FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...........to...............
Commission File Number 000-29957
TENGTU INTERNATIONAL CORP.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0407366
--------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
206-5050 Kingsway, Burnaby, B.C., Canada V5H 4H2
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(Address of Principal Executive Offices)
(Zip Code)
(416) 368-8400
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(Registrant's telephone number, including Area Code)
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Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PREVIOUS FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: there were 24,176,321 shares
outstanding as of November 13, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
For the Quarter Ended September 30, 2000
AS AT AS AT
SEPT 30,2000 JUNE 30, 2000
(UNAUDITED)
----------- -------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 707,044 919,091
Accounts receivable, net of
allowance for doubtful accounts
of $200,097 75,989 36,009
Due from related party 96,890 170,123
Prepaid expenses 14,779 3,715
Inventories 0 18,071
Other receivables 14,803 5,588
----------------------------
Total Current Assets 909,505 1,152,597
----------------------------
PROPERTY AND EQUIPMENT, net 902,208 967,840
----------------------------
OTHER ASSETS
Notes receivable 71,940 71,940
Advance to director 67,511 60,011
License fees 118,750 125,000
Other assets 10,325 30,454
----------------------------
268,526 287,405
----------------------------
TOTAL ASSETS $ 2,080,239 2,407,842
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,710,440 $ 1,690,658
Accrued expenses 442,890 419,160
Related party loan payable 100,000 100,000
Due to related party consultants 1,565,026 1,415,026
Other liabilities 470,704 414,197
----------------------------
Total Current Liabilities 4,289,060 4,039,041
----------------------------
OTHER LIABILITIES
Related party loans payable 255,490 255,490
Convertible debenture, net of discount 1,213,688 1,194,334
----------------------------
1,469,178 1,449,824
----------------------------
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.01 per share;
authorized 10,000,000 shares;
issued -0- shares
Common stock, par value $.01 per share;
authorized 100,000,000 shares;
issued 23,890,607 shares 238,907 238,907
Additional paid in capital 11,871,444 11,871,444
Accumulated deficit (15,782,209) (15,184,374)
Accumulated Other Comprehensive Income (Loss):
Cumulative translation adjustment (5,357) (6,216)
----------------------------
(3,677,215) (3,080,239)
Less: Treasury stock, at cost,
78,420 common shares (784) (784)
----------------------------
Total Stockholders' Deficit (3,677,999) (3,081,023)
----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 2,080,239 2,407,842
============================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<S> <C>
SALES $ 1,143,446
COST OF SALES 1,035,967
------------
GROSS PROFIT 107,479
============
OPERATING EXPENSES
General and administrative 382,472
Related party consultants 180,000
Selling 73,765
Depreciation and amortization 13,504
------------
649,741
------------
OTHER INCOME (EXPENSE)
Interest income 5,436
Interest expense (61,009)
------------
(55,573)
------------
NET LOSS $ (597,835)
============
NET LOSS PER COMMON SHARE [Basic and Diluted] $ (0.025)
WEIGHTED AVERAGE NUMBER OF SHARES 23,890,607
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME(LOSS) DEFICIT INCOME(LOSS)
------ ------ ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 2000 23,890,607 238,907 11,871,444 -- (15,184,374) (6,216)
Other Comprehensive Income:
Foreign currency adjustment -- 0 0 859 0 859
Comprehensive Income:
Net loss -- -- -- (597,835) (597,835) --
------------
(596,976)
------------ ------------ ------------ ------------ ------------ ------------
Balance September 30, 2000 23,890,607 $ 238,907 $ 11,871,444 $(15,782,209) $ (5,357)
============ ============ ============ ============ ============
TREASURY UNAMORTIZED
STOCK AT DEFERRED STOCKHOLERS'
COST COMPENSATION DEFICIT
----------- ------------ ----------
Balance June 30, 2000 (784) 0 (3,081,023)
Other Comprehensive Income:
Foreign currency adjustment 0 0 859
Comprehensive Income:
Net loss -- -- (597,835)
------------ ------------ ------------
Balance September 30, 2000 $ (784) $ 0 $ (3,677,999)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net Loss $(597,835)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 73,392
Noncash interest expense-
convertible debenture 19,354
Changes in operating assets
and liabilities
Decrease(Increase)on operating assets:
Accounts receivable (39,980)
Due from related party 73,233
Prepaid expenses (11,064)
Inventories 18,071
Other receivables - current (9,215)
Advance to director (7,500)
Other assets 20,129
Increase (Decrease)in operating liabilities:
Accounts payable 19,782
Accrued expenses 23,730
Due to related party consultants 150,000
Other liabilities 56,507
---------
Net Cash Used by Operating Activities (211,396)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (1,510)
---------
Net cash Used by Investing Activities (1,510)
---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 859
---------
INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS (212,047)
CASH AND CASH EQUIVALENTS,
beginning of quarter 919,091
---------
CASH AND CASH EQUIVALENTS, end of quarter 707,044
=========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE>
NOTES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary in order to make the
financial statements not misleading have been included. Results for the three
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Tengtu International Corp. (the "Company") and Subsidiary's
annual report on Form 10-K for the fiscal year ended June 30, 2000.
The accompanying unaudited consolidated financial statements do not
contain comparative columns for the interim period ended September 30, 1999. The
Company has only recently gained the capability of producing quarterly financial
statements, filing its first Form 10-Q for the fiscal quarter ended December 31,
1999.
1. Principles of Consolidation
In accordance with Accounting Research Bulletin 51, the Company has
charged to income the losses applicable to the minority interests of
subsidiaries where such losses were in excess of the minorities' interests in
the equity capital of the joint venture and subsidiaries, including any
guarantees or commitments from minority owners for further capital
contributions.
2. Long-Term Debt
On December 23, 1999, The Company received cash in the amount of
$1,500,000 in exchange for a four year Floating Convertible Debenture
("Debenture") convertible into shares of Tengtu's $.01 par value common stock
("Common Stock") and a separate Common Stock Warrant ("Warrant") for the
purchase of 1,500,000 shares of Common Stock. The purchaser of the Debenture and
Warrant is Top Eagle Holdings Limited, a British Virgin Islands company ("Top
Eagle"). The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
The Hong Kong and Shanghai Banking Corporation plus two percent (approximately
9% as at September 30, 2000). The Debenture is convertible into the Company's
Common Stock at a conversion price of $.50 during the first year, $1.00 during
the second year, $2.00 during the third year and $4.00 on any date thereafter.
The unpaid balance of principal and interest outstanding at maturity, if any,
may be converted by the holder into the Company's Common Stock at the then
existing market price minus twenty percent.
The Warrant gives the holder the right to purchase 1,500,000 shares of
the Company's Common Stock at $1.00 per share during the first year, $2.00 per
share during the second year and $4.00 thereafter. The Warrant shall become void
three years after issuance. In connection with the purchase of the Debenture and
Warrant, The Company and Top Eagle entered into an Investor Rights Agreement
which provides that on or before June 15, 2000, Top Eagle may purchase
additional convertible debentures for up to $3.5 million and receive additional
warrants on substantially the same terms. Top Eagle did not exercise these
rights. The Investor Rights Agreement also provides the holder(s) of the
Debenture, Warrant and or the shares issued upon conversion or exercise thereof,
with registration and certain other rights. The effective interest rate of the
debenture is 8.5%.
Because no portion of the price paid by Top Eagle was for the Warrants,
the Warrants were assigned a value by the Company and the Debenture was
discounted by that amount. The interim financial statements reflect entries of
$346,154 for a discount to the Debenture and paid in capital for the Warrant.
This value was assigned as follows. On the date that the Debenture and Warrant
were sold to Top Eagle, the Company's stock was trading at $1.60 per share and
the Warrant was exercisable at $1.00. Therefore, the Warrant had a value between
$.00 and $.60 per share. The Company chose to value the Warrant at $.30 per
share. The gross amount of the Debenture and Warrant were therefore $1.5 million
(Debenture) plus $450,000 (Warrant - $.30 x 1,500,000) for a total of $1.95
million. Of the $1.95 million, the Warrant represents 23.08% ($450,000/$1.95
million). The discount to the Debenture was calculated by multiplying the
percentage of the total represented by the Warrant (23.08%) by the total
proceeds received from the sale ($1.5 million). The discount to the Debenture
was therefore equal to $346,154 and the Debenture was discounted to $1,153,846
($1.5 million - $346,154).
On the date the Debenture was issued, the conversion price was $.50 and
the market price was $1.60. The conversion feature was valued at the full
adjusted amount of the Debenture, after valuation of the Warrant, of $1,153,846.
Because the Debenture was immediately convertible, the full discount was charged
to interest expense for the fiscal year ended June 30, 2000.
3. Related Party Transactions
Due to the continued downsizing of the staff of the joint venture
(Tengtu United), the operations of the venture during the quarter ended
September 30, 2000 were carried out by the minority interest holder. At
September 30, 2000, the joint venture had a receivable balance of $96,980. At
June 30, 2000, the joint venture had a receivable balance from the minority
interest holder of $170,123. The Company advanced $7,500 to one of the officers
during the quarter.
During the quarter ended September 30, 2000, the Company incurred
consulting and related expenses of approximately $180,000 from officers and
directors of the Company or its subsidiaries or companies controlled by these
officers and directors. Only $30,000 in payments have been made for the quarter.
In January 2000, the Company and Comadex Industries, Ltd. entered into
a consulting agreement for the employment of Pak Cheung as the Company's
Chairman and CEO. Pursuant to that agreement Comadex received 3,000,000 common
shares for past services rendered, resulting in a charge to related party
consultants expense of $750,000. If Pak Cheung is able to raise $3,000,000 or
more in capital for the Company or a 50% or more owned joint venture or
subsidiary, Comadex shall receive an option to purchase 1,000,000 shares of the
Company's common stock at the closing price on the day the capital is received
by the Company.
On September 9, 1999 a Company director loaned $100,000 to the Company.
The loan bears interest at 6% per annum and is due in twelve months. The loan is
convertible at the option of the Company director at the rate of $0.35 per
share, or into an aggregate of 285,14 shares of the Company's common stock. The
loan is guaranteed by another director of the Company. At the date of the loan,
the Company's common stock was trading at $0.25 per share, therefore the loan
does not contain a beneficial conversion feature.
On April 1, 2000, the Company entered into a contract with a consultant
which terminates in April, 2002. Under the terms of the contract the consultant
will receive $10,000 per month, 250,000 common shares of the Company under a
vesting schedule which coincides with that of the contract, and two options to
purchase the Company's common stock for $1 per share. Both options represent
37,500 shares. The first option will be granted by December 1, 2000, and the
second option after December 1, 2000 and before April 1, 2001.
4. H.K.$2,000,000 Loan to Edsoft Platforms (Canada) Ltd.
A group of private investors, in July 1999, advanced approximately
$250,000 into Edsoft Platforms (Canada), Inc., one of the Company's
subsidiaries, as a shareholder's loan, bearing a 10% interest rate. One half of
the loan can be converted into common shares of the Company at $3 per share if
the loan is not paid in full at the maturity date of July 27, 2002.
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<PAGE>
5. License Fees
On June 21, 2000, the Company entered into a license agreement with
Netopia, Inc. The agreement grants the Company a fee-bearing, nonexclusive
license right to promote and otherwise market Netopia's web site product and
services to the Company's customers. The agreement shall continue in perpetuity
until terminated by either party. The cost of the agreement or $125,000 is being
amortized on a straight-line basis over five years. No amortization was recorded
for the year ended June 30, 2000 due to the short amortization period of nine
days.
6. Subsequent Events
a. On October 25, 2000, the Company entered into an investment
agreement with Swartz Private Equity, L.L.C. ("Swartz") (the "Investment
Agreement"). The Investment Agreement entitles the Company to issue and sell up
to $30 million of the Company's common stock to Swartz subject to a formula
based on the stock price and trading volume, from time to time over a three year
period, following the effective date of a registration statement on Form S-1.
The Investment Agreement defines each issuance and sale as a "Put."
Under the Investment Agreement, Swartz will pay the Company a
percentage of the market price for each share of common stock during the 20
business days immediately following the date the Company elects to sell stock to
Swartz in a Put is used to determine the price Swartz will pay and the number
of shares the Company will issue in return. For each share of common stock,
Swartz will pay the Company the lesser of:
- the "market price" for each share, minus $.075; or
- 92% of the "market price" for each share.
The "market price is the lowest bid price during the 20 day period preceding a
Put.
Each time the Company sells shares of its common stock to Swartz, it
will also issue five year warrants to Swartz to purchase its common stock in an
amount corresponding to 10% of the number of shares in the Put. Each warrant
will be exercisable at 110% of the market price for the applicable Put.
As consideration for making its financing commitment to the Company,
Swartz was issued a warrant to purchase 1,200,000 shares of the Company's common
stock exercisable at $.745 per share until October 25, 2005.
b. On October 6, 2000, Iconix International, Inc.'s ("Iconix") assets
and business were sold for $3,333,000. The Company owns 44% of Iconix and is
expected to receive a gain from the sale over what it invested in Iconix of
$580,000 over the next 12 months. The Company has received $220,000 of the
proceeds of the Iconix sale to date.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
COMPARISONS OF RESULTS OF OPERATION FROM THE FISCAL QUARTER ENDED
SEPTEMBER 30, 2000 AND THE CORRESPONDING PERIOD IN 1999 ARE NOT PROVIDED. WE
RECENTLY GAINED THE CAPABILITY OF PRODUCING QUARTERLY FINANCIAL STATEMENTS FOR
THE FISCAL QUARTER ENDED DECEMBER 31, 1999.
Liquidity and Capital Resources
For the fiscal quarter ended September 30, 2000, net cash used by
operating activities totaled $211,396, including net loss of $597,835 and
depreciation and amortization of $73,392. Accounts receivable, prepaid expenses,
advance to director and other receivables increased by $39,980, $11,064, $7,500
and $9,215, respectively, primarily due to the increase in sales activities at
Edsoft Platforms (H.K.) Ltd. ("Edsoft"), our new Toronto office and a $7,500
advance to a director. Noncash interest expense increased by $19,354 due to
amortization on the convertible debenture issued to Top Eagle Holdings, Ltd. in
December, 1999. Due from related party, inventories and other assets decreased
by $73,233, $18,071 and $20,129, respectively, primarily due to a loan repayment
from a related party and sale of inventory and a reduction in rent deposits.
Accounts payable, accrued expenses, due to related party consultants
and other liabilities increased by $19,782, $23,730, $150,000, $56,507,
respectively, primarily due to deferral of legal and consultants fees and
accrual of interest expenses on related party loans.
To conserve cash, the Company has not been paying it senior management
and consultants. Therefore, amounts due to related party consultants and
management increased by another $150,000 during the quarter for a accumulated
total of $1,565,026. Under the terms of a Board of Directors resolution,
payments to the consultants and management will not be made until the Company is
successful in a "major financing transaction." A "major financing transaction"
was not defined in the resolution.
Cash used by investing activities amounted to $1,510 primarily due
to an upgrade of production equipment for TIC Beijing Digital Pictures, Co. Ltd.
operations.
There were no financing activities during the fiscal quarter ended
September 30, 2000. However, on October 25, 2000, the Company entered into an
investment agreement with Swartz Private Equity, L.L.C. which may provide equity
financing of up to $30 million to the Company over the next three years
depending upon the volume of trading in the Company's stock and the price at
which it trades. A full description of the transaction with Swartz Private
Equity, L.L.C. is provided in "Changes in Securities and Use of Proceeds" below.
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<PAGE>
Revenues
--------
Sales increased by 571.4% from $170,303 for the fiscal quarter ended
June 30, 2000 to $1,143,446 for the fiscal quarter ended September 30, 2000
primarily due to a significant increase in installations of the "Total Solution"
by Beijing Tengtu United Electronics Development Co., Ltd. ("Tengtu United") in
China and Multimedia Digital Classroom by Edsoft in Hong Kong.
Gross Profit
------------
The Company recorded a gross profit of $107,479 for the fiscal quarter
ended September 30, 2000. This was an improvement from a gross loss of $1,333
for the fiscal quarter ended June 30, 2000. The Company had a gross margin of
9.4%. The gross margin was lowered by special promotion prices for the "Total
Solution" and low margins earned on system integration services performed by
Tengtu United.
Research and Development Expenses
---------------------------------
Research and development continued during the fiscal quarter ended
September 30, 2000 with the emphasis on product refocusing of the Tengtu
United's operations and modification of Tengtu United software for sale by
Edsoft in Hong Kong. Because the Company has not provided an additional
$6,000,000 in funding that it committed to Tengtu United, research and
development expenses were funded by Beijing Tengtu Culture & Education
Development Co., Ltd. ("Tengtu China"), our joint venture partner which is owned
by the following four Chinese companies: Legend Computer Group, Taiji Computer
Corporation, Great Wall Computer Group and Beijing Oriental Lian Fa Technology &
Trade Group, Co. Ltd. Zhang Fan Qi, one of the Company's directors, is the
Chairman of Beijing Oriental Lian Fa Technology & Trade Group Co., Ltd.
General and Administrative Expenses
-----------------------------------
General and administrative expenses decreased by 32.8%, from $569,372
for the fiscal quarter ended June 30, 2000, to $382,472 for the fiscal quarter
ended September 30, 2000, primarily due to professional fees and financing fees
incurred in the fiscal quarter ended June 30, 2000.
Related Party Consultants
-------------------------
Related party consultants expense decreased by 50.4%, from $362,813 for
the fiscal quarter ended June 30, 2000, to $180,000 for the fiscal quarter ended
September 30, 2000, primarily due to the amortization of the balance of deferred
compensation of $156,251 in the fiscal quarter ended June 30, 2000.
Selling Expenses
----------------
Selling expenses increased by 121.2% from $33,351 for the fiscal
quarter ended June 30, 2000, to $73,765 for the fiscal quarter ended September
30, 2000, primarily due to increased sales activities.
Interest Expense
----------------
Interest expenses of $61,009 for the fiscal quarter ended September 30,
2000 was primarily the interest on the convertible debenture issued to Top Eagle
Holdings, Ltd. in December, 1999 and related party loans.
Business Update
---------------
Tengtu United Electronic Development Co., Ltd. ("Tengtu United")
continued to work diligently with Beijing Tengtu Culture & Education Development
Co., Ltd. ("Tengtu China") to capture market share in the Chinese educational
software market which is maturing and which the Company believes has tremendous
growth potential. Tengtu United has cleared the previously existing installation
bottleneck that had existed with respect to installations of the "Total
Solution" with the assistance of Microsoft (China), Ltd. and has generated more
than $1 million sales in the fiscal quarter ended September 30, 2000. Tengtu
United Management believes that the clearing of the installation bottleneck will
enable it to accomplish installations at 3,000 schools which would result in
approximately $5 million in sales for the fiscal quarter ending December 31,
2000.
-8-
<PAGE>
On September 20, 2000, Tengtu China entered into an agreement with the
Chinese Ministry of Education under the auspices of the National Center for
Audio/Visual Education ("NCAVE") called "Operation Morning Sun." Under Operation
Morning Sun, the NCAVE made a commitment to direct the purchase by the end
of the calendar year 2000 of 3,000 educational software packages which could
result in sales of approximately $5.4 million by Tengtu United.
In addition, the NCAVE, Tengtu China and Legend Computer Group entered
into a cooperation agreement on September 20, 2000 known as the "Relief for
Disadvantaged Regions Project." Under this cooperation agreement, the NCAVE is
to purchase 5,000 units of Tengtu United's Total Solution. The Chinese Ministry
of Education, as well as the provincial education departments, have the right to
audit the school districts and individual schools. The Ministry of Education has
advised the Company that if it finds that a school is utilizing an unauthorized
version of a designated software program, such as a copy of the Company's
Network Classroom, or the Microsoft components to the Total Solution, it will
cut off information technology funding to that school.
In the fiscal quarter ended September 30, 2000, Tengtu China entered
into three contracts for the provision of the following systems integration
services by Tengtu United: purchase and supply of software hardware and related
materials and network installation, testing and tuning. The first contract is
with Qwai Zhou Normal University Attached High School and Qwai Zhou Qin Hwa Yuen
Information Technology Development Co., Ltd. That agreement calls for payments
of RMB 170,000 to Tengtu China for Tengtu United software. The second contract
is with the Inner Mongolia 1st High School and calls for payments of RMB 1.95
million to Tengtu China for Tengtu United software and services. The third
contract is with Zhong Yau Normal College and calls for payment of RMB 1,525,347
to Tengtu China for Tengtu United software and services.
On July 22, 2000 the Chinese Ministry of Education officially endorsed
the Company's "Total Solution" package for a General Elementary/Secondary (K-12)
School Network Information System for China schools. This endorsement on the
national level is evidence of the Ministry's support of the Company's mandate to
prepare China's educational infrastructure for the 21st century. In addition,
the Company believes that this endorsement sends a strong signal to all school
boards in China that the Ministry expects their full and serious cooperation in
implementing its plan, in which the Company is a key component. The Company's
Total Solution makes available via intranet and internet a comprehensive set of
tools not only for computerized class instruction, but for school administration
and the management of educational and multimedia resources as well. Designed
specifically to accommodate broadband internet connections via satellite and
cable, the Total Solution software is an ideal tool for distance learning.
Once the Total Solution project has been fully implemented with a
significant number of users in the Chinese school system, the Company plans to
become an ASP (Application Service Provider), and, through its licensing
agreement with Netopia, Inc., transform its education business model from its
present state of systems integrator/developer to high value added ASP/ICP
(Application Service Provider/Internet Content Provider).
Since the Company's June 30, 2000 fiscal year end, Edsoft Platforms
(H.K.), Ltd. ("Edsoft") has undergone a restructuring to focus on the sale of
its Multimedia Digital Classroom software in the Hong Kong market. Sales
commenced in July, 2000 and Edsoft's management believes that these sales will
increase. Edsoft's management also believes that Edsoft can benefit from the
Company's licencing agreement with Netopia, Inc.
On August 8, 2000, TIC Beijing Digital Pictures Co., Ltd. ("TIC
Beijing") entered into a contract with Beijing Hwa Yue Advertisement Co., Ltd.
in which it agreed to lease its post- production facilities and personnel until
September 2001 for a total of RMB 1,270,000. However, TIC Beijing has retained
the exclusive use of these facilities and personnel for two days each week and
the right to the use of these facilities and personnel when the lessee is not
using them, thus, enabling TIC Beijing to furnish any post-production required
by its strategic alliances.
On October 6, 2000, Iconix International, Inc. ("Iconix") (which was
44% owned by the Company but in which the Company had only a 30% voting
interest) was sold for $5,000,000 (Canadian). Barry Clark, the Company's
President, who was the President of Iconix, and former employees of Iconix, will
own approximately 8% of the stock in the acquiring company. The Company is
expected to receive a gain from the sale over what it invested in Iconix of
$580,000 over the next 12 months. The Company has received $220,000 of the
proceeds of the Iconix sale to date.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company operates through subsidiaries located principally in
mainland China and Hong Kong; the administrative office is in Vancouver, Canada.
The Company grants credit to customers in both geographic regions.
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<PAGE>
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 September
30, 2000 of $200,997. The Company believes any credit risk beyond this amount
would be negligible.
At September 30, 2000, the Company had approximately $300,000 of cash
in banks uninsured. The Company has balances in excess of the federally insured
amounts in U.S. banks.
The Company does not require collateral or other securities to support
financial instruments that are subject to credit risk.
Because the Company's subsidiaries in mainland China and Hong Kong, its
accounts receivable are also subject to foreign currency exchange rate risk in
the U.S. dollar/Chinese yen and U.S. dollar/Hong Kong dollar. These foreign
currency exchange rate risks are not hedged by the Company.
As of September 30, 2000, one customer 95.8% of total sales.
MARKET RISK SENSITIVE INSTRUMENTS
---------------------------------
FINANCIAL INSTRUMENT CARRYING VALUE FAIR VALUE
-------------------- -------------- ----------
Instruments entered into for trading purposes
NONE
Instruments entered into for
other than trading purposes
Cash and Cash equivalents
United States $ 570,986 $ 570,986
Foreign 136,058 136,058
---------- ----------
Total $ 707,044 $ 707,044
========== ==========
Accounts receivable, net
United States $ 67,511 $ 67,511
Foreign 259,622 259,622
---------- ----------
$ 327,133 $ 327,133
Total ========== ==========
Accounts payable
United States $1,130,876 $1,130,876
Foreign 3,158,184 3,158,184
---------- ----------
Total $4,289,060 $4,289,060
========== ==========
The financial instruments are short-term and are not subject to
significant market risk. Substantially all financial instruments are settled in
the local currency of each subsidiary, and therefore, the Company has no
substantial exposure to foreign currency exchange risk. Cash is maintained by
each subsidiary in its local currency.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in the Management's Discussion and Analysis section above.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, levels of activity,
performance or achievement of the Company, or industry results, to be materially
different from any future results, levels of activity, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in the United States, China and Canada; the ability of the Company to
implement its business strategy; the Company's access to financing; the
Company's ability to successfully identify new business opportunities; the
Company's ability to attract and retain key executives; the Company's ability to
achieve anticipated cost savings and profitability targets; changes in the
industry; competition; the effect of regulatory and legal restrictions imposed
by foreign governments; the effect of regulatory and legal proceedings and other
factors discussed the Company's Form 10 and 10-K filings. As a result of the
foregoing and other factors, no assurance can be given as to the future results
and achievements of the Company. Neither the Company nor any other person
assumes responsibility for the accuracy and completeness of these statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently a party to any pending legal proceeding, nor
does the Company know of any legal proceeding that any governmental authority
may be contemplating against the Company.
Item 2. Changes in Securities and Use of Proceeds.
(a) No constituent instruments defining the rights of the holders of the
Company's $.01 par value per share common stock have been materially modified
during the fiscal quarter ended March 31, 2000.
(b) No rights evidenced by the Company's $.01 par value per share common stock
have been materially limited or qualified by the issuance or modification of any
other class of securities during the fiscal quarter ended March 31, 2000.
(c) On October 25, 2000, the Company sold securities to Swartz Private Equity,
L.L.C. ("Swartz") pursuant to an investment agreement (the "Investment
Agreement") in reliance upon the exemption from registration under the
Securities Act of 1933 provided by Rule 506 of Regulation D. The basis for the
Rule 506 exemption is that Swartz meets the definition of an "accredited
investor" under Rule 502 of Regulation D. The following is a description of the
provisions of the Investment Agreement and related documents.
OVERVIEW
On October 25, 2000, the Company entered into an Investment Agreement
with Swartz Private Equity, L.L.C. The Investment Agreement entitles the Company
to issue and sell up to $30 million of the Company's common stock to Swartz,
subject to a formula based on our stock price and trading volume, from time to
time over a three year period, following the effective date of a registration
statement on Form S-1. The Company is currently preparing the registration
statement on Form S-1. Each election by the Company to sell stock to Swartz is
referred to as a "Put."
Each time the Company sells shares to Swartz, it will also issue five
(5) year warrants (referred to as purchase warrants) to Swartz in an amount
equal to 10% of the Put amount. Each purchase warrant will be exercisable at
110% of the market price for the applicable Put.
In addition, as consideration for making its financing commitment to
the Company, Swartz was issued a warrant to purchase 1,200,000 shares of common
stock exercisable at $.745 per share until October 25, 2005. This warrant is
referred to as the "commitment warrant." The commitment warrant contains
anti-dilution provisions, such that the number of warrants will be adjusted upon
the occurrence of certain events such as reverse stock splits and stock
dividends.
PUT RIGHTS
The Company may begin exercising Puts on the date of effectiveness of
the registration statement and continue for the shorter of a three year period,
or until the Company has Put amounts of common stock to Swartz totaling $30
million. To exercise a Put, the Company must have an effective registration
statement on file with the Securities and Exchange Commission covering the
resale to the public by Swartz of any shares that it acquires under the
Investment Agreement. Also, the Company must give Swartz at least 10, but not
more than 20, business days advance notice of the date on which it intends to
exercise a particular Put right. The notice must indicate the date the Company
intends to exercise the Put and the maximum number of shares of common stock the
Company intends to sell to Swartz. At the Company's option, it may also specify
a maximum dollar amount (not to exceed $2 million) of common stock that the
Company will sell under the Put. The Company may also specify a minimum purchase
price per share at which the Company will sell shares to Swartz. The minimum
purchase price cannot exceed the lesser of 80% of the closing bid price of the
Company's common stock on the day prior to the date the Company gives Swartz
notice of the Put or such closing bid price minus $.125.
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The number of common shares the Company sells to Swartz may not exceed
15% of the aggregate daily reported trading volume of the Company's common
shares during the 20 business days before or the 20 days after the date the
Company exercises a Put. Further, the Company cannot issue additional shares to
Swartz, when such shares added to the shares Swartz previously acquired under
the Investment Agreement during the previous 61 days prior to the exercise of a
Put, will result in Swartz beneficially owning holding over 9.99% of our
outstanding shares upon completion of the Put. A party beneficially owns common
stock which it has the right to acquire within sixty days, including shares
underlying warrants and options.
Swartz will pay the Company a percentage of the market price for each
share of common stock in a Put. The market price of the shares of common stock
during the 20 business days immediately following the date the Company exercises
a Put is used to determine the purchase price Swartz will pay and the number of
shares the Company will issue in return. This 20 day period is referred to in
the Investment Agreement as the "pricing period." For each share of common
stock, Swartz will pay the Company the lesser of:
-- the market price for each share, minus $.075; or
-- 92% of the market price for each share.
The Investment Agreement defines market price as the lowest closing bid
price for the Company's common stock during the 20 business day pricing period.
However, if the Company designates a minimum price in its Put notice, Swartz
must pay at least that price and the above formula will not apply. If the price
of the Company's common stock is below the greater of the price the Company
designates plus $.075, or the price the Company designates divided by .92 during
any of the 20 days during the pricing period, that day is excluded from the 15%
volume limitation described above. Therefore, the amount of cash that the
Company can receive for that Put may be reduced if the Company elects to
designate a minimum price per share and the Company's stock price declines.
The Company must wait a minimum of five business days after the end of
the 20 business day pricing period for a prior Put before exercising a
subsequent Put. The Company may, however, give advance notice of its subsequent
Put during the pricing period for the prior Put. The Company can only exercise
one Put during each pricing period.
WARRANTS
Within five business days after the end of each pricing period, the
Company is required to issue and deliver to Swartz a warrant to purchase a
number of shares of common stock equal to 10% of the common shares issued to
Swartz in the applicable Put. Each warrant will be exercisable at a price that
will initially equal 110% of the market price for the applicable Put. Each
warrant will be immediately exercisable and have a term beginning on the date of
issuance and ending five years later.
LIMITATIONS AND CONDITIONS TO OUR PUT RIGHTS
The Company's ability to Put shares of common stock, and Swartz's
obligation to purchase the shares, is subject to the satisfaction of certain
conditions. These conditions include:
-- satisfaction all obligations under the agreements entered into
between the Company and Swartz in connection with the Investment
Agreement;
-- the Company's common stock being listed and traded on Nasdaq, the
over-the-counter Bulletin Board, or an exchange;
-- the Company's representations and warranties in the Investment
Agreement must be accurate as of the date of each Put;
-- reservation for issuance a sufficient number of shares of common
stock to satisfy the Company's obligations to issue shares under any
Put and upon exercise of warrants;
-- the registration statement for the shares the Company will be
issuing to Swartz must remain effective as of the Put date and no stop
order with respect to the registration statement is in effect;
-- shareholder approval is required by the Investment Agreement if the
number of shares Put to Swartz, together with any shares previously Put
to Swartz, would equal 20% of all shares of our common stock that would
be outstanding upon completion of the Put.
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Swartz is not required to acquire and pay for any additional shares of
common stock once it has acquired $30 million worth of our shares in Puts.
Additionally, Swartz is not required to acquire and pay for any shares of common
stock with respect to any particular Put for which, between the date the Company
gives advance notice of an intended Put and the date the particular Put closes:
-- the Company announced or implemented a stock split or combination of
our common stock;
-- the Company paid a dividend on its common stock;
-- the Company made a distribution of all or any portion of its assets
or evidences of indebtedness to the holders of our common stock; or
-- the Company consummated a major transaction, such as a sale of all
or substantially all of its assets or a merger or tender or exchange
offer that results in a change in control.
The Company may not require Swartz to purchase any subsequent Put
shares if:
-- the Company, or any of its directors or executive officers, have
engaged in a transaction or conduct related to the Company's operations
that resulted in:
-- a Securities and Exchange Commission enforcement action,
administrative proceeding or civil lawsuit; or
-- a civil judgment or criminal conviction or for any other
offense that, if prosecuted criminally, would constitute a
felony under applicable law;
-- the aggregate number of days which the registration
statement is not effective or the Company's common stock is
not listed and traded on Nasdaq, the O.T.C. Bulletin Board or
an exchange exceeds 120 days;
-- the Company files for bankruptcy or any other proceeding
for the relief of debtors; or
-- the Company breaches covenants contained in the Investment
Agreement.
COMMITMENT AND TERMINATION FEES
If the Company does not Put at least $2,000,000 worth of common stock
to Swartz during the one year period following the effective date of the
registration statement, the Company must pay Swartz a non-usage fee. This fee
equals the difference between $200,000 and 10% of the value of the shares of
common stock the Company Put to Swartz during the one year period.
If the Investment Agreement is terminated, the Company must pay Swartz
the greater of (i) the non-usage fee described above, or (ii) the difference
between $200,000 and 10% of the value of the shares of common stock Put to
Swartz during all Puts to date.
SHORT SALES
The Investment Agreement prohibits Swartz and its affiliates from
engaging in short sales of the Company's common stock unless Swartz has received
a Put notice and the amount of shares involved in the short sale does not exceed
the number of shares the Company specifies in the Put notice.
CANCELLATION OF PUTS
The Company must cancel a particular Put if:
-- the Company discovers an undisclosed material fact relevant to
Swartz's investment decision;
-- the registration statement registering resales of the common stock
becomes ineffective; or
-- the Company's shares of common stock are either delisted from, or no
longer trading on, Nasdaq, the over-the-counter Bulletin Board or an
exchange.
If the Company cancels a Put, it will continue to be effective, but the
pricing period for the Put will terminate on the date the Company notifies
Swartz that the Company is canceling the Put. Because the pricing period will be
shortened, the number of shares Swartz will be required to purchase in the
canceled Put may be smaller than it would have been had the Company not canceled
the Put.
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<PAGE>
TERMINATION OF THE INVESTMENT AGREEMENT
The Company may terminate its right to initiate further Puts or
terminate the Investment Agreement at any time by providing Swartz with written
notice of its intention to terminate. However, any termination will not affect
any other rights or obligations the Company has concerning the Investment
Agreement or any related agreement.
CAPITAL RAISING LIMITATIONS
During the term of the Investment Agreement and for a period of sixty
(60) days after the termination of the Investment Agreement, the Company is
prohibited from entering into any private equity line agreements similar to the
Swartz Investment Agreement without obtaining Swartz's prior written approval.
The Company has agreed to give Swartz a Right of First Offer during
this same period, the term of the Investment Agreement plus sixty (60) days.
Under the right of first offer, the Company must give at least ten (10) days
written notice to Swartz of a proposed transaction at least ten (10) days prior
to the transaction closing. Swartz may elect to participate in the transaction
during this ten (10) day period.
Neither of the above restrictions apply to the following items and the
Company may engage in and issue securities in the following transactions without
notifying or obtaining approval from Swartz;
-- in connection with a merger, consolidation, acquisition, or sale of
assets;
-- in connection with a strategic partnership or joint venture, the
primary purpose of which is not simply to raise equity capital;
-- in connection with our disposition or acquisition of a business,
product or license;
-- upon exercise of options by employees, consultants or directors;
provided that no more than 1,000,000 option per year are issued to
consultants and no more than 250,000 options per consultant;
-- in an underwritten public offering of the Company's common stock;
-- upon conversion or exercise of currently outstanding options,
warrants or other convertible securities;
-- under any option or restricted stock plan for the benefit of
employees, directors or consultants;
-- upon the issuance of debt securities with no equity feature for
working capital purposes; or
-- the issuance of up to $2 million of convertible debt or equity
securities which are convertible at a fixed price that is not less than
75% of the closing price of the Company's common stock on the date of
the closing or purchase of the convertible security.
SWARTZ'S RIGHT OF INDEMNIFICATION
The Company has agreed to indemnify Swartz, including its owners,
employees, investors and agents, from all liability and losses resulting from
any misrepresentations or breaches the Company makes in connection with the
Investment Agreement, the registration rights agreement, other related
agreements, or the registration statement. The Company has also agreed to
indemnify these persons for any claims based on violation of Section 5 of the
Securities Act caused by the integration of the private sale of the Company's
common stock to Swartz and the public offering pursuant to the registration
statement.
(d) The Company is not required to furnish information pursuant to Rule 463 of
the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
During the fiscal quarter ended March 31, 2000, there have not been any
material defaults in the payment of principal, interest, a sinking or purchase
fund installment, or any other material default not cured within 30 days, with
respect to indebtedness of the Company or any of its significant subsidiaries
exceeding 5% of the total assets of the Company and its consolidated
subsidiaries.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
No matter has been submitted to a vote of the Company's security holders,
through solicitation of proxies or otherwise, during the fiscal quarter ended
September 30, 2000.
Item 5. Other Information.
The Company has no additional information top report that would be required
to be reported on Form 8-K.
Item 6. Exhibits and Reports on Form 8-K.
(a) Index of Exhibits
(2) Not Applicable
(3)(i) The Company's Certificate of Incorporation, and the amendments
thereto, have been filed as exhibits to its Form 10 dated May 25,
2000.
(3)(ii) The Company's Restated By-Laws have been filed as exhibits to its
Form 10 dated May 25, 2000.
(4) Instruments defining the rights of security holders, including
indentures - See the Company's Certificate of Incorporation and the
Amendments thereto.
(10) Exhibit (10) - Material contracts;
10.1 - Tengtu International Corp. Investment Agreement with
Swartz Private Equity, L.L.C. dated October 25, 2000;
10.2 - Agreement between National Center for Audio Visual
Education and Tengtu Culture and Education Electronics
Development Co., Ltd. dated September 20, 2000 - referred to
as "Operation Morning Sun";
10.3 - Cooperation Agreement among the Chinese National Center
for Audio/Visual Education of the Ministry of Education,
Tengtu China and Legend Group;
10.4 - Qwai Zhou Normal University Attached High School
Thousand Mega Campus Network System Agreement with Tengtu
China and Qwai Zhou Qin Hwa Yuen Information Technology
Development Co., Ltd. dated July 28, 2000;
10.5 - Zhong Yau Normal College Campus Network Contract with
Tengtu China dated September 10, 2000;
10.6 - Inner Mongolia 1st High School Campus Network Contract
with Tengtu China dated August 25, 2000;
10.7 - Equipment Lease contract between TIC Beijing Digital
Pictures Co., Ltd and Beijing Hwa Yue Advertisement Co., Ltd.
dated August 8, 2000;
10.8 - 1999 Non-Qualified Stock Option Incentive Plan (filed
as part of our Form 10 filed on May 25, 2000 and incorporated
herein by reference),
10.9 - English Translation of Microsoft Cooperation Agreement
(filed as part of our Form 10 filed on May 25, 2000 and
incorporated herein by reference),
10.10 - Consulting Agreement between Tengtu and B.D. Clark and
Associates, Ltd. (filed as part of our Form 10 filed on May
25, 2000 and incorporated herein by reference),
10.11 - Tengtu United Joint Venture Agreement and the
amendment thereto (filed as part of our Form 10 filed on May
25, 2000 and incorporated herein by reference),
10.12 - Iconix agreement with Dell Products, L.P. (filed as
part of our Form 10 filed on May 25, 2000 and incorporated
herein by reference),
10.13 - Employment agreement between Tengtu and Jing Lian
(filed as part of our Form 10 filed on May 25, 2000 and
incorporated herein by reference),
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<PAGE>
10.14 - Consulting agreement between Comadex Industries, Ltd.
and Tengtu (filed as part of our Form 10 filed on May 25, 2000
and incorporated herein by reference),
10.15 - Top Eagle Holdings, Ltd. Convertible Debenture and
Warrant Purchase Agreement (filed as part of our Form 8-K
dated December 23, 1999 and incorporated herein by reference),
10.16 - Top Eagle Holdings, Ltd. Investor Rights Agreement
(filed as part of our Form 8-K dated December 23, 1999 and
incorporated herein by reference),
10.17 - Top Eagle Holdings, Ltd. Convertible Debenture (filed
as part of our Form 8-K dated December 23, 1999 and
incorporated herein by reference),
10.18 - Top Eagle Holdings, Ltd. Common Stock Warrant (filed
as part of our Form 8-K dated December 23, 1999 and
incorporated herein by reference),
10.19 - Independent Contractor Agreement among us, 1334945
Ontario Limited and Gregory Mavroudis dated April 1, 2000
(filed as part of our Form 10-K dated September 28, 2000 and
incorporated herein by reference),
10.20 - Letter of Intent for Cooperation between Guandong
Southern Natural Museum Co., Ltd. and Tic Beijing (filed as
part of our Form 10-K dated September 28, 2000 and
incorporated herein by reference),
10.21 - License Agreement between us and Netopia, Inc. dated
June 21, 2000 (filed as part of our Form 10-K dated September
28, 2000 and incorporated herein by reference).
(11) Not applicable.
(15) Letter from Moore Stephens, P.C. re: unaudited financial information.
(18) Not applicable.
(19) Not applicable.
(22) Not applicable.
(23) Not applicable.
(24) Not applicable.
(27) Financial Data Schedule
(99) Not applicable.
(b) No reports on Form 8-K have been filed for the fiscal quarter ended March
31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENGTU INTERNATIONAL CORP.
--------------------------------
(Registrant)
Date: November 14, 2000 Pak Kwan Cheung
----------------- ---------------------------------
(Name)
/s/
---------------------------------
(Signature)
Chairman and Chief Executive Officer
-------------------------------------
(Title)
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