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
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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, other than its activities in seeking a potential business ventures.
On August 20, 1993, the Company changed its name to Tower Broadcast,
Inc. in order to assist it in searching for a suitable merger or reorganization
candidate. On March 20, 1996, the Company, under the name Tower Broadcast, Inc.,
was cleared by the National Association of Securities Dealers for an unpriced
quotation on the over-the-counter electronic bulletin board. The Company sought
such clearance because successful negotiation of one or more acquisition or
joint-venture opportunities seemed imminent and management foresaw a resultant
need to raise capital.
On May 28, 1996, the Company, in connection with a change in
management, changed its name to Tengtu International Corp. This name change was
accomplished to reflect the Company's intended business direction and its
affiliation with certain Chinese firms in the Chinese educational software
industry.
There have been several changes in the management and control of the
Company from the time of its formation in 1988. The Company was incorporated by
Patrick C. Brooks and the initial management and directors of the Company were
Patrick C. Brooks and Stephanie A. Brooks. Patrick C. Brooks and Stephanie A.
Brooks continued in their positions until February, 1995. On February 16, 1995,
Patrick C. Brooks resigned as a director of the Company and its President and
Chief Financial Officer and Stephanie A. Brooks resigned as a director of the
Company and its Secretary. On the same date, Mark A. DiSalvo became a director
and President and Chief Financial Officer of the Company and Leah DiSalvo became
a director and Secretary of the Company. On January 16, 1996, William C. Pierce
was also appointed as a director of the Company.
On May 31, 1996, Mark DiSalvo resigned as a director and President and
Chief Financial Officer of the Company, Leah DiSalvo resigned as a director and
Secretary of the Company and William C. Pierce resigned as a director of the
Company. On that date, Pak Kwan Cheung was elected and appointed as Chairman of
the Company's Board of Directors and as its President and Chief Executive
Officer, Stephen Dadson as a director and the Company's Secretary, John Donald
Watt, as a director and the Company's Treasurer and Francis Fox and Gordon Reid
as directors.
In June, 1996, Francis Fox resigned as a Company director and Jing Lian
and Nan Hai became directors of the Company. In or about January, 1997, Michael
Corneilissen became President and a director of the Company.
On March 14, 1997, Stephen Dadson was removed a Secretary and as a
director of the Company and Michael Corneillesen was removed a President and a
director of the Company by the Company's Board of Directors in order to clear a
management impasse and promote more efficient management of the Company.
On April 25, 1997, Barry Clark and Millard Roth were appointed as
directors. Barry Clark was also appointed as the Company President and Millard
Roth as a Vice President. In June, 1997, Michael Nikiforuk was appointed as a
Director of the Company. On August 31, 1999, Zhang Fan Qi was elected as a
director of the Company.
<PAGE>
Since August 31, 1999, the management and control of the Company have
remained the same.
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(60.2% owned by the Company) and Edsoft Platforms
(H.K.) Limited (wholly owned by Edsoft Platforms (Canada) Ltd. and therefore,
60.2% owned by the Company). These companies engage in the following lines of
business in China and Canada: systems integration, development and marketing of
educational and entertainment software, animation and multimedia.
The largest shareholders, other than the Company, in Iconix are
(percentages reflect ownership of common stock unless otherwise stated):
Ayelsworth Park Holdings Inc., a Canadian corporation (4.7%), Plum Hollow
Investments Inc., an Ontario, Canada corporation (4.7%), Capital Partners Fund
I, an Ontario, Canadian limited partnership (100% of convertible preferred
shares), B.D. Clark Investments Inc., an Ontario, Canada corporation (10.3%),
Greg McLelland (10.3%), James G. Poole (10.3%) and William C. Harker (2.3%).
B.D. Clark Investments Inc. is a company owned and controlled by Barry Clark,
the a Company director and its President. James G. Poole provides financial
consulting and accounting services to Iconix as an independent contractor. Greg
McLelland is an officer of Iconix.
Pursuant to a shareholders' agreement among the Iconix
shareholders, the consent of Capital Partners I is required for certain
corporate actions including, a change in the number of directors, articles of
incorporation or by-laws, a fundamental corporate change, the issuance,
redemption, purchase or other acquisition of shares in Iconix, declaration of
dividends or distributions, entering into contracts outside of the ordinary
course of business, any capital expenditure in excess of $100,000, appointment
of auditors, hiring of senior management with a compensation package in excess
of $100,000, establishment of subsidiaries and transactions with affiliates.
Under this shareholders' agreement, all shareholders, including minority
shareholders, have preemptive rights with respect to certain offerings of stock
in Iconix. In addition, Capital Partners I has the right to nominate one of
Iconix' six directors. None of the other minority shareholders may nominate a
director, however, Barry Clark, Greg McLelland, James Poole and Chris Dundas,
each of which is a minority shareholder, either individually, or through a
corporation they own or control, are Iconix directors.
The shareholders, other than the Company, in Edsoft Platforms
(Canada) Ltd. are: Goodwill Technologies, Ltd., a British Virgin Islands ("BVI")
company (17.7%) and Wing Fat Hong, Ltd., a BVI company (22.1%). The
understanding of the Company, Goodwill Technologies, Ltd. and Wing Fat Hong,
Ltd. grants the two minority shareholders one representative each on the five
person Board of Directors of Edsoft Platforms (Canada) Ltd. and also provides
that the two principals of Wing Fat Hong shall be employed by Edsoft Platforms
(Canada) Ltd. as its Executive Vice President and Vice President of
Administration and Corporate Development. Agreements reflecting the this
understanding have been prepared, but have not yet been executed.
Unanimous consent of all members of the Edsoft Platforms (Canada)
Ltd. Board of Directors is necessary for the following actions: amendment of the
charter, issuance of stock, mergers, asset sales, consolidations or exchanges of
Edsoft Platforms (Canada) Ltd. shares, issuance of dividends, dissolution of the
<PAGE>
company or a subsidiary, changes in legal counsel or auditors, changes in
corporate structure, changes in lines of business, bonus and incentive
compensation, incurring indebtedness or expenditures in excess of U.S.$50,000 in
the ordinary course of business and incurring expenditures in excess of $10,000
outside of the ordinary course of business.
TENGTU UNITED
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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.
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
<PAGE>
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:
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.
Tengtu realizes revenue from the sales of its software and a markup on
providing its "total solution," a bundled package of software marketed under the
name of Tengtu-Microsoft Total Solution to K-12 Schools. Tengtu is Microsoft
China's exclusive selling representative for the K-12 market in mainland China.
Both the Company's and Microsoft's software is integrated on one CD, with a
serial number, with both companies' names on the CD. Microsoft China produces
the joint CD and ships them to Tengtu United on a COD basis. The programs that
are visible to the end users developed by Tengtu United and Microsoft China have
been converted to Chinese characters. Each party pays its translation costs.
Certain of the Microsoft programs, which are not visible and commonly known as
"back room" programs, may not be translated.
Tengtu United ships the CD's received from Microsoft China to either
the school districts directly or, where applicable, to its local marketing
partners, which install the CD and any related hardware. Tengtu United and
Microsoft China are available at no charge to consult on the installation of the
programs. Microsoft China trains and subsidizes the cost of training for the
designee for each school.
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
<PAGE>
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. If the end user school buys directly from Tengtu United,
it is invoiced the retail price. Tengtu United has found it is more cost
effective and logistically more efficient to market to distributors who are
invoiced a wholesale price. All of the orders received have been shipped and
installation has been completed for approximately 300 schools because the
schools and distributors do not have adequate technical personnel.
Microsoft China and Tengtu United are cooperating to come up with a
solution to this installation bottleneck. Because Tengtu United views these
contracts as the first of a series of a potential series of many contracts, it
has delayed invoicing, when requested, until installation is complete. Because
the software and hardware offered by Tengtu United is new to the Chinese school
system, the Company believes that many schools and school districts will observe
how Tengtu United total solution is working before deciding whether to place an
order.
The Company had committed an additional $6,000,000 in funding to Tengtu
United for the fiscal year ended June 30, 1998 to develop the application
platforms needed by the K-12 market. Tengtu United realized that the software
titles developed by it could not be sold in sufficient volume because there was
no application software platform to enable the teachers and students to utilize
these programs. Tengtu United has not yet fulfilled its commitment 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 believes that it is 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.
Tengtu China's electronic publishing license was granted on
December 1, 1998 and is to be renewed each year. Although the current license
has expired, Tengtu China has received assurances from the Chinese Bureau of
News that it will be renewed and Tengtu China is in the process of filing its
renewal application. Despite the assurances received by Tengtu China, there can
be no guarantee that the license will be renewed.
With respect to the development and sale of application software
platforms to the K-12 market in mainland China, the Company is aware of two
competitors: IBM China and Novell China. The Company has no information as to
the nature and extent of their sales of application software platforms to the
K-12 market. There are a number of domestic Chinese companies, as well as
foreign companies, which produce individual software programs which can be
utilized by teachers and students. The Company has no knowledge of their sales
into the K-12 market at the school and school district level. Certain of these
programs are marketed by other companies directly to the students and
<PAGE>
their parents, but this is not the market in which the Company is initially
focusing.
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(TM)
product discussed below.
Tengtu United's competition in China consists of numerous Chinese and
foreign software manufacturers
TIC BEIJING
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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. Governmental approval is
required for the distribution and broadcast of foreign programs.
TIC Beijing's services are marketed by its own in-house marketing staff
with contacts in the Chinese television industry and through attendance at trade
shows and conferences.
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 was granted by the Bureau of News on October 11, 1997 and is
valid until October 10, 2017, and which is reviewed each year in accordance with
standard Chinese government policy. There is no other significant government
approval or regulation of its business.
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 for $214,000 [Canadian]. Iconix has 2
employees and 9 independent contractors. The independent contractors provide
executive services, through B.D. Clark & Associates, Inc., a consulting company
which is owned by Barry Clark, the Company's President and a director, and his
wife, finance services, sales, installation, technical and customer educational
services.
Iconix develops and markets middleware network management software
exclusively for the K-12 educational software market worldwide. Iconix'
UserNet(TM) product allows non-technical school staff to manage complex computer
networks with an
<PAGE>
easy to use tool set. All computing resources, including personal computers,
printers, internet resources, software applications and userfiles can be
centrally managed through UserNet(TM), resulting in savings in costs and
administrative task time. Iconix has sold approximately 750 upgrades since May
1997. Iconix had new sales of approximately 750 UserNets.
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. To date, Iconix has expended
approximately $250,000 of that funding in defining and developing network
interface software for Novell Networks with NDS directories and for Windows
2000. ACTIVE directory services and anticipates spending another $250,000 for
development of these new products prior to December 31, 2000. The estimated
dates of completion are for the interface with the Novell directories is June
30, 2000, and the interface with the Windows 2000 directory services is December
31, 2000. As at April 13, 2000, if Capital Partners I were to convert all of its
preferred shares, it would own 32% of Iconix' common stock and the Company would
own 30%.
UserNet is marketed and distributed through Iconix' sales force and
through its web site at WWW.ICONIX.COM. Its sales force consists of three
independent contractors, working under Greg McLelland, Iconix' President, who
each devote substantially all of its time to marketing UserNet and its updated
versions. Iconix' UserNet name is a registered trademark in Canada and the
UserNet source code is copyrighted.
EDSOFT PLATFORMS (CANADA) LTD. AND EDSOFT PLATFORMS (H.K.) LIMITED
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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. That loan is included in the the Company's
December 31, 1999 interim balance sheet below on the line item titled
"SHAREHOLDERS' LOAN." That line item, totaling $361,455, is comprised of the
H.K.$2,000,000 loan (U.S.$261,455) and an additional loan to the Company of
U.S.$100,000 from Zhang Fan Qi, who became a Company director. 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 the middle of May, 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.
<PAGE>
EMPLOYEES
The Company, exclusive of subsidiaries, has two full time employees and
six independent contractors.
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
<PAGE>
$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.
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 $(1,662,900) $(4,219,000) $(3,868,400)
in accompanying statements =========== =========== ===========
Identifiable assets: 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 $ 2,695,800 $ 3,156,200 $5,764,000
in accompanying statements =========== =========== ===========
</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
<PAGE>
for the past five years of operations presented on a consolidated basis as
required by Section 301 of Regulation S-K.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30,
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 FOR THE FISCAL YEAR ENDED JUNE 30, 1999
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LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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. The total
obsolete inventory writedown for the year ended June 30, 1999 was $101,870 which
was comprised of the following:
Educational and Entertainment Software $ 26,529
Hardware 51,398
Advertising Films (returned by customer) 15,245
Animation Film (terminated project) 8,698
---------
$101,870
The total obsolete inventory writedown was classified under "cost of sales" in
the Company's financial statements.
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.
<PAGE>
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.
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 is committed to contribute $6,000,000 to Tengtu United
pursuant to the Joint Venture Agreement between the Company and Tengtu China
dated July 30, 1996. Pursuant to that Joint Venture Agreement, and in return for
its funding commitment, the Company obtained a 57% interest in Tengtu United.
Pursuant to an amendment to the Joint Venture Agreement, there is no time period
in which the Company must provide the $6,000,000. However, the amendment
provides that after-tax profits may not be distributed to the Company until the
$6,000,000 funding commitment is fulfilled.
The Company has planned an expansion of TIC Beijing businesses of
pre-production and co-production of television shows, distribution of foreign
television programs and co-production of cartoons. This expansion requires an
additional investment of approximately $3 million.
The Company is presently involved in negotiating the raising of
additional capital through from a limited number of institutional investors by
way of the sale of its common stock and/or a debenture convertible into shares
of common stock, with warrants attached. The estimated proceeds from these
efforts, if successful, should be sufficient to satisfy all or substantially all
of its additional funding commitment to Tengtu United but may not be sufficient
to provide the $3 million investment for TIC Beijing.
When the Company meets its additional funding commitment to Tengtu
<PAGE>
United, it anticipates that it will account for the funding by making an entry
to "investment in Tengtu United" on its books and a corresponding entry to
shareholders' equity on Tengtu United's books. These entries will be eliminated
upon consolidation.
RESULTS OF OPERATIONS IN FISCAL 1999 COMPARED TO FISCAL 1998
- ------------------------------------------------------------
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
- --------
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
- ------------
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.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
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.
<PAGE>
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.
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.
<PAGE>
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. That
customer was Dell Properties, L.P. and the amount of the receivable was
$257,197.
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.
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.
RESULTS OF OPERATIONS IN FISCAL 1998 COMPARED TO FISCAL 1997
- ------------------------------------------------------------
Revenues
- --------
The Company derived its revenues from its systems integration,
educational and entertainment software, and animation businesses for the fiscal
years ended June 30, 1998 and June 30, 1997. Sales increased by 117.6% from
$2,135,066 for the fiscal year ended June 30, 1997 to $4,646,355 for the fiscal
year ended June 30, 1998. This increase is attributable to TIC Beijing and
Iconix emerging from their start up phases and generating sales beginning in
July, 1997. Sales by Tengtu United amounted to $2,776,605 ($2,125,702 in FY
1997). Sales by Iconix amounted to $1,423,185 (approximately $9,000 in FY 1997).
<PAGE>
Gross Profit
- ------------
Gross profit margins, expressed as a percentage of sales, increased
from 0.05% for the fiscal year ended June 30, 1997, to 11.4% for the fiscal year
ended June 30, 1998, due to less overhead costs per unit and a profit margin of
22.2% from Iconix's systems integration and software sales.
Research and Development Expenses
- ---------------------------------
Research and development expenses decreased 50.1% from $1,041,092 for
the fiscal year ended June 30, 1997, to $511,889 for the fiscal year ended June
30, 1998, due to decreased start up costs associated with the commencement of
operations of Tengtu United in the previous fiscal year. Research and
development expenses significantly decreased in the latter part of the fiscal
year ended June 30, 1998 because an additional $6,000,000 in financing was not
in place and the software market in China was not developing at the pace
expected by Management.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by 35.1% from
$2,627,152 for the fiscal year ended June 30, 1997, to $3,549,003 for the fiscal
year ended June 30, 1998, primarily due to the commencement of operations by
Iconix and TIC Beijing in July, 1997. In addition, the June 30, 1998 expenses
included an accrual of approximately $538,000 for a contingent liability for a
breach of lease agreement.
Advertising
- -----------
Advertising expenses increased by 233.9% from $41,793 for the fiscal
year ended June 30, 1997, to $139,550 for the fiscal year ended June 30, 1998,
primarily due to an advertising campaign by Tengtu China to gain a foothold in
the Chinese software market.
Selling
- -------
Selling expenses increased by 265.3% from $81,875 for the fiscal year
ended June 30, 1997, to $299,101 for the fiscal year ended June 30, 1998,
primarily due to the commencement of operations by TIC Beijing in July, 1997 and
the expansion of Tengtu United's sales team.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expenses increased by 78% from $66,992
for the fiscal year ended June 30, 1997, to $119,262 for the fiscal year ended
June 30, 1998, primarily due to the acquisition of machinery and equipment for
TIC Beijing's animation center.
Write down of goodwill
- ----------------------
The Company recorded a significant loss of $180,000 from the write
down of goodwill during the fiscal year ended June 30, 1998. As a result of that
<PAGE>
loss 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 Tengtu United (a joint venture) of
$200,000 ($100,000 cash and 2,000,000 common shares valued at $.05 per share) in
June 1996. Therefore, goodwill of $200,000 and related accumulated amortization
of $20,000 was written off.
Interest Income
- ---------------
Interest income decreased by 77.6% from $100,916 for the fiscal year
ended June 30, 1997, to $22,578 for the fiscal year ended June 30, 1998,
primarily due to a decrease in cash of $2,362,428 during fiscal 1998.
Other income
- ------------
Other income of $38,088 for the fiscal year ended June 30, 1998 was
primarily attributable to sales of technical support services and software
copyrights generated by Tengtu United.
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. The Company does not have supporting
documentation from the payees. In fiscal 1998, legal counsel of the Company
investigated these transactions. Despite these efforts, the Company has been
unsuccessful in discovering the purpose for these payments and therefore
believes these costs should be expensed.
Minority interests in subsidiary's earnings
- -------------------------------------------
Minority interests of $10,038 recorded for the fiscal year ended June
30, 1998 were due to a 55% minority interest in Iconix. Although the Company's
interest in Iconix fell below 50%, it retains voting control over Iconix. The
Company therefore consolidated Iconix into its financial statements and the
other shareholders are treated as the minority.
Minority interest in the loss of Tengtu United is limited to the
minority shareholders' capital investment. The cumulative loss of $1,400,355 not
realized by the minority shareholders was carried over for years in which Tengtu
United has net income or a year in which the minority shareholders contribute
more capital.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
For the quarter ended December 31, 1999, net cash used by operating
activities totaled $636,613, including a net loss of $598,389 and depreciation
and amortization of $70,128. Accounts receivable, prepaid expenses, inventories
and other receivables decreased by $192,011, $9,635, $75 and $2,458,
respectively, primarily due to Tengtu United's preparations relating to its
agreement with Microsoft (China) Co., Ltd. Due from related party increased
slightly by $8,588, primarily due to an advance of $7,500 to an officer.
<PAGE>
Accounts payable decreased by $189,399 primarily due to catch-up
payments made to suppliers by Iconix.
To conserve cash, the Company has not been paying its senior
management and consultants. Accordingly, the amounts due to related party
consultants increased by $120,000 during the quarter for an accumulated total of
$1,299,549. Past due payments to consultants have been deferred pending
completion of a subsequent financing and thereafter there will be a scheduled
reduction of the amounts past due to consultants.
Net cash used by investing activities amounted to $13,445 primarily
due to the acquisition of computer equipment for Edsoft Platforms (H.K.) Limited
and Edsoft Platforms (Canada), Ltd. operations.
During the fiscal quarter ended December 31, 1999, cash flow
increased by $1,500,000 as a result of the sale of a convertible debenture
purchased with warrants attached to Top Eagle Holdings, Ltd. The full details of
that transaction were reported in a Form 8-K dated December 23, 1999, which is
incorporated herein by reference.
The Company also received $189,750 from the sale of common stock to a
private investor, outside counsel's exercise of two stock options previously
granted to it, and an outside consultant's exercise of options granted in lieu
of services rendered.
Revenues
- --------
Sales decreased by 61.9% from $392,004 for the quarter ended
September 30, 1999 to $149,500 for the quarter ended December 31, 1999. TIC
Beijing did not receive a number of contracts on which it had submitted bids.
Also, Iconix did not receive anticipated orders because of delays due to school
board approval cycles.
Gross Profit
- ------------
There was a loss of $51,129 for the quarter ended December 31, 1999
due to a decrease in sales without a corresponding reduction in cost of sales.
Research and Development Expenses
- ---------------------------------
There were no research and development costs incurred by the Company
during the quarter ended December 31, 1999. However, Tengtu United research and
development expenses were borne by Tengtu China, the Company's joint venture
partner in Tengtu United, which is owned by the four following 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.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by 39.3% from $424,709
for the fiscal quarter ended September 30, 1999 to $591,776 for the fiscal
quarter ended December 31, 1999. This increase is primarily due to costs of
approximately $140,000 relating to the sale of a convertible debenture with
attached warrants to Top Eagle Holdings, Ltd. and the start up costs for Edsoft
(H.K.) Limited and Edsoft (Canada), Ltd. operations.
<PAGE>
Selling
- -------
Selling expenses increased slightly by 3.6% from $110,872 for the
fiscal quarter ended September 30, 199 to $114,879 for the fiscal quarter ended
December 31, 1999.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expenses increased slightly from
$10,045 for the fiscal quarter ended September 30, 1999 to $17,727 for the
fiscal quarter ended December 31, 1999 due to the purchase of computer equipment
for Edsoft Platforms (Hong Kong) Limited and Edsoft Platforms (Canada) Ltd.
operations.
Minority interests in subsidiary's earnings
- -------------------------------------------
The Company's total minority interests share of losses of Iconix and
Edsoft Platforms (Canada), Ltd. for the first half year ended December 31, 1999
are $136,401 and $66,528, respectively. These losses will be carried forward to
be absorbed by future earnings.
The Company's minority interest in Tengtu United's loss is limited to
the Company's capital investment. Any loss not realized by the minority will be
carried forward to be absorbed in the year(s) in which Tengtu United has net
income or in the year(s) that the minority contributes more capital. As at
December 31, 1999, the cumulative loss of Tengtu United being carried forward is
$1,625,010.
Trends, Events or Uncertainties
- -------------------------------
Under the terms of the strategic partnership 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 local school systems to purchase mandated
technology infrastructure improvements from the Company. Shipments are now
scheduled to commence in the last week in February, 2000.
Tengtu China, the Company's joint venture partner in Tengtu United,
holds one of only seven 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.
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.
<PAGE>
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 rights 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 and Edsoft (Canada), Ltd. were established
in July, 1999 to provide a "Total Solution" for information technology education
in Hong Kong. Edsoft initiated its marketing campaign in Hong Kong in February,
2000 and the Company anticipates that revenue will begin to be generated in
approximately May 2000.
Internal and External Sources of Liquidity
- ------------------------------------------
The Company received US $1.5 million in financing from the sale of a
convertible debenture, with warrants attached, to Top Eagle Holdings, Ltd. in
December, 1999. Proceeds will be used for the Company's marketing activities
throughout China and Hong Kong.
The Company received $250,000 from a private investor in the last
quarter of 1999. $150,000 was for the purchase of common shares and $100,000 was
a short term loan. These funds provided working capital for the Company.
The Company is seeking additional financing for working capital and
future business expansion.
Material Commitments for Capital Expenditures and Sources of Funds
- ------------------------------------------------------------------
No material commitments exist at this time.
Significant Income or expense Items
- -----------------------------------
1. See explanation above.
2. Tengtu United Electronics Development, Co. Ltd allocated most
of its resources to obtain (1) the approval of the Torch
projects from the Chinese government and (2) the strategic
alliance with Microsoft (China), Ltd. at the end of
calendar1999. Shipments to the Chinese schools pursuant to the
strategic alliance with Microsoft (China), Ltd. were delayed
until February, 2000.
Material Changes from Last Quarter
- ----------------------------------
See explanation above.
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
<PAGE>
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, 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. 4,070,750 17.13
common
Burnaby, B.C. Canada V5J 3X8
$.01 par Jing Lian - 3806 169th Street 870,750 3.7
common
Lynnwood, WA 98037
$.01 par John Watt - 335 Nepean Street 37,000 .15
common
Ontario, Ottawa Canada
$.01 par Hai Nan - c/o the Company - 206-5050 870,750 3.7
common
Kingsway, Burnaby, B.C. V5H 4H2
$.01 par Michael Nikiforuk - 155 University Ave., 200,000 .84
common Suite 1450, Toronto, Ontario M5H 3B7
$.01 par Zhang Fan Qi - c/o the Company, 206- 750,000 3.1
common 5050 Kingsway, Burnaby B.C. V5H 4H2
$.01 par Gordon Reid - 29 Riverbrook Road 353,224 1.5
common
Nepean, Ontario Canada K2H7W7
------------------------------------------------------------------
$.01 par B.D. Clark & Associates, Inc. 500,000 2.1 %
common 2253 Shardawn Mews, Missisauga,
Ontario, Canada L5C 1W6 **
------------------------------------------------------------------
<FN>
** Owned equally by Barry Clark and his wife, Brenda C. Clark.
</FN>
</TABLE>
2. SECURITY OWNERSHIP OF ALL 5% BENEFICIAL OWNERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
TITLE BENEFICIAL BENEFICIAL PERCENT
OF CLASS OWNER OWNER OF CLASS
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
$.01 par Pak Cheung - 7089 Frederick Ave. 4,070,750 17.13
common
Burnaby, B.C. Canada V5J 3X8
$.01 par Geomat Holdings, Inc. - Charlotte House 1,540,000 6.5
common
PON 4825, Nassau NP, Bahamas
Debenture
and warrant Top Eagle Holdings, Ltd. - c/o 4,500,000 15.9**
Yugang Int'l Ltd., Room 3301-4,
26 Harbour Rd., Hong Kong
<FN>
- --------------------------------------------------------------------------------
* To the Company's knowledge, no shareholder of Geomat Holdings, Inc. is an
officer or director of the company. The Company has been advised that Basil
Shackelford is the President of Geomat Holdings, Ltd., who also possesses
Geomat's voting and investment powers.
** Top Eagle Holdings, Ltd. currently holds a debenture convertible into the
Company's common stock and 1,500,00 warrants. If Top Eagle Holdings, Ltd. were
to convert its debenture and exercise all of its warrants prior to June 30,
2000, it would own 4,500,000 shares of the Company's common stock. After June
30, 2000, the conversion price of the debenture rises from $.50 to $1.00.
</FN>
</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
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Tengtu International Corp.
We have audited the accompanying consolidated balance sheet of Tengtu
International Corp. and its subsidiaries as of June 30, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tengtu
International Corp. and its subsidiaries as of June 30, 1999, and the results of
their operations and their cash flows for each of the two fiscal years in the
period then ended in conformity with United States generally accepted accounting
principles.
The accompanying statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2, the Company incurred a net
loss of $1,662,947 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.
<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>
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
Addi- Other
tional Comprehensive Compre-
Common Stock Paid-in Income(Loss) Accumulated hensive
Shares Amount Capital ------------ Deficit Income(Loss)
------------ ------- ----------- -------------
<S> <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 500,000 5,000 57,500 -- --
- - June 19, 1998
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) (4,219,004) --
-------
Comprehensive Income $ (4,224,758)
----------- -------
----------- ------------ ----------- =======
Balance - June 30, 1998 19,297,107 192,972 8,725,901 (8,352,743) (21,385)
Issuance of common
stock in exchange for
services at fair value 180,500 1,805 20,758 -- --
- - May 21, 1999
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) (1,662,947) --
-------
Comprehensive Income $ (1,646,712)
------------ -------- ----------- ------------ ----------- -------
Balance - June 30, 1999 19,477,607 $194,777 $ 8,746,659 $(10,015,690) $ (5,150)
======== =========== ============ =========== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tengtu International Corp. and Subsidiaries
Statement of Stockholders' Deficit
For the Years Ended June 30, 1999 and 1998
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Compre-
------------ Capital Income(Loss) Accumulated hensive
Shares Amount ------- ------------ Deficit Income(Loss)
------------- ----------- -------------
<S> <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, 500,000 5,000 57,500 -- --
1998
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) (4,219,004) --
-------
Comprehensive Income $ (4,224,758)
------------ ----------- -------
=======
Balance - June 30, 1998 19,297,107 192,972 8,725,901 (8,352,743) (21,385)
Issuance of common stock
in exchange for services
at fair value - May 21, 180,500 1,805 20,758 -- --
1999
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) (1,662,947) --
-------
Comprehensive Income $ (1,646,712)
------------ -------- ----------- ------------ ----------- -------
Balance - June 30, 1999 19,477,607 $194,777 $ 8,746,659 $(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>
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>
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.
<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.
<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.
<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.
<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, 1998, 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.
<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.
<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.
<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
<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.
<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.
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Financial Statements
June 30, 1998
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 United States 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 9,394,651
Accumulated deficit (8,594,930)
Cumulative translation adjustment (21,385)
-----------
971,308
Less: Treasury stock, at cost, 78,420 common shares (784)
Less: unamortized deferred compensation (476,563)
-----------
Total Stockholders' Equity 493,961
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,156,191
===========
</TABLE>
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,
1998 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 3,730,253 2,688,089
Advertising 139,550 41,793
Selling 299,101 81,875
Depreciation and amortization 119,262 66,992
Write down of goodwill 180,000 -0-
------------ ------------
4,980,055 3,919,841
------------ ------------
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 $ (4,390,216) $ (3,929,390)
============ ============
MINORITY INTERESTS IN SUBSIDIARY'S
EARNINGS 10,038 -0-
------------ ------------
NET LOSS $ (4,400,254) $ (3,868,453)
============ ============
NET LOSS PER COMMON SHARE
[Basic and Diluted] $ (.23) $ (.22)
18,813,545 17,470.174
WEIGHTED AVERAGE NUMBER OF SHARES
</TABLE>
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
Deferred compensation
related to common stock
issued fro services at
fair value 731,250 (670,313) 60,937
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- (3,929,390) -0- -0- -0- (3,929,390)
---------- --------- ---------- ----------- -------- ------ --------- -----------
Balance - June 30, 1997 18,797,107 $ 187,972 $9,399,678 $(4,194,676) $(15,631) $ (784) $(770,313) $ 4,606,246
Issuance of common stock
related to deferred
compensation 500,000 5,000 (5,000) -0- -0- -0- -0- -0-
Amortization of deferred
compensation related to
stock options and common
stock for services -0- -0- -0- -0- -0- 293,750 293,750
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- (4,400,254) -0- -0- -0- (4,400,259)
---------- --------- ---------- ----------- -------- ------ --------- -----------
Balance - June 30, 1998 19,297,107 $ 192,972 $9,394,651 $(8,599,930) $(21,385) $ (784) $ (476,563) $ 493,961
========== ========= ========== =========== ======== ====== ========= ===========
</TABLE>
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 $(4,400,254) (3,929,390)
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.
<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.
<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.
<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.
<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.
<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.
<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.
<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.
<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:
<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.
<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.
<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>
<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>
<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>
<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>
<PAGE>
NOTES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the
Companay for the six month periods ended December 31, 1999 and 1998 have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and include all adjustment (consisting of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
operating results and cash flows for those periods. These condensed consolidated
financial statements and notes thereto should be read in conjunction with the
audited consolidated financial statements for the fiscal year ended June 30,
1999 included in the Company's Form 10-KSB for the fiscal year ended June 30,
1999.
1. 1.5 million Convertible Debenture and Warrant
On December 23, 1999, Tengtu received an investment of U.S.$1,500,000
in exchange for a four year Floating Convertible Debenture ("Debenture")
convertible into shares of Tengtu's $.01 par value common stock ("Common Stock")
and a separate Common Stock Warrant ("Warrant") for the purchase of 1,500,000
shares of Common Stock. The purchaser of the Debenture and Warrant is Top Eagle
Holdings Limited, a British Virgin Islands company ("Top Eagle").
The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
The Hong Kong and Shanghai Banking Corporation plus two percent. The Debenture
is convertible into Tengtu's Common Stock at a conversion price of U.S.$.50
during the first year, U.S.$1.00 during the second year, U.S.$2.00 during the
third year and U.S.$4.00 on any date thereafter. The unpaid balance of principal
and interest outstanding at maturity, if any, may be converted by the holder
into 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 effective interest rate of the debenture is 8.5%.
2. Minority Interests
The statement of operations reflects a credit of $202,929 for the six
months ended December 31, 1999 which is comprised of the following:
<TABLE>
<CAPTION>
Minority Int.
SUBSIDIARY 6 MONTH LOSSES MINORITY % IN LOSS
12/31/99
- ---------- -------------- ---------- ----------
<S> <C> <C> <C>
Iconix $243,574 56 $136,401
Edsoft Platforms (Canada) Ltd. 42,555 45 19,150
Edsoft Platforms (H.K.) Limited 105,284 45 47,378
-------------
</TABLE>
$202,929
The $202,929 credit does not include any catch-up amount for losses not
previously allocated to minority interests due to a lack of a funding
commitment. The total amount of the credit is to be absorbed by the minority
shareholders.
3. Issuances of Shares
During the six month period ended December 31, 1999, the Company
issued 1,080,000 shares of its common stock as follows. All issuances were
either based on market value at the time of issuance or were the result of the
exercise of options previously issued.
SHAREHOLDER NO. OF SHARES SHARE PRICE TOTAL PROCEEDS
- ----------- ------------- ----------- --------------
Zhang Fan Qi (Director) 750,000 $.200 $150,000
Hecht & Steckman, P.C. 150,000 .125 18,750
(legal counsel)
Hecht & Steckman, P.C. 60,000 .100 6,000
The Cavior Organization 120,000 .125 15,000
(P.R. Firm)
-------------
1,080,000
4. Commitment to Issue Shares/Subsequent Events
In January, 2000, the Company and Comadex Industries, Ltd. entered
into a consulting agreement for the employment of Pak Cheung as the Company's
Chairman and CEO. Pursuant to that agreement, if Pak Cheung is able to raise
$3,000,000 or more in capital for the Company or a 50% or more owned joint
venture or subsidiary, Comadex shall receive an option to purchase 1,000,000
shares of Tengtu stock at the closing price on the day the capital is received
by Tengtu.
5. Subsequent Events/Agreement with Microsoft China
Pursuant to a cooperation agreement with Microsoft China, Tengtu
United began delivery of a bundled package of software to the Chinese K-12
schools. The average retail price charged to the schools is $2,500. Sales made
through distributors are at a discount from retail.
6. H.K.$2,000,000 Loan to Edsoft Platforms (Canada) Ltd.
In July, 1999, Goodwill Technologies Ltd. loaned Edsoft Platforms
(Canada) Ltd. H.K.$2,000,000 ($U.S.261,000) in exchange for a debenture
convertible into Tengtu's common stock if the loan is not repaid in three years.
<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 (9) - Voting Trust
4. Exhibit (10) - Material contracts
- 1999 Non-Qualified Stock Option Incentive Plan
- English Translation of Microsoft Cooperation Agreement
- Consulting Agreement between Tengtu and B.D. Clark and
Associates, Ltd.,
- Tengtu United Joint Venture Agreement and the amendment
thereto,
- Iconix agreement with Dell Products, L.P.,
- Employment agreement between Tengtu and Jing Lian,
- Consulting agreement between Comadex Industries, Ltd. and
Tengtu.,
- UserNetTM Software Acquisition Agreement,
- Consulting Agreement between Tengtu and B.D. Clark and
Associates, Ltd.,
- Top Eagle Holdings, Ltd. Convertible Debenture and Warrant
Purchase Agreement contained in the Tengtu December 23, 1999
Form 8-K.
- Top Eagle Holdings, Ltd. Investor Rights Agreement contained
in the Tengtu December
23, 1999 Form 8-K.
- Top Eagle Holdings, Ltd. Convertible Debenture contained in
the Tengtu December
23, 1999 Form 8-K.
- Top Eagle Holdings, Ltd. Common Stock Warrant contained in the
Tengtu December 23, 1999 Form 8-K.
5. Exhibit(16) - Letter re: Change in Certifying Accountant
6. Exhibit (21) - List of Subsidiaries
7. Exhibit(99) - Additional Exhibits
- December 23, 1999 Form 8-K
- September 24, 1997 Form 8-K
- Tengtu International Corp. and Subsidiaries audited financial
statements for the fiscal year ended June 30, 1998
- Tengtu International Corp. and Subsidiaries audited financial
statements for the fiscal year ended June 30, 1999
- Tengtu International Corp. and Subsidiaries unaudited
financial statements for the fiscal quarter ended December 31,
1999
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
<PAGE>
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:
-1-
<PAGE>
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.
-2-
<PAGE>
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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<PAGE>
(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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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<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
- ----------------------------
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<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.
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<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
- -----------------------------------------
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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
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<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.
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<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.
Exhibit (9)
Agreement
The undersigned hereby acknowledge and agree to the following:
1. Mr. Jack Lian is the trustee of 2,000,000 shares of Tengtu International
Corporation (TIC) issued in the name of Jing Lian, and Mr. Pak Cheung is the
trustee of 1,483,000 shares of TIC issued in the name of Pak Cheung. For
purposes of this agreement, the aggregate total of these 3,483,000 shares are
hereinafter referred to as the Trust Shares.
2. The actual beneficial owners of the Trust Shares are as follows with the
number of shares owned by each person indicated next to their names:
Pak Cheung 870,750 shares Jack Lian 870,750 shaares Xiaofeng Lin 870,750 shares
Hai Nan 870,750 shares
3. Mr. Jack Lian and Mr. Pak Cheung shall, as soon as practicable, cause the
Turst Shares to be reissued and/or transferred to the actual beneficial owners
in their appropriate names in accordance with section 2 of this agreement.
/s/
- -----------------
/s/
- -----------------
/s/
- -----------------
/s/
- -----------------
Pak Cheung
Jack Lian
Xiaofeng Lian
Hai Nan
3/29/99
Acknowledged and agreed. Signed on March 29, 1999 at Toronto, Ontario, Canada.
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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
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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
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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:
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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;
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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,
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<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.
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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
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<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.
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<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.
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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.
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<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
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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.
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<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.
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<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
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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
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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.
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Exhibit (10)
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.
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<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
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THIS AGREEMENT made this March 21st 1997
BETWEEN:
TENGTU INTERNATIONAL CORP.
a body corporate incorporated under the
laws of Delaware having its head
office at
(hereinafter referred to as "Tengtu")
AND:
B.D. CLARK & ASSOCIATES INC.
2253 Shardawn Mews
Mississauga, Ontario
L5C 1W6
(hereinafter referred to as the "Consultant")
<PAGE>
WHEREAS, Tengtu's business opportunities can be grouped into two categories,
identifiable as education and entertainment.
AND WHEREAS, Consultant has experience with and knowledge of Tengtu and can be
of assistance in furthering its business objectives;
AND WHEREAS, Tengtu and Consultant wish to enter into an agreement whereby
Consultant will provide such assistance to Tengtu;
NOW THEREFORE, in consideration of the mutual covenants and agreements set forth
herein, Tengtu and Consultant agree as follows:
I.
AGREEMENT
Tengtu hereby engages Consultant to provide the service to Tengtu outlined in
Article 2 hereof and Consultant agrees to provide the same, upon the following
terms and conditions.
II.
CONSULTANT SERVICES
Consultant will nominate one of its officers to assume the position of President
which duties shall include the development and field implementation of
strategies for Tengtu produce lines as well as Marketing Strategies and
quantified Revenue and Profit objectives as required to satisfy operating plan
objectives, including but not limited to capital infusions, mergers and
acquisitions, revenues and profit objectives and share price.
III.
TENGTU OBLIGATIONS
Tengtu shall provide suitable office space, parking, secretarial assistance,
stationery, postage, telephone and other such standard support services to
Consultant at its premises as and where determined by Consultant.
IV.
CHARGES AND PAYMENT TERMS
4.1
For the services provided hereunder, Tengtu shall pay Consultant at the rate of
one hundred and ninety- two dollars ($192.00) per hour plus expenses, as
determined by Consultant.
4.2
The parties agree that the minimum billable hours to be provided under this
contract are 3,600 hours and that the total paid will not exceed six hundred and
twelve thousand dollars ($612,000) without the prior written consent of Tengtu.
4.3
Allowable business costs for which Consultant is to be reimbursed are the usual
business related travel and entertainment expenses of a professional consultant
inclusive of business related telephone calls on Consultant's car phones.
4.4
Payment shall be made the last working day of each month provided Consultant
submits an itemized invoice
<PAGE>
for hours worked and expenses incurred at least three (3) working days in
advance.
4.5
Effective with the signing of the agreement Tengtu agrees to provide Consultant
with a retainer of $15,000, which will be returned in full at the satisfactory
completion of this contract.
V.
TERM
This Agreement shall be in effect from the date first mentioned in this
Agreement until March 31, 2000, provided only that either party may terminate
the Agreement, without cause, on sixty (60) days prior written notice. If Tengtu
so terminates the Agreement a termination payment of two hundred thousand
dollars ($200,000) is immediately due and payable, if neither Barry Clark nor
Pak Cheung is Chief Executive Officer. If Pak Cheung or Barry Clark is Chief
Executive Officer at the time, the termination payment will be reduced by one
hundred thousand dollars ($100,000).
VI.
INCENTIVE REMUNERATION
6.1
Effective with the signing of this Agreement Tengtu agrees to cause to be vested
to Consultant 500,000 shares of Tengtu at no cost to Consultant. These shares
will be subject to a voting trust for two years in favour of Pak Cheung.
6.2
At each anniversary of this contract or at achievement of each objective,
Consultant will receive a performance bonus in cash or equity (equity to be
determined based on latest month and share price) or a combination as agreed to
by Consultant and Tengtu equal to percentages identified in Table A attached of
capital funds raised, revenue/profit achieved, alliances and acquisitions
attained and share price increases.
6.3
Effective with the acquisition of the Iconix project (to be identified as such
by Consultant) Consultant will receive a one-third interest in the share equity
of the Iconix equity at Consultant option, at no cost to Consultant.
6.4
Effective with completion of each corporate acquisition by Tengtu, Consultant
will receive a 10.1% interest in the share equity of each project at
Consultant's option at no cost to Consultant. Each acquisition will be subject
to Board approval and Consultant may charge percentage in conjunction with
executive compensation packages that Consultant is to design.
VII.
INDEPENDENCE
The relationship between Tengtu and Consultant is solely that of principal and
independent contractor and without limiting the generality of the foregoing,
Consultant shall not under any circumstances be considered to be an employee of
Tengtu.
VIII.
LOCATION OF SERVICE
The services to be provided by Consultant shall be at any location deemed
appropriate by the Consultant. It is understood and agreed, however, that
Consultant shall undertake such travel, at Tengtu expense as may be required
form time to time.
INDEMNIFICATION
Each party shall indemnify and hold the other harmless from any loss, costs,
damages or expenses which the other may sustain and arising out of anything done
or omitted to be done by the indemnifying party . This provision shall survive
the termination of this
Agreement.
10.
ASSIGNMENT
This Agreement or any of its benefits or liabilities may not be assigned by
either party without the prior written consent of the other party.
APPLICABLE LAW
This Agreement shall be construed and governed solely in accordance with the
laws of the Province of Ontario and the parties specifically submit to the
exclusive jurisdiction of the courts of the said Province.
FURTHER ASSURANCE
The parties shall execute or cause or permit to be made, done or executed all
such further and other lawful acts, deeds, things, devices, conveyances and
assurances in law, as may be required, to carry out the true intent and to give
full force and effect to this Agreement.
NOTICE
Any notice, direction of instrument shall be given in writing and be mailed
postage prepaid by registered mail or delivered by one party to the other at the
address of the party first written above and, if delivered, shall be deemed to
have been given or made on the day on which it was delivered, or if mailed,
shall be deemed to have been given or made on the third business day following
the date after which it was mailed and either of the parties hereto may, from
time to time give notice of any change of their addresses in the manner herein
provided and, in such event, the address of the party shall be deemed to be
changed accordingly.
14.
HEADINGS
The section headings hereof are for the convenience of the parties only and
shall not be given any legal effect or otherwise affect the interpretation of
this Agreement.
15.
TAXES
Tengtu shall reimburse Consultant for all Goods and Services or Provincial Sales
taxes arising out of his provision services under this Agreement. This does not
include any liability for income taxes for which Consultant shall be solely
responsible.
16.
SEVERABILITY
If any provision of this Agreement shall be or become illegal or unenforceable
in whole or in part, the remaining provisions shall nevertheless be valid,
binding and subsisting.
TABLE A
ATTACHED TO SECTION 7
<PAGE>
CAPITAL FUNDS First $5,000,000 4.0%
Balance 2.0%
REVENUE ACHIEVEMENTS On an annual basis 2.0%
ALLOWANCES/ACQUISITIONS At each transaction 5.0%
SHARE PRICE INCREASES On annual measurement of
increase per share times
outstanding shares issued 7.5%
These percentages are subject to downward adjustment by Consultant in
conjunction with the executive remuneration package that Consultant is
designing. The overall executive remuneration is subject to Board approval and
Consultant acknowledges that the business percentages for the executives and
Consultant will be relative and that he will evaluate accordingly.
TENGTU INTERNATIONAL CORP.
PROPOSED CORPORATE BONUS SCHEDULEJ.
- -----------------------------------
The following are proposed bonus scheme to executives and directors of the
company for their direct contributions to successful undertakings listed below.
In cases where more than one person is involved in the undertaking, the bonuses
have to be apportioned according to either (a) a mutually agreed to bonus
sharing formula among the persons having involvement, or, (b) the Corporate
Bonus Sharing Formula depicted in Note 1.
Undertaking accomplished
- ------------------------
Total Corp.
Form of
Allocation (%)
- --------------
Payment
- -------
Capital raised from external sources
3
Cash
(Amount of cash raised)
Mergers and Acquisition
3
(Transaction value)
Shares
Strategic Relationship
3
Shares
(Resulting increase in revenue
forecast for two years)
<PAGE>
Gross Revenue
1
Shares
(Current year for first two years)
Profit
1/4
Shares
(Before tax profit, commencing
on the third year)
Note 1: Corporate Bonus Sharing Formula (Applicable to Capital raised,
Mergers and Acquisition, and Strategic Relationships.)
a. If only two persons are involved with one lead person, lead person
takes 2/3 and the other person takes 1/3
b. If three persons are involved with one lead person, lead person
takes 1/2 and the other persons share the remaining.
If three persons are involved with two lead persons, lead persons take
1/2 and 3/4 each and the other person takes the remaining. c. If more than three
persons are involved with two lead persons, lead persons take 1/3 each and other
persons take the remaining.
Exhibit (10)
JOINT VENTURE AGREEMENT
THIS AGREEMENT ("Agreement") is dated for reference the 30th day of July 1996
BETWEEN:
BEIJING TENGTU CULTURE & EDUCATION ELECTRONIC DEVELOPMENT CO. LTD. a Chinese
Company duly incorporated under the laws of China and having an office in
Beijing China.
("Party A")
AND:
TENGTU ENTERPRISES LIMITED. a Company duly incorporated under the laws of
Barbados with offices at Beckwith House Hinks and Prince Albert Streets
Bridgetown Barbados.
("Party B")
(Part A and B are collectively called the Parties)
BEIJING TENGTU UNITED ELECTRONICS DEVELOPMENT CO LTD a Chinese Foreign Joint
Tengtu United with offices at ________
(Tengtu United)
WHEREAS:
XI.
Party A has acquired certain licence and rights as described on Schedule A
(Rights) in connection with its principal business (Business) being the
production and distribution of educational software in China to the elementary,
middle and junior schools (Schools System).
XII.
Party A is controlled by three Chinese state organizations Legend Group Co.,
Taiji Computer Corporation, and Great Wall Computer Group Co. (Chinese
Principals).
<PAGE>
XIII.
Tengtu United is a Chinese Foreign Joint venture that is authorized to assume
the Business of Party A with foreign investors upon certain financial
commitments being made by Part B as described herein.
XIV.
Blue Lake Industries Ltd a Washington State Company was approved by MOFTEC as a
foreign investor in Tengtu United on June 12th 1995 (Effective Date) and has
under separate agreement effective July 30th 1996 assigned its interests to
Party B.
XV.
The parties hereto have agreed to form this joint venture upon entering this
agreement which sets out the terms and conditions under which Tengtu United will
operate the Business.
NOW THEREFORE IN CONSIDERATION of the mutual promises contained herein, the
parties hereto agree as follows:
1.2
Purpose and Scope
XVI.
- -----------------
Tengtu United has been formed to carry on the business of Party B to:
1.
produce and distribute in China by the year 2001, 5,000 electronic educational
software titles in accordance with the Rights;
2.
produce and distribute animated cartoons in association with Chinese animation
companies and as permitted by law;
3.
be a gateway for electronic publishing in China;
4.
engage in such other activities as are reasonably incidental to the foregoing.
1.3
Scope of Authority
5.
- ------------------
Except as otherwise expressly and specifically provided in this Agreement,
neither Party A or Party B shall have the authority to act for or assume any
obligations or responsibility on behalf of the other or Tengtu United. Neither
Party A or Party B shall be liable to each other for any expense, damage, loss
or liability as may be caused by the gross negligence or willful neglect of that
other or by a failure by that other to carry out the obligations of the other
under this Agreement. This Agreement shall not be deemed to create a general
partnership between the Party A or Party B it respect to any activities
whatsoever.
1.4
Principal Place of Business
- ---------------------------
The principal place of business of the Tengtu United shall be in Beijing China
however the principal place of business may be changed at any time by a
resolution of the Board.
1.5
Term
- ----
The term of the Tengtu United will commence as of the date hereof and shall
continue, for a term no less than 20 years from the Effective Date unless sooner
terminated, in accordance with other provisions of this Agreement ("Term").
2.
Responsibilities of Party A:
A.
To transfer and assign the Rights to Tengtu United; B.
To transfer and assign the Titles and all work in progress in new Titles to
Tengtu United; C. To transfer and assign all material contracts used in the
Business to Tengtu United; D.
To allow Tengtu United to use all equipment including computer work stations
that Party A used in the business at no cost; E.
To stop all operational activities in connection with the Business; and F.
To assist Tengtu United in securing future rights that relate to its Business
and assist Tengtu United to maintain good relations between Tengtu United and
all governmental and state agencies.
3.
Responsibilities of Party B
(1)
To pay to Tengtu United the sum of $12,000,000 US as follows:
1.
6,000,000 on or before July 30th 1996; and
2.
$6,000,000 on or before July 30th 1997 failing which interest will be payed to
Tengtu at the rate of 1% over the average Libor rate (Interest) over the period
that the said funds are in default and if the said funds are not paid by January
1st 1998 the Party B's percentage interest in Tengtu United will reduce by an
amount equivalent to the percentage of the amount actually contributed less
interest over $12,000,000.
MANAGEMENT
- ----------
3.1
Directors
- ---------
1.
The parties agree that the Board of Directors (Board) of Tengtu United will
consist o equal representation where Party A selects the Chairman of Tengtu
United and Party B selected the President of Tengtu United.
2.
The Parties agree that the Board of Directors will create a Board composed of an
equal representative of each Party of so many more thereafter as the Tengtu
Uniteds agree.
3.
The quorum at any meeting of the Board shall be two persons, provided each of
party A and B is represented by its representative(s).
<PAGE>
4.
A resolution of the Board shall be passed by a majority vote and each
representative is entitled to one vote.
3.2
Meetings of the Board
- ---------------------
1.
The board shall convene and meet as needed.
2.
Any action required to be taken by the Board may be taken without a meeting if
all the members of the Board entitled to vote thereon consent in writing to such
action, whether such written consent shall be in the form of a handwritten,
typewritten or in the form of a telecopy of a signed copy.
3.
The Board in conducting any meeting may, in lieu of a face to fact meeting,
conduct such meeting by conference telephone or other communications facility by
means of which all persons participating in the meeting can hear and speak to
each other.
3.3
Duties of the Board
- -------------------
Except as otherwise expressly provided, the overall management and control of
the affairs of the Tengtu United shall be vested in the Board which shall have
control over the day to day business of the Tengtu United, including the power
to assign duties, approve budgets, sign contracts, pay accounts and assume
direction of business operations subject to the specific control of the Tengtu
Uniteds.
3.4
Manager of the Tengtu United
- ----------------------------
Except as otherwise expressly provided herein, the day to day management of the
Tengtu United may be undertaken by the President and a General Manager who will
be appointed from time to time by the Board.
3.7
Other Business Activities
- -------------------------
The Tengtu China many engage in or possess any interest in any other business of
any nature or description EXCEPT any business that competes directly or
indirectly with Tengtu United independently or with others..
4.
Proprietary Rights
- ------------------
The parties agree that Tenngtu United absolutely retains ownership to the Rights
and any rights or technologies hereafter acquired and or developed.
5.
Confidentiality
- ---------------
(a)
Each Party from time to time shall disclose to the other and to Tengtu United
orally or in writing, any Confidential Information which is necessary for the
Business. If such disclosure is made in writing, it shall be marked with a
legend "Confidential".
<PAGE>
(b)
Each Party will also treat all Confidential Information developed within the
Tengtu United as if it were the Tengtu United's own Confidential Information.
6.
CAPITAL, DISTRIBUTIONS AND COSTS
- --------------------------------
6.1
Percentage Interest
- -------------------
Except as hereinafter provided, the Parties agree tht they have the following
interests ("Percentage Interest") in Tengtu United:
Party A
- -
51%
Party B
- -
49%
and that, save and except as otherwise provided herein, they shall each share in
the profits or losses of the Tengtu United and in all distributions of assets of
the Tengtu United in accordance with their respective Percentage Interests.
6.2
No Interest on Capital
- ----------------------
No interest shall be paid upon any contributions to the capital of the Tengtu
United nor upon any undistributed or reinvested income or profits of the Tengtu
United.
6.3
Withdrawals of Capital
- ----------------------
Except as otherwise provided herein, no portion of any capital of the Tengtu
United may be withdrawn at any time without the express consent of the Board to
be given by resolution. Upon the termination of the Tengtu United, the Tengtu
United's capital shall be distributed pursuant to this agreement.
6.4
Distributions
- -------------
1.
Not more than 30 days following the end of each fiscal quarter the Board shall,
by resolution, determine from the net cash flow of the Tengtu United the cash
available for distribution (the 'Cash Available for Distribution").
2.
The Cash Available for Distribution shall be distributed to the Parties by
resolution of the Board in accordance with each parties Percentage Interest.
7.0
ACCOUNTING
- ----------
7.1
Books and Records
- -----------------
<PAGE>
The Board shall appoint an international outside audit firm to report on the
affairs of Tentgtu United. Internally it shall cause accurate books and records
of account to be prepared and maintained and in which shall be entered all
matters relating to the Tengtu United, including all income, expenditures,
assets and liabilities thereof. Such books and records of account shall be kept
in accordance with generally accepted accounting principals and practices and
shall be adequate to provide each Party with all financial information as may be
needed by them or an affiliate for purposes of satisfying the financial
reporting obligations of each Party of its respective affiliate which in the
case of Party B requires quarterly reporting. Said books and records of account
shall be open to examination and/or audit by any of the Partys or their
authorized representatives at all reasonable times during the normal business
hours. Any expense for such examination and/or audit shall be borne by the
Tengtu United causing it to be conducted.
7.2
Fiscal Year
- -----------
The fiscal year end of the Tengtu United shall be determined by resolution of
the Board. If the Tengtu United shall terminate for any reason provided herein,
the period following the last day of the fiscal year of the Tengtu United first
preceding the date of such termination and ending on the date of such
termination, shall also be deemed to be a fiscal year of the Tengtu United.
7.3
Bank Accounts
- -------------
Funds of the Party B shall be deposited in an account(s) in the name of the
Tengtu United and in a bank(s) approved by the Board. The designate of the Board
may draw against such accounts for any purpose permitted by this Agreement in
accordance with a Board resolution.
8.0
Sale and Transfer
- -----------------
8.1
General
- -------
Except as expressly permitted herein no Party may mortgage, charge or otherwise
encumber, or suffer any third party to mortgage, charge or otherwise encumber,
any part or all of its interest in the Tengtu United ('Interest") unless
approved by the other Party such approval not to be unreasonably withheld.
8.2
Sale to Affiliate
- -----------------
A Party may sell, transfer or otherwise dispose of the whole or any part of its
Interred to an affiliate provided that the Party and the affiliate enter into an
agreement with the other Tengtu United that:
(a)
an affiliate will remain such so long as the affiliate holds the Interest or any
part thereof;
(b)
prior to the affiliate ceasing to be such, the affiliate will transfer its
Interest back to the Party or to another affiliate of the Party provided that
such other affiliate enters into a similar agreement with the other Party; and
(c)
the affiliate will otherwise be bound by and have the benefit of the provisions
of this Agreement.
<PAGE>
9.0
DEFAULT AND DISSOLUTION
- -----------------------
9.1
Events of Default
- -----------------
The occurrence of any of the following events shall constitute an event of
default ("Event of Default") hereunder:
(a)
the failure by a Party to make any capital contribution as required in herein;
(b)
any transfer by a Party of its Interred hereunder, except as may be permitted
herein;
(c)
a general assignment by a Party for the benefit of creditors;
(d)
the filing by a Party of a petition of Bankruptcy which petition remains
undismissed and undischarged for a period of 90 days.
(e)
default in performance of any other material agreements of a Party herein if the
default continues for a period of 60 days following written notice of such
default, except that an Event of Default shall not be deemed to have occurred if
any such default is of a non material nature or that it reasonably requires more
than 60 days to cure, and is capable of being fully cured within a reasonable
time, and the defaulting Party is diligently proceeding to cure said default.
9.2
Causes of Dissolution
- ---------------------
The Tengtu United shall be dissolved in the event that:
(a)
an Event of Default has occurred and the non-defaulting Party elects to dissolve
the Tengtu United as provided herein;
(b)
the Board determines by resolution to terminate the Tengtu United;
(c)
the Tengtu United by its terms is terminated.
9.3
Election
- --------
(a)
If an Event of Default has occurred, the non-defaulting Party, if it so notifies
the defaulting Party within thirty (30) days after acquiring knowledge of such
Event of Default, may elect to terminate the said Party pursuant to this
Agreement;
(b)
The election shall be exercised by written notice. No waiver of any right to so
elect upon a subsequent or continuing default of the same or different nature
shall be implied from any failure on the part of a non-defaulting Party to make
the election permitted by agreement as a result of any prior Event of
<PAGE>
Default.
9.4
Procedure in Dissolution and Liquidation
- ----------------------------------------
(a)
Upon the election of a Party to dissolve the Tengtu United pursuant to this
agreement or upon the occurrence of any other event Tengtu United shall
immediately commence to wind up its affairs and the Party shall proceed with
reasonable promptness to liquidate the business of Tengtu United. To the extent
the Tengtu United is not completely liquidated within a reasonable time (not to
exceed 36 months) from the date of the election to dissolve, the remaining
assets shall forthwith be disposed of at a public sale.
(b)
During the period of the winding up of the affairs of the Tengtu United, the
Board shall continue to manage the affairs of the Tengtu United.
(c)
Profits and losses of the Tengtu United shall be determined as of the end of the
period of winding up in accordance with the provisions of this Agreement and
shall be credited or charged to each Party in the same manner as profits and
losses of each Party would have been credited or charged if there were no
dissolution, liquidation and termination.
(d)
The assets of the Tengtu United shall be applied or distributed in liquidation
in the following order of priority:
(i)
to creditors of the Tengtu United other than Tengtu Uniteds in payment of debts
and obligations of the Tengtu United;
(ii)
to each Party as return of any capital; and
(iii)
to each party in accordance with their Percentage Interest.
10
SETTLEMENT OF DISPUTES AND GOVERNING LAW
- ----------------------------------------
10.1. In the event a dispute arises in connection with the interpretation or
implementation of this Agreement, the parties to the dispute shall attempt in
the first instance to resolve such dispute through amicable consultations If the
dispute cannot be resolved in this manner within thirty (30) days after first
conferring, then any or all parties to the dispute may refer the dispute to
arbitration in Beijing International Arbitration Committee ("Committee"). The
number of arbitrators shall be three. The arbitration proceedings shall be
conducted in the Chinese language.
10.2 any award of the arbitrators shall be final and binding on the parties. The
costs of arbitration shall be borne by the losing party, unless the arbitrators
determine that this would be inequitable. The parties agree and recognize that
any award of the arbitrators shall be recognizable and enforceable in any court
having jurisdiction over the party against whom the award was rendered, and also
wherever assets of such party are located.
10.3 The legal relations between the parties under this contract shall be
interpreted in accordance with the substantive laws of China. Any disputes
between the parties concerning their legal obligations arising under this
contract which are submitted to arbitration pursuant to this clause shall be
decided pursuant to the substantive laws of China.
<PAGE>
11.0
GENERAL PROVISIONS
- -------------------
11.1
Complete Agreement
- ------------------
This agreement constitutes the entire agreement between the Parties and
supersedes all agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof, and neither Party shall be bound by or charged with any oral or written
agreements, representations, warranties, statements, promises or understandings
not specifically set forth in this agreement. This Agreement may not be amended,
altered or modified except in writing, signed by each of the Parties.
12.0
Notice
- ------
12.1 Notices as to disputes or termination to be given under this Agreement
shall be signed by the party giving such notice and mailed by certified or
registered mail, addressed to the party to be notified at its then current
business address as set forth at the beginning of this Agreement or as
subsequently changed by giving notice. Notice as to address changes, pricing
changes, warranty changes and other matters relating to policy and business may
by given to such addresses, by facsimile transmission, telex, telegram or first
class mail. Notices by mail shall be deemed given three days after mailing.
12.3
Lawyers Fees
- ------------
Should any litigation be commenced between the Parties or their representatives
or should any Party institute any proceedings in a bankruptcy court which has
jurisdiction over any other Party or any or all of its property or assets
concerning nay provision of this Agreement or the rights and duties of any
person or entity in relations thereto, the Party prevailing in such litigation
shall be entitled, in addition to such other relief as may be granted, to a
reasonable sum as and for its attorny's fees and court costs in such litigation
which shall be determined by the court in such litigation or in a separate
action brought for that purpose.
12.4
Validity
- --------
In the event that any provision of this Agreement shall be held to be invalid,
the same shall not affect in any respect whatsoever the validity of the
remainder of this Agreement.
12.5
Survival of Rights
- ------------------
Except as provided herein to the contrary, this Agreement shall be binding upon
and enure to the benefit of the Parties their respective successors, heirs and
permitted assigns.
12.6
Governing Law
- -------------
This Agreement has been entered into in the China and all questions with respect
to the Agreement and the rights and liabilities of the Parties shall be governed
by the laws of China and this agreement shall be written in both Chinese and
English and both contracts shall had equal force and if an inconsistency then
such shall be resolved by arbitration under the arbitration provision hereunder
<PAGE>
12.7
Waiver
- ------
No consent to or waiver of, express or implied, by any Party of any breach or
default in the performance by a Party of any term of this Agreement shall be
deemed to be a waiver of the same or any other obligations of such Party
hereunder. Failure on the part of any Party to complain of any act or failure to
act of the other Party or to declare the other Party in default, irrespective of
how long such failure continues, shall not constitute a waiver by such Party of
its rights hereunder.
IN WITNESS WHEREOF the Parties have executed or caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
BLUE LAKE INDUSTRIES LIMITED . ) In presence of:
)
)
- --------------------------------------
)
Authorized Signatory
BEIJING TENGTU CULTURE &
EDUCATION ELECTRONIC
DEVELOPMENT CO LTD
)
In presence of:
)
)
- --------------------------------------
)
Authorized Signatory
BEIJING TENGTU UNITED
ELECTRONICS DEVELOPMENT CO LTD
)
In presence of:
)
)
- --------------------------------------
)
Authorized Signatory
<PAGE>
Exhibit (
Note 3:
List of Education Softwares
<TABLE>
<CAPTION>
List of Education Softwares and the Current Condition
No Name of Projects Item Cooperative Condition Cost (RMB 10,000)
<C> <S> <C> <C> <C> <C>
1 Legend maths for elementary school Book I 1 Legend completed 30
2 Legend maths for elementary school Book II 1 Legend completed 30
3 Legend maths for elementary school Book III, IV 1 Legend completed 50
4 Legend maths for elementary school Book V, VI, VII 1 Legend completed 80
5 Legend maths for elementary school - comprehensive exercise 1 Legend completed 50
6 Collection of Difficult Questions-conditions of sinking & floating as
well as their applications-junior high physics
7 Collection of Difficult Questions-image of lens-junior high physics 1 school completed 28
8 Collection of Difficult Questions-regular instruments for measurement
and survey-junior high physics
9 Collection of Difficult Questions-five elements for leverage-junior
high physics 1 school completed 23
10 Collection of Difficult Questions-Oscilloscope-senior high physics
Grade 10 1 school completed 38
11 Collection of Difficult questions-Brown movement-senior high physics
Grade 10 1 school completed 39
12 Collection of Difficult Questions-Nature of Gas-senior high physics
Grade 10 1 school completed 37
13 Collection of Difficult Questions-tests on nature of gas senior high
physics Grade 10
14 Collection of Difficult Questions-law of Boma-senior high physics
Grade 10 1 school completed 32
<PAGE>
List of Education Softwares and the Current Condition
15 Collection of Difficult Questions-exercises for high-energy atomic
core-senior 1 school completed 39 high physics Grade 11
16 Collection of Difficult Questions-teaching of high atom-senior high
physics Grade 1 school completed 30 11
17 Collection of Difficult Questions-effects of light and
electricity-senior high 1 school completed 25 Grade 11
18 Collection of Difficult Questions-light interference-senior high
Grade 11 1 school completed 28
19 Collection of Difficult Questions-functional image of electric
circuits-senior 1 school completed 40 high Grade 11
20 Collection of Difficult Questions-waves-senior high Grade 11 1 school
completed 38
21 Collection of Difficult Questions-Equilibrium of electromagnetic
mechanics-senior 1 school completed 49 high Grade 11
22 Collection of Difficult Questions-nature of static electric
field-senior high 1 school completed 46 Grade 11
23 Collection of Difficult Questions-general knowledge of use of
electricity-senior 1 school completed 49 high Grade 11
24 Collection of Difficult Questions-alternate current-senior high Grade
11 1 school completed 45
25 Collection of Difficult Questions-making charts by using five
points-senior high 1 school completed 45 algebra
26 Collection of Difficult Questions-functional curves of sine 1 school completed 46
27 Collection of Difficult Questions-equation of index 1 school completed 48
28 Collection of Difficult Questions-biology (structure of heart) 1 school completed 54
29 Collection of Difficult Questions-biology (respiratory system) 1 school completed 50
30 Collection of Difficult Questions-curves-senior high algebra 1 school completed 28
<PAGE>
List of Education Softwares and the Current Condition
31 1+1 paradise 1 Legend completed 15
32 Funny games-international chess 1 Zili completed 20
33 Funny games-toy bricks building 1 Legend completed 16
34 Funny games-loan carrier 1 Legend completed 12
35 Funny games-brick builder 1 Legend completed 18
36 Extracurricular assistance for elementary school-charts of numbers
and arrays 1 school completed 20
37 Extracurricular assistance for elementary school-maths games 1 school completed 30
38 Extracurricular assistance for elementary school-numbers, lines, and
sections 1 school completed 20
39 Extracurricular assistance for elementary school-spelling games 1 school completed 26
40 Extracurricular assistance for elementary school-games of Chinese
characters 1 school completed 38
41 Extracurricular assistance for elementary school-exercise of Chinese
idioms 1 school completed 36
42 Extracurricular assistance for elementary school-Reda test 3Q test
software 1 school completed 20
43 The ABC of computer-keyboard tutor 1 school completed 14
44 The ABC of computer-extrance to computer 1 school completed 15
45 Question bank of intelligence-senior high English family-staple
product of Legend 1 Legend completed 65
46 Question bank of intelligence-senior high English family-staple
product of Legend 1 Legend completed 60
47 Question bank of intelligence-senior high English family-staple
product of Legend 1 Legend completed 40
48 Question bank of intelligence-senior high English family-staple
product of Legend 1 Legend completed 46
49 Composition master-Legend magic cube 1 legend completed 50
50 Collection of Difficult Questions-ancient Rome senior high history 1 school completed 20
51 Collection of Difficult Questions-ancient drifting senior high
geography 1 school completed 15
<PAGE>
List of Education Softwares and the Current Condition
52 24 points 1 Legend completed 15
53 Nature of gas 1 school completed 18
54 Numbers, arrays and charts (I) 1 school completed 23
55 Numbers, arrays and charts (II) 1 school completed 22
56 Numbers, arrays and charts (III) 1 school completed 22
57 Visiting labyrinth 1 school completed 18
58 Monkey King fights out 1 school completed 18
59 Question on sums and difference 1 school completed 10
60 Cute brain 1 school completed 10
61 Comprehensive shapes 1 school completed 10
62 Nature of condensor 1 school completed 10
63 Question of chasing 1 school completed 14
64 Story of Xiao Ming 1 school completed 15
65 Electric circuits 1 school completed 17
66 Arrangements of arrays 1 school completed 18
67 Intelligence challenge 1 school completed 12
68 Triangles 1 school completed 18
69 Intelligence test (I) 1 school completed 10
70 Intelligence test (II) 1 school completed 10
71 Introduction to plane geometry 1 school completed 18
72 Contest on applied questions 1 school completed 18
<PAGE>
List of Education Softwares and the Current Condition
73 Contest on addition and subtraction 1 school completed 18
74 Contest on multiplication and division 1 school completed 18
75 Equation solution 1 school completed 18
76 Four mixed calculations for fractions 1 school completed 15
77 Four mixed calculations for decimals 1 school completed 15
78 Four mixed calculations for whole numbers 1 school completed 15
79 Additions 1 school completed 15
80 Questions of 2-4 1 school completed 15
81 Shapes for elementary school (I) 1 school completed 15
82 Shapes for elementary school (II) 1 school completed 18
83 Shapes for elementary school (III) 1 school completed 18
84 Arithmetics for BCS 1 school completed 15
85 Questions of arithmetics for elementary school 1 school completed 10
86 Quadrilateral 1 school completed 18
87 Rotating substance 1 school completed 16
88 Multi-facet substance 1 school completed 16
89 Volume 1 school completed 16
90 Cubic plane 1 school completed 15
91 The ABC of computer 1 People's
Ed P completed 9.4
92 Asking for directions 1 school completed 18
93 History 1 school completed 28
<PAGE>
List of Education Softwares and the Current Condition
94 Conditions of sinking and floating in physics 1 school completed 28
95 Cubic geometry (straight lines in different planes) 1 school completed 16
96 Texts of Classical Chinese 1 school completed 15
97 Dictionary of basic Chinese characters 1 People's
Ed P completed 160
98 An old Beijing hand 1 Zili completed 110
99 Textbook series for junior high physics 2 Peoples
Ed P uncomplete 80
100 Textbook series for junior high chemistry 2 Peoples
Ed P uncomplete 90
101 Textbook series for junior high maths 6 Peoples
Ed P uncomplete 180
102 Textbook series for junior high English 6 Peoples
Ed P uncomplete 100
103 Textbook series for junior high biology 3 Peoples
Ed P uncomplete 60
104 Textbook series for junior high geography 3 Peoples
Ed P uncomplete 60
105 Textbook series for junior high history 6 Peoples
Ed P uncomplete 60
106 Textbook series for junior high Chinese 1 Peoples
Ed P uncomplete 120
107 Comprehensive review of English for exam 1 Peoples
Ed P uncomplete 20
108 Memory of English words 1 Zili completed 8
<PAGE>
List of Education Softwares and the Current Condition
109 English for elementary pupils 4 Peopples Ed P uncomplete 85
110 Cartoons and VCD 26 Artist Studio completed 800
111 Animation cartoon books 12 Artist studio completed 480
112 Chinese conversations 1 Taiwan completed 60
113 Family beauty expert 1 Zili completed 80
114 English prepositions 1 TV education completed 10
115 Comprehensive review of Chinese for entrance exam 1 People's ed P uncomplete 25
116 Comprehensive review of history for entrance exam 1 People's ed P uncomplete 25
117 Comprehensive review of biology for entrance exam 1 People's ed P uncomplete 25
118 Comprehensive review of maths for entrance exam 1 People's ed P uncomplete 25
119 Comprehensive review of chemistry for entrance exam 1 People's ed P uncomplete 25
120 Comprehensive review of physics for entrance exam 1 People's ed P uncomplete 25
</TABLE>
Total Costs: RMB 52,174,000
Exhibit (10)
AMENDMENT AND EXPLANATION OF RESTATED
AGREEMENT EFFECTIVE RETROACTIVELY TO JUNE 1, 1995
WHEREAS, the parties o the Joint Venture Contract dated as of June 1, 1995, as
restated by amendment, have agreed to incorporate the following amendments and
explanations into this contract to restate and clarify certain items, including
(i) the terms upon which the parties have agreed to contribute to the Joint
Venture; and (ii) the relationship among the parties and the Joint Venture.
<PAGE>
Contribution
------------
The total amount of investment to be contributed by the Tengtu International
Corporation ("TIC"), which has been substituted for Tengtu Enterprises Limited,
a proposed subsidiary of TIC which was not utilized for this transaction, shall
be US $12,000,000 in cash. To date, TIC has contributed, or caused to be
contributed, US $6,000,000 contribution to the Joint Venture . It is intended
that the remaining US $6,000,000 contribution to the Joint Venture to be made,
or caused to be made, by TIC shall be through a subsidiary of TIC, either
Transcontinental Multimedia Inc., or CRC Bermuda Corp. (to be formed in the
future) upon the completion of the next major financing by TIC. TIC's equity
interest in the Joint Venture shall be adjusted from 49% to 57% retroactive to
June 1, 1995.
Beijing Tengtu Culture & Education electronics Development co., Ltd.'s ("Tengtu
China") contribution to the Joint Venture shall be the assignment of its
contract with People's Education Press ("PEP") to supply virtually all
textbooks, educational software and other educational materials for use in o by
all elementary, middle and high schools and junior collected in China. There
shall be no other intangible assets to be contributed by Tengtu China except the
right to the PEP contract. The value of the PEP contract assigned to the Joint
Venture shall be a 43% interest in the Joint Venture. Tengtu China has also
transferred rights to ceratin educational software, both developed o in the
process of being developed, and certain equipment or the use thereof, as
required by the initial Joint Venture agreement. Due to the rapidly changing
technology and market conditions, the owners of the Joint Venture agree and
acknowledge that this software and this equipment had no fair market value as of
the date(s) of transfer or, where applicable, usage of equipment.
The contributions from Blue Lake USA (RMB 33,971,683) mentioned in Note 7 to the
Financial Statements of Tengtu China (included in the August 1996 Tengtu
International Corporation Private Placement Memorandum) will not be transferred
to the Joint Venture. These contributions were not related to the formulation of
the Joint Venture and were not related to the subsequent receipt by Blue Lake
USA of the two million shares and US $100,000 cash received from TIC in exchange
for Blue Lake USA's interest in the Joint Venture in June 1996.
Profits and Losses of the Joint Venture
---------------------------------------
The parties have agreed that Tengtu China shall not be required to share in or
be responsible for any losses incurred by the Joint venture. After-tax profits
may not be distributed to TIC until the total US $12,000,000 cash has been
contributed to the Joint Venture by TIC. Furthermore, after-tax profits may not
be distributed to any parities unless the losses from previous years have been
recouped and TIC has received back all the cash contributions, without interest,
contributed or caused to be contributed, by it to the Joint Venture. Thereafter,
profits, when and if distributed, shall be allocated 43% to Tengtu China and 57%
to TIC.
Effective Date
--------------
The Restated Joint Venture Contract and this Amendment and Explanation, upon
execution, shall supersede the previous Joint Venture Contract and be effective
retroactively to June 1, 1995. IN WITNESS WHEREOF, the parties hereto have
caused this Amendment and explanation to be executed.
TENGTU INTERNATIONAL CORPORATION
DATE:________, 1998
- ----------------------------------
BY:
BEIJING TENGTU CULTURE & EDUCATION
ELECTRONICS DEVELOPMENT CO., LTD
DATE:________, 1998
- ----------------------------------
BY:
EXHIBIT (10)
DIRECT EFFECT Program Agreement
CONTRACT # 11174
------------
This Alliance Agreement (this "Agreement") is entered into between Dell Products
L.P. having its principal place of business at One Dell Way, Round Rock, Texas
78682 ("Dell") and the party executing this agreement below ("ICONIX
INTERNATIONAL INC."), as of the day on which it is accepted by Dell as set forth
below (the "Effective Date").
Whereas:
Dell is a manufacturer and distributor of computer hardware ("Dell Systems").
Whereas:
ICONIX INTERNATIONAL INC. is a developer of certain other computer-related
products or services ("ICONIX INTERNATIONAL INC, Products").
Whereas:
The parties recognize and agree that compatibility of the ICONIX INTERNATIONAL
INC. Products with Dell Systems will benefit both parties, as would the
marketing of such compatibility.
Now, Therefore, the parties agree as follows:
- --------------------------------------------------------------------------------
Definitions:
1.
"Certification" and "Certified" means that ICONIX INTERNATIONAL INC. Products
listed on Addendum A have been tested by ICONIX INTERNATIONAL INC. in accordance
with ICONIX INTERNATIONAL INC.'s designated Testing Criteria and to the best of
ICONIX INTERNATIONAL INC.'s and, If requested by Dell, at Dell's reasonable
determination are free and clear of defect when used in conjunction with Dell
products.
<PAGE>
2.
"Testing Criteria" means the criteria promulgated by ICONIX INTERNATIONAL INC.
(and, if requested by Dell, approved by Dell) from time to time for determining
certification of ICONIX INTERNATIONAL INC. Products with Dell Systems.
3.
"Change of Control" shall be deemed to have occurred if any person, entity or
group comes to own, directly or indirectly, beneficially or of record, voting
securities or any form of controlling interest which represents more than 50% of
the total voting power of one of the parties to this Agreement.
- ----------------------------------------------------------------------------
A.
Alliance Relationship
Upon the Effective Date, ICONIX INTERNATIONAL INC. shall become a member of
Dell's Direct Effect(TM)Program, as modified by Dell from time to time in Dell's
sole discretion. ICONIX INTERNATIONAL INC. agrees that such participation shall
be subject to the following obligations:
1.
ICONIX INTERNATIONAL INC. must be and remain in the business oriented,
computer-related product business.
2.
ICONIX INTERNATIONAL INC. should have revenue of approximately U.S. $10,000,000
per year, or a demonstrated track record in the computer industry.
3.
The ICONIX INTERNATIONAL INC. Products must be deployable In a Microsoft
Windows(R), Microsoft Windows NT(R), Linux(R), SCO(R), Solaris(R), or Novell
Netware(R)environment.
4.
The ICONIX INTERNATIONAL INC. Products must be consistent with Dell's current
and anticipated products and activities, in Dell's discretion.
5.
The ICONIX INTERNATIONAL INC. warrants that (i) its Products can be marketed by
Dell to its customers as Certified; and (ii) that its Products on an ongoing
basis shall be able to accurately process date data (including, but not limited
to, calculating, comparing, and sequencing) between the twentieth and
twenty-first centuries (including, but not limited to, the change from December
31, 1999 to January 1, 2000 and recognition of the Year 2000 as a leap year) and
(iii) that ICONIX INTERNATIONAL INC.'S marketing and product information, direct
or implied, provided to Dell shall be accurate and truthful and supported by
competent and reliable tests or other objective data.
- -----------------------------------------------------------------------------
B.
Testing
ICONIX INTERNATIONAL INC. shall perform Certification testing for each version
of the ICONIX INTERNATIONAL INC. Products at ICONIX INTERNATIONAL INC.'s sole
cost and expense. Dell agrees to provide ICONIX INTERNATIONAL INC. with
reasonable telephonic and documentary assistance in obtaining Certification.
ICONIX INTERNATIONAL INC. agrees to provide Dell (at Dell's written request)
<PAGE>
with the results of all testing of each ICONIX INTERNATIONAL INC. Products
version upon completion of such testing, provided, that Dell shall not publish
such test results without obtaining ICONIX INTERNATIONAL INC.'s prior written
consent, which shall not be unreasonably withheld by ICONIX INTERNATIONAL INC..
- --------------------------------------------------------------------------------
C.
Dell's Responsibilities
Provided that ICONIX INTERNATIONAL INC. is in compliance with the terms and
conditions of this Agreement and Dell's Direct Effect Program Guidelines, Dell
agrees to:
1.
List the ICONIX INTERNATIONAL INC. Products on Dell's Direct Effect Alliance
Catalogue web page. Dell will include a description of the ICONIX INTERNATIONAL
INC. Products and ICONIX INTERNATIONAL INC. contact information.
2.
Dell will provide ICONIX INTERNATIONAL INC. with alliance marketing materials in
soft copy form, for ICONIX INTERNATIONAL INC.'s use in trade shows, which
identify ICONIX INTERNATIONAL INC. as a Dell Direct Effect Program member.
ICONIX INTERNATIONAL INC. is responsible for its own costs in printing and
materials.
3.
Upon agreement of the parties and execution of all applicable licensing and/or
distribution agreements, Dell will include the ICONIX INTERNATIONAL INC.
Products in the DellWare Catalog.
4.
Provide ICONIX INTERNATIONAL INC. with all materials and product updates made
generally available to the Dell Direct Effect Program members.
5.
Permit ICONIX INTERNATIONAL INC. to use the Dell Direct Effect logo for ICONIX
INTERNATIONAL INC.'s marketing materials, provided that such use is in
accordance with the Guidelines attached as Addendum B.
- --------------------------------------------------------------------------------
D.
ICONIX INTERNATIONAL INC.'s Responsibilities
ICONIX INTERNATIONAL INC. agrees to perform the following obligations:
1.
ICONIX INTERNATIONAL INC. hereby grants to Dell the right to use ICONIX
INTERNATIONAL INC.'s trademarks, trade names and product names, as listed in
Addendum A, on Dell's web site and in other marketing materials to indicate that
the ICONIX INTERNATIONAL INC. Products are compatible with the applicable Dell
Systems.
2.
ICONIX INTERNATIONAL INC. will be responsible for all end user support for the
ICONIX INTERNATIONAL INC. Products.
3.
ICONIX INTERNATIONAL INC. will provide Dell with a description of the ICONIX
INTERNATIONAL INC. Products and provide ICONIX INTERNATIONAL INC. contact
Information.
4.
ICONIX INTERNATIONAL INC. will, upon agreement of the parties, refer to the Dell
Direct Effect Program and post Dell URL or the Direct Effect Program URL on
ICONIX INTERNATIONAL INC.'s web site. ICONIX INTERNATIONAL INC. will immediately
cease use of the URL and Logo on its web site upon notification by Dell that it
is in material breach of this Agreement.
- --------------------------------------------------------------------------------
E.
Confidentiality
ICONIX INTERNATIONAL INC. and Dell acknowledge that, in the course of dealings
between the parties, each party may acquire information or materials about the
other party, its business activities and operations, its technical information
and trade secrets, which are of a confidential or proprietary nature.
Information will be treated as confidential (x) if it is marked or accompanied
by documents clearly and conspicuously designating them as "confidential" or the
equivalent; or (y) if it is identified by the disclosing party as confidential
before, during or promptly after the presentation or communication. Each party
will use the same degree of care, but no less than a reasonable degree of care,
as the party uses with respect to its own similar information to protect the
information and to prevent (a) any use of information not authorized in this
Agreement, (b) dissemination of information to any employee of the party without
a need to know, (c) communication of information to any third party, or (d)
publication of information which (i) was known to the receiving party before
receipt from the disclosing party; (ii) is or becomes publicly available through
no fault of the receiving party; (iii) is rightfully received by the receiving
party from a third party without a duty of confidentiality; (iv) is disclosed by
the disclosing party to a third party without a duty of confidentiality on the
third party; (v) is independently developed by the receiving party without a
breach of this Agreement; or (vi) is disclosed by the receiving party with the
disclosing party's prior written approval. If a receiving party is required by a
government body or court of law to disclose information, the receiving party
agrees to give the disclosing party reasonable advance notice so that disclosing
party may contest the disclosure or seek a protective order. Each party warrants
that it has the right to disclose its confidential information. Each party
agrees to return to the other party, or to destroy (and to certify the
destruction in writing to the other party), all materials containing any
confidential information of the other party, regardless of the media and
regardless of by whom prepared, within ten (10) days after demand for the
materials or in any event within ten (10) days after termination or expiration
of this Agreement. The parties further agree that this section will remain in
effect for a period of 3 years from the termination date of this Agreement.
Each party agrees that by disclosing information under this Agreement, neither
party grants to the other party any express or implied right or license under
the disclosing party or affiliate's, patents, copyrights, trademarks, trade
names, service marks, proprietary designations, or other intellectual property.
- --------------------------------------------------------------------------------
F.
No Representations
Neither party will make any representations or create any warranties, express or
implied, concerning the other party's products or services, other than those
stated in their respective product documentation. Neither party shall have any
obligation to license, install or provide technical support for the other's
products nor represent or infer any such support or maintenance obligation to
its customers or prospective customers.
- --------------------------------------------------------------------------------
<PAGE>
G.
Trademarks & Logos
All trademarks, service marks, trade names or other words or symbols ("Marks")
identifying each party's products and services are and will remain their
respective exclusive property. Neither party will take any action that
jeopardizes the other party's proprietary rights or acquire any rights in the
Marks. Any use of either party's marks as permitted hereunder, shall be made
only if the party clearly and properly identifies the other party's ownership of
such Marks and provided each party receives prior written consent to each such
use of the other party's Marks. The right to use the other party's Marks may be
terminated at any time upon written notice. No license to use any Dell or ICONIX
INTERNATIONAL INC. logo is granted in this section.
- --------------------------------------------------------------------------------
H.
Approval of Press Releases
Neither party shall issue a press release or other public announcement
concerning the terms and conditions of this Agreement or its relationship with
the other party, without the prior written consent of such other party.
- --------------------------------------------------------------------------------
I.
Termination
This agreement will automatically renew for 1-year terms unless one party
informs the other of its intent to terminate the agreement 30 days before the
end of the current term. Either party may terminate this agreement without cause
with 30 days prior written notice to the other party. If either party undergoes
a Change of Control, the other party shall have the option to immediately
terminate this Agreement.
Upon termination of this Agreement, each party shall return to the other (or
certify destruction of) all Confidential Information, including, but not limited
to, software and related materials, in its possession provided by the other
party for purposes of this Agreement.
In the event of expiration or termination of this Agreement, the terms of
Sections E, F, G, J, M, and N will survive.
- --------------------------------------------------------------------------------
J.
Status of ICONIX INTERNATIONAL INC.
ICONIX INTERNATIONAL INC. is an independent contractor under this Agreement and
nothing in this Agreement authorizes ICONIX INTERNATIONAL INC. to act as an
agent of Dell or bind Dell to any transaction. Nothing in this Agreement
authorizes Dell to act as an agent of ICONIX INTERNATIONAL INC. or bind ICONIX
INTERNATIONAL INC. to any transaction. It is expressly understood that this
Agreement does not establish a franchise relationship, legal partnership or
joint venture. Each party is solely responsible for its employees, including
terms of employment, wages, hours, taxes and any required insurance. ICONIX
INTERNATIONAL INC. acts at its own risk and has not received nor is reliant upon
any representation by Dell as to anticipated profits or revenue from this
Alliance Agreement.
- --------------------------------------------------------------------------------
<PAGE>
K.
Purchase of Demonstration and Support Equipment
As a Direct Effect Program member, ICONIX INTERNATIONAL INC. shall be entitled
to purchase Dell Systems for the sole purpose of Certification, Demonstration
and Support of ICONIX INTERNATIONAL INC. Products as certified, at a Direct
Effect Program discount to be determined from Dell from time to time. Equipment
purchased under the Direct Effect Program, at the specified discount, shall not
include any additional discounts or special promotions that Dell may offer at
the time of purchase. Such Dell Systems shall not be sold or otherwise
transferred by ICONIX INTERNATIONAL INC. in the ordinary course of ICONIX
INTERNATIONAL INC.'s business (i.e. such Dell Systems are not to be sold as
ICONIX INTERNATIONAL INC.'s inventory in the ordinary course of business).
ICONIX INTERNATIONAL INC.'s purchases under this provision shall be limited to
the following maximum amounts in each 12 calendar month period under this
Agreement:
1. one (1) Dell PowerEdge(R) Server
2. one (1) Dell Precision(R) Workstation
3. one (1) Dell desktop computer (Optiplex(R)model)
4. one (1) Dell portable computer (either Latitude(R))
The ICONIX INTERNATIONAL INC. is permitted to use the Dell Premier Page(sm)
usernames and passwords and to place on-line orders for purchases of computer
systems and/or related products with Dell, provided that such use is in
accordance with the Guidelines attached as Addendum C.
- -----------------------------------------------------------------------------
L.
Freedom of Action
Nothing in this Agreement shall be construed as prohibiting or restricting
either party from independently developing or acquiring and marketing materials,
programs or software which are competitive with those of the other party or from
entering into the same or similar agreements with others.
- ------------------------------------------------------------------------
M.
Limitation of Liability/INDEMNITY
In the event of failure of either party to fulfill any of its obligations
hereunder, the exclusive remedy of the other party under this Agreement shall be
to request performance of such obligation. If such performance is not rendered,
the other party's sole remedy shall be to terminate this Agreement.
Notwithstanding the foregoing,
(i)
either party shall be entitled to enforce its rights regarding confidential
information, patents, copyrights, trademarks or tradenames as provided for
herein, by any appropriate action, including actions for damages and equitable
relief;
(ii)
ICONIX INTERNATIONAL INC. shall indemnify, defend and hold Dell and its
subsidiaries and affiliates harmless from and against any and
<PAGE>
all third party claims, demands, liabilities, losses, damages, judgments, or
settlements, including all reasonable attorney's fees, and related expenses (a)
directly or indirectly resulting from any claimed violation of the warranties in
Section A5, or (b) arising out of or in connection with any alleged or actual
infringement by ICONIX INTERNATIONAL INC. and/or ICONIX INTERNATIONAL INC.
Product(s) of a copyright, patent, trademark, trade secret or other intellectual
property right of any third party.
EXCEPT FOR LIABILITY UNDER (i) or (ii) directly above, IN NO EVENT SHALL EITHER
PARTY HAVE ANY RIGHT HEREUNDER AGAINST THE OTHER FOR ANY INDIRECT, SPECIAL, OR
INCIDENTAL DAMAGES, LOST PROFITS OR OTHER CONSEQUENTIAL DAMAGES, EVEN IF ADVISED
O F THE POSSIBILITY OF SUCH DAMAGES.
- ----------------------------------------------------------------------------
N.
Miscellaneous
1.
Amendments; Waivers. This Agreement may not be amended except by a subsequently
dated written instrument signed on behalf of both parties by a duly authorized
person. No waiver of any term or condition is valid unless it is in writing and
signed by a duly authorized person of the party charged with the waiver. A valid
waiver is limited to the specific situation for which it is given.
2.
Assignment. This Agreement may not be assigned, or otherwise transferred, in
whole or in part, by either party without the prior written consent of the other
party, which the other party will not unreasonably withhold, condition or delay
except that Dell may assign this Agreement, or any of its rights or obligation s
under this Agreement, to any of its subsidiaries or affiliates without consent
of ICONIX INTERNATIONAL INC.. Any attempted assignment in violation of the
foregoing will be void.
3.
Compliance. Each party agrees to comply with all applicable laws, rules,
regulations and orders of the United States and any other state or country with
jurisdiction over each party's activities in performance of its obligations
under this Agreement, including without limitation all applicable import or
export regulations and all licensing or permitting requirements.
4.
GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS.
5.
Independent Contractors. The parties are independent contractors and neither
party is an employee, agent, servant, representative, partner, or joint venturer
of the other. Neither party has the right or ability to bind the other to any
agreement with a third party or to incur any obligation or liability on behalf
of the other party without the other party's written consent.
6.
Severance. Whenever possible, each provision of this Agreement will be
interpreted in such a manner as to be effective and valid under applicable law,
but if any provision of this Agreement is found to violate a law, it will be
severed from the rest of the Agreement and ignored.
7.
Entire Agreement. This Agreement constitutes the entire understanding of the
parties with respect to the subject matter hereof and merges all prior written
or oral communications, understandings, and agreements with respect to the
subject matter of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives, to be effective as of the Effective Date stated
above.
DELL PRODUCTS L.P.
[ICONIX INTERNATIONAL INC.]
By: /s/
-----------
By: /s/
-----------
Printed Name: Debbie Durin
Printed Name: Greg McLelland
Title: Manager, Business Operations
Title: President
Date: 9-29-99
Date: 09/10/99
<PAGE>
Addendum A
----------
ICONIX INTERNATIONAL INC. PRODUCTS
<PAGE>
Addendum B
1.
Downloadable Direct Effect Logos. Usage of this logo must always be accompanied
by the following legal text:
o
The Dell Direct Effect Alliance Program logo is a trademark of Dell Computer
Corporation. Use of the logo means the product has been certified and is
supported by ICONIX INTERNATIONAL INC. on Dell hardware.
Alteration of any Dell Direct Effect Alliance Program logo (other than sizing)
after file download is strictly prohibited.
2.
Color: The color designated for the Dell Direct Effect Alliance Program is PMS
300 Blue from the Panatone Matching System. If process colors are used PMS 300
should be matched as 100% cyan, 40% magenta. The logo may be reversed from any
color background as long as sufficient contrast exists to ensure readability.
3.
Space: The minimum space surrounding the Dell Direct Effect Alliance Program
logo is 1/4 inch from the top, the bottom or either side. No other graphic
elements should infringe on this space.
4.
Minimum Size: The Dell Direct Effect Alliance Program logo must never appear
smaller than1/2an inch in height.
<PAGE>
Addendum C
-----------
This addendum will confirm the understanding between DELL and ICONIX
INTERNATIONAL INC. regarding the issuance to ICONIX INTERNATIONAL INC. of
Premier Page(sm) usernames and passwords ("Purchasing Codes") that will allow
ICONIX INTERNATIONAL INC. to place on-line orders for purchases ("Purchase
Orders") of computer systems and/or related products ("Products") with Dell.
1.
Terms and Conditions. In the absence of a current Customer Purchase Agreement
between Dell and ICONIX INTERNATIONAL INC., Dell's standard terms and conditions
of sale shall apply. Any attempt to alter or amend those terms and conditions or
to enter an order for Products that is subject to additional or altered terms
and conditions will be null and void, unless otherwise agreed to in a written
agreement signed by both ICONIX INTERNATIONAL INC. and Dell.
2.
Issuance of Purchasing Codes. Upon the request of the ICONIX INTERNATIONAL INC.,
Dell will create a Premier Page for the ICONIX INTERNATIONAL INC.. Once the
ICONIX INTERNATIONAL INC. Premier Page is created, Dell will issue a set of
usernames and passwords to the ICONIX INTERNATIONAL INC. that Dell may revise
from time to time for security purposes. ICONIX INTERNATIONAL INC. may use these
Purchasing Codes to access the ICONIX INTERNATIONAL INC. Premier Page and place
on-line Purchase Orders. Upon receipt of an executed original of this Agreement,
Dell will recognize all on-line Purchase Orders submitted via the Premier Page
as valid Purchase Orders.
3.
Purchasing Codes. ICONIX INTERNATIONAL INC.'s Purchasing Codes are required so
that Dell may accept an on-line Purchase Order. By submitting on-line Purchase
Orders via Premier Pages using ICONIX INTERNATIONAL INC.'s Purchasing Codes to
access the Premier Page, ICONIX INTERNATIONAL INC. authorizes Dell to carry out
instructions included in the Purchase Order. ICONIX INTERNATIONAL INC.
acknowledges its duty to hold the Purchasing Codes in strictest confidence and
agrees to maintain control over the Purchasing Codes, revealing its Purchasing
Codes only to those ICONIX INTERNATIONAL INC. employees, representatives or
agents authorized to place Product and/or services orders with Dell. If ICONIX
INTERNATIONAL INC. believes or has reason to believe its Purchasing Codes have
been revealed to or obtained by unauthorized individuals, ICONIX INTERNATIONAL
INC. will contact Dell immediately so that Dell may deactivate the Purchasing
Codes. ICONIX INTERNATIONAL INC. further agrees that use of the Purchasing Codes
in connection with an on- line Purchase Order will be deemed a signed and
written purchase order, that ICONIX INTERNATIONAL INC. intends the order to be
legally binding, and ICONIX INTERNATIONAL INC. will not contest the validity or
enforcement of any obligation on the ground that the Purchase Order is not
written or signed.
4.
ICONIX INTERNATIONAL INC.'s Liability. ICONIX INTERNATIONAL INC. agrees that
full payment for any Purchase Order made using ICONIX INTERNATIONAL INC.'s
Purchasing Codes will be ICONIX INTERNATIONAL INC.'s responsibility.
Exhibit (10)
TIC Tengtu International Corp.
19101 36 Ave. West Suite 211
Lynnwood, WA 98036
Tel: 206-771 8855
Fax: 206-771 8917
<PAGE>
January 1, 1997
Mr. Jing(Jack) Lian
3806 169 th S.W
Lynnwood, WA 98037
Dear Jing,
I am pleased to confirm the terms of our offer of employment to you for the
Position of Manager - Managing director, VP of Tengtu International Corp for
1997.
The salary will be $80,000 per year, payable monthly plus an annual bonus
dependent on the achievement of specific objectives which we will establish and
agree with you as soon as feasible. In addition, we will provide full medical &
dental insurance benefits. You will commence full-time employment with us
effective January 1, 1996.
We will be pleased to welcome you on board as a key member of our team, and look
forward to facing the exciting challenges which lie ahead of us. If you are
agreeable to these terms, please indicate your acceptance by your signature
below.
Yours sincerely,
/s/
Pak Cheung
Accepted: /S/ Date: 1/1/97
---------------- -----------
Exhibit (10)
CONSULTANT AGREEMENT
THIS AGREEMENT is made and entered into effective as of October 15, 1999
(the"Agreement"), by and among TENGTU INTERNATIONAL CORP., a Delaware
corporation ("Tengtu"), COMADEX INDUSTRIES LTD., a British Columbia company
("Comadex") and Pak Kwan Cheung ("Cheung").
WHEREAS, Cheung, the principal of Comadex, has acted as Tengtu's Chairman of the
Board of Directors and Chief Executive Officer ("CEO") since July, 1996; and
WHEREAS, Cheung has provided exemplary leadership to Tengtu, advanced Tengtu's
interests and has been successful in creating a business plan and forging
strategic alliances for Tengtu's future; and
<PAGE>
WHEREAS, Cheung has worked for Tengtu without compensation since July, 1996 even
though he was to have received U.S.$10,000 per month; and
WHEREAS, the Tengtu's Compensation Committee of its Board of Directors has
decided to compensate Cheung for his past services to Tengtu and has deemed it
in Tengtu's best interests to retain Cheung through Comadex, to serve as its CEO
and Chairman of its Board of Directors for five years, pursuant to a consulting
agreement;
NOW, THEREFORE, in consideration of past services rendered by Cheung, Cheung's
continued retention as CEO and other valuable consideration, receipt of which is
hereby acknowledged, Tengtu, Comadex and Cheung agree as follows:
1. SERVICES TO BE PROVIDED AND COMMITMENT.
--------------------------------------
1.1
Services to Be Provided by Cheung.
---------------------------------
Comadex shall designate Cheung to serve as Tengtu's CEO, Chairman of its Board
of Directors and such other positions to which Cheung may be appointed or
designated by Tengtu 's Board of Directors. Cheung shall perform all services
required of the foregoing positions on a full-time basis.
1.2
Exclusivity.
- ------------
Comadex shall not enter into any other contract or arrangement requiring
services to be performed by Cheung, other than completing already existing
contracts or commitments or any future contract if, in the opinion of a majority
of Tengtu's board of directors, exclusive of Cheung, that contract does not
conflict with any aspect of the business of Tengtu, or any affiliate of Tengtu,
and the performance of Cheung's duties under this Agreement.
1.3
Other Services to be Provided by Comadex.
- ----------------------------------------
Services other than those required of Tengtu's CEO, Chairman of the Board of
Directors may be performed by Comadex employees other than Cheung if approved by
Tengtu's Board of Directors.
2.
TERM. The term of this Agreement shall be five (5) years. Notwithstanding
anything in this Section 2 to the contrary, this Agreement may be terminated at
any time in accordance with Section 6.
3.
COMPENSATION OF COMADEX.
- -----------------------
3.1 Compensation for Past Services Performed by Cheung. In consideration of
services performed by Cheung for Tengtu between July,
<PAGE>
1996 and November 30, 1999, Tengtu shall issue three million (3,000,000) shares
of its $.01 par value Common Stock to Comadex, with the following restrictive
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED(THE "SECURITIES ACT), AND MAY NOT BE
OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNLESS REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH OFFER, SALE OR DISTRIBUTION.
3.2
Base Compensation for Services Rendered by Comadex and Cheung after November 30,
1999.
- --------------------------------------------------------------------------------
Subsequent to November 30, 1999, Comadex shall receive base compensation of
U.S.$10,000 per month, plus seven percent (7%) of that amount for the Canadian
General Services Tax, for all services rendered to Tengtu by its employees
("Base Compensation"). Every 12 months, beginning one year after the effective
date of this Agreement, the compensation Committee can increase Cheung's base
salary up to a maximum of $10,000 per year.
3.3
Incentive Compensation.
- ----------------------
3.3.1
Tengtu Stock Option.
- --------------------
If, by November 15, 2000, Cheung is primarily responsible for raising three
million dollars (U.S.$3,000,000) or more in capital for Tengtu, or any
subsidiary or joint venture in which Tengtu has at least a fifty percent (50%)
equity interest, Comadex shall receive an option to purchase one million
(1,000,000) shares of Tengtu stock at the closing market price of Tengtu's stock
on the day the capital is received by Tengtu. In the event that Tengtu's stock
is not traded on that day, then the option price shall be the closing price of
Tengtu stock on the last day that it was traded prior to the receipt of capital
by Tengtu. Any option granted pursuant to this section 3.3.1 shall expire ten
(10) years from the date granted. For purposes of this provision, if the funds
raised prior to November 15, 2000 are in the form of a security convertible into
Common Stock, and at least three million dollars (U.S. $3,000,000) worth of that
security is converted after November 15, 2000, Comadex shall be entitled to
receive the option to purchase the 1,000,000 shares. The exercise price shall be
the lesser of the price of the Common Stock on the date of initial receipt of
the funds or the date of conversion.
3.3.2
Percentage of Capital Raised.
- -----------------------------
Tengtu shall pay to Comadex incentive compensation equal to one percent (1%) of
all capital raised, in excess of three million dollars (U.S. $3,000,000), by
Cheung for Tengtu, or any subsidiary or joint venture in which Tengtu has at
least a fifty percent (50%) equity interest (the "Capital Incentive"). The
Capital Incentive shall be payable to Comadex in either cash, or the same
security sold, as determined by Tengtu, within five (5) business days of receipt
of the capital by Tengtu.
<PAGE>
3.3.3
Percentage of Tengtu Net Profits.
- --------------------------------
Tengtu shall pay to Comadex incentive compensation equal to one percent (1%) of
Tengtu's annual pre-tax net profits (the "Net Profit Incentive"). The Net Profit
Incentive shall only be payable to Comadex under the following circumstances:
3.3.3.1
Tengtu's Board of Directors, or a committee thereof, prior to the start of a
fiscal year, sets a pre-tax profit target;
3.3.3.2
Tengtu's pre-tax net profits as reported in its audited financial statements
exceed the profit target.
The Net Profit Incentive, if any, shall be paid, in cash, to Comadex annually,
within thirty (30) days of the receipt by Tengtu from its accountants of its
final audited financial statements.
3.4
Participation in Tengtu Stock Option Incentive Plan.
- ----------------------------------------------------
Cheung shall be permitted to participate in any Tengtu Stock Option Incentive
Plan in effect during the term of this Agreement upon the same terms and
conditions as other Tengtu consultants and employees.
.
4.
EXPENSE REIMBURSEMENTS AND PAYMENTS. Cheung, or other employees of Comadex shall
promptly be reimbursed for reasonable and actual out-of-pocket expenses incurred
by it the performance of their duties and responsibilities hereunder after
presentation of proper vouchers and expense reports.
5.
VACATION, HOLIDAYS, SICK LEAVE AND OTHER FRINGE BENEFITS. Cheung shall be
entitled to four (4) weeks vacation per year during the term of this Agreement
and no more than two (2) weeks vacation at a time, unless he obtains a longer
period with the prior consent of the Board of Directors. Cheung shall also be
entitled to days off for holidays as are available to other Canadian employees
of Tengtu.
6.
TERMINATION.
- ------------
6.1
Termination by Tengtu for Cause. Tengtu may terminate this Agreement for Cause
(as defined herein) any time effective upon written notice to Comadex. As used
herein, the term "Cause" shall mean:
6.1.1 Habitual neglect, gross negligence or malfeasance in the performance of
the duties required of Cheung as CEO and Chairman of the Board of Directors
which continues uncorrected for a period of thirty (30) days after written
notice thereof by Tengtu to Comadex; or
<PAGE>
6.1.2 Consultant's confession or conviction of theft, fraud, embezzlement, or
any other crime involving dishonesty with respect to Tengtu.
If this Agreement is terminated by Tengtu for cause, then Comadex shall be
entitled to receive the Base Compensation and any incentive compensation owed by
Tengtu through the effective date of such termination.
6.2
Termination Upon Death or Disability. This Agreement shall terminate upon
Cheung's death or disability (as defined herein). For this purpose "disability"
means incapacity, whether by reason of physical or mental illness or disability,
which prevents Cheung from substantially performing his material duties as CEO
and Chairman of the Board for six (6) months, or for shorter periods aggregating
six (6) months during the term of this Agreement. Termination for death shall
become effective upon the occurrence of such event and termination for
disability shall become effective upon written notice to Comadex.
6.3
Events Upon Termination. The termination of this Agreement pursuant to Sections
6.1 and 6.2 shall also result in the termination of all rights and benefits of
Comadex under this Agreement, except for any rights to compensation accrued
under Section 3 prior to the date of termination or rights to expense
reimbursement under Section 4, and except as provided by law.
6.4
Payments Upon Termination Without Cause. In the event Tengtu elects to terminate
this Agreement prior to the scheduled termination date for any reason other than
Cause, Tengtu shall continue to make all payments and provide all benefits due
under this Agreement for the full remaining term of this Agreement as if there
had been no termination, or $150,000, whichever is greater. Such payments shall
be deemed to be liquidated damages for the damage done to Comadex' and Cheung's
reputation and for having foregone the opportunity to pursue other employment
opportunities while performing services pursuant to this Agreement. Comadex
hereby agrees that such amount shall constitute a realistic and reasonable
valuation of the damages with respect to Consultant's claims.
6.5
Merger or Acquisition of Tengtu.
In the event that Tengtu is merged into another company, or another company
acquires more than fifty percent (50%) of Tengtu's outstanding voting stock, or
the right to acquire more than fifty percent (50%) of Tengtu's outstanding
voting stock, this Agreement shall terminate and all compensation due Comadex
under Section 3.2 as if Comadex performed under this Agreement until November
30, 2004, and any amounts owed Comadex under Section 3.3 shall be payable within
thirty (30) days of the closing of such merger or acquisition. In addition, in
the event of a merger, any Tengtu stock options held by Comadex or Cheung shall
have a new five year period, beginning on the date of closing of the merger,
within which to exercise those stock options to obtain comparable stock in the
successor company.
7. RESIGNATION. In the event that Comadex resigns or terminates this Agreement
with Tengtu, Comadex shall be entitled to no further payments or other benefits
under this Agreement, other than any accrued Base Compensation through the date
of resignation or voluntary termination.
8.
COMADEX' REPRESENTATIONS. Comadex represents and warrants that Comadex has the
power to enter into this Agreement and to perform each of the provisions
contained herein. Comadex represents and warrants that Comadex is not restricted
or prohibited, contractually, by court order or otherwise from entering into and
performing this Agreement, and the services to be performed hereunder, and that
Cheung's execution and performance of this Agreement is not a violation or
breach of any agreement between or among Comadex, Cheung and any other person or
entity.
9.
NONDISCLOSURE OF CONFIDENTIAL
INFORMATION; NON COMPETITION; NON SOLICITATION.
- ----------------------------------------------
9.1
NONDISCLOSURE OF CUSTOMERS OR SUPPLIERS. Comadex and Cheung will not, at any
time, either during the term of this Agreement or during the period of one (1)
year after the termination of this Agreement either directly or indirectly,
divulge, disclose or communicate to any person, firm, or corporation, in any
manner whatsoever, any Confidential Information (as defined herein), except as
may be required by law or valid legal process. In the event that Comadex is
served with formal legal process requesting any Confidential Information,
Comadex shall notify Tengtu within three (3) business days of receipt of the
request and provide Tengtu with a copy of the request. "Confidential
Information" includes, but is not limited to, all customer lists, names and
addresses of customers, investors and joint venture partners, contact persons at
customers, investors and joint venture partners, agreements or arrangements with
customers, items usually purchased by customers, supplier lists, names and
addresses of suppliers, contact persons at suppliers, agreements or arrangements
with suppliers, sales techniques, pricing and prices, marketing information or
strategies, and other confidential information of any kind, nature or
description concerning any matters affecting or relating to the business of
Tengtu which derives economic value, actual or potential, from not being
generally known to the public or trade. Comadex agrees said confidential
information is proprietary to Tengtu, and constitutes a trade secret owned
exclusively by Tengtu, the disclosure of which would be harmful and damaging to
Tengtu's business.
9.2. TENGTU MATERIALS. All reports and analysis, contracts, contractual
arrangements, specifications, computer software, computer records and data
stored in Tengtu's computers, computer printouts, computer disks, documents,
memoranda, notebooks, correspondence, files, lists and other records, and the
like, and all photocopies or other reproductions thereof, affecting or relating
to the business of Tengtu which Comadex or Cheung shall prepare, use, construct,
observe, possess or control ("Tengtu Materials"), shall be and remain the sole
property of Tengtu. Upon termination of this Agreement, Comadex and Cheung shall
deliver promptly to Tengtu all such Tengtu Materials.
9.3
CERTAIN RESTRICTIONS ON BUSINESS ACTIVITIES. Comadex and Cheung agree that:
- -------------------------------------------
9.3.1 BUSINESS ACTIVITIES. During the term of this Agreement, Comadex and Cheung
will not, directly or indirectly, own an interest in, operate, join, control or
participate in, or be connected as an officer, employee, agent, independent
contractor, partner, shareholder or principal of any corporation, partnership,
proprietorship, firm, association, person or other entity providing services
and/or products or a combination thereof which directly or indirectly compete
with Tengtu's business, and they will not undertake planning for or organization
of any business activity competitive with Tengtu's business or combine or
conspire with other employees or representatives of Tengtu's business for the
purpose of organizing any such competitive business activity.
9.3.2 SOLICITATION OF CUSTOMERS, SUPPLIERS, ETC. Comadex and Cheung will not,
either during the term of this Agreement, or during the period of two (2) years
after termination of this Agreement under any circumstances, directly or
indirectly, either for themselves or for any other person, firm, or corporation,
compete for, solicit, divert, or take away, or attempt to divert or take away,
any of the customers or suppliers.
9.3.3 SOLICITATION OF EMPLOYEES, ETC. Comadex and Cheung will not at any time,
either during the term of this Agreement, or during the period of two (2) years
after termination of this Agreement under any circumstances, directly or
indirectly, either for themselves or for any other person, firm, or corporation,
solicit (or seek to solicit ) any person who is engaged (as an employee, agent,
independent contractor or otherwise) by Tengtu to terminate his or his
employment or engagement.
9.4
SEVERABILITY. Comadex agrees, in the event that any provision of this Section 9
or any word, phrase, clause, sentence or other portion thereof shall be held to
be unenforceable or invalid for any reason, such provision or portion thereof
shall be modified or deleted in such a manner so as to make this Section 9 , as
modified, legal and enforceable to the fullest extent permitted under applicable
laws. The validity and enforceability of the remaining provisions or portions
thereof shall not be affected thereby and shall remain valid and enforceable to
the fullest extent permitted under applicable laws. A waiver of any breach of
the provisions of this Section 9 shall not be construed as a waiver of any
subsequent breach of the same or any other provision.
10. GENERAL PROVISIONS.
------------------
10.1
SEVERABLE PROVISIONS. The provisions of this Agreement are severable, and if any
one or more provisions may be determined to be judicially unenforceable, in
whole or in part, the remaining provisions shall nevertheless be binding and
enforceable.
10.2
ASSIGNMENT. Neither this Agreement nor any of the rights or obligations of
Comadex or Tengtu hereunder shall be assignable.
10.3
ARBITRATION. Any dispute arising under or in connection with this Agreement
shall be subject to arbitration before the American Arbitration Association
("AAA") at the facility nearest Tengtu's principal place of business.
10.4
ATTORNEYS' FEES. If any dispute arises under this Agreement or by reason of any
asserted breach of it, the prevailing party shall be entitled to recover all
costs and expenses, including reasonable attorneys' fees, incurred in enforcing
or attempting to enforce any of the terms, covenants or conditions, including
costs incurred prior to commencement of any action, and all costs and expenses,
including reasonable attorneys' fees, incurred in any appeal from an action
brought to enforce any of the terms, covenants or conditions.
10.5
NOTICES. Any notice to be given to Tengtu under the terms of this Agreement
shall be addressed to Tengtu at the address of Tengtu's principal place of
business, with a copy to Hecht & Steckman, P.C., 60 East 42nd Street, Suite
5101, New York, New York 10165-5101, Attn: Charles J. Hecht, Esq., and any
notice to be given to Comadex shall be addressed to Comadex at its address last
shown on the records of Tengtu, or at such other address as either party may
hereafter designate in writing to the other. Any notice required or permitted
under this Agreement shall be in writing and shall be deemed effective: (i) upon
receipt in the event of delivery by hand,
<PAGE>
including delivery made by private delivery or overnight mail service where
either the recipient or delivery agent executes a written receipt or
confirmation of delivery; or (ii) 72 hours after deposited in the mail,
registered or certified mail, return receipt requested, postage prepaid.
10.6
WAIVER. Any party's failure to enforce any provision or provisions of this
Agreement shall not in any way be construed as a waiver of any such provision or
provisions, or prevent that party thereafter from enforcing each and every other
provision of this Agreement.
10.7
ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the consulting relationship between Comadex by Tengtu and contains all of the
covenants and agreements between the parties with respect to the consulting
relationship between Comadex by Tengtu. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements,
orally or otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not embodied herein, and that no other agreement, statement
or promise not contained in this Agreement will be effective unless it is in
writing signed by the party to be charged.
10.8
TITLES AND HEADINGS. Titles and headings to sections of this Agreement are for
the purpose of reference only and shall in no way limit, define or otherwise
affect the interpretation or construction of such provisions.
10.9 COUNTERPARTS. This document may be executed in one or more counterparts,
each of which shall be deemed to be an original, and all of which together shall
constitute a single agreement.
10.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
COMADEX:
By:___________________________
By: Pak Kwan Cheung
Title:____________________________
- ---------------------------------
Pak Kwan Cheung
TENGTU INTERNATIONAL CORP.
By:___________________________
Title:__________________________
Exhibit (10)
USERNET SOFTWARE ACQUISITION AGREEMENT
THIS AGREEMENT made as of the 22nd day of May, 1997
A M O N G:
UNISYS CORPORATION, a company formed under the laws of the State of Delaware
(hereinafter called "Unisys")
- - and -
UNISYS CANADA INC., a company formed under the laws of Canada
(hereinafter called "Unisys Canada")
- - and -
3364569 CANADA INC., a company formed under the laws of Canada
(hereinafter called the "Purchaser")
- - and -
TENGTU INTERNATIONAL CORP., a company formed under the laws of Canada
(hereinafter called "Tengtu")
<PAGE>
WHEREAS Unisys Canada is the owner of certain computer software known as
"UserNet" and the trademark known as "ICONIX", together with certain related
intellectual property rights;
AND WHEREAS Unisys is the owner of the trademark known as "USERNET", together
with certain related intellectual property rights;
AND WHEREAS the Purchaser wishes to purchase from each of Unisys and Unisys
Canada its respective interests in that software and those intellectual property
rights under the terms and conditions herein specified;
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained and provided for, the parties hereto agree as follows:
PART I - INTERPRETATION
1.1
DEFINITIONS. For the purposes of this Agreement, the following terms shall have
the meanings herein:
"Closing" means the date hereof.
"Development Documentation" shall mean a complete copy of all plans,
specifications, applicable documentation and other explanatory materials,
technical or otherwise, including programmer's notes, pertaining to the
Software, including without limitation the online notes for version 4.0 of the
Software, in the possession of Unisys Canada.
"Encumbrance" shall mean, in respect of property, including intangible property,
any encumbrance of any kind whatever and includes a security interest, mortgage,
lien, pledge, assignment, charge, trust or deemed trust (whether contractual,
statutory or otherwise arising), any restriction, royalty or obligation to pay a
royalty or any other right or claim of others of any kind whatever affecting the
applicable property and any restrictive covenant or other agreement, restriction
or limitation (registered or unregistered), on the use of the applicable
property; and "Encumber" has a corresponding meaning.
"Enhancements" shall mean any and all modifications, additions, or substitutions
made by Unisys Canada to the Software as of the date first above written.
"Hardware" shall mean the networked hardware environment which consists of the
units identified on Schedule A, as attached hereto.
"ICONIX Trademark" shall mean the registered Canadian trademark "ICONIX".
"Intellectual Property Rights" shall mean the Trademarks and those rights to
use, copy, adapt or distribute the Software including: (A) any and all
proprietary rights provided under (i) patent law, (ii) copyright law, (iii)
trade mark law, or (iv) any other statutory provision or common law principle
applicable which may provide a right in either (ideas, formulae, algorithms,
concepts, inventions or know-how generally, including trade secret law), or the
expression or use of such ideas, formulae, algorithms, concepts, inventions or
know-how; and (B) any and all applications, registrations or any other evidence
<PAGE>
of a right in any of the foregoing;
"Mailing List" shall mean the Unisys/ICONIX customer mailing list and any
product marketing documentation not containing any reference to Unisys or Unisys
Canada and not otherwise reusable by Unisys or Unisys Canada for non-ICONIX
products or services.
"Non-Compete Period" shall mean from the date hereof until the later of: (i)
December 31, 1997; and (ii) the date of completion of delivery of any product
ordered pursuant to any valid purchase orders from the Peel School Board of
Education outstanding as of December 31, 1997.
"Software" shall mean the following: (i) the source code for UserNet 3.xx, (ii)
the executable object code for UserNet 3.xx, and (iii) Enhancements.
"Tools" shall mean the software development tools including Microsoft Visual
Basic and C++ that are presently loaded on the Hardware and are not restricted
by Unisys Canada's corporate site licenses.
"User Documentation" shall mean all manuals and other written materials relating
to the use and operation of the Software including without limitation the course
training materials.
"UserNet Development Environment" shall mean the Software, Hardware, Development
Documentation, User Documentation and Tools.
"UserNet 3.xx" shall mean UserNet versions of 3.0 and 3.5.
"UserNet Trademark" shall mean the registered United States trademark "USERNET"
(Reg. No. 1,429,892).
1.2
INTERPRETATION. For all purposes of the Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(a)
"this Agreement" means this software acquisition agreement as it may from time
to time be supplemented or amended by one or more agreements entered into
pursuant to the applicable provisions hereof;
(b)
the words "herein", "hereof" and "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular Article, section or
other subdivision;
(c)
the headings are for convenience only and do not form a part of this Agreement
nor are they intended to interpret, define or limit the scope, extent or intent
of this Agreement or any provision hereof;
(d)
the word "including", when following any general statement, term or matter,
shall not be construed to limit such general
<PAGE>
statement, term or matter to the specific items or matters set forth immediately
following such word or to similar items or matters, whether or not non-limiting
language (such as "without limitation" or "but not limited to" or words of
similar import) is used with reference thereto but rather shall be deemed to
refer to all other items or matters that could reasonably fall within the
broadest scope of such general statement, term or matter;
(e)
all references to currency herein are deemed to mean the currency of Canada; and
(f)
any reference to an entity shall include and shall be deemed to be a reference
to any entity that is a successor to such entity.
PART II - REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1
Unisys Canada hereby represents, warrants and covenants to the Purchaser and
acknowledges that the Purchaser is relying on such representations, warranties
and covenants in entering into this Agreement:
(a)
This Agreement has been duly executed and delivered by each of Unisys and Unisys
Canada and constitutes a valid and binding obligation of each of Unisys and
Unisys Canada enforceable against them in accordance with its terms. The
Intellectual Property Rights to be acquired by the Purchaser hereunder are valid
and enforceable. All registrations and filings with all relevant governmental
intellectual property offices, domestic and foreign, required to evidence or
protect or preserve the Intellectual Property Rights in Canada and the United
States have been made, are up-to-date, are valid, subsisting and enforceable,
are in good standing and all fees in connection therewith have been paid. Each
of Unisys and Unisys Canada shall reasonably assist Purchaser in transferring
all trademarks and copyright registrations for the ICONIX Trademark, the UserNet
Trademark and the Software. Each of Unisys and Unisys Canada shall reasonably
assist Purchaser to register and/or enforce all patents, copyrights, trade
secret rights and other forms of intellectual property protection relating to
the Software in any and all countries, provided that in no event shall either
Unisys or Unisys Canada be required to incur any out-of-pocket costs in
connection therewith.
(b)
To the knowledge of each of Unisys and Unisys Canada, there are no legal actions
pending by any third party, including any governmental agency, relating to the
UserNet Development Environment, nor is either such party aware of: (i) any
adverse claim which has ever been, or is currently being, threatened against the
UserNet Development Environment, the Intellectual Property Rights or the
Software; of (ii) any claim by any third party that any of the Intellectual
Property Rights or the intellectual property rights in the Software is or may be
invalid or unenforceable.
(c)
Unisys and Unisys Canada have the full right to sell, transfer and assign the
UserNet Development Environment, including any component software comprising a
part thereof, to the Purchaser in the manner contemplated herein and without any
restrictions of any kind whatsoever other than the Software License Agreement
among the parties hereto and dated the date hereof and those restrictions
imposed upon the Purchaser under this Agreement.
<PAGE>
(d)
Unisys or Unisys Canada is the owner of the Intellectual Property Rights and
User Development Environment, and are, if applicable, registered as the sole
owners of the Intellectual Property Rights and have full and exclusive right,
title, and interest in each of the Intellectual Property Rights and the
Software, free and clear of all Encumbrances. To the knowledge of Unisys and
Unisys Canada, no portion of the Software uses coies or comprises the work of
any third party including, without limitation, the structure, sequence or
organization of any third party work. No royalty or other consideration is due
to any third party arising out of the creation, copying or distribution of the
Software or Intellectual Property Rights therein.
(e)
Except as previously disclosed to the Purchaser, neither Unisys nor Unisys
Canada have granted, transferred, licensed or assigned any right or interest in
either the Intellectual Property Rights or the Software to any third party which
is or could be in any way inconsistent with the rights acquired or to be
acquired by the Purchaser hereunder. There are no contracts, agreements,
licenses or other commitments or arrangements in effect with respect to or which
would permit the manufacture, marketing, distribution, licensing, promotion,
maintenance or support of the Software or any part thereof by any third party.
To the knowledge of Unisys and Unisys Canada, no third party has a copy of the
source code of the Software.
(f)
To the knowledge of each of Unisys and Unisys Canada, the Software has not been
published under circumstances that have created loss of any copyright or trade
secret protection therein.
(g)
To the knowledge of each of Unisys and Unisys Canada, the use by the Purchaser
in the manner contemplated herein of hte Software in the form delivered soes not
and will not infringe any copyright, trade secret, intellectual property or
other proprietary rights of any third party.
(h)
No authorization, approval or other action by, and no notice to or filing with,
any governmental authority or regulatory body is requried or desirable for the
assignment by Unisys and Unisys Canada of the UserNet Development Environment.
(i)
Unisys and Unisys Canada have the entire right to assign to the Purchaser the
Intellectual Property Rights in accordance with the terms of this Agreement and
in any agreement referred to or contemplated in this Agreement and such
assignment of rights is sufficient to allow the Purchaser to carry out the
business of marketing, licensing, selling, exploiting, installing, operating,
maintaining and supporting the Software.
2.2
The representations and warranties of each of Unisys and Unisys Canada contained
in this Part II shall survive Closing for a period of one year, and shall
thereafter be void and have no further effect.
2.3
The total aggregate liability of Unisys and Unisys Canada for all claims made
against them by the Purchaser and/or Tengtu for any breaches of the
representations and warranties contained in Section 2.1 hereof shall not exceed
$200,000. Neither Unisys nor Unisys Canada shall be liable hereunder for any
breach of representation or warranty as of the date hereof known by
<PAGE>
Purchaser or Tengtu to be untrue.
PART III - SALE, POSSESSION AND USE
3.1
In consideration of the payment of the purchase price, as set out in Part IV:
(i) Unisys hereby sells, assigns and transfers to the Purchaser the UserNet
Trademark; and (ii) Unisys Canada hereby sells, assigns and transfers to the
Purchaser the remaining Intellectual Property Rights and each of Unisys and
Unisys Canada confirms the Purchaser's right to exercise all rights and benefits
incident to ownership of the Intellectual Property Rights including, without
limitation, the right to take the following actions, in each case subject to the
terms and conditions set forth herein and in the Software License Agreement:
(a)
copy, reproduce, sell, license, modify, develop, enhance, merge, adopt,
transcribe or otherwise distribute copies of the derivative works thereof, in
whole or in part;
(b)
develop, modify, use, reproduce, display or license the derivative works
thereof, for purposes of promoting and demonstrating the Products;
(c)
develop, use and reproduce derivative works of the Software as necessary to
prepare or integrate Enhancements thereto; and
(d)
sue or commence proceedings against others for infringement of the rights
acquired hereunder.
PART IV - PURCHASE AND OWNERSHIP
4.1
PURCHASE PRICE. The purchase price for a 100% undivided interest in the UserNet
Development Environment, the Mailing List and the Intellectual Property Rights
shall be $200,000 plus applicable taxes (the "Purchase Price"). The Purchase
Price shall be allocated as follows: (i) $199,999 to the Software; and (ii) $1
to all remaining assets being purchased.
4.2
PAYMENT OF PURCHASE PRICE. The Purchaser agrees to make payment of the Purchase
Price to Unisys and Unisys Canada by wire transfer payable in immediate funds to
Unisys Canada at closing.
4.3
RECEIPT OF USERNET DEVELOPMENT ENVIRONMENT AND MAILING LIST. Unisys Canada
agrees to provide to the Purchaser at Closing the UserNet Development
Environment and Mailing List on diskette or hard drive in order to permit the
Purchaser to verify that Unisys Canada has properly delivered the UserNet
Development Environment and Mailing List.
<PAGE>
PART V - INDEMNIFICATION
5.1
Unisys Canada agrees, in respect of the Software, to forthwith defend and
indemnify and hold the Purchaser and its directors, officers, agents, employees,
licensees, assignees and designees harmless from and against any and all losses,
costs (including all legal fees), claims, damages, demands, actions and causes
of action which any of them may incur, suffer or become liable for as a result
of or in connection with any claim now exiting or in the future arising out of:
(i) the licensing, sale or use of the Software by Unisys Canada prior to the
Closing; and (ii) the licensing or sale of Software by Unisys Canada during the
Non-Compete Period.
5.2
The Purchaser and Tengtu agree to forthwith defend and indemnify and hold each
of Unisys, Unisys Canada and their respective directors, officers, affiliates,
agents, employees, licensees, assignees and designees harmless from and against
any and all losses, costs, claims, damages, demands, actions and causes of
action which any of them may incur, suffer or become liable for as a result of
or in connection with any claim in the future arising out of the licensing, sale
or use of Software, any other Intellectual Property Rights or the UserNet
Development Environment by the Purchaser, Tengtu or any of their permitted
successors and assigns following the Closing.
PART VI - GENERAL
6.1
ASSIGNMENT AND REPURCHASE RIGHTS. No party may assign this Agreement without the
written consent of the other parties, except that the Purchaser may assign this
Agreement without the prior written consent of Unisys and/or Unisys Canada to
Tengtu or an affiliate thereof. In no event may the Purchaser, or any successor
or assign of the Purchaser, assign or transfer to EMC Partners, Michael
Ozerkevich, Jeffery Shulamn or any partner or affiliate thereof, within one year
following the date hereof, any rights in the UserNet Development Environment or
the Intellectual Property Rights.
6.2
LAW OF AGREEMENT. This Agreement shall be governed and interpreted in accordance
with the laws of the Province of Ontario and the laws of Canada applicable
therein, as interpreted by the Courts of such province, and the parties
irrevocably attorn to the jurisdiction of the courts of such province.
6.3
SUCCESSORS AND ASSIGNS. Subject to the restrictions on assignment and trasnfer
herein contained, this Agreement shall enure to the benefit of and be binding
upon the parties hereto and their respective heirs executors, administrators and
other legal representatives, successors, and assigns.
6.4
SEVERABILITY. Each provision of this Agreement is intended to be severable. If
any provision hereof is illegal or invalid, such illegality or invalidity shall
not affect the validity of the remainder hereof.
6.5
TIME OF THE ESSENCE. Time shall be of the essence of this Agreement.
<PAGE>
6.6
UNITED NATIONS CONVENTION. The rights and obligations under this Agreement shall
not be governed by the United Nations Convention on Contracts for the
International Sale of Goods and/or any local implementing legislation, the
application of which is expressly excluded.
6.7
COUNTERPARTS. This Agreement may be executed by the parties in separate
counterparts each of which, when so executed and delivered, shall be deemed to
constitute an original, but all of which together shall constitute one and the
same agreement.
6.8
ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and cancels and
supersedes any prior understandings and agreements between the parties hereto
with respect thereto, other than the Software License Agreement among the
parties hereto dated the date hereof. Schedule A attached hereto shall form a
part of this Agreement. There are no representations, warranties, terms,
conditions, undertakings or collateral agreements, expressed, implied or
statutory, between the parties other than as expressly set forth in this
Agreement.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereot as of
the date first above written.
UNISYS CORPORATION
By: /S/
-----------------
Name: Gerald A. [illegible]
Title: President, GCS Group
I have the authority to bind the Corporation.
UNISYS CANADA INC.
By: /S/
---------------
Name: GARTH [illegible]
Title: G.M. G.C.S. CANADA
I have the authority to bind the Corporation.
3364569 CANADA INC.
By: /S/
---------------
Name: President
Title: Greg McLelland
I have the authority to bind the Corporation.
<PAGE>
TENGTU INTERNATIONAL CORP.
By: /S/
---------------
Name: Barry D. Clark
Title: President
I have the authority to bind the Corporation.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
USERNET HARDWARE INVENTORY
SERIAL NUMBER DESCRIPTION SERIAL NUMBER DESCRIPTION
<S> <C> <C> <C>
A-5467700-000 486-DX266 A-5387291-000 Pentium - 90 MHZ
16 Meg Memory Mini Tower
420 IDE Conner 24 Meg Memory
Hard Drive 2.5 GB Scsi Wide
Nic Card Hard Drive
On Board Video Ncr Scsi
CA910001VDC Controller Card
Monitor 2 Nic Cards
Keyboard Pci Video Card
Mouse Keyboard
Mouse
Samsung4237LR
Monitor
A-5014281 486-DX266 A-5489565 Pentium - 75 MHZ
16 Meg Memory 32 Meg Memory
240 Scsi Hard 340 IDE Hard
Drive Drive
1520 Adaptec Scsi Nic Card
Card On Board Video
Nic Card Fax Modem
On Board Video SVG 100-COL -
CA910001VDC Monitor
Monitor PCK 101-KBD
Keyboard Mouse
Mouse
<PAGE>
A-5012365 486-DX266
8 Meg Memory
340 Scsi Hard
Drive
1540 Adaptec Scsi
Card
Nic Card
On Board Video
CA910001VDC
Monitor
Keyboard
Mouse
A-3012T Hub
</TABLE>
Exhibit (16)
Deloitte & Touche, LLP
700 Fifth Avenue, Suite 4500
Seattle, Washington 98104-5044
September 29, 1997
Securities and Exchange Commission
Mail Stop 9-8
450 Fifth Street N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the contents in Item 4 of the Form 8-K SB of Tengtu
International Corp. dated September 17, 1998, with the exception of the last
sentence of the first paragraph and the first sentence of the last paragraph as
to which we have no basis to agree or disagree.
Yours truly,
Deloitte & Touche LLP
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%
Exhibit (99)
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Financial Statements
June 30, 1998
<PAGE>
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>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN ACCUMULATED TRANSLATION
------------ -----
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance-June 30, 1996 15,377,750 $ 153,778 $ 859,095 $ (265,286) $ -0-
Issuance of common stock 3,419,357 34,194 7,659,333 -0- -0-
Deferred compensation
related to stock options
issued below market value -0- 150,000 -0- -0-
Translation adjustment -0- -0- -0- (15,631)
Treasury stock -0- -0- -0- -0-
Net loss - year ended June
30, 1997 -0- -0- (3,868,453) -0-
---------- --------- ----------- ------------ ---------
Balance - June 30, 1997 18,797,107 $ 187,972 $ 8,668,428 $ (4,133,739) $ (15,631)
Issuance of common stock
in exchange for services
at fair value - June 19, 500,000 5,000 57,500 -0- -0-
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 -0- -0- -0- -0-
Adjustment to minority
interest -0- (27) -0- -0-
Translation adjustment -0-
Net loss - year ended
June 30, 1998 -0- -0- (4,219,004) -0-
---------- --------- ----------- ------------ ---------
Balance - June 30, 1998 19,297,107 $ 192,972 $ 8,725,901 $ (8,352,743) $ (21,385)
========== ========= =========== ============ =========
UNAMORTIZED
TREASURY STOCK DEFERRED STOCKHOLDERS'
AT COST COMPENSATION EQUITY
------- ------------ ------
Balance-June 30, 1996 $ -0- $ -0- $ 747,587
Issuance of common stock -0- -0- 7,693,527
Deferred compensation
related to stock options
issued below market value -0- (100,000) 50,000
Translation adjustment -0- -0- (15,631)
Treasury stock (784) -0- (784)
Net loss - year ended June
30, 1997 -0- -0- (3,868,453)
------- ----------- -----------
Balance - June 30, 1997 $ (784) $ (100,000) $ 4,606,246
Issuance of common stock
in exchange for services
at fair value - June 19, -0- -0- 62,500
1998
Amortization of deferred
compensation related to
stock options issued in
year ended June 30, 1997 -0- 50,000 50,000
Adjustment to minority
interest -0- -0- (27)
Translation adjustment -0- (5,754) (5,754)
Net loss - year ended
June 30, 1998 -0- -0- (4,219,004)
------- ----------- -----------
Balance - June 30, 1998 $ (784) $ (50,000) $ 493,961
======= =========== ===========
</TABLE>
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-
Offset of software purchase price by licensing fee revenue -0- (54,180)
Noncash compensation expense on granting of stock options 50,000 50,000
Noncash compensation expense on shares to be issued for services 243,750 60,937
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.
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. 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.
II. SIGNIFICANT ACCOUNTING POLICIES
1. 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.
2. 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.
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
3. 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.
4. INVENTORIES
Inventories are priced at the lower of cost, on a weighted-average
basis, or market and consist primarily of computer hardware and
software.
5. 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.
6. 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.
7. 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].
8. CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities
of three months or less when purchased to be cash equivalents.
9. 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.
10. 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.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. ADVERTISING EXPENSE
The Company expenses advertising costs as incurred.
IMPAIRMENT
The Company evaluates its long-lived assets to determine whether
later events and
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
circumstances warrant revised estimates of useful lives or a
reduction in carrying value due to impairment. [See Note 4].
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.
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.
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.
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
III. 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.
IV. 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.
V. 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.
<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.
VI. 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.
VII. 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.
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
VIII. 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.
<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.
IX. 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:
Net sales to unaffiliated customers: For the year ended
June 30,
1998 1997
---- ----
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 $(4,219,000) $(3,868,400)
=========== ===========
statements
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 $ 3,156,200 $ 5,764,000
=========== ===========
statements
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.
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
X. 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.
XI. 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:
<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
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.
<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.
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.
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.
Exhibit (99)
<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>
<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 SHARES 19,317,382 18,813,545
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
OTHER STOCK-
ADDITIO COMPRE- TREASUR UNAMORTIZED HOLDERS'
COMMON STOCK N-AL COMPREHENSIV ACCUMULATED HENSIVE Y STOCK DEFERRED EQUITY
------------
SHARES PAID-IN E DEFICIT INCOME(LOSS) AT COST COMPENSATION (DEFICIT)
------ ------- ------------ ---- ------------ ---------
AMOUNT CAPITAL INCOME(LOSS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-June 30, 18,797,10 $ $8,688,4 $(4,133,739 $ (15,631) $(784) $(100,000) $4,606,246
1997 7 187,972 28 )
Issuance of common
stock in exchange
for services at fair 500,000 5,000 - - - - 62,500
value - June 19, 57,500
1998
Amortization of
deferred
compensation related
to stock options - - - - - - - 50,000 50,000
issued in year ended
June 30, 1997
Adjustment to
minority interest - - (27) - - - - (27)
Other Comprehensive
Income:
Foreign currency - - - $(5,754) - (5,754) - - (5,754)
adjustment
Comprehensive
Income: - - - (4,219,004) - - - (4,219,004
-
Net Loss (4,219,004)
-----------
Comprehensive Income $(4,224,758)
_________ _______ ________
============
- -
Balance - June 30, 19,297,10 192,972 8,725,90 (8,352,743) (21,385) (784) (50,000) 493,961
1998 7 1
Issuance of common
stock in exchange
for services at fair 180,500 1,805 20,758 - - - - 22,563
value - May 21, 1999
Amortization of
deferred
compensation related
to stock options - - - - - - 50,000 50,000
issued in year ended
June 30, 1997
Other Comprehensive
Income: Foreign
currency adjustment - - - 16,235 - 16,235 - - 16,235
Comprehensive
Income: Net loss - - - (1,662,947) - (1,662,947) - - -- - - (1,662,947
-----------
Comprehensive Income $(1,646,712)
--------- ------- -------- ----------- ---------- ---------- -------
- - -
Balance - June 30, 19,477,60 $194,77 $8,746,6 $(10,015,69 $(5,150) $(784) $ 0 $(1,080,18
========= ======= ======== =========== ======== ====== ======== ==========
1999 7 7 59 0) 8)
= = == ==
</TABLE>
<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>
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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.
<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.
<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.
<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.
<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, 1998, 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.
<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:
YEAR ENDED JUNE 30,
1999 1998
---- ----
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
=========== ==========
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.
<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:
Net sales to unaffiliated customers: For the year ended
June 30,
1999 1998
----------- -----------
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 $(1,662,900) $(4,219,000)
=========== ===========
statements
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 $ 2,695,800 $ 3,156,200
statements =========== ===========
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.
<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
<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.
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. SUBSEQUENT EVENTS
p. 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.
q. 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.
Exhibit (99)
<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 305,088 497,099
$ 209,112
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, 205,577 194,777
authorized 100,000,000 shares, issued 20,557,607 shares
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>
<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
SEPT 30 DEC 31
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>
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE QUARTER ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIO CUMULATIVE TREASUR UNAMORTIZED STOCK-
COMMON STOCK N-AL ACCUMULATED TRANSLATION Y STOCK DEFERRED HOLDERS'
------------
SHARES PAID-IN DEFICIT ADJUSTMENT AT COST COMPENSATION DEFICIT
------ ------- ---------- ---- ------------ -------
AMOUNT CAPITAL
------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance-June 30, 19,297,10 $ $8,725,9 $(8,352,743 $ (21,385) $(784) $(50,000)
$493,961
1998 7 192,972 01 )
Issuance of common
stock in exchange
for services at fair 180,500 1,805 22,563
value - May 21, 1999 20,758
Amortization of
deferred
compensation related
to stock options 50,000 50,000
issued in year ended
June 30, 1997
Translation 16,235 16,235
adjustment
Net loss - year
ended
June 30, 1999 (1,662,947) (1,662,947
-------- ------- -------- ----------- ------------- -------
------------ ----------
)
Balance June 30, 19,477,60 194,777 8,746,65 (10,015,690 (5,150) (784) 0
(1,080,188
1999 7 9 ) )
Net loss - quarter
ended (334,087) (334,087)
September 30, 1999
Foreign currency
adjustment
(35,694) (35,694)
------- ------ ----- ---------- -------- -------
- ------------- --------
Balance - Sept. 30, 19,477,60 194,777 8,746,65 (10,349,777 (40,844) (784) 0(1,449,969
1999 7 9 ) )
Issuance of common 1,080,000 10,800 178,950 189,750
stock
Net loss - quarter (598,389) (598,389)
ended December 31,
1999
Foreign currency
adjustment 25,526 25,526
Balance -
December 31, 1999 20,557,60 $205,57 $8,925,6 ($10,948,16 ($15,318) ($784) $0 ($1,833,08
========= ======= ======== =========== ========= ====== == ==========
7 7 09 6) 2)
= = == == ==
</TABLE>
<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 $ (598,389) (334,067) (932,476)
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) (17,503)
---------- ----------
0
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 EQUIVALENTS
1,223,778 1,068,738 155,040
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>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000847597
<NAME> TENGTU INTERNATIONAL
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 406,131
<SECURITIES> 0
<RECEIVABLES> 467,792
<ALLOWANCES> (209,981)
<INVENTORY> 34,448
<CURRENT-ASSETS> 1,280,002
<PP&E> 372,080
<DEPRECIATION> 61,930
<TOTAL-ASSETS> 2,695,822
<CURRENT-LIABILITIES> 1,607,699
<BONDS> 0
<COMMON> 194,777
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,695,822
<SALES> 2,344,873
<TOTAL-REVENUES> 2,344,873
<CGS> 2,087,768
<TOTAL-COSTS> 2,036,614
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3923)
<INCOME-TAX> 0
<INCOME-PRETAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,636,157)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<PAGE>
<CIK> 0000847597
<NAME> TENGTU INTERNATIONAL
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 422,135
<SECURITIES> 0
<RECEIVABLES> 432,284
<ALLOWANCES> (66,900)
<INVENTORY> 255,613
<CURRENT-ASSETS> 1,528,182
<PP&E> 1,612,807
<DEPRECIATION> 119,262
<TOTAL-ASSETS> 3,156,191
<CURRENT-LIABILITIES> 2,618,938
<BONDS> 0
<COMMON> 192,972
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,156,191
<SALES> 4,646,355
<TOTAL-REVENUES> 4,646,355
<CGS> 4,117,182
<TOTAL-COSTS> 4,117,182
<OTHER-EXPENSES> 4,798,805
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22,578)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,219,004)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000847597
<NAME> TENGTU INTERNATIONAL
<S> <C>
<PAGE>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,784,563
<SECURITIES> 0
<RECEIVABLES> 263,700
<ALLOWANCES> 0
<INVENTORY> 474,453
<CURRENT-ASSETS> 4,547,360
<PP&E> 1,007,917
<DEPRECIATION> 66,992
<TOTAL-ASSETS> 5,763,961
<CURRENT-LIABILITIES> 1,157,715
<BONDS> 0
<COMMON> 187,972
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,763,961
<SALES> 2,135,066
<TOTAL-REVENUES> 2,135,066
<CGS> 2,133,911
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