SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
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TENGTU INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 77-0407366
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(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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (416) 368-8400
----------------------------
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered Each class is to be so registered
Tengtu International Corp. Nasdaq OTC Bulletin Board
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common stock $.01 par value per share
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Securities to be registered pursuant to Section 12(g) of the Act:
Tengtu International Corp. $.01 par value common stock
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(Title of class)
<PAGE>
ITEM 1. BUSINESS
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BACKGROUND INFORMATION ON THE COMPANY AND ITS SUBSIDIARIES
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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.
On August 20, 1993, the Company changed its name to Tower Broadcast,
Inc. 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 28, 1996, the Company 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.
THE BUSINESS OF THE COMPANY
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The Company's operations are carried out through a joint venture,
Tengtu United Electronics Development, Co. Ltd. ("Tengtu United"), and four
subsidiaries, TIC Beijing Electronics Co., Ltd. ("TIC Beijing")(wholly owned by
the Company), Iconix International, Inc. ("Iconix")(44% owned by the Company),
Edsoft Platforms (Canada) Ltd(wholly owned by the Company) and Edsoft Platforms
(H.K.) Limited (55% 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.
TENGTU UNITED
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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 3
full time employees as of June 30, 1999 and 25 independent contractors working
on software development.
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<PAGE>
Tengtu United develops educational and entertainment software for sale
to kindergarten through 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.
Many Chinese schools lack computer systems, networks, operating systems
and teachers with computer knowledge. Therefore, Tengtu United also provides
information technology solutions to Chinese K-12 schools by providing hardware,
networking and operating systems.
With the assistance of Tengtu China, Tengtu United is continuing its
work with the Chinese Ministry of Education and Ministry of 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 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.
Tengtu United has entered the final stages of software development for
the Digital Library System and General School Computer Networking System. The
Company's management believes that the software developed for these projects
will be useful to Chinese K-12 schools and will generate revenues to the Company
beginning in late 1999.
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, the Tengtu United and Tengtu China entered into a
"Cooperation Agreement" with the Microsoft (China) Co., Ltd. ("Microsoft China")
which generally provides as follows:
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<PAGE>
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;
7. The parties understand that this Agreement provides only a framework
and substantial implementation plans are subject to further agreement.
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.
As of March 1, 2000, Tengtu United has received purchase orders from
3070 Chinese schools for hardware and software products with an average purchase
order value of $2,500.
The Company had committed an additional $6,000,000 in funding to Tengtu
United for the fiscal year ended June 30, 1998 which it was unable to raise.
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 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 Ministry of
Education and Ministry of 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. Tengtu China is one of only eight companies that has been
granted an electronic publishing license in China and the only company in China
with a license to publish educational software. The license is for one year and
is renewable each year thereafter upon approval from the Chinese Government.
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<PAGE>
In the future, Tengtu United plans to focus 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 product
discussed below.
Tengtu United's competition in China consists of numerous Chinese and
foreign software manufacturers
TIC BEIJING
- -----------
TIC Beijing is a wholly owned subsidiary of the Company which commenced
operations in July, 1997 and has 40 employees. Five of the employees are
responsible for marketing, thirty are responsible for production and engineering
and five 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.
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.
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.
TIC Beijing has a license to operate its business from the Chinese
government which is reviewed each year. There is no other significant government
approval or regulation of its business.
ICONIX
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Iconix is a Toronto, Canada based company in which the Company had a
44% interest as of June 30, 1999. Iconix and its UserNet(TM) product were
acquired from Unisys Canada in May, 1997. Iconix has 2 employees and 9
independent contractors.
Iconix develops and markets middleware network management software
exclusively for the K-12 educational software market worldwide. Iconix' UserNet
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, resulting in savings in costs and
administrative task time. UserNet is already installed in over 1,500 schools on
over 70,000 computers in the United States, Canada, France, South Africa and
China.
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<PAGE>
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.
In March, 1999, Capital Partners I, a Canadian Corporation, invested
$999,600 (Canadian) in Iconix in exchange for 588 convertible preferred shares.
These funds will be used to finance Iconix' current activities as well as for
additional marketing and product development.
UserNet is marketed and distributed through Iconix' sales force and
through its web site at WWW.ICONIX.COM. 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
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In July, 1999, the Company formed a joint venture company, Edsoft
Platforms (Canada) Ltd. ("Edsoft"), in which the Company has a 55% 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. Edsoft is in the process of attempting to raise
an additional U.S.$5 million in working capital.
Edsoft Platforms (H.K.) Limited initiated its marketing campaign in
Hong Kong in February, 2000 and the Company anticipates that revenue will begin
to be generated in approximately April 2000.
ebiztengtu.com, Inc.
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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
six independent contractors.
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<PAGE>
PLAN OF OPERATION FOR THE REMAINDER OF FISCAL 2000
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Under the terms of the strategic partnership cooperation agreement
announced on January 27, 2000, Microsoft (China) Ltd. is to license its
proprietary operating and educational software to the Company, install software,
train teachers, provide technical support, contribute funds for marketing
jointly developed educational software products and establish a demonstration
center for such products in China.
Tengtu United has begun installing information technology solutions and
curriculum software for the first group of 70,000 schools designated by the
Chinese government for such installation in the calendar year 2000. The Chinese
government is providing financing to some local school systems to purchase
mandated technology infrastructure improvements from the Company. Shipments
commenced in February, 2000 and Tengtu United plans continue its efforts to
complete installation of information technology solutions and curriculum
software at all 70,000 schools designated by the Chinese government.
Tengtu China, the Company's joint venture partner in Tengtu United,
holds one of only eight electronic publishing licenses granted by the Chinese
government. 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, either in the form of cash or the Company's common stock, it will
become a stockholder in TEP or, form a joint venture, and be entitled to certain
specific exclusive rights to the use, export and/or import of electronic
publication of 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 and in what form to make that investment.
TIC Beijing has entered into a joint venture with two leading Canadian
production companies, Crawleys, Inc. and Boomstone Entertainment, Inc., to
co-produce prime-time entertainment programs estimated to be 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 "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 and merchandising
rights.
Iconix has formed a partnership with Novell, Inc. and Dell Computer
Corp. to provide a comprehensive set of educational networking solutions for
K-12 teachers in Canada.
Edsoft (Hong Kong) Limited initiated its marketing campaign in Hong
Kong in February, 2000 and the Company anticipates that revenue will begin to be
generated in approximately April 2000.
In the remainder its fiscal year, the Company will also seek to obtain
additional financing. On March 1, 2000, the Company entered into a term sheet
with an NASD member broker-dealer in which the Company is seeking to raise
$5,000,000 through a private placement to accredited investors. Also, the
Company is in negotiations with a Hong Kong merchant bank for it to invest
$5,000,000 for a minority interest in its newly formed ebiztengtu.com, Inc.
subsidiary.
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<PAGE>
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
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The Company operates principally in two geographic areas: China and
Canada. Following is a summary of information by area for the years ended June
30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Net sales to unaffiliated customers: FOR THE YEAR ENDED JUNE 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
China $ 624,100 $ 3,223,200 $ 2,125,700
Canada 1,720,800 1,423,200 0
----------- ----------- ------------
$ 2,344,900 $ 4,646,400 $ 2,125,700
=========== =========== ============
Income (loss) from operations:
China $ (678,900) $(1,999,000) $(1,891,100)
Canada (148,300) 29,000 (24,500)
----------- ----------- ------------
(827,200) (1,970,000) (1,915,600)
Other income 39,500 58,400 110,300
General corporate expenses (875,200) (2,307,400) (2,063,100)
Net loss as reported in accompanying statements $(1,662,900) $(4,219,000) $(3,868,400)
=========== =========== ===========
Identifiable assets:
China 1,744,400 $ 2,475,600 $ 4,561,500
Canada 864,100 479,700 252,500
----------- ----------- ------------
2,608,500 2,955,300 4,814,000
General corporate assets 87,300 200,900 950,000
----------- ------------
Total assets as reported in accompanying statements $ 2,695,800 $ 3,156,200 $ 5,764,000
=========== =========== ===========
</TABLE>
There were no interarea sales in fiscal 1999, 1998 or 1997.
Identifiable assets are those that are identifiable with operations in
each geographical area. General corporate assets consist primarily of
cash, cash equivalents, fixed assets, and prepayments.
ITEM 2. FINANCIAL INFORMATION
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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.
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<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
total assets $ 576 $ 750,576 $ 5,763,961 $ 3,156,191 $ 2,695,822
total sales 0 0 2,135,066 4,646,355 2,344,873
income (loss) from 0 (12,239) (3,868,453) (4,219,004) (1,662,947)
continuing operations
income (loss) from continuing 0 (.0001) (.22) (.22) (.09)
operations per common share
dividends declared per 0 0 0 0 0
common share
</TABLE>
MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------
RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES
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The Company has relied on $7,693,527 capital raised during the fiscal
year ended June 30, 1997 pursuant to Regulation S and section 4(2) of the
Securities Act of 1933, as amended.
For the year ended June 30, 1999, net cash provided by operating
activities totaled $41,141 including net loss of $1,662,947 and depreciation and
amortization of $314,108. Pre-paid expenses, inventories, advances to suppliers
and other receivables decreased by $5,307, $191,164, $122,415 and $3,199
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 due from related party increased by $184,529,
$44,238 and $32,762 primarily due to longer payment terms extended to Iconix
customers and an advance of $30,000 to an officer.
Accounts payable, accrued expenses and due to related party consultants
increased by $556, $109,853 and $481,124 respectively, offset slightly by other
liabilities of $12,284. To conserve cash, the Company has deferred payments to
consultants and senior management of approximately $481,000.
At the end of the fiscal year ended June 30, 1999, the Company set up a
provision for bad debt totaling $143,081 for overdue receivables, issued common
stock with a value of $22,563 for services and expensed $50,000 in compensation
costs on granting of stock options.
During the year, $669,023 was generated by Iconix' sale of 558
convertible preferred shares with a coupon rate of 9.5%.
Net cash used by investing activities amounted to $73,380 primarily due
to acquisitions of machinery and equipment for TIC Beijing's Animation Centre.
There were no funds generated by financing activities during the year.
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<PAGE>
For the year ended June 30, 1998, net cash used by operating activities
totaled $1,409,062 including net loss of $4,219,004 and depreciation and
amortization of $311,041. Prepaid expenses, inventories, advances to suppliers,
other receivables decreased by $559,611, $248,840, $180,908 and $90,560
respectively primarily due to scaling down and product refocusing of Tengtu
United's operations at the end of the year. Accounts receivable increased by
$199,544 due to the commencement of Iconix and TIC Beijing operations in July,
1997. Accounts payable and accrued expenses increased by $1,286,264 and
$266,146. To conserve cash, the Company deferred payments to consultants of
$518,936. Included in the accounts payable 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, used common stock for
services of $62,500 and expensed compensation costs on granting of stock options
of $50,000. Net cash used by investing activities was $947,612 primarily due to
acquisitions of machinery and equipment for TIC Beijing's Animation Centre.
There were no funds generated by financing activities during the fiscal year
ended June 30, 1999.
The Company incurred a net loss of $1,662,947 for the fiscal year ended
June 30, 1999, and, as of that date, had a working capital deficiency of
$1,933,885. These factors, as well as a significant downsizing and product
refocusing by Tengtu United, the Company's largest operating entity, create an
uncertainty about the Company's ability to continue as a going concern. However,
the Company's management developed a plan of operation to mitigate these factors
and to enable the Company to continue as a going concern. The Company's plan of
operation includes obtaining funds by private placement, the reduction of
operating expenses, deferral of payment of consulting fees, the expansion of
Iconix with $669,023 raised by the sale of Iconix convertible preferred shares,
as well the items discussed in the "Plan of Operation for the Remainder of
Fiscal 2000," set forth above.
REVENUES
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The Company derived its revenues from its systems integration,
educational and entertainment software, and animation businesses. Sales
decreased by 49.5% from $4,646,355 for the fiscal year ended June 30, 1998 to
$2,344,873 for the fiscal year ended June 30, 1999, primarily due to the
downsizing and product refocusing of Tengtu United's operations.
Sales by Tengtu United for the fiscal year ended June 30, 1999 were
$30,344 ($2,776,605 in fiscal year ended June 30, 1998), TIC Beijing $593,777
($446,565 in fiscal year ended June 30, 1998) and Iconix $1,720,752 ($1,423,185
in fiscal year ended June 30, 1998) respectively.
GROSS PROFIT
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Gross profit margins, expressed as a percentage of sales, decreased
from 11.4% for the fiscal year ended June 30, 1998, to 11.0% for the fiscal year
ended June 30, 1999, due to higher overhead costs per unit on smaller sales.
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<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
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Research and development expenses decreased from $511,889 for the
fiscal year ended June 30, 1998, to $1,440 for the fiscal year ended June 30,
1999, due to the downsizing and product refocusing of Tengtu United's
operations. Research and development expenses were supported by Tengtu China,
Tengtu United's Chinese partner, because an expected additional US $6,000,000
financing was not obtained and funds were thereafter needed to implement the
cooperation agreement with Microsoft (China) Ltd..
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses decreased by 49.5% from $3,482,105
for the fiscal year ended June 30, 1998, to $1,757,356 for the fiscal year ended
June 30, 1999, primarily due to the significant downsizing and product
refocusing of the operations of the Company and Tengtu United.
BAD DEBT
- --------
Bad debt increased by 114.3% from $66,898 for the fiscal year ended
June 30, 1998 to $143,347 for the fiscal year ended June 30, 1999 due to a
provision for overdue accounts receivable.
ADVERTISING
- -----------
Advertising expense decreased by 88.1% from $139,550 for the fiscal
year ended June 30, 1998, to $16,621 for the fiscal year ended June 30, 1999,
due to the downsizing and product refocusing of operations of Tengtu United.
SELLING
- -------
Selling expenses decreased by 82.2% from $299,101 for the fiscal year
ended June 30, 1998 to $53,333 for the fiscal year ended June 30, 1999,
primarily due to the downsizing and product refocusing of operations of Tengtu
United.
DEPRECIATION
- ------------
Depreciation expenses charged to operations decreased by 45.9% from
$119,262 for the fiscal year ended June 30, 1998, to $64,517 for the fiscal year
ended June 30, 1999, primarily due to the downsizing and product refocusing of
the operations of Tengtu United.
WRITE DOWN OF GOODWILL
- ----------------------
The Company recorded a loss of $180,000 from the write down of goodwill
during the fiscal year ended June 30, 1998. As a result of the Company's losses
during the fiscal year ended June 30, 1998 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 (a joint venture) of $200,000 ($100,000 cash and 2,000,000 common shares
valued at $.05 per share) purchased in June 1996. As of June 30, 1998, goodwill
of $200,000 and related accumulated amortization of $20,000 was written off.
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<PAGE>
INTEREST INCOME
- ---------------
Interest income decreased by 82.6% from $22,578 for the fiscal year
ended June 30, 1998 to $3,923 for the fiscal year ended June 30, 1999, primarily
due to the decrease in cash available for investments during the current year.
OTHER INCOME
- ------------
Other income decreased by 6.6% from $38,088 for the fiscal year ended
June 30, 1998 to $35,585 for the fiscal year ended June 30, 1999. Other income
was primarily attributable to sales of technical support services and software
copyrights generated by Tengtu United.
MINORITY INTERESTS IN SUBSIDIARY'S EARNINGS
- -------------------------------------------
The share of Iconix' loss for the fiscal year ended June 30, 1999 is
$83,075 and the cumulative investment up to June 30, 1998 was $77,054. $77,054
of loss was absorbed in the fiscal year ended June 30, 1999 and the remaining
balance of $6,021 will be carried forward to be absorbed by future earnings.
Tengtu China's interest in Tengtu United's loss is limited by its
capital investment. Any loss not realized by Tengtu China will be carried
forward to be absorbed in the year(s) in which Tengtu United has net income or
in the year(s) that Tengtu China contributes more capital. As at June 30, 1999,
the cumulative loss of Tengtu United being carried forward is $1,601,840.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
The Company operates through subsidiaries located principally in
Beijing, China and Toronto, Canada; the administrative office is in Vancouver,
Canada. The Company grants credit to its customers in both geographic regions.
At June 30, 1999, approximately 53% of the accounts receivable balance was due
from customers in Canada. As of June 30, 1999, balances from one customer
accounted for approximately 28% of the accounts receivable balance.
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,
1999 of $209,981. The Company believes any credit risk beyond this amount would
be negligible.
At June 30, 1999, the Company had approximately $403,000 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.
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<PAGE>
Because the Company's subsidiaries 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. These foreign
currency exchange rate risks are not hedged by the Company.
ITEM 3. 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:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
--------
<S> <C> <C>
2000 $ 80,810
2001 66,075
2002 51,340
------
Total $ 198,225
=======
</TABLE>
Rent expense for the years ended June 30, 1999, 1998 and 1997
has been charged as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
General and administrative expense $102,380 $ 808,051 $235,379
Research and development 0 110,810 112,767
Selling expense 8,900 79,531 23,357
Cost of sales 52,114 72,257 0
-------- ---------- --------
Total rent expense $163,394 $1,070,649 $371,503
======== ========== ========
</TABLE>
-13-
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
1. Security Ownership of Management - as of February 23, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
TITLE BENEFICIAL BENEFICIAL PERCENT
OF CLASS OWNER OWNER OF CLASS
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
$.01 par Pak Cheung - 7089 Frederick Ave. 1,070,750 5.2
common
Burnaby, B.C. Canada V5J 3X8
$.01 par Jing Lian - 3806 169th Street 870,750 4.19
common
Lynnwood, WA 98037
$.01 par John Watt - 335 Nepean Street 37,000 .18
common
Ontario, Ottawa Canada
$.01 par Hai Nan - c/o the Company - 206-5050 870,750 4.19
common
Kingsway, Burnaby, B.C. V5H 4H2
$.01 par Michael Nikiforuk - 155 University Ave., 400,000 1.92
common Suite 1450, Toronto, Ontario M5H 3B7*
$.01 par Zhang Fan Qi - c/o the Company, 206- 750,000 3.61
common 5050 Kingsway, Burnaby B.C. V5H 4H2
$.01 par Gordon Reid - 29 Riverbrook Road 353,224 1.7
common
Nepean, Ontario Canada K2H7W7
------------------------------------------------------------------
$.01 par B.D. Clark & Associates, Inc. 500,000 2.41%
common 2253 Shardawn Mews, Missisauga,
Ontario, Canada L5C 1W6
------------------------------------------------------------------
<FN>
* Includes 200,000 shares held in the name of Beckston Investments Limited, 3-5
Goldies Terrace, Douglas, Isle of Man.
</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
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
$.01 par Pak Cheung - 7089 Frederick Ave. 1,070,750 5.2
common
Burnaby, B.C. Canada V5J 3X8
$.01 par Geomat Holdings, Inc. - Charlotte House 1,540,000 7.42
common
PON 4825, Nassau NP, Bahamas
- --------------------------------------------------------------------------------
</TABLE>
WARRANTS OUTSTANDING
As of June 30, 1999, the Company does not have any warrants
outstanding.
-14-
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
- ------- --------------------------------
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 Mr. 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 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 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.
-15-
<PAGE>
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.
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.
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 (42)
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 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.
-16-
<PAGE>
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 6. EXECUTIVE COMPENSATION
- ------- ----------------------
For the fiscal year ended June 30, 1999, the following compensation was
paid to Directors and Officers of the Company:
COMPENSATION OF EXECUTIVE OFFICERS
- ----------------------------------
No compensation was paid to any executive officers of the Company
during the fiscal year ended June 30, 1999. 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.
The following list of payments deferred as of June 30, 1999.
B.D. Clark & Associates Inc.
(Barry Clark, President and Director) $545,026
Corporate Growth Assistance Ltd.
(Millard Roth - former director) $120,000
Nan Hai, Director $ 86,665
Xiao Feng Lin, Presedent of Tengtu United $ 86,665
Simon Xu, Officer of tengtu United $ 86,665
John Watt, Director $250,000
Jing Lian, Director $173,340
-17-
<PAGE>
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 officer who have agreements with the
Company.
COMADEX INSUSTRIES 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.
Tengtu's Common Stock was trading at approximately $.10 per
share in October 1999.
-18-
<PAGE>
(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 . 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.
-19-
<PAGE>
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
$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.
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 on April 25, 1997 for two (2) million shares. The
second stock option plan was approved on March 29, 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 (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, General Manager - Iconix 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.
-20-
<PAGE>
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
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
- ------- ----------------------------------------------------
In the normal course of business with Tengtu China during the fiscal
year ended June 30, 1999, 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.
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, the Company's joint venture partner in
Tengtu United. Tengtu China has a 43% interest in the Tengtu United. During the
current and past fiscal year, Tengtu China has been providing operating capital
to Tengtu United. In addition, Tengtu China borrowed approximately $4.6 million
from two Chinese banks to fund the Torch Projects being administered by Tengtu
United. Zhang Fan Qi personally guaranteed those loans. Mr. Zhang 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.
The Company and its Compensation Committee are currently considering
whether Zhang Fan Qi should be compensated in some fashion for being
responsible, either directly or indirectly, for providing operating capital to
Tengtu United and for funding and registering Tengtu Electronic Publishing when
the Company was not able to provide the necessary funds. Zhang Fan Qi has
requested compensation in the form of stock or options to purchase stock, rather
than cash.
ITEM 8. 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 9. MARKET PRICE OF AND DIVIDENDS ON THE 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:
-21-
<PAGE>
<TABLE>
<CAPTION>
HIGH/ASK LOW/BID
-------- -------
<S> <C> <C>
3rd Quarter 1997 - 5/8 1/8
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
</TABLE>
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 March 10, 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.
ITEM 10. 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 $250,000 in
cash. The sale was made pursuant to an exemption from registration under the
Securities Act of 1933, as amended (the "Act") provided by Section 4(2) thereof.
The facts relied upon for an exemption under Section 4(2) of the Act
are as follows:
1. The securities were offered and sold in a private transaction
without general solicitation or advertisement;
2. Zhang Fan Qi is a sophisticated investor, and 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;
-22-
<PAGE>
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 Tengtu's $.01 par value common stock
and a separate Common Stock Warrant ("Warrant") for the purchase of 1,500,000
shares of common stock. The purchaser of the Debenture and Warrant was Top Eagle
Holdings Limited, a British Virgin Islands company ("Top Eagle") that is wholly
owned by Yugang International Limited, a Hong Kong company engaged in the
trading of audio visual products and components, industrial equipment,
automobile parts, agricultural products, raw materials and other products in the
Central and Western parts of China.
The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
The Hong Kong and Shanghai Banking Corporation plus two percent. The Debenture
is convertible into Tengtu's Common Stock at a conversion price of U.S.$.50
during the first year, U.S.$1.00 during the second year, U.S.$2.00 during the
third year and U.S.$4.00 on any date thereafter. The unpaid balance of principal
and interest outstanding at maturity, if any, may be converted by the holder
into Tengtu Common Stock at the then existing market price minus twenty percent.
The Warrant gives the holder the right to purchase 1,500,000 shares of
Tengtu common stock at U.S.$1.00 per share during the first year, U.S.$2.00 per
share during the second year and U.S.$4.00 thereafter. The Warrant shall become
void three years after issuance.
In connection with the purchase of the Debenture and Warrant, Tengtu
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 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:
-23-
<PAGE>
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.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
- -------- -------------------------------------------------------
The stock to be registered by the Company is its common stock, $.01 par
value per share, which has the following characteristics:
1. Voting Rights - each share of the Company's common stock is
entitled to one vote at a meeting of shareholders shall be
entitled to one vote. Pursuant to the Company's Certificate of
Incorporation and By-Laws, a majority of the votes present, in
person or by proxy, are necessary to take action; except that
in order to elect directors, a plurality of votes is necessary
and any "Business Combination Transaction" requires a vote of
80% of all outstanding shares. "Business Combination
Transaction" is defined in the Company's Certificate of
Incorporation as:
(a) any merger or consolidation of the
Corporation or any Subsidiary with (i) an
Interested Stockholder or (ii) any other
Person (whether or not itself an Interested
Stockholder) which is, or after such merger
or consolidation would be, an Affiliate or
Associate of an Interested Stockholder; or
(b) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one
transaction or a series of transactions) to
or with, or proposed by or on behalf of, an
Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder, of
any assets of the Corporation or any
Subsidiary constituting not less than 5% of
the total assets of the Corporation as
reported in the consolidation balance sheet
of the Corporation as of the end of the most
recent quarter with respect to which such
balance sheet has been prepared; or
(c) the issuance or transfer by the Corporation
or any Subsidiary (in one transaction or a
series of transactions) of any securities of
the Corporation or any Subsidiary to, or
proposed by or on behalf of an Interested
Stockholder or an Affiliate or Associate of
-24-
<PAGE>
an Interested Stockholder in exchange for
cash, securities or other property (or a
combination thereof) constituting not less
than 5% of the total assets of the
Corporation as reported in the consolidated
balance sheet of the Corporation as of the
end of the most recent quarter with respect
to which such balance sheet has been
prepared; or
(d) the adoption of any plan or proposal for the
liquidation or dissolution of the
Corporation, or any spin-off or split-up of
any kind of the Corporation or any
Subsidiary, proposed by or on behalf of an
Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder; or
(e) any reclassification of securities
(including any reverse stock split), or
recapitalization of the Corporation, or any
merger or consolidation of the Corporation
with any Subsidiary or any other transaction
(whether or not with or into or otherwise
involving an Interested Stockholder) which
has the effect, directly or indirectly, of
increasing the percentage of the outstanding
shares of (i) any class of equity securities
of the Corporation or any Subsidiary or (ii)
any class of securities of the Corporation
or any Subsidiary convertible into equity
securities of the Corporation or any
Subsidiary, represented by securities of
such class which are directly or indirectly
owned by an Interested Stockholder and all
of its Affiliates and Associates.
2. Liquidation Rights - pursuant to the Company's Certificate of
Incorporation, on any dissolution, liquidation or winding up
of the Company, after there shall have been paid to or set
aside for the holders of all outstanding shares of preferred
stock the full preferential amount to which they are
respectively entitled to receive, pro rata in accordance with
the number of shares of each class outstanding, all the
remaining assets of the Company will be available for
distribution to its common stock holders. Presently, the
Company does not have any shares of preferred stock
outstanding.
3. Preemption Rights - there are no preemption rights with
respect to the Company's common stock.
4. Liability to Further Calls or Assessment by the Registrant and
for Liabilitiesof the Registrant Imposed on its Stockholders
under State Statutes - under Delaware law, the Company's
common stock is non-assessable. Therefore, once the Company's
stock is paid for, there can be no further calls or assessment
by the Company for liabilities of the Company.
5. Restrictions on Alienability of the Company's Common Stock -
the Company's common stock has not been registered under the
Securities Act of 1933, as amended (the "Act"). Therefore,
certain certificates which have not been hold for the
requisite period under Rule 144, promulgated under the Act,
have a restrictive legend preventing transfer unless pursuant
to an exemption from the registration requirements under the
Act.
-25-
<PAGE>
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS
- -------- -----------------------------------------
Pursuant to Article 8 of the Company's By-Laws, the Company is
authorized to indemnify and hold harmless any person who was or is a director,
consultant, officer, incorporator, employee or agent of the Company, or such
other person acting at the request of the foregoing, from and against liability
incurred as a result of the fact that he or she is or was director, consultant,
officer, incorporator, employee or agent of the Company, or such other person
acting at the request of the foregoing. The permitted indemnification is to the
full extent permitted by the Delaware General Corporation Law ("GCL"). Under the
GCL, a corporation may indemnify any of the foregoing persons as long as he or
she was acting, in good faith, in the best interests of the corporation, and the
corporation does not have reason to believe that the actions taken were
unlawful.
The Company presently does not have any Directors and Officers
liability insurance.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------- -------------------------------------------
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Financial Statements
June 30, 1999
-26-
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONTENTS
Page
Independent Auditor's Report F-1
Consolidated Financial Statements:
Balance Sheet as of June 30, 1999 F-2
Statements of Operations for the years ended
June 30, 1999 and 1998 F-3
Statements of Stockholders' Equity for the years ended
June 30, 1999 and 1998 F-4
Statements of Cash Flows for the years ended
June 30, 1999 and 1998 F-5
Notes to Financial Statements F-6 - F-15
<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, 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 opnion.
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 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 $1,662,947 for the year ended June 30, 1999 and, as of that date, had a
working capital deficiency of$1,933,885. 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.
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 406,131
Accounts receivable, net of allowance for
doubtful accounts of $209,981 437,792
Due from related party 323,287
Prepaid expenses 29,903
Inventories 34,448
Other receivables 32,741
------------
Total Current Assets 1,264,302
PROPERTY AND EQUIPMENT, net 1,372,080
OTHER ASSETS 59,440
------------
TOTAL ASSETS $ 2,695,822
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,607,699
Accrued expenses 465,704
Due to related party consultants 1,059,549
Other liabilities 65,235
------------
Total Current Liabilities 3,198,187
------------
COMMITMENTS [Note 8]
MINORITY INTEREST 577,823
------------
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 8,746,659
Accumulated deficit (10,015,690)
Accumulated Other Comprehensive Income (Loss):
Cumulative translation adjustment (5,150)
------------
(1,079,404)
Less: Treasury stock, at cost, 78,420 common shares (784)
Total Stockholders' Deficit (1,080,188)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,695,822
============
</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 YEAR ENDED JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
SALES $ 2,344,873 $ 4,646,355
COST OF SALES 2,087,768 4,117,182
------------ ------------
GROSS INCOME 257,105 529,173
------------ ------------
OPERATING EXPENSES
Research and development 1,440 511,889
General and administrative 1,757,356 3,482,105
Bad Debts 143,347 66,898
Advertising 16,621 139,550
Selling 53,333 299,101
Depreciation 64,517 119,262
Write down of goodwill -0- 180,000
------------ ------------
2,036,614 4,798,805
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 3,923 22,578
Other income 35,585 38,088
------------ ------------
39,508 60,666
------------ ------------
LOSS BEFORE MINORITY INTERESTS $ (1,740,001) $ (4,208,966)
============ ============
MINORITY INTERESTS IN SUBSIDIARY'S
EARNINGS (LOSS) (77,054) 10,038
------------ ------------
NET LOSS $ (1,662,947) $ (4,219,004)
============ ============
NET LOSS PER COMMON SHARE
[Basic and Diluted] $ (.09) $ (.22)
WEIGHTED AVERAGE NUMBER OF 19,317,382 18,813,545
SHARES
</TABLE>
F-3
The accompanying notes are an integral part of these
consolidated financial statements.
<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 $ 8,688,428 -- $ (4,133,739) $ (15,631)
Issuance of common stock
in exchange for services at
fair value - June 19, 1998 500,000 5,000 57,500 -- -- --
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 -- -- -- -- -- --
Adjustment to minority
interest -- -- (27) -- -- --
Other Comprehensive
Income:
Foreign currency -- -- -- $ (5,754) -- (5,754)
adjustment
Comprehensive Income:
Net Loss -- -- -- (4,219,004) --
Comprehensive Income (4,219,004)
---------- -------- ---------- ------------ ----------- --------
Balance - June 30, 1998 19,297,107 192,972 8,725,901 $ (4,224,758) (8,352,743) (21,385)
Issuance of common stock ============
in exchange for services at
fair value - May 21, 1999 180,500 1,805 20,758 -- --
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 -- -- -- -- --
Other Comprehensive
Income: Foreign currency
adjustment -- -- -- 16,235 -- 16,235
Comprehensive Income:
Net loss -- -- -- (1,662,947) --
Comprehensive Income (1,662,947)
---------- -------- ---------- ------------ ------------ --------
Balance - June 30, 1999 19,477,607 $194,777 $8,746,659 $ (1,646,712) $(10,015,690) $ (5,150)
========== ======== ========== ============ ============ ========
TREASURY STOCK-
STOCK AT UNAMORTIZED HOLDERS'
COST DEFERRED EQUITY
COMPENSATION (DEFICIT)
-------- ------------ ---------
Balance-June 30, 1997 $ (784) $ (100,000) $ 4,606,246
Issuance of common stock
in exchange for services at
fair value - June 19, 1998 -- -- 62,500
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 -- 50,000 50,000
Adjustment to minority
interest -- -- (27)
Other Comprehensive
Income:
Foreign currency -- -- (5,754)
adjustment
Comprehensive Income:
Net Loss -- -- (4,219,004)
----------- ------------ ------------
Comprehensive Income
Balance - June 30, 1998 (784) (50,000) 493,961
Issuance of common stock
in exchange for services at
fair value - May 21, 1999 -- -- 22,563
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 -- 50,000 50,000
Other Comprehensive
Income: Foreign currency
adjustment -- -- 16,235
Comprehensive Income:
Net loss -- -- (1,662,947)
Comprehensive Income
----------- ------------ -----------
Balance - June 30, 1999 $ (784) $ 0 $(1,080,188)
=========== ============ ===========
</TABLE>
F-4
The accompanying notes are an integral part of these
consolidated financial statements.
<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 $(1,662,947) (4,219,004)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization 314,108 311,041
Provision for bad debt 143,081 66,900
Issuance of common stock for services 22,563 62,500
Noncash compensation expense on granting of stock options 50,000 50,000
Minority interest in subsidiary 534,531 43,265
Write-down of goodwill 0 180,000
Changes in operating assets and liabilities:
Decrease (Increase) in operating assets:
Accounts receivable (184,529) (199,544)
Prepaid expenses 5,307 (559,611)
Inventories 191,164 248,840
Advances to suppliers 122,415 180,908
Other receivables 3,199 90,560
Organization Costs 0 (1,000)
Due from related party (32,762) (258,819)
Other assets (44,238) 14,457
Increase (Decrease) in operating liabilities:
Accounts payable 556 1,286,264
Accrued expenses 109,853 (252,785)
Due to related party consultants 481,124 518,931
Due to related party 0 (74,128)
Other liabilities (12,284) ( 7,059)
----------- -----------
Net Cash Provided (Used) by Operating Activities (41,141) (1,409,062)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (73,380) (947,612)
----------- -----------
Net Cash Used by Investing Activities (73,380) (947,612)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 16,235 (5,754)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (16,004) (2,362,428)
CASH AND CASH EQUIVALENTS, beginning of year 422,135 2,784,563
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 406,131 $ 422,125
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
- -------------------------------------------
The Company issued common stock valued at $22,563 and $62,500 in exchange for
services for the years ended June 30, 1999 and 1998. respectively.
</TABLE>
F-5
The accompanying notes are an integral part of these
consolidated financial statements.
<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, 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 $1,662,947 for the year ended June 30, 1999 and, as of that date, had a
working capital deficiency of $1,933,885. 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-6
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and subsidiaries over which it has operational control,
including subsidiaries with a year end of December 31; however, those
subsidiaries financial books and records have been cut-off at June 30
to allow them to be included in these consolidated financial
statements. Significant intercompany balances and transactions have
been eliminated on consolidation.
In accordance with Accounting Research Bulletin 5, 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.
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 computer hardware and software is recognized
when the products are delivered to the customer. Revenue from software
license fees is recognized on a straight-line basis over the term of
the license.
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. 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.
F-7
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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].
l. FOREIGN CURRENCY TRANSACTIONS/TRANSLATION
Assets and liabilities of the financial statements of foreign
subsidiaries 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 U.S. dollars at the
rate of exchange ruling on the date of the transaction. Material gains
and losses from foreign currency transactions are reflected in the
financial statements in the period in which they are realized.
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.
F-8
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 of 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 191,301
Furniture and fixtures 45,479
Automobiles 206,553
Office equipment 89,369
Leasehold improvement 27,137
Idle equipment 73,305
Production equipment 1,288,495
-----------
Total at Cost 2,027,736
Less: accumulated depreciation (655,656)
----------
Net property and equipment $ 1,372,080
===========
Depreciation charged to operations for the year ended June 30, 1999 and 1998 was
$314,108 and $311,016, respectively, of which approximately $249,591 and
$191,779 was included in cost of sales for the year ended June 30,1999 and June
30, 1998, respectively.
F-9
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 expire 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.
7. CONCENTRATION OF CREDIT RISK
The Company operates through subsidiaries located principally in
Beijing, China and Toronto, Canada; the administrative office is in
Vancouver, Canada. The Company grants credit to its customers in both
geographic regions. At June 30, 19998, approximately 53% of the
accounts receivable balance was due from customers in Canada. As of
June 30, 1999, balances from one customer accounted for approximately
28% of the accounts receivable balance.
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-10
<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 $403,000 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.
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:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
General and administrative expense $ 102,380 $ 808,051
Research and development 0 110,810
Selling expense 8,900 79,531
Cost of sales 52,114 72,257
--------- -----------
Total rent expense $ 163,394 $1,070,649
========= ===========
</TABLE>
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 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.
F-11
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
9. FOREIGN OPERATIONS
The Company operates principally in two geographic areas: China and
Canada. Following is a summary of information by area for the years
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Net sales to unaffiliated customers: For the year ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
China $ 624,100 $ 3,223,200
Canada 1,720,800 1,423,200
----------- -----------
$ 2,344,900 $ 4,646,400
=========== ===========
Income (loss) from operations:
China $ (678,900) $(1,999,000)
Canada (148,300) 29,000
----------- -----------
(827,200) (1,970,000)
Other income 39,500 58,400
General corporate expenses (875,200) (2,307,400)
Net loss as reported in accompanying statements $(1,662,900) $(4,219,000)
=========== ===========
Identifiable assets:
China 1,744,400 $ 2,475,600
Canada 864,100 479,700
----------- -----------
2,608,500 2,955,300
General corporate assets 87,300 200,900
----------- -----------
Total assets as reported in accompanying statements $ 2,695,800 $ 3,156,200
=========== ===========
</TABLE>
There were no interarea sales in fiscal 1999 or 1998. Identifiable
assets are those that are identifiable with operations in each
geographical area. General corporate assets consist primarily of cash,
cash equivalents, fixed assets, and prepayments.
10. 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 $543,600 and $708,900 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.
F-12
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. STOCK OPTIONS
In April 1997, the Company granted options to an employee 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 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 $(1,662,947) $(4,219,004)
Pro Forma Net Loss (1,677,281) (4,233,338)
Loss Per Share as Reported (.09) (.22)
Pro Forma Loss Per Share (.09) (.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 $1.29 during 1997.
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, 1997
-------------
Risk Free Interest Rate 6.5
Expected Life 1.8
Expected Volatility 16.2
Expected Dividends None
F-13
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. 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-14
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. SUBSEQUENT EVENTS
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 convertd into
common shares of the Company at $3 per share if the loan is
not paid in full after 3 years.
b. As of August 31, 1999, the Company's shareholders approved the
1997 Stock Option Incentive Plan to grant stock options
representing a maximum of 2,000,000 common shared to its
directors, officers, key employees and consultants. The
purchase price of the option shall be the fair value on the
date that such option is granted. The exercise period of the
option shall expire on such date as the Board of Directors
shall determine, but in on event after the expiration of ten
years form the date the option is granted.
14. 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.
15. MINORITY INTEREST
Minority interest includes preferred stockholder's equity in a
subsidiary which represents 588 shares of voting preferred stock issued
by Iconix International Inc. ('Iconix"), a subsidiary of the Company,
which are owned by outside investors. These preferred shaers are
entitled to approxdximately 32% of the combined voting power of all
classes of capital stock. The Company owns approximately 44% of the
common stock representing the remaining 68% of the combined voting
power of all classes of capital stock of Iconix. The preferred stock is
entitled to cumulative dividends at a rate of 9.5%. Preferred dividends
are included in the Minority Interest. There were no dividends in
arrears at June 30, 1999.
16. PRESENTATION
Certain amounts in the June 30, 1998 financial statements have been
reclassified to correspond with the June 30, 1999 presentation.
17. SUBSEQUENT EVENTS (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 13a). The potential investor will then own approximately 20%
of that company.
F-15
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Financial Statements
June 30, 1998
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONTENTS
PAGE
Independent Auditor's Report F-1
Consolidated Financial Statements:
Balance Sheet as of June 30, 1998 F-2
Statements of Operations for the years ended
June 30, 1998 and 1997 F-3
Statements of Stockholders' Equity for the years ended
June 30, 1998 and 1997 F-4
Statements of Cash Flows for the years ended
June 30, 1998 and 1997 F-5
Notes to Financial Statements F-6 - F-15
<PAGE>
MOORE STEPHENS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
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, 1998 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, 1998, 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 generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $4,219,004 and utilized $1,409,062 in cash
for operations for the year ended June 30, 1998, and, as of that date, had a
working capital deficiency of $1,090,756. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. 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
April 1, 1999
Except for Note 8b
as to which the date is
May 25, 1999
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 422,135
Accounts receivable, net of allowance for
doubtful accounts of $66,900 396,344
Due from related party 290,525
Prepaid expenses 35,210
Inventories 255,613
Advances to suppliers 122,415
Other receivables 35,940
-----------
Total Current Assets 1,528,182
PROPERTY AND EQUIPMENT, net 1,612,807
OTHER ASSETS 15,202
TOTAL ASSETS $ 3,156,191
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,607,143
Accrued expenses 934,276
Other liabilities 77,519
-----------
Total Current Liabilities 2,618,938
-----------
COMMITMENTS [Note 8]
MINORITY INTEREST IN SUBSIDIARY 43,292
-----------
STOCKHOLDERS' EQUITY
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 19,297,107 shares 192,972
Additional paid in capital 8,725,901
Accumulated deficit (8,352,743)
Cumulative translation adjustment (21,385)
-----------
544,745
Less: Treasury stock, at cost, 78,420 common shares (784)
Less: unamortized deferred compensation (50,000)
-----------
Total Stockholders' Equity 493,961
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,156,191
===========
</TABLE>
F-2
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30,
1988 1997
---- ----
<S> <C> <C>
SALES $ 4,646,355 $ 2,135,066
COST OF SALES 4,117,182 2,133,911
------------ ------------
GROSS INCOME 529,173 1,155
------------ ------------
OPERATING EXPENSES
Research and development 511,889 1,041,092
General and administrative 3,549,003 2,627,152
Advertising 139,550 41,793
Selling 299,101 81,875
Depreciation and amortization 119,262 66,992
Write down of goodwill 180,000 -0-
------------ ------------
4,798,805 3,858,904
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 22,578 100,916
Other income 38,088 -0-
Other costs (Note 13) -0- (111,620)
------------ ------------
60,666 (10,704)
------------ ------------
LOSS BEFORE MINORITY INTERESTS $ (4,208,966) $ (3,868,453)
============ ============
MINORITY INTERESTS IN SUBSIDIARY'S
EARNINGS 10,038 -0-
------------ ------------
NET LOSS $ (4,219,004) $ (3,868,453)
============ ============
NET LOSS PER COMMON SHARE
[Basic and Diluted] $ (.22) $ (.22)
18,813,545 17,470.174
WEIGHTED AVERAGE NUMBER OF SHARES
</TABLE>
F-3
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
CUMULATIVE UNAMORTIZED
COMMON STOCK ADDITIONAL TRANSLATION TREASURY DEFERRED STOCK-
------------ PAID-IN ACCUMULATED STOCK AT HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT COST COMPENSATION EQUITY
------ ------ ------- ------- ---------- --------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance-June 30, 1996 15,377,750 $ 153,778 $ 859,095 $ (265,286) $ -0- $ -0- $ -0- $ 747,587
Issuance of common stock 3,419,357 34,194 7,659,333 -0- -0- -0- -0- 7,693,527
Deferred compensation
related to stock options
issued below market value -0- 150,000 -0- -0- -0- (100,000) 50,000
Translation adjustment -0- -0- -0- (15,631) -0- -0- (15,631)
Treasury stock -0- -0- -0- -0- (784) -0- (784)
Net loss - year ended June
30, 1997 -0- -0- (3,868,453) -0- -0- -0- (3,868,453)
---------- --------- ---------- ----------- -------- ------ --------- -----------
Balance - June 30, 1997 18,797,107 $ 187,972 $8,668,428 $(4,133,739) $(15,631) $ (784) $(100,000) $ 4,606,246
Issuance of common stock
in exchange for services at
fair value - June 19, 1998 500,000 5,000 57,500 -0- -0- -0- -0- 62,500
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 -0- -0- -0- -0- -0- 50,000 50,000
Adjustment to minority
interest -0- (27) -0- -0- -0- -0- (27)
Translation adjustment -0- -0- (5,754) (5,754)
Net loss - year ended
June 30, 1998 -0- -0- (4,219,004) -0- -0- -0- (4,219,004)
---------- --------- ---------- ----------- -------- ------ --------- -----------
Balance - June 30, 1998 19,297,107 $ 192,972 $8,725,901 $(8,352,743) $(21,385) $ (784) $ (50,000) $ 493,961
========== ========= ========== =========== ======== ====== ========= ===========
</TABLE>
F-4
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(4,219,004) (3,868,453)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 311,041 66,992
Provision for bad debt 66,900 -0-
Issuance of common stock for services 62,500 -0-
Offset of software purchase price by licensing fee revenue -0- (54,180)
Noncash compensation expense on granting of stock options 50,000 50,000
Adjustment of interest in joint venture -0- 50,000
Minority interest in subsidiary 43,265 -0-
Write-down of goodwill 180,000 -0-
Changes in operating assets and liabilities:
Decrease (Increase) in operating assets:
Accounts receivable (199,544) (263,700)
Prepaid expenses 559,611 (612,635)
Inventories 248,840 (474,453)
Advances to suppliers 180,908 (303,323)
Other receivables 90,560 (126,500)
Organization Costs (1,000) (10,294)
Due from related party (258,819) -0-
Other assets 14,457 -0-
Increase (Decrease) in operating liabilities:
Accounts payable 1,286,264 317,106
Accrued expenses 266,146 668,130
Due to related party (74,128) 74,128
Other liabilities (17,059) 94,578
----------- -----------
Net Cash Used by Operating Activities (1,409,062) (4,392,604)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (947,612) (1,000,729)
----------- -----------
Net Cash Used by Investing Activities (947,612) (1,000,729)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock -0- 7,693,527
----------- -----------
Net Cash Provided by Financing Activities -0- 7,693,527
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5,754) (15,631)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,362,428) 2,284,563
CASH AND CASH EQUIVALENTS, beginning of year 2,784,563 500,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 422,135 $ 2,784,563
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for acquisition (2,000,000 shares) $ -0- $ 100,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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, are the development and marketing of educational
software and other forms of electronic publishing in China and Canada.
As shown in the accompanying financial statements, , the Company incurred a net
loss of $4,219,004 and utilized $1,409,062 in cash for operations for the year
ended June 30, 1998, and, as of that date, had a working capital deficiency of
$1,090,756. Those factors, as well as a significant downsizing of operations in
its largest operating subsidiary, 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 private placement of stock
to inject cash into the Company, the reduction of operating expenses to a
minimum and deferral of payments of consulting fees, the expansion of its
Canadian subsidiary through a financing of approximately $650,000, which was
received in January 1999, and the use of government project financing to expand
its operations in China. 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.
2. SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and subsidiaries over which it has operational control,
including a subsidiary with a year end of December 31; however, that
subsidiary's financial books and records have been cut-off at June 30
to allow it to be included in these consolidated financial statements.
Significant intercompany balances and transactions have been eliminated
on consolidation. In accordance with Accounting Research Bulletin 51,
in the case of one subsidiary, the Company has charged to income the
loss applicable to the minority interest as the loss was in excess of
the minority's interest in the equity capital of the subsidiary.
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, 1998, and reported amounts of revenues and
expenses during each of the two fiscal years then ended . Actual
results could differ from those estimates.
F-6
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c. REVENUE RECOGNITION
Revenue from the sale of computer hardware and software is recognized
when the products are delivered to the customer. Revenue from software
license fees is recognized on a straight-line basis over the term of
the license.
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. ORGANIZATION COSTS
These costs consist primarily of incorporation and business
registration fees for subsidiaries of the Company and are being
amortized on a straight line basis over sixty months.
g. GOODWILL
Goodwill represented the excess of cost of an acquired subsidiary over
the fair value of net assets acquired, and was to be amortized on the
straight-line basis over ten years. [See Note 4].
h. CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
i. 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.
j. EARNINGS PER SHARE
Income 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, 1998 and 1997, earnings per share does not give
effect to the exercise of these common stock equivalents in either
year.
F-7
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
k. ADVERTISING EXPENSE
The Company expenses advertising costs as incurred.
l. 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 4].
m. FOREIGN CURRENCY TRANSACTIONS/TRANSLATION
Assets and liabilities of the financial statements of foreign
subsidiaries 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 U.S. dollars at the
rate of exchange ruling on the date of the transaction. Material gains
and losses from foreign currency transactions are reflected in the
financial statements in the period in which they are realized.
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 ("PB" 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.
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 of the useful life of the related product.
F-8
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1998 is comprised as follows:
Computer hardware $ 181,446
Computer software 209,551
Furniture and fixtures 44,886
Automobiles 205,698
Office equipment 81,274
Leasehold improvement 3,816
Production equipment 1,227,683
---------
1,954,354
Less: accumulated depreciation (341,547)
---------
Net property and equipment $ 1,612,807
===========
Depreciation charged to operations for the year ended June 30, 1998 and 1997 was
$311,016 and $46,993, respectively, of which approximately $191,779 was included
in cost of sales for the year ended June 30,1998.
4. 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 current year's 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 a joint venture of $200,000 ($100,000 cash and
2,000,000 common shares valued at $.05 per share) purchased in June
1996. As of June 30, 1998 and 1997 the Company's interest in the joint
venture was 57%. 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.
5. 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 $4,370,000 of operating
losses which may be used to offset future federal taxable income. The
utilization of the losses expire in years from 2005 to 2018. 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.
F-9
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. INCOME TAXES (CONTINUED)
As the Company is not liable for either current or deferred income
taxes for the years ended June 30, 1998 and 1997, respectively, no
provision is shown on the statement of operations. The Company has
recorded a deferred tax asset of approximately $1,486,000 at June 30,
1998 and $769,000 at June 30, 1997 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 $717,000 and $769,000 during the years ended
June 30, 1998 and 1997 respectively.
6. WARRANTS
The Company has 9,675,000 of warrants outstanding, which can be
exercised to purchase a like number of shares of common stock at a
price of $1.00. The warrants expire on July 30, 1998.
7. CONCENTRATION OF CREDIT RISK
The Company operates through subsidiaries located principally in
Beijing, China and Toronto, Canada; the administrative office is in
Vancouver, Canada. The Company grants credit to its customers in both
geographic regions. At June 30, 1998, approximately 65% of the accounts
receivable balance was due from customers in Canada, while at June 30,
1997, approximately 97% of the accounts receivable balance was due from
customers in China. As of June 30, 1998, balances from two customers
accounted for approximately 49% of the accounts receivable balance
while as of June 30, 1997, a balance from a different customer
accounted for approximately 38% of the accounts receivable balance.
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, 1998 of $66,900. The
Company believes any credit risk beyond this amount would be
negligible.
At June 30, 1998, the Company had approximately $445,000 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.
F-10
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company has entered into a number of operating leases for office
space. The minimum rental payments on these leases are as follows:
YEAR ENDED
JUNE 30,
--------
1999 $ 108,200
2000 29,600
2001 14,800
------
$ 152,600
Rent expense for the years ended June 30, 1998 and 1997 has
been charged as follows:
YEAR ENDED JUNE 30,
1998 1997
---- ----
General and administrative expense $ 808,051 $235,379
Research and development 110,810 112,767
Selling expense 79,531 23,357
Cost of sales 72,257 -0-
---------- --------
Total rent expense $1,070,649 $371,503
========== ========
The Company has contracts with various executives and
consultants. The minimum cash compensation due under these
contracts is as follows:
YEAR ENDED
JUNE 30,
--------
1999 $365,000
2000 274,000
-------
$639,000
========
In addition to the cash compensation, the Company is committed to issue 100,000
common shares to a consultant.
In January 1998, the Company terminated its contract with a consultant effective
May 1998. The Company completed negotiating a settlement with the consultant in
May 1999. The settlement requires the Company to pay up to $120,000 to the
consultant depending upon the Company's future cash flows and payments to other
consultants and executives, as well as the issuance of 80,500 shares of the
Company's common stock to the consultant. The settlement (both cash and fair
value of the common stock) of $130,000 has been recorded as a liability as of
June 30, 1998.
F-11
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. COMMITMENTS (CONTINUED)
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 is included in accrued expenses at June 30, 1998 and is
part of rent expense within the Statement of Operations for the year
ended June 30, 1998.
The Company is committed to contribute $6,000,000 to the joint venture
(see Note 4) upon the completion of its next major financing.
9. FOREIGN OPERATIONS
The Company operates principally in two geographic areas: China and
Canada. Following is a summary of information by area for the years
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Net sales to unaffiliated customers: FOR THE YEAR ENDED JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
China $ 3,223,200 $ 2,125,700
Canada 1,423,200 -0-
----------- -----------
$ 4,646,400 $ 2,125,700
=========== ===========
Income (loss) from operations:
China $(1,999,000) $(1,891,100)
Canada 29,000 24,500
----------- -----------
(1,970,000) (1,915,600)
Other income 58,400 110,300
General corporate expenses (2,307,400) (2,063,100)
Net loss as reported in accompanying statements $(4,219,000) $(3,868,400)
=========== ===========
Identifiable assets:
China $ 2,475,600 $ 4,561,500
Canada 479,700 252,500
----------- -----------
2,955,300 4,814,000
General corporate assets 200,900 950,000
----------- -----------
Total assets as reported in accompanying statements $ 3,156,200 $ 5,764,000
=========== ===========
</TABLE>
There were no interarea sales in fiscal 1998 or 1997. Identifiable assets are
those that are identifiable with operations in each geographical area. General
corporate assets consist primarily of cash, cash equivalents, fixed assets, and
prepayments.
F-12
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. RELATED PARTY TRANSACTIONS
In the normal course of business with the joint venturer, the Company
generated a receivable balance of $290,525 which represents the net
balance of advances to and from the Company during the year ended June
30, 1998. During 1998 and 1997 respectively, the Company incurred
consulting and related expenses of approximately $708,900 and $693,700
from officers and directors of the Company or its subsidiaries or
companies controlled by these officers and directors. Approximately
$249,500 and $634,200 of these amounts were paid during the years ended
June 30, 1998 and 1997, respectively.
11. STOCK OPTIONS
In April 1997, the Company granted options to an employee to purchase
150,000 shares of common stock at one-third of the market price of the
stock at the date of grant. As the market price at that date was $1.50
per share, the option price is $.50 a share. The options are vested
equally over three years, beginning with the year ended June 30, 1997.
At June 30, 1998, the remaining contractual life is one year. 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 will be recognized ratably over three
years, with $50,000 being charged to operations for the years ended
June 30, 1998 and 1997.
Had the Company elected to recognize compensation expense 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,
1998 1997
---- ----
Net Loss as Reported $(4,219,004) $(3,868,453)
Pro Forma Net Loss (4,233,338) (3,882,787)
Loss Per Share as Reported (.22) (.22)
Pro Forma Loss Per Share (.23) (.22)
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 $1.29 during 1997. 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-13
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. STOCK OPTIONS (CONTINUED)
JUNE 30, 1997
-------------
Risk Free Interest Rate 6.5
Expected Life 1.8
Expected Volatility 16.2
Expected Dividends None
12. 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. The Company will adopt both statements on July 1, 1998. Financial
position and results of operation are not expected to be materially
affected by adoption of the statements.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
While SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, earlier adoption is permitted. Reclassification of
the financial statements for earlier periods is required. Management is
in the process of determining its preferred format. The adoption of
SFAS No. 130 will have no impact on the Company's consolidated results
of operations, financial position or cash flows.
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. SFAS No. 131 is effective for financial statements for
fiscal years beginning after December 15, 1997 and comparative
information for earlier years is to be restated. SFAS No. 131 need not
be applied to interim financial statements in the initial year of
application. The Company is in the process of evaluating the disclosure
requirements.
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 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.
F-14
<PAGE>
12. AUTHORITATIVE PRONOUNCEMENTS (CONTINUED)
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. 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.
13. OTHER COSTS
In September and October of 1996, the Company made three payments to
two different vendors totaling $111,620. These payments were authorized
by a former officer of the Company. However, the Company does not
appear to have supporting documentation showing that those payments
were for the benefit of the Company and has not been able to obtain
such documentation from the payees. Without this supporting
documentation, the Company cannot determine if these payments were for
valid business reasons and, therefore, the total of the payments is
shown as a separate line item on the Statement of Operations for the
year ended June 30, 1997. In fiscal year 1998, legal counsel of the
Company has pursued these transactions. Despite these legal efforts,
the Company has been unsuccessful in its attempt and therefore
continues to believe these costs should be expensed.
F-15
CAUTION TO READER
- -----------------
The following consolidated financial statements of Tengtu International
Corp. are unaudited and for discussion purposes only. They have been
prepared internally by management. The actual results could be
materially different from the unaudited consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
(UNAUDITED)
AS AT
SEPT. 30, 1999
--------------
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 561,171
Accounts receivable, net of allowance for
doubtful accounts of $209,981 497,099
Due from related party 299,333
Prepaid expenses 47,262
Inventories 38,592
Other receivables 35,358
------------
Total Current Assets 1,478,815
PROPERTY AND EQUIPMENT, net 1,318,182
OTHER ASSETS 13,742
------------
TOTAL ASSETS $ 2,810,739
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,124,270
Due to related party consultants 1,179,549
Other liabilities 47,732
------------
Total Current Liabilities 3,351,551
------------
SHAREHOLDERS' LOAN 357,935
------------
MINORITY INTEREST 551,222
------------
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 8,746,659
Accumulated deficit (10,349,777)
Cumulative translation adjustment (40,844)
------------
(1,449,185)
Less: Treasury stock, at cost, 78,420 common shares (784)
Total Stockholders' Deficit (1,449,969)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,810,739
============
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER30, 1999
(UNAUDITED)
JUL 1 TO SEPT 30 1999
---------------------
<S> <C>
SALES $ 392,004
COST OF SALES 207,468
GROSS INCOME 184,536
------------
OPERATING EXPENSES
Research and development 0
General and administrative 424,709
Advertising 0
Selling 110,872
Depreciation and amortization 10,045
------------
545,626
OTHER INCOME (EXPENSE)
Interest income 402
Other income 0
------------
402
LOSS BEFORE MINORITY INTERESTS $ (360,688)
============
MINORITY INTERESTS IN SUBSIDIARY'S
EARNINGS (LOSS) (26,601)
------------
NET LOSS $ (334,087)
============
NET LOSS PER COMMON SHARE
[Basic and Diluted] $ (0.02)
WEIGHTED AVERAGE NUMBER OF SHARES 19,477,607
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
(UNAUDITED)
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY UNAMORTIZED STOCK-
------------ PAID-IN ACCUMULATED TRANSLATION STOCK AT DEFERRED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT COST COMPENSATION DEFICIT
------ ------ ------- ------- ---------- ---- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance-June 30, 1998 19,297,107 $192,972 $8,725,901 $ (8,352,743) $ (21,385) $(784) $(50,000) $493,961
Issuance of common stock
in exchange for services at
fair value - May 21, 1999 180,000 1,805 20,758 22,563
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 50,000 50,000
Translation adjustment 16,235 16,235
Net loss - year ended
June 30, 1999 (1,662,947) (1,662,947)
Balance June 30, 1999 19,477,607 194,777 8,746,659 (10,015,690) (5,150) (784) 0 (1,080,188)
Net loss - quarter ended
September 30, 1999 (334,087) (334,087)
Foreign currency
adjustment (35,694) (35,694)
Balance - Sept. 30, 1999 19,477,607 194,777 8,746,659 (10,349,777) (40,844) (784) 0 (1,449,969)
========== ======= ========= =========== ========= === = =========
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
(UNAUDITED)
SEPT. 30, 1999
--------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net loss $(334,087)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization 53,898
Minority interest in subsidiary (26,601)
Changes in operating assets and liabilities:
Decrease (Increase) in operating assets:
Accounts receivable (59,307)
Prepaid expenses (17,359)
Inventories (4,144)
Other receivables (2,617)
Due from related party 23,954
Other assets 45,698
Increase (Decrease) in operating liabilities:
Accounts payable 50,867
Due to related party consultants 120,000
Other liabilities (17,503)
---------
Net Cash Used by Operating Activities (167,201)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment 0
---------
Net Cash Used by Investing Activities 0
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in shareholders' loan 357,935
Net Cash Provided by Financing Activities 357,935
EFFECT OF EXCHANGE RATE CHANGES ON CASH (35,694)
---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 155,040
CASH AND CASH EQUIVALENTS, beginning of year 406,131
---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 561,171
=========
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FOR THE QUARTER ENDED DECEMBER 31, 1999
(UNAUDITED)
ASSETS
AS AT AS AT
DEC. 31, 1999 SEPT. 30, 1999
------------- --------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,629,909 561,171
Accounts receivable, net of allowance for doubtful accounts of $209,112 305,088 497,099
Due from related parties 307,921 299,333
Prepaid expenses 37,627 47,262
Inventories 38,517 38,592
Other receivables 32,900 35,358
------------ ------------
Total Current Assets 2,351,962 1,487,815
PROPERTY AND EQUIPMENT, net 1,261,499 1,318,182
OTHER ASSETS 13,750 13,742
------------ ------------
TOTAL ASSETS $ 3,627,211 2,810,739
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,934,871 2,124,270
Due to related party consultants 1,299,549 1,179,549
Other liabilities 47,732 47,732
------------ ------------
Total Current Liabilities 3,282,152 3,351,551
------------ ------------
SHAREHOLDERS' LOAN 361,455 357,935
------------ ------------
CONVERTIBLE DEBENTURE 1,500,000 0
------------ ------------
MINORITY INTEREST 316,686 551,222
------------ ------------
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 20,557,607 shares 205,577 194,777
Additional paid in capital 8,925,609 8,746,659
Accumulated deficit (10,948,166) (10,349,777)
Cumulative translation adjustment (15,318) (40,844)
------------ ------------
(1,832,298) (1,449,185)
Less: Treasury stock, at cost, 78,420 common shares (784) (784)
------------ ------------
Total Stockholders' Deficit (1,833,082) (1,449,969)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,627,211 2,810,739
============ ============
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 1999
(UNAUDITED)
QUARTER ENDED
YEAR TO DATE DEC 31 SEPT 30
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
SALES $ 541,504 149,500 392,004
COST OF SALES 408,097 200,629 207,468
------------ ------------ ------------
GROSS INCOME 133,407 (51,129) 184,536
------------ ------------ ------------
OPERATING EXPENSES
Research and development 0 0 0
General and administrative 1,016,485 591,776 424,709
Advertising 0 0 0
Selling 225,751 114,879 110,872
Depreciation and amortization 27,772 17,727 10,045
------------ ------------ ------------
1,270,008 724,382 545,626
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 1,196 794 402
Other income 0 0 0
------------ ------------ ------------
1,196 794 402
------------ ------------ ------------
LOSS BEFORE MINORITY INTERESTS (1,135,405) (774,717) (360,688)
MINORITY INTERESTS IN
SUBSIDIARY'S EARNINGS (202,929) (176,328) (26,601)
------------ ------------ ------------
NET LOSS $ (932,476) (598,389) (334,087
============ ============ ============
NET LOSS PER COMMON SHARE $ (0.05) (0.03) (0.02)
WEIGHTED AVERAGE NUMBER OF SHARES 19,545,922 19,614,237 19,477,607
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE QUARTER ENDED DECEMBER 31, 1999
(UNAUDITED)
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY UNAMORTIZED STOCK-
------------ PAID-IN ACCUMULATED TRANSLATION STOCK AT DEFERRED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT COST COMPENSATION DEFICIT
------ ------ ------- ------- ---------- ---- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance-June 30, 1998 19,297,107 $ 192,972 $8,725,901 $(8,352,743) $ (21,385) $(784) $(50,000) $493,961
Issuance of common stock
in exchange for services at
fair value - May 21, 1999 180,500 1,805 20,758 22,563
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 50,000 50,000
Translation adjustment 16,235 16,235
Net loss - year ended
June 30, 1999 (1,662,947) (1,662,947)
-------------------------------------------------- ---------------------------------------------------
Balance June 30, 1999 19,477,607 194,777 8,746,659 (10,015,690) (5,150) (784) 0 (1,080,188)
Net loss - quarter ended
September 30, 1999 (334,087) (334,087)
Foreign currency
adjustment (35,694) (35,694)
------------------------------------------------------------------------------------------------------
Balance - Sept. 30, 1999 19,477,607 194,777 8,746,659 (10,349,777) (40,844) (784) 0 (1,449,969)
Issuance of common stock 1,080,000 10,800 178,950 189,750
Net loss - quarter ended (598,389) (598,389)
December 31, 1999
Foreign currency
adjustment 25,526 25,526
Balance -
December 31, 1999 20,557,607 $205,577 $8,925,609 ($10,948,166) ($15,318) ($784) $0 ($1,833,082)
========== ======== ========== ============ ======== ===== == ===========
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED DECEMBER 31, 1999
(UNAUDITED)
YEAR TO DATE DEC 31 SEPT 30
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (932,476) (598,389) (334,067)
Net Loss
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization 124,026 70,128 53,898
Minority interest in subsidiary (261,137) (234,536) (26,601)
Changes in operating assets and liabilities
Decrease (Increase) on operating assets:
Accounts receivable 132,704 192,011 (59,307)
Prepaid expenses (7,724) 9,635 (17,359)
Inventories (4,069) 75 (4,144)
Other receivables (159) 2,458 (2,617)
Due from related party 15,366 (8,588) 23,954
Other assets 45,690 (8) 45,698
Increase (Decrease) on operating liabilities:
Accounts payable (138,532) (189,399) 50,867
Due to related party consultants 240,000 120,000 120,000
Other liabilities
(17,503) 0 (17,503)
----------- ----------- -----------
Net Cash Used by Operating Activities
(803,814) (636,613) (167,201)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment
(13,445) (13,445) 0
----------- ----------- -----------
Net Cash Used by Investing Activities
(13,445) (13,445) 0
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in shareholder's loan 361,455 3,520 357,935
Increase in convertible debenture 1,500,000 1,500,000 0
Issuance of common shares
189,750 189,750 0
----------- ----------- -----------
Net Cash Provided by Financing Activities
2,051,205 1,693,270 357,935
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(10,168) 25,526 (35,694)
INCREASE (DECREASE) IN CASH AND CASH 1,223,778 1,068,738 155,040
EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of quarter
406,131 561,171 406,131
CASH AND CASH EQUIVALENTS, end of quarter $1,629,909 1,629,909 561,171
========== ========= =======
</TABLE>
F-23
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
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.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
- -------- ---------------------------------
(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, 1998;
2. Tengtu International Corp. and Subsidiaries audited financial
statements for the fiscal year ended June 30, 1999;
3. Tengtu International Corp. and Subsidiaries unaudited
financial statements for the fiscal quarter ended September
30, 1999;
4. Tengtu International Corp. and Subsidiaries unaudited
financial statements for the fiscal quarter ended
December 31, 1999.
(b) Index of Exhibits
1. Exhibit (3)(i) - Articles of Incorporation
2. Exhibit (3)(ii) - By-Laws
3. Exhibit (10) - Material contracts
- 1999 Non-Qualified Stock Option Incentive Plan
- English Translation of Microsoft Cooperation Agreement
4. Exhibit (21) - List of Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
<PAGE>
TENGTU INTERNATIONAL CORP.
- --------------------------
(Registrant)
Date _____________________________________
By:/s/ PAK KWAN CHEUNG
-------------------
Pak Kwan Cheung, Chairman of the Board of Directors
and Chief Executive Officer
EXHIBIT 3(I)
CERTIFICATE OF INCORPORATION
OF
GALWAY CAPITAL CORPORATION
1. The name of the Corporation is:
GALWAY CAPITAL CORPORATION
2. The duration of the Corporation is perpetual.
3. The address of the registered office in the State of Delaware is No.
1102 West Street, in the City of Wilmington, County of New Castle. The
name of its registered agent at such address is The Colonial Charter
Company.
4. The purposes for which the Corporation is organized are: To engage,
without limitation, in any lawful activity for which corporations may
be organized under the General Law of Delaware.
(a) To engage, without limitation, in any lawful activity for
which corporations may be organized under the General Law of
Delaware.
(b) To do such acts in pursuit of its general purposes as are not
forbidden by the laws of the State of Delaware, as now in
force or hereafter may be in force.
5. The maximum number of shares which the Corporation shall have the
authority to issue is:
(a) 50,000,000 (Fifty Million) Shares of Common Stock having a
value of $.001 per share; and
(b) 1,000,000 (One Million) Shares of Preferred Stock having a par
value of $.01 per share, such Preferred Stock being issuable
in one of more series as hereafter provided.
No holder of any class of stock of the Corporation shall be entitled as
of right to purchase or subscribe for any part of any class of stock of the
Corporation now authorized or hereafter authorized by any amendment of the
Certificate of Incorporation, or of any bonds, debentures, or other securities
convertible into or evidencing rights to purchase or subscribe for any stock of
the Corporation; and any stock now authorized or any such additional authorized
issue of any stock or any securities convertible into or evidencing rights to
purchase or subscribe for stock may be issued and disposed of by the Board of
Directors to such firms, persons, corporations or associations for such
consideration and upon such terms and in such manner as the Board of Directors
may in its discretion determine without offering any thereof on the same terms,
or on any terms, to the shareholders, or to any class of shareholders.
The preferences, restrictions and qualifications applicable to the
Common Stock and the Preferred Stock are as follows:
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PART A - COMMON STOCK
Each holder of Common Stock shall be entitled to one vote for each
share of such stock standing in his name on the books of the Corporation.
After the payment or declaration and setting aside for payment of the
full cumulative dividends for all prior and then current dividend periods on all
outstanding shares of Preferred Stock and after setting aside all stock purchase
funds or sinking funds heretofore required to be set aside with respect to the
Preferred Stock, dividends on the Common Stock may be declared and paid, but
only when and as determined by the Board of Directors.
On any dissolution, liquidation or winding up of the Corporation, after
there shall have been paid to or set aside for the holders of all outstanding
shares of Preferred Stock the full preferential amount to which they are
respectively entitled to receive, pro rata in accordance with the number of
shares of each class outstanding, all the remaining assets of the Corporation
will be available for distribution to its shareholders.
The holders of Common Stock will have no redemption or conversion
rights.
PART B - PREFERRED STOCK
The Board of Directors is expressly vested with the authority to divide
any or all of the Preferred Stock into series and to fix and determine the
relative rights and preferences of the shares of each series so established,
provided, however, that the rights and preferences of the various series may
vary only with respect to:
(a) the rate of dividend;
(b) whether the shares may be called and, if so, the call price
and the terms and conditions of call;
(c) the amount payable upon the shares in the event of voluntary
and involuntary liquidation;
(d) sinking fund provisions, if any, for the call or redemption of
the shares;
(e) the terms and conditions, if any, on which the shares may be
converted;
(f) voting rights; and
(g) whether the shares will be cumulative, noncumulative or
partially cumulative as to dividends and the dates from which
any cumulative dividends are to accumulate.
The Board of Directors shall exercise the foregoing authority by
adopting a resolution setting forth the designation of each series and the
number of shares therein, and fixing and determining the relative rights and
preferences thereof. The Board of Directors may make any change in the
designations, terms, limitations or relative rights or preferences of any series
in the same manner, so long as no shares of such series are outstanding at such
time.
Within the limits and restrictions, if any, stated in any resolution of
the Board of Directors originally fixing the number of shares constituting any
series, the Board of Directors is authorized to increase or decrease (but not
below the number of shares of such series then outstanding) the number of shares
of any series subsequent to the issue of shares of such series. In case the
number of shares of any series shall be so decreased, the share constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
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6. The Corporation will not commence business until consideration of One
Thousand Dollars ($1,000.00) has been received for the issuance of shares.
7. The shareholders of the Corporation may take any action which they are
required or permitted to take without a meeting on written consent, setting
forth the action so taken, signed by all of the persons or entities entitled to
vote thereon.
8. A. Any Business Combination Transaction (as defined in Section 8.B(3) below)
shall require the affirmative vote of the holders of at least 80% of the voting
power of all of the shares of capital stock of the Corporation then entitled to
vote generally in the election of directors, voting together as a single class.
Such affirmative vote shall be required, notwithstanding the fact that no vote
may be required, or that a lesser percentage may be specified, by law or in any
agreement with any national securities exchange or otherwise.
B. For the purposes of this Paragraph 8:
(1) "Affiliate" or "Associate" shall have the respec-tive
meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as
in effect on December 31, 1985.
(2) "Beneficial owner" shall have the meaning ascribed to such
terms in Rule 13d-3 of the General Rules and Regulations
under the Exchange Act, as in effect on December 31, 1985.
(3) "Business Combination Transaction" shall mean:
(a) any merger or consolidation of the Corpora-tion or any
Subsidiary with (i) an In-terested Stockholder or (ii)
any other Person (whether or not itself an Interested
Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an
Interested Stockholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition (in one transaction or a series of
transactions) to or with, or proposed by or on behalf
of, an Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder, of any assets
of the Corporation or any Subsidiary constituting not
less than 5% of the total assets of the Corporation as
reported in the consolidation balance sheet of the
Corporation as of the end of the most recent quarter
with respect to which such balance sheet has been
prepared; or
(c) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of
transactions) of any securities of the Corporation or
any Subsidiary to, or proposed by or on behalf of an
Interested Stockholder or an Affiliate or Associate of
an Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof)
constituting not less than 5% of the total assets of
the Corporation as reported in the consolidated balance
sheet of the Corporation as of the end of the most
recent quarter with respect to which such balance sheet
has been prepared; or
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(d) the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation, or any
spin-off or split-up of any kind of the Corporation or
any Subsidiary, proposed by or on behalf of an
Interested Stockholder or an Affiliate or Associate of
an Interested Stockholder; or
(e) any reclassification of securities (including any
reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the
Corporation with any Subsidiary or any other
transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the
effect, directly or indirectly, of increasing the
percentage of the outstanding shares of (i) any class
of equity securities of the Corporation or any
Subsidiary or (ii) any class of securities of the
Corporation or any Subsidiary convertible into equity
securities of the Corporation or any Subsidiary,
represented by securities of such class which are
directly or indirectly owned by an Interested
Stockholder and all of its Affiliates and Associates.
(4) "Continuing Director" means (a) any member of the Board of
Directors of the Corporation who (i) is neither the Interested
Stockholder involved in the Business Combination Transaction
as to which a vote of Continuing Directors is provided
hereunder, nor an Affiliate, Associate, employee, agent, or
nominee of such Interested Stockholder, or the relative of any
of the foregoing, and (ii) was a member of the Board of
Directors of the Corporation prior to the time that such
Interested Stockholder became an Interested Stockholder, and
(b) any successor of a Continuing Director described in clause
(a) who is recommended or elected to succeed a Continuing
Director by the affirmative vote of a majority of Continuing
Directors then on the Board of Directors of the Corporation.
(5) "Fair Market Value" means: (a) in the case of stock, the
highest closing sale price during the 30- day period
immediately preceding the date in question of a share of such
stock on the Composite Tape, on the New York Stock
Exchange-Listed Stocks, or, if such stock is not reported on
the Composite Tape, on the New York Stock Exchange, or, if
such stock is not listed on such Exchange, in the principal
United States securities exchange registered under the
Exchange Act on which such stock is listed, or, if such stock
is not listed on any such exchange, the highest closing bid
quotation with respect to a share of such stock during the
30-day period preceding the date in question on the National
Association of Securities Dealers, Inc. Automated Quotations
System or any similar interdealer quotation system then in
use, or, if no such quotation is available, the fair market
value on the date in question of a share of such stock as
determined by a majority of the Continuing Directors in good
faith; and (b) in the case of property other than cash or
stock, the fair market value of such property on the date in
question as determined by a majority of the Continuing
Directors in good faith.
(6) "Interested Stockholder" shall mean any Person (other than the
Corporation or any Subsidiary, any employee benefit plan
maintained by the Corporation or any Subsidiary or any trustee
or fiduciary with respect to any such plan when acting in such
capacity) who or which:
(a) is or was at any time within the two-year period
immediately prior to the date in question, the Beneficial
Owner, directly or indirectly, or 10% or more of the
voting power of the then outstanding Voting Stock of the
Corporation; or
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(b) is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in
question was the Beneficial Owner, directly or indirectly,
of 10% of more of the voting power of the outstanding
Voting Stock of the Corporation; or
(c) is an assignee of, or has otherwise succeeded to, any
shares of Voting Stock of the Corporation of which an
interested Stockholder was the Beneficial Owner, directly
or indirectly, at any time within the two-year period
immediately prior to the date in question, if such
assignment or succession shall have occurred in the course
of a transaction, or series of transactions, not involving
a public offering within the meaning of the Securities Act
of 1933, as amended.
For the purpose of determining whether a Person is an Interested
Stockholder, the outstanding Voting Stock of the Corporation shall include
unissued shares of Voting Stock of the Corporation of which the Interested
Stockholder is the Beneficial Owner but shall not include any other shares of
Voting Stock of the Corporation which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights, warrants or
options, or otherwise, to any Person who is not the Interested Stockholder.
(7) A "Person" means any individual, partnership, firm,
corporation, association, trust, unincorporated organization
or other entity, as well as any syndicate or group deemed to
be a person pursuant to Section 14(d)(2) of the Exchange Act.
(8) "Subsidiary" means any corporation of which the Corporation
owns, directly or indirectly, (a) a majority of the
outstanding shares of equity securities of such corporation,
or (b) shares having a majority of the voting power
represented by all of the outstanding Voting Stock of such
corporation. For the purpose of determining whether a
corporation is a Subsidiary, the outstanding Voting Stock and
shares of equity securities thereof shall include unissued
shares of which the Corporation is the Beneficial Owner but,
except for the purposes of Paragraph 8.B(6), shall not include
any other shares which may be issuable pursuant to any
agreement, arrangement or understanding, or upon the exercise
of conversion rights, warrants or options, or otherwise, to
any Person who is not the Corporation.
(9) "Voting Stock" shall mean outstanding shares of capital stock
of the relevant corporation entitled to vote generally in the
election of directors.
C. The provisions of Paragraph 8.A shall not be applicable to any
particular Business Combination Transaction, and such Business
Combination Transaction shall require only such affirmative vote of the
stockholders, if the conditions specified in either of the following
paragraphs (1) and (2) are met:
(1) The Business Combination Transaction shall have been approved
by the affirmative vote of a majority of the Continuing
Directors, even if the Continuing Directors do not constitute
a quorum of the entire Board of Directors.
(2) All of the following conditions shall have been met:
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(a) With respect to each share of each class of outstanding
Voting Stock of the Corporation (including Common Stock),
the holder thereof shall be entitled to receive on or
before the date of the consummation of the Business
Combination Transaction (the "Consummation Date"), cash
and consideration, in the form specified in Paragraph
8.C(2)(b) hereof, with an aggregate Fair Market Value as
of the Consummation Date at least equal to the highest of
the following:
(i) the highest per share price (including brokerage
commissions, transfer taxes and the soliciting dealers'
fees) paid by the Interested Stockholder to which the
Business Combination Transaction relates, or by any
Affiliate or Associate of such Interested Stockholder,
for any shares of such class of Voting Stock acquired
by it (x) within the two-year period immediately prior
to the first public announcement of the proposal of the
Business Combination Transaction (the "Announcement
Date") or (y) in the transaction in which it became an
Interested Stockholder, whichever is higher;
(ii) the Fair Market Value per share of such class Voting
Stock of the Corporation on the Announcement Date; and
(iii)the highest preferential amount per share, if any, to
which the holders of shares of such class of Voting
Stock of the Corporation are entitled in the event of
any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation.
(b) The consideration to be received by holders of a
particular class of outstanding Voting Stock of the
Corporation (including Common Stock) as described in
Paragraph 8.C(2)(a) hereof shall be in cash or, if the
consideration previously paid by or on behalf of the
Interested Stockholder in connection with its acquisition
of beneficial ownership of shares of such class of Voting
Stock consisted, in whole or in part, of consideration
other than cash, then in the same form as such
consideration. If such payment for shares of any class of
Voting Stock of the Corporation has been made in varying
forms of consideration, the form of consideration for such
class of Voting Stock shall be either cash or the form
used to acquire the beneficial ownership of the largest
number of shares of such class of Voting Stock previously
acquired by the Interested Stockholder.
(c) After such Interested Stockholder has become an Interested
Stockholder and prior to the Consummation Date: (1) there
shall have been no failure to declare and pay at the
regular date therefor any full dividends (whether or not
cumulative) on the outstanding Preferred Stock of the
Corporation, if any, except as approved by the affirmative
vote of a majority of the Continuing Directors; (ii) there
shall have been (x) no reduction in the annual rate of
dividends paid on the Common Stock of the Corporation
(except as necessary to reflect any subdivision of the
Common Stock), except as approved by the affirmative vote
of a majority of the Continuing Directors, and (y) an
increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of
outstanding shares of the Common Stock, unless the failure
so to increase
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<PAGE>
such annual rate is approved by the affirmative vote of a
majority of the Continuing Directors; and (iii) such
Interested Stockholders shall not have become the
Beneficial Owner of any additional shares of Voting Stock
of the Corporation except as part of the transaction which
results in such Interested Stockholder becoming an
Interested Stockholder.
(d) After such Interested Stockholder has become an Interested
Stockholder, neither such Interested Stockholder nor any
Affiliate or Associate thereof shall have received the
benefit, directly or indirectly (except proportionately as
shareholder of the Corporation), of any loans, advances,
guarantees, pledges or other financial assistance or any
tax credits or other tax advantages provided by the
Corporation.
(e) A proxy or information statement describing the proposed
Business Combination Transaction and complying with the
requirements of the Exchange Act and the General Rules and
Regulations thereunder (or any sub-quent provisions
replacing such Act, Rules or Regulations) shall be mailed
to the shareholders of the Corporation at least 30 days
prior to the Consummation Date (whether or not such proxy
or information statement is required to be mailed pursuant
to such Act or subsequent provisions thereof).
D. A majority of the Continuing Directors shall have the power
and duty to determine, on the basis of information known to
them after reasonable inquiry, all facts necessary to
determine compliance with this Paragraph 8, including without
limitation, (1) whether a Person is an Interested Stockholder,
(2) the number of shares of Voting Stock of the Corporation
beneficially owned by any Person, (3) whether a Person is an
Affiliate or Associate of another, (4) whether the
requirements of Paragraph 8.C(2) have been met with respect to
any Business Combination Transaction, and (5) whether the
assets which are the subject of any Business Combination
Transaction have, or the consideration to be received for the
issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination Transaction constitutes
not less than 5% of the total assets of the Corporation as
reported in the consolidated balance sheet of the Corporation
as of the end of the most recent quarter with respect to which
determination of a majority of the Continuing Directors on
such matters shall be conclusive and binding for all the
purposes of this Paragraph 8.
E. Nothing contained in this Paragraph shall be construed to
relieve the members of the Board of Directors or an Interested
Stockholder from any fiduciary obligation imposed by law. The
fact that any Business Combination Transaction complies with
the provisions of Paragraph 8.C shall not be construed to
impose any fiduciary duty, obligation or responsibility on the
Board of Directors, or any member thereof, to approve such
Business Combination Transaction or recommend its adoption or
approval to the shareholders of the Corporation, nor shall
such compliance limit, prohibit or otherwise restrict in any
manner the Board of Directors, or any member thereof, with
respect to evaluations of or actions and responses taken with
respect to such Business Combination Transactions.
9. In the event the Board of Directors should consist of in excess of two
directors, the Board of Directors shall be divided into three classes as nearly
equal in number as possible. The initial terms of directors elected in 1988
shall expire as of the annual meeting of shareholders for the years indicated
below:
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Class I Directors..........................................1991
Class II Directors.........................................1990
Class III Directors........................................1989
Upon expiration of the initial terms specified for each class of directors,
their successors shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain or attain if possible, the equality of the number of
directors in each class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. If an equality in number
is not possible, the increase or decrease shall be apportioned among the classes
in such a way that the difference in the number of directors in any two classes
shall not exceed one.
Any vacancies in the Board of Directors for any reason and any newly created
directorships resulting by reason of any increase in the number of directors
shall be filled by the Board of Directors, acting by a majority of the remaining
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
directors have been chosen and until their successors are elected and qualified.
A written ballot shall not be required for the election of directors unless the
bylaws of the Corporation so provide.
10. A quorum of the Board of Directors of the Corporation shall consist of two
directors, but in the event that the Board should consist of in excess of six
directors, one-third of the directors in office shall constitute a quorum.
11. In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized:
(a) To adopt, amend or repeal the Bylaws of the Corporation by
vote of a majority of the members of the Board of Directors,
but any Bylaws adopted by the Board of Directors may be
amended or repealed by the shareholders of the Corporation;
(b) To distribute too the shareholders of the Corporation out of
capital surplus of the Corporation a portion of its assets, in
cash or property, subject to the requirements of law, and such
distribution is expressly permitted without the vote of the
shareholders;
(c) To cause the Corporation to make purchases of its shares,
directly or indirectly, to the extent of unreserved and
unrestricted earned surplus available therefor, without the
vote of the shareholders;
(d) If at any time the Corporation has more than one class of
authorized or outstanding stock, to pay dividends in shares of
any class to the holders of shares of any class, without the
vote of the shareholders of the class in which the payment is
to be made; and
(e) To take any action which the Board of Directors is required or
permitted to take without a meeting or written consent,
setting forth the action so taken, signed by all of the
directors entitled to vote thereon.
12. In evaluating a Business Combination (as defined in Paragraph 8 above) or a
tender or exchange offer and other acquisition proposal, the Board of Directors
in determining what is in the best interest of the Corporation, may consider,
among others, the following factors:
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(a) the financial aspects of the offer, the long-term interests of
the Corporation's shareholders, the present and historical
market value of the Corporation's shares and the premiums paid
in other relevant transactions, the liquidation value of the
Corporation's assets and component operations, the prospects
of the Corporation, and (to the extent estimable) its stock on
a going-concern basis over the subsequent several years;
(b) the prospects for obtaining and methods of achieving a better
offer, such as seeking other bids, pursuing negotiating
strategies (which may include defensive tactics), and partial
or total liquidation;
(c) the impact, if the offer is partial or two-tier, on the
remaining shareholders and on the prospects of the Corporation
in the event the offer is successful;
(d) the value and investment attributes of the noncash
consideration if the offer involves considerations other than
cash;
(e) the potential of the offer (if partial or two-tier), including
the offeror's competence, experience, integrity, management,
reputation and financial condition;
(f) legal and regulatory matters, or other considerations that
could impede or prevent the transaction's consummation;
(g) the effect of the transaction on the Corporation's (and its
Subsidiaries') customers, including policyholders, suppliers
and employees; and
(h) local community interests.
13. The affirmative vote of the holders of at lest 80% of the voting power of
all of the shares of capital stock of the Corporation then entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to amend, alter, change or repeal, or adopt any provision or
provisions inconsistent with any provision of Paragraphs 8, 9, 12 or 13 hereof,
unless such amendment, alteration, change, re peal or adoption of any
inconsistent provision or provisions is declared advisable by the Board of
Directors by the affirmative vote of (A) two-thirds of the entire Board of
Directors and (b) a majority of the Continuing Directors (as defined in
Paragraph 8).
14. The name and mailing address of the incorporator is as follows:
NAME MAILING ADDRESS
Patrick C. Brooks 1701 Altivo Way
Los Angeles, CA 90026
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 22nd day of April, 1988.
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CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
GALWAY CAPITAL CORPORATION
GALWAY CAPITAL CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation law of the State of Delaware, does
hereby certify as follows:
FIRST: The first sentence of Paragraph 5 of the Certificate of
Incorporation of the Corporation, which sentence now reads, "The maximum number
of shares which the Corporation shall have the authority to issue is: (a)
50,000,000 (Fifty Million) Shares of Common Stock having value of $.001 per
share; and (b) 1,000,000 (One Million) Shares of Preferred Stock having a par
value of $.01 per share, such Preferred Stock being issuable in one or more
series as hereafter provided.", is amended to read in full as follows:
"5. Effective on the date upon which this Certificate of
Amendment of Certificate of Incorporation is duly filed with the
Secretary of State of the State of Delaware (the "Effective Date"),
each share of the Common Stock, $.001 par value, authorized and
outstanding on the Effective Date shall be combined, reconstituted, and
converted by reverse stock split into one-tenth (1/10) share of Common
Stock, $.01 per value. The Board of Directors is authorized to
determine by resolution all matters reasonably required by, or
ancillary to, said reverse stock split, including but not limited to
the manner and terms upon which new share certificates shall be issued,
certificates for existing share certificates shall be surrendered, and
fractional shares (if any) shall be issued. Upon the occurrence of said
reverse stock split, the maximum number of shares which the Corporation
shall have the authority to issue is:
"(a) 5,000,000 (Five Million) Shares of Common Stock having a
par value of $.01 per share; and
"(b) 1,000,000 (One Million) Shares of Preferred Stock having
a par value of $.01 per share, such Preferred Stock being issuable in
one or more series as hereinafter provided."
SECOND: The capital of the Corporation will not be reduced by reason of
the foregoing amendment.
THIRD: The foregoing amendment was duly approved and adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware. The foregoing amendment was duly
approved and adopted by the unanimous written consent of the directors of the
Corporation pursuant to Section 141(f) of the General Corporation Law of the
State of Delaware. The foregoing amendment was thereupon duly approved and
adopted pursuant to Section 228 of the General Corporation Law of the State of
Delaware by the written consent of the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to approve and
adopt the foregoing amendment at a regular or special meeting of shareholders
entitled to vote thereon, said minimum number being a majority of the
outstanding shares of Common Stock. Notice of such written consent of
shareholders was thereupon promptly given to all persons entitled to receive
said notice (except such persons with whom communication is unlawful) in
accordance with said Section 228.
IN WITNESS WHEREOF, on the 4th day of August, 1989, said GALWAY CAPITAL
CORPORATION has caused this Certificate to be signed by Patrick C. Brooks, its
President, and attested by Stephanie A. Brooks, its Secretary, both of whom
affirm and acknowledge, under penalties of perjury, that this Certificate is the
act and deed of the Corporation and that the facts stated herein are true.
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<PAGE>
GALWAY CAPITAL CORPORATION
By: /s/ Patrick C. Brooks, President
--------------------------------
ATTEST:
/s/ Stephanie A. Brooks, Secretary
- ----------------------------------
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CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
GALWAY CAPITAL CORPORATION
GALWAY CAPITAL CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation law of the State of Delaware, does
hereby certify as follows:
FIRST: Article "1." of the Certificate of Incorporation of this
corporation is amended to read in full as follows:
"1. The name of the corporation is TOWER BROADCAST, INC.
SECOND: The capital of the corporation will not be reduced, increased,
or in any way affected by reason of the foregoing amendment.
THIRD: The foregoing amendment was duly approved and adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware. Initially, the foregoing amendment was
duly approved and adopted by the unanimous written consent of the directors of
the corporation pursuant to Section 141(f) of the General Corporation Law of the
State of Delaware. Thereupon, the foregoing amendment was duly approved and
adopted pursuant to Section 228 of the General Corporation Law of the State of
Delaware by the written consent of the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to approve and
adopt the foregoing amendment at a regular or special meeting of shareholders
entitled to vote thereon, said minimum number being a majority of the
outstanding shares of Common Stock, par value $.0002 per share. Notice of such
written consent of shareholders was thereupon promptly given to all persons
entitled to receive said notice (except such persons with whom communication is
unlawful) in accordance with said Section 228.
IN WITNESS WHEREOF, on this 18th day of August, 1993, said Galway
Capital Corporation has caused this Certificate to be signed by Patrick C.
Brooks, its President, and attested by Stephanie A. Brooks, its Secretary, both
of whom affirm and acknowledge, under penalties of perjury, that this
Certificate is the act and deed of the corporation and that the facts stated
herein are true.
/s/Patrick C. Brooks, President
-------------------------------
/s/Stephanie A. Brooks, Secretary
---------------------------------
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CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
*************
TOWER BROADCAST, INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of TOWER BROADCAST,
INC. be amended by changing Paragraph 5 thereof so that, as amended,
said Paragraph shall be and read as follows:
"5. The maximum number of shares which the Corporation shall
have the authority to issue is:
(a) 50,000,000 (Fifty Million) Shares of Common Stock having a
par value of $.01 per share; and
(b) 5,000,000 (Five Million) Shares of Preferred Stock having
a par value of $.01 per share, such Preferred Stock being issuable in
one or more series as hereinafter provided."
"Effective on the date upon which this Certificate of
Amendment of Certificate of Incorporation is duly filed (the "Effective
Date"), every four (4) shares of the Common Stock outstanding is
reverse split into one (1) share of Common Stock. The Board of
Directors is authorized to determine by resolution all matters
reasonably required by, or ancillary to, said reverse stock split,
including but not limited to the manner and terms upon which new share
certificates shall be issued, certificates for existing share
certificates shall be surrendered, and fractional shares (if any) shall
be issued."
SECOND: The capital of the Corporation will not be reduced by reason of
the foregoing amendment.
THIRD: The foregoing amendment was duly approved and adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware. The foregoing amendment was duly
approved and adopted pursuant to Section 228 of the General Corporation Law of
the State of Delaware by the written consent of the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
approve and adopt the foregoing amendment at a regular or special meting of
shareholders entitled to vote thereon, said minimum number being a majority of
the outstanding shares of Common Stock. Notice of such written consent of
shareholders was then promptly given to all persons entitled to receive said
notice in accordance with said Section 228.
-13-
<PAGE>
IN WITNESS WHEREOF, on this 20th day of March, 1995, said TOWER
BROADCAST, INC. has caused this Certificate to be signed by Mark Di Salvo, its
President, and attested by its Secretary, Leah Di Salvo, both of whom affirm and
acknowledge under penalty of perjury, that this Certificate is the act and deed
of the Corporation and that the facts stated herein are true.
TOWER BROADCAST, INC.
BY: /s/ Mark Di Salvo, President
----------------------------
ATTEST:
/s/ Leah Di Salvo, Secretary
- ----------------------------
-14-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TOWER BROADCAST, INC.
TOWER BROADCAST, INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
FIRST: Article "1." of the Certificate of Incorporation of this
corporation is amended to read as follows:
"1. The name of the corporation is TENGTU INTERNATIONAL CORP."
SECOND: The capital of the corporation will not be reduced, increased,
or in any way affected by reason of the foregoing amendment.
THIRD: The foregoing amendment was duly approved and adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware. Thereupon, the foregoing amendment was
duly approved and adopted pursuant to Section 228 of the General Corporation Law
of the State of Delaware by the written consent of the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to approve the adopt the amendment at a regular or special meeting of
shareholders entitled to vote thereon, said minimum number being a majority of
the outstanding shares of common stock, par value $.01 per share. Notice of such
written consent was thereupon promptly given to all persons entitled to receive
said notice in accordance with Section 228.
IN WITNESS WHEREOF, on this 24th day of May, 1996, said TOWER
BROADCAST, INC. has caused this Certificate to be signed by Mark Di Salvo, its
President, and attested by its Secretary, Leah Di Salvo, both of whom affirm and
acknowledge under penalty of perjury, that this Certificate is the act and deed
of this Corporation and that the fact stated herein are true.
TOWER BROADCAST, INC.
By: /s/ Mark Di Salvo
-----------------
ATTEST:
/s/ Leah Di Salvo
- -----------------
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<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TENGTU INTERNATIONAL CORP.
TENGTU INTERNATIONAL CORP., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify as follows:
FIRST: That the Board of Directors of said corporation, by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of TENGTU International
Corp. by amended by changing Paragraph 5 to read as follows:
"5. The maximum number of shares which the Corporation shall
have the authority to issue is:
(a) 100,000,000 (One Hundred Million) Shares of Common Stock
having a par value of $.01 per share; and
(b) 10,000,000 (Ten Million) Shares of Preferred Stock, having
a par value of $.01 per share, being issuable in one or more series as
hereinafter provided."
"Effective on the date upon which this Certificate of
Amendment of Certificate of Incorporation is duly filed (the "Effective
Date), every two (2) shares of the Common Stock outstanding is reverse
split into one (1) share of Common Stock. The Board of Directors is
authorized to determine by resolution all matters reasonably required
by, or ancillary to, said reverse stock split, including but no limited
to the manner and terms upon which new share certificates shall be
issued, certificates for existing shares certificates shall be
surrendered, and fractional shares (if any) shall be issued."
SECOND: The capital of the corporation will not be reduced, increased,
or in any way affected by reason of the foregoing amendment.
THIRD: The foregoing amendment was duly approved and adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware. Thereupon, the foregoing amendment was
duly approved and adopted pursuant to Section 228 of the General Corporation Law
of the State of Delaware by the written consent of the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to approve and adopt the amendment at a regular or special meeting of
shareholders entitled to vote thereon, said minimum number being a majority of
the outstanding shares of common stock, par value $.01 per share. Notice of such
written consent was thereupon promptly given to all persons entitled to receive
said notice in accordance with Section 228.
-16-
<PAGE>
IN WITNESS WHEREOF, on this 29th day of May, 1996, said TENGTU
INTERNATIONAL CORP. has caused this Certificate to be signed by Mark Di Salvo,
its President, and attested by its Secretary, Leah Di Salvo, both of whom affirm
and acknowledge under penalty of perjury, that this Certificate is the act and
deed of this Corporation and that the facts stated herein are true.
TENGTU INTERNATIONAL CORP.
By: /s/ Mark Di Salvo
-----------------
ATTEST:
/s/ Leah Di Salvo
- -----------------
-17-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TENGTU INTERNATIONAL CORP.
WE, Pak Cheung, Chairman, and Gerald A. Eppner, Assistant Secretary of
Tengtu International Corp., a corporation existing under the laws of the State
of Delaware, do hereby certify as follows:
FIRST: That the name of the Corporation (hereinafter called the
"Corporation") is Tengtu International Corp.
SECOND: That the Certificate of Incorporation of the Corporation has
been amended as follows:
By striking out the whole of Paragraphs 7 and 9 of the Certificate of
Incorporation.
THIRD: That such amendment has been duly adopted in accordance with the
provisions of the General Corporation Law of the State of Delaware by the
majority of all the stockholders entitled to vote in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, we have signed this Certificate this 2nd day of
April, 1997.
/s/ Pak Cheung
--------------
ATTEST:
/s/ Gerald A. Eppner, Assistant Secretary
- -----------------------------------------
-18-
EXHIBIT (3)(II)
RESTATED BYLAWS OF
TENGTU INTERNATIONAL CORP.
AS AT MARCH 1, 2000
ARTICLE 1.
INDEMNIFICATION
Section 1.01 NAME. The name of this corporation is Tengtu International
Corp. The Corporation may conduct operations under such other trade names as the
Board of Directors may designate.
Section 1.02 SEAL. The Corporation shall be authorized, but not
required to use a corporate seal, which if used shall be circular in form and
contain the name of the Corporation and the words "Corporate Seal." The
corporate seal shall be affixed by the Secretary upon such instruments or
documents as may be deemed necessary. The presence or absence of such seal on
any instrument shall not, however, affect its character or validity or legal
effect in any respect.
Section 1.03 OFFICES. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware. The Corporation may also
have offices at such other places as the Board of Directors may from time to
time determine or the business of the corporation may require.
The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors.
Section 1.04 FISCAL YEAR. The fiscal year of the Corporation shall end
on June 30, unless otherwise amended by the Board of Directors.
ARTICLE 2.
CAPITAL STOCK
-------------
Section 2.01 CONSIDERATION FOR SHARES. Except as otherwise permitted by
law, the Capital Stock having par value may be issued for such consideration,
expressed in dollars, not less than the par value thereof, as shall be fixed
from time to time by the Board of Directors. Treasury shares may be disposed of
by the Corporation for such consideration expressed in dollars as may be fixed
from time to time by the Board of Directors.
Except as otherwise permitted by law, Capital Stock without par value
may be issued for such consideration as may be fixed by the Board of Directors,
all of which consideration shall constitute stated capital unless prior to or
within sixty (60) days after issuance the Board of Directors allocates to
capital surplus a portion, but not all, of such consideration.
Section 2.02 PAYMENT OF SHARES. The consideration for the issuance of
shares may be paid, in whole or in part, in money, in other property, tangible
or intangible, or in labor or services already performed for the Corporation.
When payment of the consideration for which shares are to be issued shall have
been received by the Corporation, such shares shall be deemed to be fully paid
and nonassessable. Neither promissory notes nor future services shall constitute
payment
-1-
<PAGE>
or part payment for shares of the Corporation. In absence of fraud in the
transaction, the judgment of the Board of directors as to the value of the
consideration received for shares shall be conclusive. No certificate shall be
issued for any share until the share is fully paid.
Section 2.03 CERTIFICATION REPRESENTING SHARES. The certificates of
stock of the Corporation shall be numbered consecutively and entered in the
books of the Corporation as they are issued. Each holder of the Capital Stock of
the Corporation shall be entitled to a certificate exhibiting the holder's name
and number of shares and signed by the President or a Vice President and the
Secretary of the corporation certifying the number of shares owned by him in the
Corporation. Where any such certificate is signed by a transfer agent the
signature of either or both of such officers may be facsimile, engraved or
printed. Each certificate shall have noted thereon any restriction on voting or
transferability or any preferences or call provision.
Section 2.04 CERTIFICATE LEGEND AND REPRESENTATION FROM SHAREHOLDERS.
Unless not necessary in the opinion of counsel for the Company, each certificate
representing shares of the Corporation's capital stock shall bear a legend to
the following effect:
The sale of the shares represented by this certificate was not
registered under the Securities Act of 1933. Accordingly,
these shares may not be resold, transferred or hypothecated
without (a) the registration of such shares under the
Securities Act of 1933; or (b) an opinion of counsel for the
company to the effect that such registration is not necessary.
and each person subscribing for shares shall be informed about, and shall
represent to the corporation prior to or at the time he makes payment for shares
that he understands the impact of the restrictions on transfer of the
Corporation's capital stock resulting from the lack of registration as well as
the application of any state securities or "Blue Sky" law.
ARTICLE 3.
MEETINGS OF SHAREHOLDERS
Section 3.01 PLACE OF MEETING. Meetings of the shareholders of the
Corporation shall be held in the City of Los Angeles, State of California, or at
such other place as shall be determined by the Board of Directors.
Section 3.02 ANNUAL MEETING. The annual meeting of the shareholders
shall be held within 150 days after the close of the fiscal year of the
Corporation, at which annual meeting the shareholders shall elect a Board of
Directors and transact such other business as may properly come before the
meeting. Failure to hold the annual meeting within the designated time shall not
work a forfeiture or dissolution of the Corporation. As permitted by the
Certificate of Incorporation and Article 7 of these Bylaws, the shareholders may
take action by consent in lieu of the annual meeting.
Section 3.03 SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the President and shall be called by the Secretary or any other
officer at the request in writing of a majority of the Board of Directors or the
holders of not less than one-tenth (1/10) of all shares entitled to vote at the
meeting. Any written request for a meeting shall state the purpose or purposes
of the proposed meeting and no action other than that specified in the notice
may be considered.
Section 3.04 NOTICE OF MEETINGS - WAIVER. Written notice stating the
place, day, and hour of the meeting, and in case of a special meeting , the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten,
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<PAGE>
nor more than forty, days before the date of the meeting, either personally or
by mail to each shareholder entitled to vote at such meeting. Waive by a
shareholder in writing or by telegram of notice of a shareholders' meeting,
signed by him whether before or after the time of the meeting, shall be
equivalent to the giving of such notice. Attendance by a shareholder, without
the objection to the notice, whether in person or by proxy at a shareholders'
meeting shall constitute a waiver of notice of the meeting.
Section 3.05 RECORD DATE. In determining the shareholders entitled to
notice of and to vote at any annual or special meeting of shareholders, the
stock transfer books of the Corporation shall not be closed, but in lieu thereof
the Board of Directors shall fix a date no less than ten nor more than sixty
days before any such meeting as a record date and only the shareholders whose
names appear on the stock transfer books at the close of business on that date
shall be entitled to notice of and to vote at such meeting, notwithstanding the
transfer of shares thereafter.
Section 3.06 QUORUM. One-third of the total number of outstanding
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. The shareholders present at a duly
organized meeting may continue to do business until adjournment, notwithstanding
the withdrawal of a number of shareholders so that less than a quorum remains. A
meeting may be adjourned despite the absence of a quorum.
Section 3.07 PROXIES AND VOTING. Unless otherwise provided by the
Certificate of Incorporation, each shareholder entitled to notice of and to vote
at a meeting of shareholders shall be entitled to one vote at a meeting of
shareholders shall be entitled to one vote for each share of Capital Stock
standing in his name on the transfer books of the Corporation on the record date
fixed for such meeting. A shareholder may vote either in person or by proxy
executed in writing by the shareholder. No proxy shall be valid after eleven
months from the date of its execution, unless otherwise provided in the proxy.
Section 3.08 SHAREHOLDER LIST. The Secretary of the Corporation shall
produce at each meeting of shareholders a list of the shareholders entitled to
notice of and to vote at such meeting.
Section 3.09 ORDER OF BUSINESS. Unless otherwise specified by the
Chairman of the Board or the Chairman of the meeting, the order of business at
the annual meeting, and as far as practicable, at all other meetings of the
shareholders, shall be (1) calling of roll, (2) proof of due notice of meetings,
(3) reading and disposal of any unapproved minutes, (4) annual reports of
officers and committees, (5) election of directors, (6) unfinished business, (7)
new business and (8) adjournment. The Chairman of the Board shall preside at all
meetings of the shareholders and in his absence the President or his designate.
ARTICLE 4.
THE BOARD OF DIRECTORS
----------------------
Section 4.01 GENERAL POWERS. The business and affairs of the
Corporation shall be managed by a Board of Directors. The directors shall in all
cases act as a Board and they may adopt such rules and regulations for the
conduct of their meetings and the management of the Corporation, as they may
deem proper, not inconsistent with these Bylaws and the laws of this state.
Section 4.02 [Deleted]
Section 4.03 REMOVAL OF DIRECTORS. Directors may be removed from office
at any time by a majority vote of
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<PAGE>
the shareholders at their annual meeting, or at a special meeting called for
that purpose, and may be removed for cause at any time by a majority of the
Board of Directors at its annual meeting, or at a special meeting called for the
purpose.
Section 4.04 VACANCIES. Any vacancies in the Board of Directors for any
reason and any newly-created directorships resulting by reason of any increase
in the number of directors shall be filled by the Board of Directors, acting by
a majority of the remaining directors then in office, although less than a
quorum, and any directors so chosen shall hold office until the next election of
the class for which directors have been chosen and until their successors are
elected and qualified.
Section 4.05 PLACE OF MEETING. Meetings of the Board of Directors,
annual, regular, or special, may be held either within or without the State of
Delaware at such place as shall be designated by the Board of Directors and
stated in the notice of the meeting.
Section 4.06 ANNUAL AND REGULAR MEETINGS. Subject to the authority of
the Board to take action by consent as permitted by the Certificate of
Incorporation immediately after the annual meeting of the shareholders, the
Board of Directors shall meet each year for the purpose of organization,
election of officers, and consideration of any other business that may properly
be brought before the meeting. Regular meetings shall be held at such time and
place as the Board of Directors may determine. No notice of any kind to either
old or new members of the Board of Directors for the annual meeting or any
regular meeting shall be required.
Section 4.07 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held upon notice by letter, telegram, cable, or radiogram,
delivered for transmission not later than during the third day immediately
preceding the day for the meeting, or by word of mouth, telephone, or radiophone
received not later than during the second day immediately preceding the day for
the meeting, upon the call of the majority of the Directors, the Chairman of the
Board, the President or the Secretary of the Corporation. Special meetings shall
be called by the President, any Vice President or the Secretary in a like manner
upon the written request of a majority of the Directors. Attendance in person at
a special meeting without objection to the notice shall constitute a waiver of
notice of the meeting. Notice of any meeting of the Board of directors may be
waived orally if confirmed in writing or by telegram sign before or after the
time of the meeting. Neither the business to be transacted at, not the purpose
of, any meeting of the Board of Directors need by specified in the notice or
waiver of notice of the meeting.
Section 4.08 QUORUM AND VOTING. A majority of the Board of directors
shall constitute a quorum for the transaction of business. The act of the
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors unless the act of a greater number is
required by these Bylaws or by the law.
Section 4.09 TELEPHONE CONFERENCES. Members of the Board of Directors,
or any committee designated by the Board, may participate in a meeting of such
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this subsection shall
constitute presence in person at such meeting.
Section 4.10 CHAIRMAN OF THE BOARD. At its annual organization meeting,
the Board of Directors shall elect by vote of a majority of the entire Board a
Chairman of the Board who shall preside at all meetings of the Board.
Section 4.11 ADVISORY BOARD. In addition to the Board of Directors, the
Corporation shall have an Advisory Board consisting of a maximum of ten members.
The Board of Directors, by resolution adopted by a majority of the Directors,
may designate and appoint persons to act as members of the Advisory Board.
Persons appointed to serve as
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<PAGE>
members of the Advisory Board shall be either former members of the Board of
Directors, or persons who have a special expertise in the use of computer
technology in education or such other persons who have an expertise in any
matters as may constitute a material part of the business plan of the
Corporation in effect at any time or from time to time. The members of the
Advisory Board shall meet annually, or as requested from time to time by the
Board of Directors, to review and evaluate the research and development projects
of the Corporation and other technology intensive aspects of the Corporation's
business plan as in effect at any time or from time to time and shall render a
report (which may be in the form of the minutes of such meeting) to the Board of
Directors concerning the action taken and matters discussed at the meeting. The
members of the Advisory Board shall be compensated as determined by the Board of
Directors by resolution adopted by a majority of the Directors which may
include, at the discretion of the Board of Directors, participation in any stock
incentive plan of the Corporation.
Section 4.12 COMMITTEES: NUMBER, TENURE AND QUALIFICATIONS. The Board
of Directors may appoint from among its members an Executive Committee, an Audit
Committee and a Compensation Committee and other committees, composed of two or
more directors, to serve at the pleasure of the Board of Directors. A majority
of the Compensation Committee shall at all times consist of a majority of
Directors who are neither employees of nor consultants to the Corporation.
Section 4.13 POWERS. The Board of Directors may delegate to committees
appointed under Section 4.12 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 4.14 MEETINGS. Notice of committee meetings shall be given in
the same manner as notice for special meetings of the Board of Directors. A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a majority
of the committee members present at a meeting shall be the act of such
committee. The Board of Directors may designate a chairman of any committee, and
such chairman or any two members of any committee may fix the time and place of
its meeting unless the Board shall otherwise provide. In the absence of any
member of any such committee, the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint another director to act in
the place of such absent member. Each committee shall keep minutes of its
proceedings.
Section 4.16 TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 4.17 INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
Section 4.18 VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
Section 4.19. VOTING BY PROXY. Each member of the Board of Directors
may vote by proxy executed in writing by the director. No proxy shall be valid
after the date of the Board of Directors meeting to which it is applicable.
-5-
<PAGE>
ARTICLE 5.
THE OFFICERS
------------
Section 5.01 OFFICERS. The officers of the Corporation shall consist of
a President and Secretary and, as deemed appropriate by the board of Directors,
one or more Vice Presidents, Assistant Secretaries, Treasurers, Assistant
Treasurers, and such other officers and assistant officers and agents as may be
deemed necessary by the Board of Directors. Any two or more offices may be held
by the same person, except the offices of President and Secretary. Officers need
not be Directors or shareholders of the Corporation.
Section 5.02 VACANCIES. Vacancies occurring in any office shall be
filled by the Board of Directors as any regular or special meeting.
Section 5.03 THE PRESIDENT. The President shall be the chief executive
officer and have active executive management and supervision of the operation of
the Corporation. He shall perform such duties as these Bylaws provide or the
Board of Directors may prescribe or his capacity as chief executive officer by
custom may provide.
Section 5.04 THE VICE PRESIDENT. The Vice President or Vice Presidents,
in the order designated by the Board of Directors, shall be vested with all the
executive powers and required to perform all the duties of that portion or area
of responsibility of the President and shall perform such other duties as may be
prescribed by the Board of Directors. Each Vice President shall report to the
President or his delegate who shall be responsible for the Vice President's
actions.
Section 5.05 THE SECRETARY. The Secretary shall attend all meetings of
the shareholders and of the Board of Directors and shall keep a true and
complete record of the proceedings of these meetings. He shall be custodian of
the records of the Corporation. He shall attend to the giving of all notices,
attest, when requested, to the authority of the President or other officers, as
revealed by the minutes of these Bylaws, to execute legal documents binding the
Corporation, and shall perform such other duties as these Bylaws may provide or
the Board of Directors may prescribe.
Section 5.06 THE TREASURER. The Treasurer shall keep correct and
complete records of account, showing accurately at all times the financial
condition and results of operation of the Corporation. He shall be the legal
custodian of all monies, notes, securities and other valuable that may from time
to time come into possession of the Corporation. He shall immediately deposit
all funds of the Corporation coming into his hands in some reliable bank or
other depository to be designated by the Board of Directors, or whenever
requested, a statement of the financial condition and results of the
Corporation, and shall perform such other duties as these Bylaws may provide or
the Board of Directors may prescribe. The Treasurer may be required to furnish
bond in such amount as shall be determined by the Board of Directors.
Section 5.07 OTHER OFFICERS. The duties of other officers elected by
the Board of Directors shall be such as are customary to their respective
offices and as shall be given them by the President.
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<PAGE>
ARTICLE 6.
SPECIAL CORPORATE ACTS
----------------------
NEGOTIABLE INSTRUMENTS, DEEDS AND CONTRACTS
-------------------------------------------
All checks, drafts, notes, bonds, bills of exchange, and orders for the
payment of money of the Corporation; all deeds, mortgages, and other written
contracts and agreements to which the Corporation shall be party; and all
assignments or endorsements of stock certificates, shall, unless otherwise
directed by the Board of Directors, be signed by the chief executive officer of
this Corporation. The Board of Directors or such officer may, however, designate
other officers, directors or employees of the Corporation any may authorize the
use of facsimile signatures of any such persons. Any shares of stock issued by
any other corporation and owned or controlled by the Corporation may be voted in
accordance with instructions approved by the Board of Directors, at any
shareholders' meeting of the other corporation by the chief executive officer of
the Corporation, if he is present or, in his absence, by such person as he
shall, by duly executed proxy, designate to represent the Corporation at such
shareholders' meeting.
ARTICLE 7.
ACTION WITHOUT MEETING
----------------------
Any action which properly may be taken by the directors, shareholders
or subscribers before there are shareholders may be taken without a meeting on
written consent, setting forth the action so taken, signed by all the persons or
entities entitled to vote thereon.
ARTICLE 8.
INDEMNIFICATION
---------------
Section 8.01 INDEMNIFICATION AND ADVANCES OF EXPENSES. To the fullest
extent permitted by the General Corporation Law of the State of Delaware
("GCL"), as the same now exists or may hereafter be amended, and, to the extent
required by the GCL, only as authorized in the specific case upon the making of
a determination that indemnification of the person is proper in the
circumstances because he or she has met the applicable standard of conduct
prescribed in Sections 145(a) and (b) of the GCL, the Corporation shall
indemnify and hold harmless any person who was or is a director, consultant,
officer or incorporator of the Corporation from and against any and all expenses
(including counsel fees and disbursements), judgments, fines (including excise
taxes assessed on a person with respect to an employee benefit plan), and
amounts paid in settlement that may be imposed upon or incurred by him in
connection with, or as a result of, any threatened, pending, or completed
proceeding, whether civil, criminal, administrative or investigative (whether or
not by or in the right of the Corporation), in which he is or may become
involved, as a party or otherwise, by reason of the fact that he is or was such
a director, consultant, officer, or incorporator of the Corporation or is or was
serving at the request of the Corporation as a director, consultant, officer,
incorporator, employee, partner, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including an employee
benefit plan), whether or not he continues to be such at the time such expenses
and judgments, fines and amounts paid in settlement shall have been imposed or
incurred. The Corporation shall be required to indemnify such a person who is or
was a director, consultant, officer, or incorporator in connection with a
proceeding (or part thereof) initiated by such person, however, only if the
initiation of such proceeding (or part thereof) by such person was authorized by
the Board. Such right of indemnification shall insure whether or not such
expenses and judgments, fines and amounts paid in
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<PAGE>
settlement are imposed or incurred based on matters which antedate the adoption
of this Article Eight. Such right of indemnification shall continue as to a
person who has ceased to be a director, consultant, officer or incorporator of
the Corporation, and shall inure to the benefit of the heirs and personal
representatives of such a person.
Expenses incurred by a person who is or was a director, consultant,
officer, or incorporator of the Corporation in defending or investigating a
threatened or pending action, suit or proceeding in which such person is or may
become involved, as a party or otherwise, by reason of the fact that he is or
was a director, consultant, officer, or incorporator of the Corporation or is or
was serving at the request of the Corporation as a director, consultant,
officer, incorporator, employee, partner, trustee, or agent of another
corporation, partnership, joint venture, trust or other enterprise (including an
employee benefit plan), shall be paid by the Corporation in advance of final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such person to repay such amount if it shall ultimately be
determined that he or she was not entitled to be indemnified by the Corporation
under this Article Eight or otherwise.
The rights of indemnification and advancement of expenses provided by
this Article Eight shall not be deemed exclusive of any other rights which are
or may be provided now or in the future under any provision currently in effect
or hereafter adopted of these Bylaws, by any agreement, by vote of stockholders,
by resolution of directors, by provision of law or otherwise.
Section 8.02 EMPLOYEES AND AGENTS. The Corporation may, to the extent
authorized from time to time by the Board of Directors, provide to employees and
agents of the Corporation who are not directors, consultants, officers or
incorporators, rights to indemnification and advancement of expenses similar to
those conferred in this Article Eight on directors, consultants, officers and
incorporators of the Corporation.
Section 8.03 REPEAL OR MODIFICATION. Any repeal or modification of this
Article Eight shall not adversely affect any rights to indemnification and
advancement of expenses of a director, consultant, officer or incorporator of
the Corporation existing pursuant to this Article Eight with respect to any acts
or omissions occurring prior to such repeal or modification.
Section 8.04 OTHER INDEMNIFICATION. The Corporation's obligation, if
any, to indemnify any person who is or was serving at its request as a director,
consultant, officer, incorporator, employee, partner, trustee, or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including an employee benefit plan), shall be reduced by any amount such person
actually receives as indemnification from such other corporation, partnership,
joint venture, trust or other enterprise.
ARTICLE 9.
AMENDMENTS
----------
These Bylaws may be altered, amended or replaced and new Bylaws adopted
by the affirmative vote of the holders of a majority of the outstanding stock at
any regular meeting of the shareholders or special meeting called for the
purpose, or by the affirmative vote of a majority of the entire Board of
Directors at any regular or special meeting of the Board, provided, however,
that if any shareholder or Director, as the case may be, should object to the
consideration of any proposed amendment, the proposal may not be voted upon
unless notice of the proposed amendment was given at least ten (10) days prior
to the meeting at which such objecting shareholder or Director is entitled to
vote. Any amendment, modification, repeal or addition to these Bylaws adopted by
the Board of Directors may be amended or repealed by the shareholders. The Board
is without authority to amend this Article 9.
-8-
EXHIBIT (10)
TENGTU INTERNATIONAL CORP.
1999 NON-QUALIFIED STOCK OPTION INCENTIVE PLAN
12. PURPOSE; EFFECTIVENESS OF THE PLAN.
(a) The purpose of the 1999 Tengtu International Corp. (the
"Company") 1999 Stock Option Incentive Plan (the "Plan") is to
advance the interests of the Company and its stockholders by
helping the Company obtain and retain the services of
employees, officers, consultants, counsel and directors, upon
whose judgment, initiative and efforts the Company is
substantially dependent, and to provide those persons with
further incentives to advance the interests of the Company.
(b) The Plan will become effective on the date of its approval by
the stockholders of the Company, provided such approval is
within twelve months of March 29, 1999, the date of adoption
by the Company's Board of Directors. If the Plan is not so
approved by the stockholders of the Company, any options
granted under this Plan will be rescinded and will be void.
The Plan will remain in effect until it is terminated by the
Board or the Committee (as defined hereafter) under section 9
hereof, OR DECEMBER 31, 2000, whichever is earlier. This Plan
will be governed by, and construed in accordance with, the
laws of the State of Delaware.
13. CERTAIN DEFINITIONS. Unless the context otherwise requires, the following
-1-
<PAGE>
defined terms (together with other capitalized terms defined elsewhere in the
Plan) will govern the construction of the Plan, and of any stock option
agreements entered into pursuant to the Plan:
(a) "1933 Act" means the federal Securities Act of 1933, as
amended;
(b) "Board" means the Board of Directors of the Company;
(c) "Committee" refers to the Board's Compensation Committee
consisting of two or more Disinterested and Non-Employee
Directors (as defined herein); provided that the term
"Committee" will refer to the Board during such times as no
Committee is appointed by the Board;
(d) "Company" means Tengtu International Corp., a Delaware
corporation;
(e) "Disinterested Director" means a member of the Board who does
not receive Options under the Plan other than the grant of a
Formula Option pursuant to section 4(m);
(f) "Eligible Participants" means persons who, at a particular
time, are employees, officers, consultants, or directors of
the Company or its subsidiaries or counsel to the Company or
its subsidiaries;
(g) "ESO" means an "Employee Stock Option" which is an Option
granted to a director, officer or employee of the Company;
(h) "Fair Market Value" means, with respect to the Stock and as of
-2-
<PAGE>
the date an Option or a Formula Option is granted hereunder,
the market price per share of such Stock determined by the
Committee as follows:
(i) the Fair Market Value will be equal to the
last-transaction price quoted by the NASDAQ system for any
date; or
(ii) if no trades in the Stock occurred on the date in
question, the Fair Market Value will be the last
transaction price quoted by the NASDAQ system for the last
date on which trades of the Stock occurred.
(i) "Formula Option" means an Option granted to non-employee
members of the Board of Directors pursuant to section 4(m)
hereof;
(j) "Non-Employee Director" means a director of the Company who:
(i) is not currently an employee or officer of the Company or
a parent or Subsidiary of the Company;
(ii) does not receive compensation, either directly or
indirectly, from the Company, or a parent or subsidiary of
the Company, for services rendered as a consultant or in
any capacity other than as a director, except for an
amount that does not exceed $60,000;
(iii) does not possess an interest in a transaction, to which
the Company, or a Company Subsidiary is a party, where the
amount involved in the transaction exceeds $60,000; and
(iv) is not an owner, executive officer or beneficial owner of
in excess of 10% of a business or professional entity:
-3-
<PAGE>
1. which during the Company's last fiscal year has made, or currently
proposes to make, payments to the Company, or a Company Subsidiary, for
property or services in excess of 5% of the Company's or its
Subsidiaries gross revenues for its last full fiscal year;
A. which during the Company's last fiscal year has received, or
currently proposes to receive, payments from the Company, or a
Company Subsidiary, for property or services in excess of 5%
of the Company's or its Subsidiaries gross revenues for its
last full fiscal year; or
B. to which, at the end of the Company's last fiscal year, the
Company owed a debt in excess of 5% of the Company's
consolidated assets;
(v) during the Company's last fiscal year, has not been a member
of, or counsel to, a law firm that the Company retained or
currently proposes to retain;
(vi) during the Company's last fiscal year, has not been a partner
or executive officer of any investment banking firm that has
performed services for the Company, or is currently proposed
to perform services for the Company, other than as a
participating underwriter in a syndicate.
a. "NSO" means "Non-employee Stock Option" which is any option
granted under this Plan which fails to qualify as an ESO
because is it granted to someone other than a director,
officer or employee of the Company;
-4-
<PAGE>
b. "Option" means an option granted pursuant to the Plan
entitling the option holder to acquire shares of Stock issued
by the Company;
c. "Option Agreement" means an agreement between the Company and
an Optionee, in form and substance satisfactory to the
Committee in its sole discretion, consistent with the Plan;
d. "Option Price" with respect to any particular Option means the
exercise price at which the Optionee may acquire each share of
the Option Stock called for under such Option;
e. "Option Stock" means Stock issued or issuable by the Company
pursuant to the valid exercise of an Option;
f. "Optionee" means an Eligible Participant to whom Options are
granted hereunder, and any transferee thereof pursuant to a
transfer authorized under the Plan;
g. "Plan" means this 1999 Stock Option Incentive Plan of the
Company;
h. "Stock" means shares of the Company's Common Stock, $.01 par
value;
i. "Subsidiary" means any company in which the Company has more
than a 30% ownership interest;
j. "Transfer," with respect to and Option or Option Stock,
includes, without limitation, a voluntary or involuntary sale,
assignment,
-5-
<PAGE>
transfer, conveyance, pledge, hypothecation, encumbrance,
disposal, loan, gift attachment or levy of such Option or
Option Stock, including without limitation an assignment for
the benefit of creditors of the Optionee, a transfer by
operation of law, such as a transfer by will or under the laws
of descent and distribution, an execution of judgment against
the Option Stock or the acquisition or record or beneficial
ownership thereof by a lender or creditor, a transfer pursuant
to any decree of divorce, dissolution or separate maintenance,
any property settlement, any separation agreement or any other
agreement with a spouse (except for estate planing purposes)
under which a part or all of the shares of Option Stock are
transferred or awarded to the spouse of the Optionee or are
required to be sold; or a transfer resulting from the filing
by the Optionee of a petition for relief, or the filing of an
involuntary petition against such Optionee, under the
bankruptcy laws of the United States or of any other nation.
2. ELIGIBILITY. The Company may grant Options under this Plan only to persons
who are Eligible Participants as of the time of such grant. Subject to the
provisions of sections 4(d), 5 and 6 hereof, there is no limitation on the
number of Options that may be granted to an Eligible Participant.
3. ADMINISTRATION.
a. COMMITTEE. The Committee will administer the Plan as set forth
herein. No grant of Options, except for Formula Options, shall
be made under the Plan without approval by the Committee.
-6-
<PAGE>
b. COMPOSITION OF THE COMMITTEE. The Committee shall be composed
of two or more Non-Employee Disinterested Directors.
c. AUTHORITY AND DISCRETION OF COMMITTEE. The Committee will have
full and final authority in its discretion, at any time and
from time to time, subject only to the express terms,
conditions and other provisions of the Company's certificate
of incorporation and by-laws, the Plan, Delaware law and the
specific limitations on such discretion set forth herein:
i. to select and approve the persons who will be granted
Options under this Plan from among the Eligible
Participants, and to grant to any person so selected one
or more Options to purchase such number of shares of
Option Stock as the Committee may determine;
ii. to determine the period or periods of time during which
Options may be exercised, the Option Price and the
duration of such Options, and other matters to be
determined by the Committee in connection with specific
Option grants and Options Agreements as specified under
this Plan;
iii. to interpret this Plan, to prescribe, amend and rescind
rules and regulations relating to this Plan, and to make
all other determinations necessary or advisable for the
operation and administration of this Plan; and
-7-
<PAGE>
d. LIMITATION ON AUTHORITY. Notwithstanding the foregoing, or any
other provision of this Plan, the Committee will have no
authority;
i. to grant Options to any of its members, whether or not
approved by the Board; and
ii. to determine any matters, or exercise any discretion, in
connection with the Formula Options under section 4(m)
hereof.
e. DESIGNATION OF OPTIONS. Except as otherwise granted hereunder,
the Committee will designate any Option granted hereunder
either as an ESO or an NSO. ESO's may only be granted to
persons who are directors, officers or employees of the
Company and/or its Subsidiaries.
f. OPTION AGREEMENTS. Options will be deemed granted hereunder
only upon the execution and delivery of an Option Agreement by
the Optionee and a duly authorized officer of the Company in
the form annexed hereto as Exhibit A. Options will not be
deemed granted hereunder merely upon the authorization of such
grant by the Committee.
4. SHARES RESERVED FOR OPTIONS.
a. OPTION POOL. The aggregate number of shares of Option Stock
that may be issued pursuant to the exercise of Options granted
under the Plan will not exceed three million (3,000,000) (the
"Option Pool").(1)
--------
(1) As at May 1, 1999 and before giving any effect to any stock split, reserve
split, recapitalization, combination or reclassification.
-8-
<PAGE>
b. ADJUSTMENTS UPON CHANGES IN STOCK. In the event of any change
in the outstanding Stock of the Company as a result of a stock
split, reverse stock split, stock dividend, recapitalization,
combination or reclassification, appropriate proportionate
adjustment will be made in: (i) the aggregate number of shares
of Option Stock in the Option Pool; (ii) the Option Price and
the number of shares of Option Stock called for in each
outstanding Option granted hereunder; and (iii) other rights
and matters determined on a per share basis under the Plan or
any Option Agreement hereunder. No such adjustment will be
required by reason of the issuance or sale by the company for
cash or other consideration of additional shares of its Stock
or securities convertible into or exchangeable for shares of
its Stock.
5. TERMS OF STOCK OPTION AGREEMENTS. Each Option granted pursuant to this Plan
will be evidence by an Option Agreement. Without limiting the foregoing, each
Option Agreement (unless otherwise stated therein) will be deemed to include the
following terms and conditions:
a. VESTING PERIODS. Except as otherwise provided herein, each
Option Agreement may specify the period of periods of time
within which each Option or portion thereof will first become
exercisable (the "Vesting Period").
i. Unless the Option Agreement, in the discretion of the
Committee, provides otherwise, for Eligible Participants
who are not directors, officers or employees of the
Company or any subsidiary of the Company, any options
granted under the Plan shall have no Vesting Period and
shall be immediately exercisable.
-9-
<PAGE>
ii. For Eligible Participants that are directors, officers or
employees of the Company or its Subsidiaries, the Option
will become exercisable, as to twenty percent (20%) of the
Option Stock on each of the first, second, third, fourth
and fifth anniversaries of such date of granting.
Therefore, the Option will only become fully exercisable,
subject to the Optionee's remaining an Eligible
Participant, on the fifth anniversary of granting.
b. EXERCISE OF THE OPTION.
i. MECHANICS AND NOTICE. An Option may be exercised to the
extent exercisable by giving written notice of exercise to
the Company, specifying the number of full shares of
Option Stock to be purchased and accompanied by full
payment of the Option Price; and (2) by giving assurances
satisfactory to the Company that the shares of Option
Stock to be purchased for investment and not with a view
to resale in connection with any distribution of such
shares in violation of the 1933 Act; provided, however,
that in the event the Option Stock called for under the
Option is registered under the 1933 Act, or in the event
resale of such Option Stock without such registration
would otherwise be permissible, this second condition will
be inoperative if, in the opinion of counsel for the
Company, such condition is not required under the 1933
Act, or any other applicable law, regulation or rule of
any governmental agency.
-10-
<PAGE>
c. OPTION PRICE. Each Option Agreement will specify the Option
Price with respect to the exercise of Option Stock thereunder.
The Option Price may not be less than Fair Market Value.
d. PAYMENT OF THE OPTION PRICE. The Option Price will be payable
to the Company in United States dollars in cash or by check
or, such other legal consideration as may be approved by the
Committee in its discretion.
e. TERMINATION OF THE OPTION. Except as otherwise provided
herein, each Option Agreement will specify the period of time,
to be fixed by the Committee in its discretion, during which
the Option granted therein will be exercisable, not to exceed
ten years from the date of grant in the case of an ESO (the
"Option Period"); provided that the Option Period will not
exceed five years from the date of grant in the case of an ESO
granted to a 10% Stockholder.
i. TERMINATION OF EMPLOYMENT. Any Option granted to a
director, officer or employee under the Plan shall
terminate (1) ninety days after the date that the Optionee
ceases to be an Eligible Participant for any reason, other
than by reason of death or disability or (2) twelve months
after the date that the Optionee ceases to be an Eligible
Participant by reason of such person's death or
disability.
ii. MERGER OR SALE. In the event of a sale or all or
substantially all of the assets of the Company, or a
merger or consolidation or
-11-
<PAGE>
other reorganization in which the Company is not the
surviving corporation, or in which the Company becomes a
subsidiary of another corporation (any of the foregoing
events, a "Corporation Transaction"), then notwithstanding
anything else herein, the right to exercise all then
outstanding Options will vest immediately prior to such
Corporation Transaction and will terminate immediately
after such Corporate Transaction; provided, however, that
if the Board, in its sole discretion, determines that such
immediate vesting of the right to exercise outstanding
Options is not in the best interests of the Company, then
the successor corporation must agree to assume the
outstanding Options or substitute therefor comparable
options of such successor corporation or a parent or
subsidiary of such successor corporation.
f. OPTIONS NONTRANSFERABLE. No Option will be transferable by
the Optionee otherwise than by will or the laws of descent
and distribution.
g. QUALIFICATION OF STOCK. If the Board determines that the
listing, registration or qualification of the shares of
Option Stock is necessary on any securities exchange or
under any state or federal law, or the consent or approval
of any governmental regulatory authority, is necessary or
desirable as a condition of the exercise of an Option, the
Option may not be exercised, in whole or in part, unless
and until such listing, registration, qualification,
consent or approval is effected or obtained free of any
conditions not acceptable to the Board.
-12-
<PAGE>
h. ADDITIONAL RESTRICTIONS ON TRANSFER. By accepting Options
and/or Option Stock under this Plan, the Optionee will be
deemed to represent, warrant and agree as follows:
i. SECURITIES ACT OF 1933. The Optionee understands that
the shares of Option Stock have not been registered
under the 1933 Act, and that such shares are not freely
tradeable and must be held indefinitely unless such
shares are either registered under the 1933 Act or an
exemption from such registration is available. The
Optionee understands that the Company is under no
obligation to register the shares of Option Stock.
ii. OTHER APPLICABLE LAWS. The Optionee further
understands that Transfer of the Option Stock requires
full compliance with the provisions of all applicable
laws.
iii. INVESTMENT INTENT. Unless a registration statement is
in effect with respect to the sale of Option Stock
obtained through exercise of Options granted hereunder:
(1) Upon exercise of any Option, the Optionee will
purchase the Option Stock for his or her own account
and not with a view to distribution within the meaning
of the 1933 Act, other than as may be effected in
compliance with the 1933 Act and the rules and
regulations promulgated thereunder and (2) no one else
will have any beneficial interest in the Option Stock.
-13-
<PAGE>
i. COMPLIANCE WITH LAW. Notwithstanding any other provision
of this Plan, Options may be granted pursuant to the Plan,
and Option Stock may be issued pursuant to the exercise
thereof by an Optionee, only after there has been
compliance with all applicable federal and state
securities laws, and all of the same will be subject to
this overriding condition. The Company will not be
required to register or qualify Option Stock with the
Securities and Exchange Commission or any state agency.
j. STOCK CERTIFICATES. Certificates representing the Option
Stock issued pursuant to the exercise of Options will bear
all legends required by law and necessary to effectuate
this Plan's provisions. The Company may place a "stop
transfer" order against shares of the Option Stock until
all restrictions and conditions set forth in this Plan and
in the legends referred to in this section 6(j) have been
complied with.
k. NOTICES. Any notice to be given to the Company under the
terms of an Option Agreement will be addressed to the
Company at its principal executive office, Attention:
Corporate Secretary, or at such other address as the
Company may designate in writing. Any notice to be given
to an Optionee will be addressed to the Optionee at the
address provided to the Company by the Optionee. Any such
notice will be deemed to have been duly given if and when
enclosed in a properly sealed envelope, addressed as
aforesaid, registered and deposited, postage and registry
fee prepaid, in a post office or branch post office
regularly maintained by the United States or Canadian
Government.
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<PAGE>
l. OTHER PROVISIONS. The Option Agreement may contain such
other terms, provisions and conditions, including such
special forfeiture conditions, rights of repurchase,
rights of first refusal and other restrictions on Transfer
of Option Stock issued upon exercise of any Options
granted hereunder, not inconsistent with the Plan, as may
be determined by the Committee in its sole discretion.
m. FORMULA OPTIONS. On the date on which the Board appoints a
director to the Committee for the first time, such
director will be granted a Formula Option to purchase __
shares of Stock. Immediately after the completion of each
annual meeting of the stockholders of the Company, each
member of the Committee will be awarded a Formula Option
to purchase __ shares of Stock. Formula Options will have
an Option Price equal to the Fair Market Value of the
Stock as of the date of such grant. Except as otherwise
specifically provided in this section 4(m), the terms of
this Plan, including the vesting provisions of section
4(a), will apply to all Formula Options granted pursuant
to this section 4(m).
6. PROCEEDS FROM SALE OF STOCK. Cash proceeds from the sale of shares of Option
Stock will be added to the general funds of the Company and will be used for
general corporate purposes.
7. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the terms and
conditions and within the limitations of the Plan, and except with respect to
Formula Options, the Committee may modify, extend or renew outstanding Options
granted under this Plan, or accept the surrender of outstanding
-15-
<PAGE>
Options (to the extent not theretofore exercised) and authorize the granting of
new Options in substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, however, no modification of any Option will,
without the consent of the holder of the Option, alter or impair any rights or
obligations under any Option theretofore granted under this Plan.
8. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or discontinue
this Plan at any time or from time to time; provided that:
a. no such action may, without the approval of the stockholders
of the Company, materially increase (other than by reason of
an adjustment pursuant to section 5(b) hereof) the maximum
aggregate number of shares of Option Stock in the Option Pool
that may be issued under Options granted pursuant to this Plan
or materially increase the benefits accruing to Plan
participants or materially modify eligibility requirements for
the participants, and
b. the provisions of section 4(m) hereof may not be amended more
often than once during any six (6) month period, and
c. no such action may alter or impair any Option previously
granted under this Plan without the consent of the holder of
such Option.
9. PLAN COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section
16 of the Securities Exchange Act of 1934, transactions under this plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the 1934 Act. To the extent any provision of the Plan or action
by the Plan administrators fails so to comply, it shall be deemed
-16-
<PAGE>
null and void, to the extent permitted by law and deemed advisable by the Plan
administrators. In accordance with Rule 16b-3, a grant of options to a
beneficial owner of more than 10% of the Company's Common Stock, who is not an
officer or director of the Company, will not be exempt under Rule 16b-3.
10. COPIES OF PLAN. A copy of this Plan will be delivered to each Optionee at or
before the time he or she executes an Option Agreement.
Date Plan Adopted by Board of Directors: March 29, 1999
Date Plan Approved by Stockholders: August 31, 1999.
-17-
<PAGE>
TENGTU CULTURE & EDUCATION ELECTRONICS DEVELOPMENT CO., LTD;
TENGTU ELECTRONIC PUBLISHING HOUSE & MICROSOFT (CHINA) LTD.
ESTABLISHMENT OF STRATEGIC COOPERATION PARTNERSHIP RELATIONSHIP
COOPERATION AGREEMENT FRAMEWORK
Party A: Tengtu Culture & Education Electronics Development Co., Ltd.
Tengtu United Electronics Development Co., Ltd.
Tengtu Electronic Publishing House
Party B: Microsoft (China) Co., Ltd.
Tengtu International Electronics Developing Co., Ltd.
1. Both parties agree to establish strategic cooperation partnership
relationships on the Chinese elementary/secondary educational market.
2. Party A is to consult with the Ministry of Education to become the
state appointed partner for Microsoft products and overall technical
service. Party A will positively develop market business.
3. In order to support the Chinese education business and the promotion of
Party A's overall "Application Solution Scheme for Information-Based
Education," Party B will offer its products at specially favored
prices.
4. Both parties agree to focus cooperation on application problems and
products. Party B promises to provide Party A with technical and
environmental support on the development of application systems based
on the former operating system platform. This will technically support
Party A to complete the state class Torch projects (General
Elementary/Secondary School Campus Network and Digital
Elementary/Secondary School Library) with high quality.
5. In order to further explore and establish information-based
elementary/secondary education market and create ongoing development
foundation, Party B will provide product for the "Overall Application
Solution Scheme for Information-Based Education." Party A and Party B
will positively support the Ministry of Education and relevant
organizations on the establishment of the "China Software Research and
Testing Centre for Information-Based Elementary/Secondary Education."
6. Both Parties agree to promote the "Overall Application Solution Scheme"
items and jointly formulate the market promotion plan. Party A will be
responsible for market promotion and product sales. Party B will
provide certain funds support for market promotion.
7. Party B will provide support to Party A, the Ministry of Education and
educational organizations of various provinces on the expiration of the
"21st Century Training Center for Information-Based
Elementary/Secondary Education" and the "General Information-Based
Education Overall Application Solution Scheme" items.
-18-
<PAGE>
8. Party B will authorize Party A to use Party B's materials (books,
software training material, lecture material, promotion materials,
etc.) To compile and distribute associated materials for the "Overall
Application Solution Scheme" item.
9. Both parties agree to carry out the various tasks associated the above
agreement as soon as possible and come up with a business plan which
includes:
a. Technical Development Cooperation Plan;
b. Marketing & Business Plan;
c. Technical Services Plan;
d. Publication Cooperation Plan.
10. Regarding promotion of this cooperation, both Parties shall consult and
confirm with each other.
11. Both Parties shall understand this agreement is only a framework.
Further substantial implementation plans are subject to signing of a
separate agreement.
Representative of Party A Representative of Party B
- -------------------------- ----------------------------
8/23/99 8/23/99
-19-
EXHIBIT (21)
LIST OF SUBSIDIARIES
NAME PERCENTAGE OWNERSHIP
- ---- --------------------
Tengtu United Electronics Development, Co. Ltd. 57%
(Joint Venture)
Iconix International, Inc. 44%
TIC Beijing Electronics Co., Ltd. 100%
Edsoft Platforms (Canada) Ltd. 55%
Edsoft Platforms (H.K.) Limited 100%
ebiztengtu.com, Inc. 100%
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