469)
============================================================
NET LOSS PER COMMON SHARE $ (0.20) (0.04) (0.13) (0.03)
WEIGHTED AVERAGE NUMBER OF SHARES 19,976,152 20,846,069 19,614,237 19,477,607
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2000
(UNAUDITED)
YEAR TO DATE MAR 31 DEC 31 SEPT 30
2000 2000 1999 1999
---- ---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net Loss $(3,918,890) (838,073) $(2,587,348) $ (493,469)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 172,826 57,827 55,015 59,984
Noncash compensation expense on
shares issued for services 1,122,563 35,938 1,013,188 73,437
Noncash compensation expense on
granting of stock options 53,625 0 0 53,625
Noncash paid-in capital -
convertible debenture 1,153,846 0 1,153,846 0
Investment-at equity 80,147 0 84,640 (4,493)
Changes in operating assets
and liabilities
Decrease(Increase)
on operating assets:
Accounts receivable 28,008 47,109 (302) (18,799)
Prepaid Expenses (6,199) 1,525 9,635 (17,359)
Inventories 16,815 20,884 75 (4,144)
Other receivables (8,677) 4,988 (880) (12,785)
Due from related party 19,234 (9,990) (4,983) 34,207
Other assets 45,700 0 0 45,700
Increase (Decrease) on operating liabilities:
Accounts Payable 154,815 212,233 (70,125) 12,707
Due to related party consultants 427,591 187,591 120,000 120,000
Other liabilities (156) 42 0 (198)
--------------------------------------------------------
Net Cash Used by Operating Activities (658,752) (279,926) (227,239) (151,587)
--------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Propery and equipment (33,891) (17,389) (8,771) (7,731)
Disposal of Property and equipment 35,258 0 7,242 28,016
--------------------------------------------------------
Net Cash Used by Investing Activities 1,367 (17,389) (1,529) 20,285
--------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in shareholders' loan 361,455 0 3,520 357,935
Increase in convertible debenture 1,175,611 21,765 1,153,846 0
Pain in capital - warrant 346,154 0 346,154 0
--------------------------------------------------------
Net Cash Provided by Financing Activities 1,883,220 21,765 1,503,520 357,935
--------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (30,284) (5,677) 1,756 (26,363)
--------------------------------------------------------
INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS 1,195,551 (281,227) 1,276,508 200,270
CASH AND CASH EQUIVALENTS,
beginning of period 115,552 1,592,330 315,822 115,552
--------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,311,103 1,311,103 1,592,330 315,822
========================================================
</TABLE>
NON CASH INVESTING AND FINANCING ACTIVITIES
The Company issued common stock valued at $939,750 in exchange for services for
the quarter ended December, 1999. The Company issued a convertible debenture at
$1,500,000 with a discount of $346,154 for the quarter ended December 31, 1999.
The interest amortized on convertible debenture of $1,153,846 was also expensed.
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE QUARTER ENDED MARCH 31, 2000
(UNAUDITED)
COMMON STOCK ADDITIONAL PAID-IN PAID-IN
------------ PAID-IN CAPITAL CAPITAL COMPREHENSIVE
SHARES AMOUNT CAPITAL CONV.DEBT WARRANT INCOME(LOSS)
------ ------ ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance-June 30, 1998 19,297,107 $192,972 $9,394,651 0 0 --
Issuance of common stock
related to deferred
Compensation 180,500 1,805 8,258 -- -- --
Amortization of deferred
compensation related to
stock options and common
stock for services -- -- -- -- -- --
Other Comprehensive income:
Foreign currency adjustment -- -- -- -- -- 2,583
Comprehensive Income:
Net loss -- -- -- -- -- --
Comprehensive Income -- -- -- -- -- (1,886,399)
---------- -------- ---------- --------- -------- ------------
(1,883,816)
============
Balance-June 30, 1999 19,477,607 194,777 9,402,909 0 0
Amortization of deferred
compensation related to
stock options and common
stock for services
Issuance of stock options
for services - at fair value -- -- 53,625 -- -- --
Other Comprehensive Income:
Foreign currency adjustment 0 -- -- -- -- (26,363)
Comprehensive Income:
Net loss quarter ended
Sept 30, 1999 -- -- -- -- -- --
Comprehensive Income -- -- -- -- -- (493,469)
---------- --------- ---------- --------- -------- ------------
(519,832)
============
Balance - Sept 30, 1999 19,477,607 $194,777 $9,456,534 0 0
Other Comprehensive Income:
Foreign currency adjustment -- -- -- -- -- 1,756
Issuance of common stock 4,080,000 40,800 898,950 -- -- --
Paid-in Capital-Conv Deb -- -- -- 1,153,846 -- --
Paid-in Capital-Warrant -- -- -- -- 346,154 --
Amortization of deferred
compensation related to
stock options and common
stock for services -- -- -- -- -- --
Comprehensive Income
Net loss-quarter ended
Dec 31, 1999 -- -- -- -- -- --
Comprehensive Income -- -- -- -- -- (2,587,348)
---------- -------- ---------- ---------- ---------- ------------
(2,585,592)
============
Balance - Dec 31, 1999 23,557,607 $235,577 10,355,484 1,153,846 346,154
Other Comprehensive Income:
Foreign currency adjustment -- -- -- -- -- (5,677)
Amortization of deferred
compensation related to
stock options and common
stock for services -- -- -- -- -- --
Comprehensive Income
Net loss-quarter ended
Mar 31, 2000 -- -- -- -- -- --
Comprehensive Income -- -- -- -- -- (838,073)
---------- -------- ----------- ---------- ------------ ------------
(843,750)
============
Balance - Mar 31, 2000 23,557,607 $235,577 10,355,484 1,153,846 346,154
COMMON
STOCK TREASURY UNAMORTIZED STOCK-
ACCUMULATED COMPREHENSIVE STOCK AT DEFERRED HOLDERS'
DEFICIT INCOME(LOSS) COST COMPENSATION DEFICIT
----------- ------------ ---------- ------------ ------
Balance-June 30, 1998 $(8,596,690) (9,335) $ (784) $(476,563) $ 504,251
Issuance of common stock
related to deferred
Compensation -- -- -- -- 10,063
Amortization of deferred
compensation related to
stock options and common
stock for services -- -- -- 293,750 293,750
Other Comprehensive income:
Foreign currency adjustment -- 2,583 -- -- 2,583
Comprehensive Income:
Net loss (1,886,399) -- -- -- (1,886,399)
Comprehensive Income -- -- -- -- --
----------- --------- ---------- ---------- ------------
Balance-June 30, 1999 (10,483,089) (6,752) (784) (182,813) (1,075,752)
Amortization of deferred
compensation related to
stock options and common
stock for services -- -- -- 73,437 73,437
Issuance of stock options
for services - at fair value -- -- -- -- 53,625
Other Comprehensive Income:
Foreign currency adjustment -- (26,363) -- -- (26,363)
Comprehensive Income:
Net loss quarter ended
Sept 30, 1999 (493,469) -- -- -- (493,469)
Comprehensive Income -- -- -- -- --
------------ -------- ---------- ----------- ------------
Balance - Sept 30, 1999 (10,976,558) (33,115) $ (784) $ (109,376) $(1,468,522)
Other Comprehensive Income:
Foreign currency adjustment -- 1,756 -- -- 1,756
Issuance of common stock -- -- -- -- 939,750
Paid-in Capital-Conv Deb -- -- -- -- 1,153,846
Paid-in Capital-Warrant -- -- -- -- 346,154
Amortization of deferred
compensation related to
stock options and common
stock for services -- -- -- 73,438 73,438
Comprehensive Income
Net loss-quarter ended
Dec 31, 1999 (2,587,348) -- -- -- (2,587,348)
Comprehensive Income -- -- -- -- --
------------ -------- --------- ----------- ------------
Balance - Dec 31, 1999 (13,563,906) (31,359) $ (784) (35,938) (1,540,926)
Other Comprehensive Income:
Foreign currency adjustment -- (5,677) -- -- (5,677)
Amortization of deferred
compensation related to
stock options and common
stock for services -- -- -- 35,938 35,938
Comprehensive Income
Net loss-quarter ended
Mar 31, 2000 (838,073) -- -- -- (838,073)
Comprehensive Income -- -- -- -- --
------------ -------- ----------- --------- ------------
Balance - Mar 31, 2000 (14,401,979) (37,036) $ (784) 0 (2,348,738)
</TABLE>
<PAGE>
NOTES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company for the nine month period ended March 31, 2000 have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and include all adjustment (consisting of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
operating results and cash flows for those periods. These condensed consolidated
financial statements and notes thereto should be read in conjunction with the
audited consolidated financial statements for the fiscal year ended June 30,
1999 and the unaudited consolidated financial statements for the six months
ended December 31, 1999 in the Company's Form 10 filing.
The accompanying unaudited condensed consolidated financial statements do
not contain comparative columns for the interim period ended March 31, 1999. The
Company has only recently gained the capability of producing quarterly financial
statements, filing its first Form 10-Q for the fiscal quarter ended December 31,
1999. Prior to that time, because of financial reporting problems in China, and
differing fiscal years of the Company's Chinese subsidiaries and joint venture
from the Company, interim financial statements were not produced.
1. Principles of Consolidation
In accordance with Accounting Research Bulletin 51, in the case of the
Company's Tengtu United Electronics Development, Co. Ltd. ("Tengtu United")
joint venture and Edsoft Platforms (Canada), Ltd. and Edsoft Platforms (H.K.)
Limited subsidiaries, the Company has charged to income the losses applicable to
the minority interests as the losses were in excess of the minorities' interests
in the equity capital of the joint venture and subsidiaries.
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 of 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.
2. $1.5 million Convertible Debenture and Warrant
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 Tengtu's $.01 par value common stock ("Common Stock")
and a separate Common Stock Warrant ("Warrant") for the purchase of 1,500,000
shares of Common Stock. The purchaser of the Debenture and Warrant is Top Eagle
Holdings Limited, a British Virgin Islands company ("Top Eagle"). The Debenture
is due December 15, 2003 and provides for accrual of interest beginning December
15, 2000 at a rate equal to the best lending rate of The Hong Kong and Shanghai
Banking Corporation plus two percent. The Debenture is convertible into Tengtu's
Common Stock at a conversion price of U.S.$.50 during the first year, U.S.$1.00
during the second year, U.S.$2.00 during the third year and U.S.$4.00 on any
date thereafter. The unpaid balance of principal and interest outstanding at
maturity, if any, may be converted by the holder into the Company's Common Stock
at the then existing market price minus twenty percent.
The Warrant gives the holder the right to purchase 1,500,000 shares of the
Company's Common Stock at 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. The Investor Rights
Agreement also provides the holder(s) of the Debenture, Warrant and or the
shares issued upon conversion or exercise thereof, with registration and certain
other rights. The effective interest rate of the debenture is 8.5%.
Because no portion of the price paid by Top Eagle was for the Warrants,
the Warrants were assigned a value by the Company and the Debenture was
discounted by that amount. The interim financial statements reflect entries of
$346,154 for a discount to the Debenture and paid in capital for the Warrant.
This value was assigned as follows. On the date that the Debenture and Warrant
were sold to Top Eagle, the Company's stock was trading at $1.60 per share and
the Warrant was exercisable at $1.00. Therefore, the Warrant had a value between
$.00 and $.60 per share. The Company chose to value the Warrant at $.30 per
share. The gross amount of the Debenture and Warrant were therefore $1.5 million
(Debenture) plus $450,000 (Warrant - $.30 x 1,500,000) for a total of $1.95
million. Of the $1.95 million, the Warrant represents 23.08% ($450,000/$1.95
million). The discount to the Debenture was calculated by multiplying the
percentage of the total represented by the Warrant (23.08%) by the total
proceeds received from the sale ($1.5 million). The discount to the Debenture
was therefore equal to $346,154 and the Debenture was discounted to $1,153,846
($1.5 million - $346,154).
On the date the Debenture was issued, the conversion price was $.50 and the
market price was $1.60. The conversion feature was valued at the full adjusted
amount of the Debenture, after valuation of the Warrant, of $1,153,846.
Appropriate adjusting entries were made in the balance sheet, income statement,
statement of shareholders deficit and statement of cash flows in accordance with
EITF 98-5.
3. Issuances of Shares
During the nine month period ended March 31, 2000, the Company issued
4,080,000 shares of its common stock as follows. All issuances were either based
on market value at the time of issuance or were the result of the exercise of
options previously issued.
SHAREHOLDER NO. OF SHARES SHARE PRICE TOTAL PROCEEDS
----------- ------------- ----------- --------------
Zhang Fan Qi (Director) 750,000 $.200 $150,000
Hecht & Steckman, P.C. 150,000 .125 18,750
(legal counsel)
Hecht & Steckman, P.C. 60,000 .100 6,000
The Cavior Organization 120,000 .125 15,000
(P.R. Firm)
Pak Kwan Cheung (CEO) 3,000,000 .250 0
issued as compensation
for past services effective
October 15, 1999 -----------
4,080,000
4. Commitment to Issue Shares/Subsequent Events
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, 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.
<PAGE>
5. H.K.$2,000,000 Loan to Edsoft Platforms (Canada) Ltd.
In July, 1999, Goodwill Technologies Ltd. loaned Edsoft Platforms (Canada)
Ltd. H.K.$2,000,000 ($U.S.261,000) in exchange for a debenture convertible into
Tengtu's common stock if the loan is not repaid in three years.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
-------------------------------
For the quarter ended March 31, 2000, net cash used by operating activities
totaled $279,926 including net loss of $838,073 and depreciation of $57,827 and
amortization of non cash compensation expense on shares issued for services of
$85,938. Accounts receivable, prepaid expenses, inventories and other
receivables decreased by $47,109, $20,884, $1,525 and $4,988, respectively,
primarily due to the scaling down and product refocusing of Tengtu United
operations at the final stage, in preparation for the sales activities to be
generated from the venture between Tengtu United and Microsoft (China) Co., Ltd.
("Microsoft China"). Due from related party increased slightly by $9,990,
primarily due to an advance of $7,500 to an officer.
Accounts payable increased by $212,233 primarily due to accruals of
interest expenses and professional fees. To conserve cash, the Company has not
been paying its senior management and consultants. Due to related party
consultants and management increased by another $187,591 during the quarter for
an accumulated total of $1,487,140. Payments to the consultants and management
will not be made until the Company is successful in raising additional funds in
a major financing.
Net cash used by investing activities amounted to $17,389 primarily due to
acquisitions of computer equipment for Edsoft Platforms (H.K.) Limited
operations.
Net cash provided by financing activities increased by $21,765 due to the
amortization of the discount on the $1,500,000 convertible debenture issued to
Top Eagle Holdings, Ltd.
During the period ended March 31, 2000, Tengtu China, the Company's joint
venture partner in Tengtu United, funded most of the Company's operating
expenses with respect to Tengtu United.
Revenues
--------
Sales decreased by 74.4% from $95,724 for the quarter ended December 31,
1999 to $24,498 for the quarter ended March 31, 2000 primarily due to
significant sales contracts for TIC Beijing which did not materialize and delays
in shipments to the Chinese schools of the Tengtu-Microsoft Total Solution with
complete installation. The Total Solution shipments, which were expected to
begin in the fiscal quarter ended March 31, 2000, have been delayed for the
reasons set forth in the "Trends, Events, or Uncertainties" section below.
Gross profit
------------
There was a negative gross profit of $115,410 for the quarter ended March
31, 2000 due to smaller sales activities which did not offset the following
fixed overhead costs: rent, depreciation, salaries and other production costs.
Research and Development Expenses
---------------------------------
Research and development continued during the quarter ended March 31, 2000
with the emphasis of product refocusing of Tengtu United's operations and Edsoft
Platforms (H.K.) Limited localization requirements to convert software for the
Hong Kong market. Research and development expenses were funded by Tengtu
China, the Company's joint venture partner in Tengtu United, because additional
financing had not been obtained by the Company.
<PAGE>
General and Administrative Expenses
-----------------------------------
General and administrative expenses decreased by 46.5% from $1,302,436 for
the quarter ended December 31, 1999 to $696,266 for the quarter ended March 31,
2000, primarily due to a one-time non-cash compensation expense to the Company's
Chairman and Chief Executive Officer for past services rendered in the amount of
$750,000 in the quarter ended December 31, 1999.
Selling
-------
Selling expenses decreased slightly by 7.8% from $12,819 for the quarter
ended December 31, 1999 to $11,822 for the quarter ended March 31, 2000 due to
decreased sales activities.
Depreciation and Amortization
-----------------------------
Depreciation and amortization expenses increased slightly from $4,018 for
the quarter ended December 31, 1999 to $4,588 for the quarter ended March 31,
2000 due to the purchase of some computer equipment for the Edsoft Platforms
(H.K.) Limited operations.
Minority interests in subsidiary's earnings
-------------------------------------------
The minority interest's share of losses of Edsoft Platforms for the first
nine months ended March 31, 2000 is $109,831 which will be carried forward and
be absorbed by future earnings.
Minority interest in the loss of Tengtu United is limited to the minority's
capital investment. Any loss not realized by the minority will be carried
forward and absorbed in the year(s) in which Tengtu United has net income or in
the year(s) that the minority contributes more capital. As at March 31, 2000,
the cumulative loss of Tengtu United being carried forward is $1,631,545.
Trends, Events or Uncertainties
-------------------------------
Under the terms of the strategic partnership agreement announced on January
27, 2000, Microsoft China formed a strategic partnership to bundle its software
with Tengtu United's software. Microsoft China will install software, train
teachers, provide technical support, contribute funds for marketing jointly
developed educational software products, and establish a demonstration center
for such products.
Tengtu United has begun installing IT solutions and curriculum software for
the first group of 70,000 schools designated by the Chinese government for year
2000. The Chinese government is providing financing to local school systems to
purchase mandated technology infrastructure improvements.
Shipments and installations under the Tengtu United/Microsoft China
strategic partnership agreement have been delayed.
The major reasons that shipments and installations have been delayed are as
follows:
1. Teachers in the Chinese school system are in the process of receiving
training on the use of the hardware and software that is part of the Total
Solution. There is a low level of computer literacy among the teachers
being trained which has led to a need for revising the training methodology
utilized. In addition, a number of Chinese schools have not yet appointed
teachers to receive training.
2. Certain teacher training materials are still in the process of being
translated and modified to suit the teachers' level of computer literacy.
Therefore, those teachers who do not have a working knowledge of the
English language and adequate computer knowledge are unable to utilize
these materials.
3. Many Chinese school boards that have ordered Total Solution products have
not yet prepared the installation sites with cables, air conditioning and
other necessary equipment.
4. A number of Chinese school boards and distributors have not formed
installation teams or made suitable arrangements for the installation of
Total Solution products.
5. A number of Chinese school boards which have received funding from the
Chinese Government to purchase Information Technology products have not yet
placed any orders for either hardware or software.
6. Tengtu China, Tengtu United and Microsoft China are discussing the
possibility of revising the Total Solution software CD to include the
latest version of Microsoft's Windows 98 program.
7. A planned product demonstration center that is part of the Tengtu
United/Microsoft China strategic partnership agreement has not yet been
opened.
8. There has been grey market selling of Microsoft software by unauthorized
distributors causing confusion among Tengu United's distributors and
end-users of the Total Solution.
Both Tengtu United and Microsoft China, along with the Chinese school boards,
are currently working to resolve each of the above issues. All contracts that
have been signed for the Total Solution remain in place and all efforts are
being made to make deliveries and installations as soon as possible. The Chinese
schools which have completed implementation of the Total Solution have indicated
their satisfaction with the products and software.
The Company believes that Tengtu China, the Company's joint venture partner
in Tengtu United, holds one of only seven electronic publishing licenses granted
by the Chinese government. To the best of the Company's knowledge, Tengtu
China's electronic publishing license is the only one which covers electronic
publication of educational materials. Tengtu China has conveyed that license to
Tengtu Electronic Publishing ("TEP"), which has been formed and registered in
Beijing, China. Pending a capital contribution by the Company, in the form of
cash or the Company's common stock, it will become a stockholder in TEP, or form
a joint venture. This would entitle the Company to certain specific exclusive
rights to the use, export and/or import of electronically published educational
materials. The Company is in the process of ascertaining the estimated value of
these electronic publishing rights to be in a position to decide if this is an
appropriate investment and, if so, how much to invest.
Tengtu China is endeavoring to obtain additional support from the Ministry
of Education, in the form of the Ministry's approval on the "Total Solution"
products offered by Tengtu United, as well as the Agriculture Bank, in the form
of a "Policy Loan" made available to all schools purchasing the "Total
Solution." Both the Company and Tengtu China are continuing with the efforts on
product development in order to maintain a leading edge over competitors.
TIC Beijing Digital Pictures, Ltd. ("TIC Beijing") has entered into a joint
venture with two leading Canadian production companies, Crawleys i Inc. and
Boomstone Entertainment Inc., to co-produce high quality prime-time
entertainment programs worth approximately $50 million. TIC Beijing will conduct
a major portion of the animation work, utilizing 3D animation production values,
for the initial project, which is 26 half-hour segments of a cartoon called
"Germs." The implementation of this joint venture is subject to obtaining
financing, most of which will qualify for funding support from Canadian film
agency programs under Canada-China co-production treaties. TIC Beijing will
share as a producer in the distribution rights and merchandising rights.
<PAGE>
TIC Beijing has signed a letter of intent with Guangdong Southern Natural
Museum Co. Ltd. to co-produce and globally market 224 episodes of high-quality
science programs with a production value of more than $14 million. The
integrated animation/live-action programs, featuring entertainment and
educational values for family audiences (children ages 7-14), are intended for
domestic and foreign distribution via television, cable and internet, as well as
exhibits in theaters and museums.
Iconix International, Inc. ("Iconix"), which is partially owned by the
Company, has formed a partnership with Novell and Dell Computers to provide a
comprehensive set of educational networking solutions for K-12 teachers in
Canada.
Edsoft Platforms (H.K.) Limited and Edsoft Platforms (Canada) Ltd. were
established in July, 1999 to provide a "Total Solution" for IT education in Hong
Kong. Edsoft kicked-off the marketing campaign in Hong Kong in February, 2000
and the Company has generated revenue since May, 2000. Sales contracts have been
signed for delivery in the summer of 2000.
Internal and External Sources of Liquidity
------------------------------------------
The Company received US $1.5 million financing from Top Eagle Holdings,
Ltd., a British Virgin Islands Company, in December, 1999. Proceeds will be used
to step up the Company's marketing activities throughout China and Hong Kong.
The Company received $250,000 from a private investor in December, 1999.
$150,000 was for the purchase of restricted common shares and $100,000 was a
short-term loan. Proceeds provided the working capital for the Company.
The Company has been seeking financing for working capital as well as
funding for future business expansion.
Material Commitments for Capital Expenditures and Sources of Funds
------------------------------------------------------------------
The Company has no material commitments unless and until it obtains
additional financing.
Significant Income or Expense Items
-----------------------------------
See explanation above.
Tengtu United allocated most of its resources to obtain (1) the approval of
the Digital Library System Torch project from the Chinese government and (2) the
strategic partnership agreement with Microsoft (China). The Digital Library
System is to be a computerized database and catalog of educational books and
research materials.
Material Changes from Last Quarter
----------------------------------
See explanation above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company operates through subsidiaries located principally in China and
an investee in Canada; the administrative office is in Vancouver, Canada. The
Company grants credit to 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.
The Company established an allowance for doubtful accounts at March 31,
2000 of $209,112. The Company believes any credit risk beyond this amount would
be negligible.
At March 31, 2000, the Company had approximately $1.2 million of cash
in banks uninsured. The Company has 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 and
Canada, its accounts receivable are also subject to foreign currency exchange
rate risk in the U.S. dollar/Chinese yen and U.S. dollar/Canadian dollar and
U.S. dollar/Hong Kong dollar. These foreign currency exchange rate risks are not
hedged by the Company.
As of March 31, 2000, no customer accounted for more than 10% of total
sales.
<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 1,067,967 1,067,967
Foreign 243,136 243,136
--------- ---------
Total 1,311,103 1,311,103
========= =========
Accounts receivable, net
United States 0 0
Foreign 348,693 348,693
--------- ---------
348,693 348,693
Total ======= =======
Accounts payable
United States 1,050,791 1,050,791
Foreign 2,519,123 2,519,123
--------- ---------
Total 3,569,914 3,569,914
========= =========
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 exchange risk. Cash is maintained by each
subsidiary in its local currency.
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-K 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently a party to any pending legal proceeding, nor
does the Company know of any legal proceeding that any governmental authority
may be contemplating against the Company.
Item 2. Changes in Securities and Use of Proceeds.
(a) No constituent instruments defining the rights of the holders of the
Company's $.01 par value per share common stock have been materially modified
during the fiscal quarter ended March 31, 2000.
(b) No rights evidenced by the Company's $.01 par value per share common stock
have been materially limited or qualified by the issuance or modification of any
other class of securities during the fiscal quarter ended March 31, 2000.
(c) No securities were sold by the Company during the fiscal quarter ended March
31, 2000 which were not registered under the Securities Act of 1933, as amended.
(d) The Company did not sell any securities during the fiscal quarter ended
March 31, 2000.
Item 3. Defaults Upon Senior Securities.
During the fiscal quarter ended March 31, 2000, there have not been any
material defaults in the payment of principal, interest, a sinking or purchase
fund installment, or any other material default not cured within 30 days, with
respect to indebtedness of the Company or any of its significant subsidiaries
exceeding 5% of the total assets of the Company and its consolidated
subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter has been submitted to a vote of the Company's security holders,
through solicitation of proxies or otherwise, during the fiscal quarter ended
March 31, 2000.
Item 5. Other Information.
The Company has no additional information top report that would be required
to be reported on Form 8-K.
Item 6. Exhibits and Reports on Form 8-K.
(a) Index of Exhibits
(2) Not Applicable
(3)(i) The Company's Certificate of Incorporation, and the amendments
thereto, have been filed as exhibits to its Form 10 dated May 25,
2000.
(3)(ii) The Company's Restated By-Laws have been filed as exhibits to its
Form 10 dated May 25, 2000.
(4) Instruments defining the rights of security holders, including
indentures - See the Company's Certificate of Incorporation and the
Amendments thereto.
(10) Material contracts - the following have been filed or referenced as
exhibits in the Company's Form 10 dated May 25, 2000:
- 1999 Non-Qualified Stock Option Incentive Plan
- English Translation of Microsoft Cooperation Agreement
- Consulting Agreement between the Company and B.D. Clark and
Associates, Ltd.,
- Tengtu United Joint Venture Agreement and the amendment
thereto,
- Iconix agreement with Dell Products, L.P.,
- Employment agreement between the Company and Jing Lian,
<PAGE>
- Consulting agreement between Comadex Industries, Ltd. and the
Company,
- UserNetTM Software Acquisition Agreement,
- Consulting Agreement between the Company and B.D. Clark and
Associates, Ltd.,
- 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.
<PAGE>
(11) Not applicable.
(15) Not applicable.
(18) Not applicable.
(19) Not applicable.
(22) Not applicable.
(23) Not applicable.
(24) Not applicable.
(27) Financial Data Schedule
(99) Not applicable.
(b) No reports on Form 8-K have been filed for the fiscal quarter ended March
31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENGTU INTERNATIONAL CORP.
-----------------------------
(Registrant)
Date: June 30, 2000 Pak Kwan Cheung
------------- ------------------------------
(Name)
/s/
------------------------------
(Signature)
Chairman and Chief Executive Officer
-------------------------------------
(Title)
