Financial Statements are included on pages F-1 through F-44.
The Table of Contents to the Financial Statements is as follows:
Independent Auditor's Report - June 30, 2000 F-1
Consolidated Financial Statements - June 30, 2000
Balance Sheet as of June 30, 2000 F-2
Statements of Operations for the Years Ended
June 30, 2000 and 1999 F-3
Statements of Stockholders' Deficit for the Years
Ended June 30, 2000 and 1999 F-4
Statements of Cash Flows for the Years Ended
June 30, 2000 and 1999 F-5
Notes to Financial Statements F-6 TO F-20
Independent Auditor's Report - June 30, 1999 F-21
Consolidated Financial Statements - June 30, 1999
Balance Sheet as of June 30, 1999 F-22
Statements of Operations for the Years Ended
June 30, 1999 and 1998 F-23
Statements of Stockholders' Deficit for the Years
Ended June 30, 1999 and 1998 F-24
Statements of cash flows for the years ended
June 30, 1999 and 1998 F-25
Notes to Financial Statements F-26 TO F-38
Unaudited Consolidated Balance Sheet as of September 30, 2000 F-39
Unaudited Consolidated Statements of Operations for the Quarters F-39
Ended September 30, 2000 and 1999 F-40
Unaudited Consolidated Statements of Stockholders' F-40
Deficit for the Quarters Ended June 30, 2000 And F-40
1999 F-41
Unaudited Consolidated Statements of Cash Flows for the Quarters F-41
Ended September 30, 2000 and 1999 F-42
Unaudited Summary of Accounting Policies and Notes to
September 30, 2000 Consolidated Unaudited Financial Statements F-43 TO F-44
<PAGE>
Tengtu International Corp. and Subsidiaries
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Tengtu International Corp.
We have audited the accompanying consolidated balance sheet of Tengtu
International Corp. And its subsidiaries as of june 30, 2000 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the two fiscal years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial. Statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tengtu
International Corp. And its subsidiaries as of June 30, 2000, and the results of
their operations and their cash flows for each of the two fiscal years in the
period then ended in conformity with united states generally accepted accounting
principles.
The accompanying statements have been prepared assuming that the company will
continue as a going concern. As discussed in note 2, the company incurred a net
loss of $4,701,285 for the year ended June 30, 2000, used cash in operations of
$1,185,677, and, as of that date, had a working capital deficiency of
$2,886,444. These conditions raise substantial doubt about the company's ability
to continue as a going concern. Management's plans in regard to these matters
are also discussed in note 2. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Moore Stephens, P.C.
Certified Public Accountants
New York, New York
August 28, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 919,091
Accounts receivable, net of
Allowance for doubtful accounts
Of $200,097 36,009
Due from related party 170,123
Prepaid expenses 3,715
Inventories 18,071
Other receivables 5,588
------------
Total Current Assets 1,152,597
============
PROPERTY AND EQUIPMENT 967,840
------------
OTHER ASSETS
Notes receivable 71,940
Advance to director 60,011
License fees 125,000
Other assets 30,454
------------
287,405
------------
TOTAL ASSETS $ 2,407,842
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,690,658
Accrued expenses 419,160
Related party loan payable 100,000
Due to related party consultants 1,415,026
Other liabilities 414,197
------------
Total Current Liabilities 4,039,041
------------
OTHER LIABILITIES
Related party loans payable 255,490
Convertible debenture, net of discount 1,194,334
------------
1,449,824
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.01
per share;authorized 10,000,000 shares;
issued -0- shares common stock,
par value $.01 Per share; authorized
100,000,000 shares;
issued 23,890,607 shares 238,907
Additional paid in capital 11,871,444
Accumulated deficit (15,184,374)
Accumulated Other Comprehensive Income (Loss):
Cumulative translation adjustment (6,216)
------------
(3,080,239)
Less: treasury stock, at cost,
78,420 common shares (784)
------------
Total Stockholders' Deficit (3,081,023)
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 2,407,842
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30
2000 1999
------------ ------------
<S> <C> <C>
SALES $ 358,026 $ 624,121
COST OF SALES 506,864 769,608
------------ ------------
GROSS LOSS (148,838) (145,487)
------------ ------------
OPERATING EXPENSES
Research and development -0- 1,440
General and administrative 1,537,833 699,582
Related party consultants 1,492,813 774,870
Bad debts (recovery) expense (8,984) 143,347
Advertising 28,991 19
Selling 74,819 52,671
Depreciation 58,698 43,217
------------ ------------
3,184,170 1,715,146
------------ ------------
OTHER INCOME (EXPENSE)
Equity earnings in investee (80,147) (65,274)
Interest income 22,641 3,923
Interest expense (1,311,372) -0-
Other income 2,240 35,585
Other expense (29,839) -0-
------------ ------------
(1,396,477) (25,766)
------------ ------------
LOSS BEFORE MINORITY INTERESTS (4,729,485) (1,886,399)
MINORITY INTERESTS IN SUBSIDIARY'S
EARNINGS (LOSS) (28,200) -0-
------------ ------------
NET LOSS $ (4,701,285) $ (1,886,399)
============ ============
NET LOSS PER COMMON SHARE [BASIC AND DILUTED] (0.23) (0.10)
WEIGHTED AVERAGE NUMBER OF SHARES 20,863,271 18,813,545
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT INCOME (LOSS)
------ ------ ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance-June 30,1998 19,297,107 $ 192,972 $ 9,394,651 $ (8,596,690) $ (9,335)
Issuance of common stock
related to deferred
compensation 180,500 1,805 8,258 0 0 0
Amortization of deferred
compensation related to
stock options and common
stock for services -- 0 0 0 0 0
Other comprehensive income:
Foreign currency adjustment -- 0 0 $ 2,583 0 2,583
Comprehensive income:
Net loss -- 0 0 (1,886,399) (1,886,399) 0
----------
Comprehensive Income (1,883,816)
-----------
---------- ------------ ------------ ------------ ------------
Balance-June 30, 1999 19,477,607 194,777 9,402,909 (10,483,089) (6,752)
Issuance of common stock 963,000 9,630 166,095 0 0 0
Issuance of common stock
for promissory notes 330,000 3,300 68,640 0 0 0
Issuance of common stock
For services 3,120,000 31,200 733,800 0 0 0
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES -- 0 0 0 0 0
PAID-IN CAPITAL RELATED TO
BENEFICIAL CONVERSION
FEATURE-DEBENTURE -- -- 1,153,846 0 0 0
PAID-IN CAPITAL RELATED TO
DETACHABLE WARRANT-
DEBENTURE -- -- 346,154 0 0 0
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- 0 0 $ 536 0 536
COMPREHENSIVE INCOME:
NET LOSS -- -- -- (4,701,285) (4,701,285) --
------------
COMPREHENSIVE INCOME $ (4,700,749)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE-JUNE 30,2000 23,890,607 238,907 11,871,444 $(15,184,374) $ (6,216)
========== ============ ============ ============ ============
TREASURY UNAMORTIZED
STOCK AT DEFERRED STOCKHOLDERS'
COST COMPENSATION DEFICIT
---- ------------ -------
BALANCE-JUNE 30,1998 $ (784) $ (476,563) $ 504,251
ISSUANCE OF COMMON STOCK
RELATED TO DEFERRED
COMPENSATION 0 0 10,063
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES 0 293,750 293,750
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT 0 0 2,583
COMPREHENSIVE INCOME:
NET LOSS 0 0 (1,886,399)
COMPREHENSIVE INCOME
------------ ------------ ------------
BALANCE-JUNE 30, 1999 (784) (182,813) (1,075,752)
ISSUANCE OF COMMON STOCK 0 0 175,725
ISSUANCE OF COMMON STOCK
FOR PROMISSORY NOTES 0 0 71,940
ISSUANCE OF COMMON STOCK
FOR SERVICES 0 0 765,000
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES 0 182,813 182,813
PAID-IN CAPITAL RELATED TO
BENEFICIAL CONVERSION
FEATURE-DEBENTURE 0 0 1,153,846
PAID-IN CAPITAL RELATED TO
DETACHABLE WARRANT-
DEBENTURE 0 0 346,154
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT 0 0 536
COMPREHENSIVE INCOME:
NET LOSS -- -- (4,701,285)
COMPREHENSIVE INCOME
----------- ------------ ------------
BALANCE-JUNE 30,2000 $ (784) $ 0 $ (3,081,023)
=========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
NET LOSS $(4,701,285) $(1,886,399)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 266,614 292,808
PROVISION FOR (RECOVERY OF) BAD DEBT (8,984) 143,081
LOSS ON INVESTMENT AT EQUITY 80,147 65,274
NONCASH COMPENSATION EXPENSE ON
SHARES ISSUED FOR SERVICES 947,813 303,813
NONCASH INTEREST EXPENSE-CONVERTIBLE DEBENTURE 1,194,334 -0-
CHANGES IN OPERATING ASSETS
AND LIABILITIES:
DECREASE(INCREASE)IN OPERATING ASSETS:
ACCOUNTS RECEIVABLE 22,398 (76,644)
DUE FROM RELATED PARTY 138,208 (2,762)
PREPAID EXPENSES 26,188 5,307
INVENTORIES 16,377 191,164
ADVANCES TO SUPPLIERS -0- 122,415
OTHER RECEIVABLES - CURRENT 7,758 13,382
DUE FROM INVESTEE -0- 50,000
ADVANCE TO DIRECTOR (30,611) (30,000)
OTHER ASSETS 28,390 (44,307)
INCREASE (DECREASE)IN OPERATING LIABILITIES:
ACCOUNTS PAYABLE 90,249 87,615
ACCRUED EXPENSES 14,384 53,019
DUE TO RELATED PARTY CONSULTANTS 355,477 481,124
OTHER LIABILITIES 366,267 (1,768)
--------------------------
NET CASH USED BY OPERATING ACTIVITIES (1,185,677) (232,878)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY AND EQUIPMENT (42,535) (63,959)
--------------------------
NET CASH USED BY INVESTING ACTIVITIES (42,535) (63,959)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM LOANS 1,858,064 -0-
CASH RECEIVED FOR SHARES ISSUED 175,725 -0-
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,033,789 -0-
--------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,038) 2,583
--------------------------
INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS 803,539 (294,254)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 115,552 409,806
--------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 919,091 $ 115,552
==========================
</TABLE>
F-5
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Tengtu International Corp. (The "Company") was incorporated in Delaware
On May 6, 1988 as Galway Capital Corporation for the purpose of seeking
Potential ventures. After operating as a development stage enterprise
through 1991, the Company became inactive and remained so until may
1996, when control of it was acquired by several individuals. On May
24, 1996 the Company changed its name to Tengtu International Corp. The
Company's main activities, which are carried out through its
subsidiaries and investee, are the development and marketing of
educational software and other forms of electronic publishing in China,
Hong Kong and Canada.
2. Going Concern
As shown in the accompanying financial statements, the Company incurred
a net loss of $4,701,285 for the year ended June 30, 2000, used cash in
operations of $1,185,677, and, as of that date, had a working capital
deficiency of $2,886,444. Those factors, as well as a continued
downsizing of operations in its largest operating subsidiary for the
year ended June 30, 2000, create an uncertainty about the Company's
ability to continue as a going concern.
Management has developed a plan to alleviate these factors to enable
the Company to continue as a going concern. The plan includes a series
of equity and debt financing. Currently, the Company has signed term
sheets with two separate organizations that would, if finalized into
contracts, provide the Company with $5,000,000 of debt financing and up
to $30,000,000 in equity capital. Another term sheet has been signed
with a different entity that would, if contracted, act as a placement
agent, on a best efforts basis, to sell $5,000,000 of the company's
common shares. Additionally, the Company's Canadian investee has signed
a draft agreement with a potential purchaser of the investee's assets.
If the deal is consummated, the Company would receive approximately
$650,000. The Company has also entered into agreements with a number of
its related party consultants (see note 10) to defer payment of their
respective fees until the company completes a major financing
transaction, either through equity or debt.
The ability of the Company to continue as a going concern is dependent
on the success of its plan. The financial statements do not include any
adjustments that might be necessary if the company is unable to
continue as a going concern.
3. Significant Accounting Policies
a) Principles of Consolidation
The consolidated financial statements include the accounts of the
company and subsidiaries over which it owns more than a 50% equity
interest. For the year ended June 30, 2000, the consolidated financial
statements include two new subsidiaries, significant intercompany
balances and transactions have been eliminated on consolidation.
F-6
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
a) Principles of Consolidation (Continued)
The Company contributed capital of $6,000,000 to a subsidiary in which
the minority has a 43% interest. No portion of the $6,000,000 has been
allocated to the minority as the joint venture agreement that concerns
the subsidiary assigns all rights to that contribution to the company.
In accordance with Accounting Research Bulletin 51, the company has
charged to income the loss applicable to the minority interests that is
in excess of the minorities' interests in the equity capital of the
subsidiaries, including any guarantees or commitments from minority
shareholders for further capital contributions.
In the case of its joint venture subsidiary, the Company and the
minority interest holder agreed that the contribution of software and
hardware by the minority interest to the joint venture had no fair
market value at the time of the contribution. The joint venture,
therefore, assigned a $0 value to these assets. The minority also
contributed a contract to the joint venture that gives the joint
venture the right to provide the Chinese public school system with
certain educational materials, including software and textbooks. A
value of $0 was assigned to the contract by the joint venture, as it
could not create a reliable model of revenue streams or cash flows
associated with the contract at the time of the contribution.
b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at June 30, 2000, and reported amounts of revenues and
expenses during each of the two fiscal years then ended. Actual results
could differ from those estimates.
c) Revenue Recognition
Revenue from the sale of hardware is recognized when the products are
delivered to the customer. Revenue from the sale of software products,
which do not require any significant production, modification or
customization for the Company's targeted users and do not have multiple
elements, is recognized in accordance with paragraphs 7 and 8 of sop
97-2. These paragraphs require four conditions to be present in order
to recognize revenue: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred, (3) the company's fee is fixed and
determinable and (4) collectibility is probable.
Revenue from software license fees is recognized on a straight-line
basis over the term of the license.
F-7
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
c) Revenue Recognition (Continued)
Hardware and software are delivered to customers at or at approximately
the same time. Software is generally installed within approximately two
weeks of delivery.
The hardware sold includes personal desktop computers, printers,
network servers, monitors, modems, hard drives and other storage media
and cables. The Company's software cannot be installed until the
hardware is delivered. Therefore, a delay in delivery of hardware will
delay the recognition of software sales revenues.
d) Inventories
Inventories are priced at the lower of cost, on a weighted-average
basis, or market and consist primarily of computer hardware and
software.
e) Long-lived Assets
Property and equipment are stated at cost. Depreciation is provided
primarily by the straight-line method over the estimated useful lives
of the assets. Other long-lived assets are amortized using the
straight-line method over the contract life or the useful life,
whichever is shorter.
f) Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
g) Income Taxes
The Company accounts for income taxes in accordance with statement of
financial accounting standards ("SFAS") No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to determine
deferred tax assets and liabilities. The deferred assets and
liabilities are determined based upon the differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that are expected to be in effect
when the differences are assumed to reverse.
F-8
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
g) Income Taxes (Continued)
The Company files a consolidated return with its subsidiaries that are
eligible to be consolidated. Separate provisions for income tax are
calculated for subsidiaries that are not eligible for consolidation
into the U. S. federal income tax return.
h) Loss per Share
Loss per common and common equivalent share is computed based on the
weighted average number of common shares outstanding. Due to the
antidilutive effect of the assumed exercise of outstanding common stock
equivalents at June 30, 2000 and 1999, loss per share does not give
effect to the exercise of these common stock equivalents in either
year, but they may dilute earnings per share in the future.
i) Advertising Expense
The Company expenses advertising costs as incurred.
j) Impairment
The Company evaluates its long-lived assets to determine whether later
events and circumstances warrant revised estimates of useful lives or a
reduction in carrying value due to impairment.
k) Foreign Currency Transactions/Translation
The functional currency of the Company's subsidiary and joint venture
in China is the renminbi. The Company's Canadian subsidiary uses the
Canadian dollar as its functional currency and its hong kong subsidiary
uses the Hong Kong dollar as its functional currency. Foreign
transaction gains and losses in the functional currencies are
immaterial. Transactions denominated in other than the functional
currencies are insignificant and therefore, foreign currency
transaction gains and losses in non-functional currencies are also
immaterial.
Assets and liabilities of the financial statements of foreign
subsidiaries and joint venture are translated into U.S. dollars
utilizing the exchange rate at the balance sheet date, and revenues and
expenses are translated using average exchange rates in effect during
the year. Translation adjustments are accumulated and recorded as a
separate component of stockholders' equity.
F-9
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Significant Accounting Policies (Continued)
k) Foreign Currency Transactions/Translation (Continued)
Foreign currency transactions are translated into the functional
currency at the exchange rate prevailing on the date of the
transaction. Material gains and losses from foreign currency
transactions are reflected in the financial period in which the
exchange rate changes.
The Chinese government imposes significant exchange restrictions on
transferring funds out of China for purposes unrelated to business
operations. These restrictions have not had a material impact on the
company because it has not engaged in any significant transactions that
are subject to the restrictions.
l) Accumulated Other Comprehensive Income
Accumulated other comprehensive income represents the change in equity
of the company during the periods presented from foreign currency
translation adjustments,
m) Stock-based Compensation
On July 1, 1996, the Company adopted the disclosure requirements of
Financial Accounting Standards SFAS No. 123, "Accounting for
Stock-Based Compensation" for stock options and similar equity
instruments (collectively, "options") issued to employees; however, the
Company will continue to apply the intrinsic value based method of
accounting for options issued to employees prescribed by Accounting
Principles Board ("APB") opinion no. 25, "Accounting for Stock Issues
to Employees" rather than the fair value based method of accounting
prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions
in which an entity issues its equity instruments to acquire goods or
services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably
measurable.
n) Software Costs
Software development costs are capitalized if they are incurred after
technological feasibility has been established. Purchased software is
capitalized if it has an alternative future use. Research and
development costs for new products or enhancement of existing software
and purchased software that do not meet these requirements are expensed
as incurred. Capitalized costs are amortized over the lesser of five
years or the useful life of the related product.
F-10
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000 is comprised as follows:
Computer hardware $ 131,590
Computer software 9,057
Furniture and fixtures 53,770
Automobiles 206,553
Office equipment 95,528
Leasehold improvement 29,061
Idle equipment 73,305
Production equipment 1,258,445
---------
Total at cost 1,857,309
Less: accumulated depreciation (889,469)
----------
Net property and equipment $ 967,840
==========
Depreciation charged to operations for the years ended June 30, 2000
and 1999 was $266,614 and $292,808, respectively, of which $207,916 and
$214,601 was included in cost of sales for the years ended June 30,
2000 and 1999, respectively.
5. LICENSE FEES
On June 21, 2000, the Company entered into a license agreement with
Netopia, Inc. The agreement grants the Company a fee-bearing,
non-exclusive license right to promote and otherwise market Netopia's
web site product and service to the Company's customers. The agreement
shall continue in perpetuity until terminated by either party. The cost
of the agreement of $125,000 is being amortized on a straight line
basis over five years. No amortization was recorded for the year ended
June 30, 2000 due to the short amortization period of nine days.
6. LONG TERM DEBT
On December 23, 1999, the Company received cash of $1,500,000 in
exchange for a four year Floating Convertible Debenture ("Debenture")
convertible into shares of Tengtu's $.01 par value common stock
("Common Stock") and a separate Common Stock Warrant ("Warrant") for
the purchase of 1,500,000 shares of Common Stock. The purchaser of the
Debenture and Warrant is Top Eagle Holdings Limited, a British Virgin
Islands company ("Top Eagle"). The Debenture is due December 15, 2003
and provides for accrual of interest beginning December 15, 2000 at a
rate equal to the best lending rate of the Hong Kong and Shanghai
Banking Corporation plus two percent (approximately 9% at June 30,
2000). The Debenture is convertible into Tengtu's Common Stock at a
conversion price of $.50 during the first year,$1.00 during the second
year $2.00 during the third year and $4.00 on any date thereafter. The
unpaid balance of principal and interest outstanding at maturity, if
any, may be converted by the holder into the Company's common stock at
the then existing market price minus twenty percent.
F-11
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Warrant gives the holder the right to purchase 1,500,000 shares of
the Company's Common Stock at $1.00 per share during the first year,
$2.00 per share during the second year and $4.00 thereafter. The
Warrant shall become void three years after issuance. In connection
with the purchase of the Debenture and Warrant. The Company and Top
Eagle entered into an Investor Rights Agreement which provides that on
or before June 15, 2000, Top Eagle may purchase additional convertible
debentures for up to $3.5 million and receive additional warrants on
substantially the same terms. Top Eagle did not exercise these rights.
The Investor Rights Agreement also provides the holder(s) of the
Debenture, Warrant and or the shares issued upon conversion or exercise
thereof with registration and certain other rights. The effective
interest rate of the debenture is 8.5%.
Because no portion of the price paid by Top Eagle was for the Warrants,
the Warrants were assigned a value by the Company and the Debenture was
discounted by that amount. The financial statements reflect entries of
$346,154 for a discount to the Debenture and paid in capital for the
Warrant. This value was assigned as follows. On the date that the
Debenture and Warrant were sold to Top Eagle, the Company's stock was
trading at $1.60 per share and the Warrant was exercisable at $1.00.
Therefore, the Warrant had a value between $0 and $.60 per share. The
Company chose to value the Warrant at $.30 per share. The gross amount
of the Debenture and Warrant were therefore $1.5 million (Debenture)
plus $450,000 (Warrant - $.30 X 1,500,000) for a total of $1.95
million. Of the $1.95 million, the Warrant represents 23.08%
($450,000/$1.95 million). The discount to the Debenture was calculated
by multiplying the percentage of the total represented by the Warrant
(23.08%) by the total proceeds received from the sale ($1.5 million).
The discount to the Debenture was therefore equal to $346,154 and the
Debenture was discounted to $1,153,846 ($1.5 million - $346,154).
On the date the Debenture was issued, the conversion price was $.50 and
the market price was $1.60. The conversion feature was valued at the
full adjusted amount of the Debenture, after valuation of the Warrant,
of $1,153,846. Because the Debenture was immediately convertible, the
full discount was charged to interest expense for the year ended June
30, 2000.
A group of private investors, in July 1999, advanced approximately
$250,000 into Edsoft Platforms (Canada), Inc., one of the Company's
subsidiaries, as a shareholder's loan, bearing a 10% interest rate. One
half of the loan can be converted into common shares of the Company at
$3 per share if the loan is not paid in full at the maturity date of
July 27, 2002.
7. Income Taxes
For the current year, none of the Company's operating subsidiaries will
be included in its federal income tax return as these are all foreign
entities and are therefore ineligible for consolidation. The Company
has accumulated approximately $9,055,000 of operating losses that may
be used to offset future federal taxable income. The utilization of the
losses expires in years from 2005 to 2020.
F-12
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. Income Taxes (Continued)
Due to an ownership change in the year ended June 30, 1996, annual
utilization of approximately $265,000 of the losses is expected to be
limited to an estimated $60,000 by current provisions section 382 of
the internal revenue code, as amended.
As the Company is not liable for either current or deferred income
taxes for the years ended June 30, 2000 and 1999, respectively, no
provision is shown on the statement of operations. For U.S. tax
purposes, the Company has recorded a deferred tax asset of
approximately $3,079,000 at June 30, 2040 and $1,813,000 at June 30,
1999 due principally to net operating losses. A valuation allowance of
an identical amount has been recorded as the Company believes that it
is more likely than not that the losses will not be utilized. The
allowance has the effect of reducing the carrying value of the deferred
tax asset to $0. The valuation allowance increased approximately
$1,266,000 and $327,000 during the years ended June 30, 2000 and 1999,
respectively. The Company's Hong Kong subsidiary has recorded a
deferred tax asset of approximately $55,400, totally offset by a
valuation allowance due to the uncertainty of realization.
The Company is a U.S. company that operates through a branch office in
Canada. As a U.S. company, it is required to file an income tax return
and report those branch operations. The income tax returns have
generated the above net operating losses.
The net operating losses for the Company's Chinese joint venture and
subsidiaries total approximately $6,700,000. Net operating losses in
china can be carried forward for five years. The Company's Chinese net
operating losses expire between 2002 and 2005. The net operating loss
for the Hong Kong subsidiary is approximately $365,000 and expires only
if there is an ownership change.
8. Concentration of Credit Risk
The Company operates through subsidiaries located principally in
Beijing, China, Hong Kong and an investee in Toronto, Canada; the
administrative office is in Vancouver, Canada. The Company grants
credit to its customers in these geographic regions.
The Company performs certain credit evaluation procedures and does not
require collateral. The Company believes that credit risk is limited
because the Company routinely assesses the financial strength of its
customers, and based upon factors surrounding the credit risk of its
customers, establishes an allowance for uncollectible accounts and, as
a consequence, believes that its accounts receivable credit risk
exposure beyond such allowances is limited.
The Company established an allowance for doubtful accounts at June 30,
2000 of $200,097. The Company believes any credit risk beyond this
amount would be negligible.
At June 30, 2000, the company had approximately $815,700 of cash in
banks uninsured.
The Company does not require collateral or other securities to support
financial instruments that are subject to credit risk.
F-13
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. Concentration of Credit Risk (Continued)
As of June 30, 2000, three customers, each with more than 10% accounted
for approximately 40% of accounts receivable. At June 30, 1999, no
customer accounted for at least 10% of accounts receivable.
For the fiscal years ended June 30, 2000 and 1999 no customer accounted
for more than 10% of total sales.
9. Commitments and Contingencies
a) The Company has entered into a number of operating leases for office
space. The minimum rental payments on these leases are as follows:
YEAR ENDING
JUNE 30,
-------
2001 $ 66,075
2002 51,340
---------
TOTAL $ 117,415
=========
Rent expense for the years ended June 30, 2000 and 1999 has been
charged as follows:
YEAR ENDED JUNE 30,
2000 1999
---- ----
General and administrative expense $ 62,671 $ 54,551
Selling expensetrative expense 6,281 8,900
-------- --------
Cost of sales 33,945 52,114
-------- --------
Total rent expense $102,897 $115,565
======== ========
The Company has contracts with various executives and consultants. The
minimum cash compensation due under these contracts is as follows:
YEAR ENDING
JUNE 30,
--------
2001 $248,400
2002 218,400
2003 128,400
2004 128,400
2005 42,800
--------
$766,400
========
F-14
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. Commitments and Contingencies (Continued)
b) The Company leased office space under an operating lease
expiring in July 2001. In May 1998, the Company terminated its
lease agreement and rent expense of approximately $538,000 was
accrued as of June 30, 1998, representing the remainder of the
lease payments due under such lease. The liability of $538,000
is included in accounts payable at June 30, 2000.
c) The Company is committed to contribute $6,000,000 to the joint
venture and to begin making deferred compensation payments to
its related party consultants [See Note 3] upon the completion
of its next major financing. However, the timing of the
payment of the deferred compensation and additional
contributions is discretionary and not defined in any
agreement. The Company's board of directors has not defined a
"major financing transaction," and such definition will be
wholly within its discretion.
10. Related Party Transactions
Due to the continued downsizing of the staff of the joint venture [See
Note 2], the operations of the venture during the year ended June 30,
2000 were carried out by the minority interest holder. At June 30, the
joint venture had a receivable balance of $170,123. At June 30, 1999,
the joint venture had a receivable balance from the minority interest
holder of $293,287. The Company advanced $30,000 to one of the officers
during the year.
During 2000 and 1999, respectively, the Company incurred consulting and
related expenses of approximately $1,493,000 and $776,000 from officers
and directors of the Company or its subsidiaries or companies
controlled by these officers and directors. No payments have been made
for the amounts incurred in either fiscal year.
Of the total expenses incurred, approximately $182,800 in 2000 and
$243,750 for 1999 represent the value of common shares issued for
services to two officers. The officers entered into agreements with the
company in the year ended June, 30, 1997 that entitled them to receive
500,000 and 100,000 shares, respectively, at the date the agreements
were signed. Deferred compensation of $731,250 was recorded in the year
ended June 30, 1997, and is being amortized over the three year term of
each agreement.
In January 2000, the Company and Comadex Industries, Ltd. entered into
a consulting agreement for the employment of Pak Cheung as the
Company's Chairman and CEO. Pursuant to that agreement Comadex received
3,000,000 common shares for past services rendered, resulting in a
charge to related party consultants expense of $750,000. If Pak Cheung
is able to raise $3,000,000 or more in capital for the Company or a 50%
or more owned joint venture or subsidiary, Comadex shall receive an
option to purchase 1,000,000 shares of the Company's common stock at
the closing price on the day the capital is received by the Company.
F-15
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. Related Party Transactions (Continued)
On September 9, 1999 a Company director loaned $100,000 to the Company.
The loan bears interest at 6% per annum and is due in twelve months.
The loan is convertible at the option of the Company director at the
rate of $.35 per share, or into an aggregate of 285,714 shares of the
Company's common stock. The loan is guaranteed by another director of
the Company. At the date of the loan, the Company's common stock was
trading at $.25 per share, therefore the loan does not contain a
beneficial conversion feature.
11. Stock Options
The Company's Board of Directors approved two stock option plans for
its employees, consultants and directors totaling 5,000,000 shares. The
first stock option plan was approved on December 29, 1998 for two (2)
million shares. The second stock option plan was approved on August 31,
1999 for three (3) million shares. Both plans were approved by the
shareholders of the company.
The maximum number of shares granted to any individual under the two
stock option plans is 300,000 shares. The following were granted stock
options under the first plan in March 1999 (1997 plan):
Pak Cheung, Chairman and CEO 300,000 shares
Barry Clark, President and Director 300,000 shares
Jack Lian, Director 300,000 shares
Hai Nan, Director 300,000 shares
Xiao Feng Lin, President, Tengtu United 300,000 shares
Greg Mclelland, Vice President 150,000 shares*
Simon Hui, Vp Finance and Controller 75,000 shares
Michael Meakes, VP - Iconix 50,000 shares
Other Employees 300,000 shares **
Gordon Reid, Director 75,000 shares
John Watt, Director 75,000 shares
Michael Nikiforuk, Director 75,000 shares
----------------
Total 2,300,000 shares
================
Simon Hui (75,000 shares) and other employees (180,000 shares)
exercised options during the year ended June 30, 2000.
* On April 8, 1997, the Company entered into an agreement with
Gregory McLelland to provide consulting services and to
serve as an officer of the Company. The term of the
agreement is three years. The agreement provides a $125,000
annual salary, 100,000 shares of common stock upon signing
of the agreement and options to purchase 50,000 shares of
common stock annually for three years.
F-16
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. Stock Options (Continued)
**To various employees of Tic Beijing and Tengtu United who
are not officers or directors of the Company.
The shortfall in the 1997 plan was made up from shares included in the
1999 plan.
The following were granted stock options under the 1999 plan and
exercised them during the year ended June 30, 2000:
Simon Hui, VP Finance and Controller 75,000 shares
All of the stock options granted under the 1997 plan, except for
150,000 issued to Greg McLelland (see above and the following
paragraph), had an exercise price greater than the market price on the
date of grant, and therefore, no compensation expense has been
recognized for these options. The contractual life of the options under
both plans cannot exceed ten years from the date of the grant. The
board of directors determines the life, but has not yet done so for the
options granted.
For the year ended June 30, 2000 certain employees exercised their
options to purchase a total of 330,000 shares for $71,940. The shares
were purchased by issuing promissory notes to the company. The notes
mature in five years. The notes are interest free in the first year and
have an interest rate of 3% a per annum for each subsequent year that
the notes are outstanding. Partial or full repayment may be due prior
to maturity if the employee sells part or all of the shares purchased.
The repayment is equal to the ratio of the shares sold over the total
shares purchased.
On August 1, 1999, the Company entered into a one year contract with a
marketing consultant. As part of its fee, the consultant received three
warrants from the company, each representing 50,000 shares of the
Company. Each of the warrants is exercisable for five years at the
following dates and prices: a) warrant 1 - August 1, 1999 at $.75 per
share; b) warrant 2 - February 1, 2000 at $1.50 per share and c)
warrant 3 - August 1, 2000 at $3.00 per share.
The following table summarizes information concerning currently
outstanding and exercisable stock options and warrants:
WEIGHTED
AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISABLE AT
PRICE JUNE 30, 2000 LIFE JUNE 30, 2000
----- ------------- ---- -------------
Options $ .218 2,045,000 8.5 years 2,045,000
Warrants $ .750 50,000 4.08 years 50,000
Warrants $ 1.50 50,000 4.58 years 50,000
Greg McLelland was granted options on April 8, 1997 to purchase 150,000
shares of common stock at one-third of the market price of the stock at
the date of the grant. The options are vested equally over three years,
beginning with the year ended June 30, 1997. At June 30, 2000, there is
no remaining contractual life. Because the exercise price of the
options was below the market price at the date of the grant, the
Company has recorded deferred compensation expense of $150,000 in
accordance with APB Opinion No. 25 and related interpretations. The
deferral is being recognized ratably over three years, with $50,000
being charged to operations for the year ended June 30, 1999.
F-17
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. Stock Options (Continued)
Had the Company elected to recognize compensation expense for all
options granted using the fair value method prescribed by SFAS 123, the
Company's net loss and net loss per share would be the pro forma
amounts indicated below:
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Net Loss as Reported $ (4,701,285) $ (1,886,399)
Pro Forma Net Loss $ (2,176,401)
Loss Per Share as Reported $ (.10)
Pro Forma Loss Per Share $ (.11)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted
average fair value of stock options granted to employees used in
determining pro forma amounts is estimated at $1.31 for Mr. McLelland's
150,000 options and $.15 for the remaining 1,850,000, for the year
ended June 30, 1999.
The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model for the pro forma amounts
with the following weighted average assumptions:
JUNE 30, 1999
-------------
Risk Free Interest Rate 4.5
Expected Life 2.0
Expected Volatility 13.7
Expected Dividends NONE
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments",
requires disclosing fair value to the extent practicable for financial
instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences
of realization or settlement.
F-18
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. Fair Value of Financial Instrument (Continued)
For certain financial instruments, including cash and cash equivalents,
trade receivables and payable, and short-term debt, it was assumed that
the carrying amount approximated fair value because of the near term
maturities of such obligations. The fair value of long-term debt was
determined based on current rates at which the company could borrow
funds with similar remaining maturities, which amount approximates its
carrying value.
13. Statements of Cash Flows Supplemental Disclosures
For the year ended June 30, 2000 the Company issued 3,120,000 shares of
common stock in lieu of cash payments for certain services rendered.
The value of such services was $765,000. The Company also issued
330,000 shares of common stock to employees exercising their stock
options. The total price of the shares was $71,940 and was paid by the
employees via promissory notes given to the Company.
There were no cash payments of interest expense for the years ended
June 30, 2000 and 1999.
14. Authoritative Pronouncements
The FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities.
SFAS No. 133 requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the
derivative and how it is designated, for example, gains or losses
related to changes in the fair value of a derivative not designated as
a hedging instrument are recognized in earnings in the period of the
change, while certain types of hedging may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction.
SFAS No. 133, as amended by SFAS No. 138, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Initial
application of SFAS No. 133 should be as of the beginning of a fiscal
quarter; on that date, hedging relationships must be designated anew
and documented pursuant to the provisions of SFAS No. 133. The
provisions of SFAS No. 133 are not to be applied retroactively to the
financial statements of prior periods. Due to the Company's limited use
of derivative financial instruments, adoption of Statement No. 133 is
not expected to have a significant effect on the company's consolidated
result of operations, financial position, or cash flows.
In March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". Among other issues,
this interpretation clarifies (a) the definition of employees for the
purposes of applying opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of
stock compensation awards in a business combination. The Company has
adopted this pronouncement.
F-19
<PAGE>
TENGTU INTERNATIONAL CORP., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. Allowance For Bad Debts
FOR THE
YEAR CHARGED CHARGED TO
ENDED BALANCE- TO OTHER BALANCE-
JUNE 30, BEGINNING EXPENSE ACCTS. DEDUCTIONS ENDING
------- --------- ------- ------ ---------- ------
1999 $ 66,900 $143,081 $-- $-- $209,081
2000 $ 209,081 $(8,984) $-- $-- $200,097
16. Subsequent Events
On April 1, 2000, the Company entered into a contract with a consultant
which terminates on April 1, 2002. Under the terms of the contract the
consultant will receive $10,000 per month, 250,000 common shares of the
company under a vesting schedule which coincides with that of the
contract, and two options to purchase the Company's common stock for $1
per share. Both options represent 37,500 shares. The first option will
be granted by December 1, 2000 and the second option after December 1,
2000 and before April 1, 2001.
17. Equity Investment
The Company owns approximately 44% of the common shares of Iconix
International, Inc. ("Iconix") and accounts for this investment on an
equity basis. The following is summarized financial information of
Iconix as of June 30, 2000 and for each of the two fiscal years in the
period ended June 30, 2000.
JUNE 30,
2000 1999
---- ----
Current Assets $ 69,998
========
Noncurrent Assets $206,492
========
Current Liabilities $221,656
========
Noncurrent Liabilities $ - 0 -
========
Net Sales 613,082 1,720,751
======== =========
Gross Profit 262,086 402,952
======== =========
Income from
Continuing Operations (602,845) (55,385)
========= =========
Net Income (Loss) (602,845) (55,385)
========= =========
18.Presentation
Certain amounts in the June 30, 1999 financial statements have been
reclassified to correspond with the June 30, 2000 presentation.
F-20
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 30, 1999
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Tengtu International Corp.
We have audited the accompanying consolidated balance sheet of Tengtu
International Corp. and its subsidiaries as of June 30, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tengtu
International Corp. And its subsidiaries as of June 30, 1999, and the results of
their operations and their cash flows for each of the two fiscal years in the
period then ended in conformity with United States generally accepted accounting
principles.
The accompanying statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 2, the Company incurred a net
loss of $1,940,024 for the year ended June 30, 1999 and, as of that date, had a
working capital deficiency of $2,420,503. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 2. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Moore Stephens, P.C.
Certified Public Accountants
New York New York
September 26, 1999, except for Note 2 as to which the date is November 15, 1999.
F-21
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 115,552
Accounts receivable, net of allowance for
doubtful accounts of $209,981 50,625
Due from related party 323,287
Prepaid expenses 29,903
Inventories 34,448
Other receivables 13,346
-----------
Total Current Assets 567,161
PROPERTY AND EQUIPMENT, net 1,205,760
INVESTMENTS - at equity 80,147
OTHER ASSETS 58,844
-----------
TOTAL ASSETS $ 1,911,912
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,475,409
Accrued expenses 404,776
Due to related party consultants 1,059,549
Other liabilities 47,930
-----------
Total Current Liabilities 2,987,664
-----------
COMMITMENTS [Note 8]
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.01 Per share;authorized
10,000,000 shares; issued -0- shares
Common stock, par value $.01 Per share; authorized
100,000,000 shares; issued 19,477,607 shares 194,777
Additional paid in capital 9,220,096
Accumulated deficit (10,483,089)
Accumulated Other Comprehensive Income (Loss):
Cumulative translation adjustment (6,752)
-----------
(1,074,968)
Less: Treasury stock, at cost, 78,420 common shares (784)
-----------
Total Stockholders' Deficit (1,075,752)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,911,912
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-22
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
SALES $ 624,121 $ 3,233,170
COST OF SALES 769,608 3,010,160
------------ ------------
GROSS INCOME (LOSS) (145,487) 213,010
------------ ------------
OPERATING EXPENSES
Research and development 1,440 511,889
General and administrative 1,474,452 3,410,907
Bad debts 143,347 66,898
Advertising 19 128,709
Selling 52,671 298,396
Depreciation 43,217 97,858
Write down of goodwill -0- 180,000
------------ ------------
1,715,146 4,694,657
------------ ------------
OTHER INCOME (EXPENSE)
Equity earnings in investee (65,274) 18,967
Interest income 3,923 22,578
Other income 35,585 38,088
------------ ------------
(25,766) 79,633
------------ ------------
NET LOSS $ (1,886,399) $(4,402,014)
============ ============
NET LOSS PER COMMON SHARE
[Basic and Diluted] $ (.10) $ (.23)
WEIGHTED AVERAGE NUMBER OF SHARES 19,317,382 18,813,545
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-23
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME(LOSS) DEFICIT INCOME(LOSS)
------ ------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE-JUNE 30,1997 18,797,107 $ 187,972 $ 9,399,678 $ (4,194,676) $ (15,631)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES
AT FAIR VALUE-JUNE 19, 1998 500,000 5,000 (5,000) -0- -0- -0-
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS ISSUED IN
YEAR ENDED JUNE 1997 -- -0- -0- -0- -0- -0-
OTHER -- -0- (27) -0- -0- -0-
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- -0- -0- $ 6,296 -0- 6,296
COMPREHENSIVE INCOME:
NET LOSS -- -0- -0- (4,402,014) (4,402,014) -0-
-------------
COMPREHENSIVE INCOME $(4,395,718)
---------- --------- ------------ ============= ------------ -------------
BALANCE-JUNE 30,1998 19,297,107 192,972 9,394,651 (8,596,690) (9,335)
ISSUANCE OF COMMON STOCK
RELATED TO DEFERRED
COMPENSATION 180,500 1,805 8,258 -0- -0- -0-
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES -- -0- -0- -0- -0- -0-
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- -0- -0- $ 2,583 -0- 2,583
COMPREHENSIVE INCOME:
NET LOSS -- -- -- (1,886,399) (1,886,399) --
-------------
COMPREHENSIVE INCOME $ (1,883,816)
---------- --------- ------------ ============= ------------ -------------
BALANCE-JUNE 30, 1999 19,477,607 $ 194,777 $ 9,402,909 $(10,483,089) $ (6,752)
========== ========= ============ ============ =============
TREASURY UNAMORTIZED STOCK-
STOCK A DEFERRED HOLDERS'
COST COMPENSATION EQUITY
---- ------------ ------
BALANCE-JUNE 30,1997 $ (784) $ (770,313) $ 4,606,246
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES
AT FAIR VALUE-JUNE 19, 1998 -0- -0- -0-
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS ISSUED IN
YEAR ENDED JUNE 1997 -0- 293,750 293,750
OTHER -0- -0- (27)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -0- -0- 6,296
COMPREHENSIVE INCOME:
NET LOSS -0- -0- (4,402,014)
--------- ------- -----------
COMPREHENSIVE INCOME
BALANCE-JUNE 30,1998 (784) (476,563) 504,251
ISSUANCE OF COMMON STOCK
RELATED TO DEFERRED
COMPENSATION -0- -0- 10,063
AMORTIZATION OF DEFERRED
COMPENSATION RELATED TO
STOCK OPTIONS AND COMMON
STOCK FOR SERVICES -0- 293,750 293,750
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -0- 2,583
COMPREHENSIVE INCOME:
NET LOSS -- -- (1,886,399)
---------- ----------- ------------
COMPREHENSIVE INCOME
BALANCE-JUNE 30, 1999 $ (784) $ (182,813) $ (1,075,752)
========= =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-24
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30,
1999 1998
------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
NET LOSS $(1,886,399) $(4,402,014)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 292,808 289,613
PROVISION FOR BAD DEBT 143,081 66,900
NONCASH COMPENSATION EXPENSE ON GRANTING OF STOCK OPTIONS 0 50,000
INVESTMENT - AT EQUITY 65,274 (3,560)
NONCASH COMPENSATION EXPENSE ON SHARES ISSUED FOR SERVICES 303,813 243,750
WRITE-DOWN OF GOODWILL 0 180,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN OPERATING ASSETS:
ACCOUNTS RECEIVABLE (76,644) 79,738
PREPAID EXPENSES 5,307 559,611
INVENTORIES 191,164 248,840
ADVANCES TO SUPPLIERS 122,415 180,908
OTHER RECEIVABLES 13,382 88,097
DUE FROM INVESTEE 50,000 (50,000)
ADVANCE 0 50,228
DUE FROM RELATED PARTY (32,762) (258,819)
OTHER ASSETS (44,307) 14,147
INCREASE (DECREASE) IN OPERATING LIABILITIES:
ACCOUNTS PAYABLE 87,615 1,084,875
ACCRUED EXPENSES 53,019 (256,879)
DUE TO RELATED PARTY CONSULTANTS 481,124 518,931
DUE TO RELATED PARTY 0 (49,756)
OTHER LIABILITIES (1,768) (24,430)
----------- -----------
NET CASH (USED) BY OPERATING ACTIVITIES (232,878) (1,389,820)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY AND EQUIPMENT (63,959) (945,135)
CHANGE FROM CONSOLIDATION TO EQUITY ACCOUNTING FOR INVESTEE 0 (43,669)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (63,959) (988,804)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,583 3,867
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (294,254) (2,374,757)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 409,806 2,784,563
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 115,552 $ 409,806
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
THE COMPANY ISSUED COMMON STOCK VALUED AT $10,063
IN EXCHANGE FOR SERVICES FOR THE YEAR ENDED JUNE 30, 1999.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-25
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Tengtu International Corp. (The "Company") was incorporated in Delaware
on May 6, 1988 as Galway Capital Corporation for the purpose of seeking
potential ventures. After operating as a development stage enterprise
through 1991, the Company became inactive and remained so until May
1996, when control of it was acquired by several individuals. On May
24, 1996 the company changed its name to Tengtu International Corp. The
Company's main activities, which are carried out through its
subsidiaries and investee are the development and marketing of
educational software and other forms of electronic publishing in China
and Canada.
2. GOING CONCERN
As shown in the accompanying financial statements, the Company incurred
a net loss of $1,886,399 for the year ended June 30, 1999 and, as of
that date, had a working capital deficiency of $2,420,502. Those
factors, as well as a significant downsizing of operations in its
largest operating subsidiary for the year ended June 30, 1999, create
an uncertainty about the company's ability to continue as a going
concern.
Management has developed a plan to alleviate these factors to enable
the Company to continue as a going concern. The plan includes an
injection of $250,000 into the Company, allocated approximately
$150,000 as equity and $100,000 as debt; the majority of the funds was
received by october 28, 1999. Additionally, the Chinese government has
granted the minority owner of one of the Company's subsidiaries in
China an exclusive license to upgrade the computer systems in grades
kindergarten through twelve in the Chinese public school system. This
project is intended to be carried out through the Company's subsidiary.
In order to exploit this license, the minority owner has entered into
three market development agreements, including one with Microsoft
(China) Co., Ltd., to provide computer software and hardware to the
schools. To help fund this project, the minority owner of the Company's
subsidiary has received bank loans of approximately $4,600,000, which
were received in two installments in September and November 1999. It is
anticipated that the Company's subsidiary will receive advances if
these monies from the minority owner of the subsidiary on an as needed
basis. Additionally, the Company has entered into agreements with a
number of its related party consultants (see Note 10) to defer payment
of their respective fees until the Company completes a major financing
transaction, either through equity or debt (see additional plans - Note
17a).
The ability of the Company to continue as a going concern is dependent
on the success of its plan. The financial statements do not include any
adjustments that might be necessary if the company is unable to
continue as a going concern.
F-26
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and subsidiaries over which it owns more than a 50% equity
interest. Significant intercompany balances and transactions have been
eliminated on consolidation.
The Company contributed capital of $6,000,000 to a subsidiary in which
the minority has a 43% interest. No portion of the $6,000,000 has been
allocated to the minority as the joint venture agreement that concerns
the subsidiary assigns all rights to that contribution to the Company.
In accordance with Accounting Research Bulletin 51, the Company has
charged to income the loss applicable to the minority interests that is
in excess of the minorities' interests in the equity capital of the
subsidiaries, including any guarantees or commitments from minority
shareholders for further capital contributions.
In the case of its joint venture subsidiary, the Company and the
minority interest holder agreed that the contribution of software and
hardware by the minority interest to the joint venture had no fair
market value at the time of the contribution. The joint venture,
therefore, assigned a $0 value to these assets. The minority also
contributed a contract to the joint venture that gives the joint
venture the right to provide the Chinese public school system with
certain educational materials, including software and textbooks. A
value of $0 was assigned to the contract by the joint venture as it
could not create a reliable model of revenue streams or cash flows
associated with the contract at the time of the contribution.
F-27
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at June 30, 1999, and reported amounts of revenues and
expenses during each of the two fiscal years then ended. Actual results
could differ from those estimates.
c. Revenue Recognition
Revenue from the sale of hardware is recognized when the products are
delivered to the customer. Revenue from the sale of software products,
which do not require any significant production, modification or
customization for the Company's targeted users and do not have multiple
elements, is recognized in accordance with paragraphs 7 and 8 of SOP
97-2. These paragraphs require four conditions to be present in order
to recognize revenue: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred, (3) the company's fee is fixed and
determinable and (4) collectibility is probable. Revenue from software
license fees is recognized on a straight line basis over the term of
the license.
Hardware and software are delivered to customers at or at approximately
the same time. Software is generally installed within approximately two
weeks of delivery.
The hardware sold includes personal desktop computers, printers,
network servers, monitors, modems, hard drives and other storage media
and cables. The Company's software cannot be installed until the
hardware is delivered. Therefore, a delay in delivery of hardware will
delay the recognition of software sales revenues.
d. INVENTORIES
Inventories are priced at the lower of cost, on a weighted-average
basis, or market and consist primarily of computer hardware and
software.
e. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
primarily by the straight-line method over the estimated useful lives
of the assets, which range from two to ten years.
F-28
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f. GOODWILL
Goodwill represented the excess of cost of an acquired subsidiary over
the fair value of net assets acquired, and was amortized on the
straight-line basis over ten years. [See Note 5].
g. CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents.
h. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
which requires an asset and liability approach to determine deferred
tax assets and liabilities. The deferred assets and liabilities are
determined based upon the differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that are expected to be in effect when the
differences are assumed to reverse.
The Company files a consolidated return with its subsidiaries that are
eligible to be consolidated. Separate provisions for income tax are
calculated for subsidiaries that are not eligible for consolidation
into the U.S. Federal income tax return.
i. LOSS PER SHARE
Loss per common and common equivalent share is computed based on the
weighted average number of common shares outstanding. Due to the
antidilutive effect of the assumed exercise of outstanding common stock
equivalents at June 30, 1999 and 1998, loss per share does not give
effect to the exercise of these common stock equivalents in either
year, but they may dilute earnings per share in the future.
j. ADVERTISING EXPENSE
The Company expenses advertising costs as incurred.
k. IMPAIRMENT
The Company evaluates its long-lived assets to determine whether later
events and circumstances warrant revised estimates of useful lives or a
reduction in carrying value due to impairment. [See Note 5].
F-29
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
l. FOREIGN CURRENCY TRANSACTIONS/TRANSLATION
The functional currency of the Company's subsidiary and joint venture
in China is the Renminbi. The Company's Canadian subsidiary uses the
Canadian dollar as its functional currency. Foreign transaction gains
and losses in the functional currencies are immaterial. Transactions
denominated in other than the functional currencies are insignificant
and therefore, foreign currency transaction gains and losses in
non-functional currencies are also immaterial.
Assets and liabilities of the financial statements of foreign
subsidiaries and joint venture are translated into u.S. Dollars
utilizing the exchange rate at the balance sheet date, and revenues and
expenses are translated using average exchange rates in effect during
the year. Translation adjustments are accumulated and recorded as a
separate component of stockholders' equity. Foreign currency
transactions are translated into the functional currency at the
exchange rate prevailing on the date of the transaction material gains
and losses from foreign currency transactions are reflected in the
financial period in which the exchange rate changes.
The Chinese government imposes significant exchange restrictions on
transferring funds out of China for purposes unrelated to business
operations. These restrictions have not had a material impact on the
Company because it has not engaged in any significant transactions that
are subject to the restrictions.
m. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income represents the change in equity
of the Company during the periods presented from foreign currency
translation adjustments.
n. STOCK-BASED COMPENSATION
On July 1, 1996, the Company adopted the disclosure requirements of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" for stock options and similar equity
instruments (collectively, "options") issued to employees; however, the
company will continue to apply the intrinsic value based method of
accounting for options issued to employees prescribed by accounting
principles board ("APB") Opinion No. 25, "Accounting for stock issues
to employees" rather than the fair value based method of accounting
prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions
in which an entity issues its equity instruments to acquire goods or
services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably
measurable.
F-30
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o. SOFTWARE COSTS
Software development costs are capitalized if they are incurred after
technological feasibility has been established. Purchased software is
capitalized if it has an alternative future use. Research and
development costs for new products or enhancement of existing software
and purchased software that do not meet these requirements are expensed
as incurred. Capitalized costs are amortized over the lesser of five
years or the useful life of the related product.
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 is comprised as follows:
COMPUTER HARDWARE $ 106,097
COMPUTER SOFTWARE 9,057
FURNITURE AND FIXTURES 45,479
AUTOMOBILES 206,553
OFFICE EQUIPMENT 89,369
LEASEHOLD IMPROVEMENT 27,137
IDLE EQUIPMENT 73,305
PRODUCTION EQUIPMENT 1,256,574
----------
TOTAL AT COST 1,813,571
LESS: ACCUMULATED DEPRECIATION (607,811)
----------
NET PROPERTY AND EQUIPMENT $1,205,760
==========
Depreciation charged to operations for the year ended June 30, 1999 and
1998 was $292,808 and $289,729, respectively, of which approximately
$214,601 and $191,871 was included in cost of sales for the year ended
June 30,1999 and June 30, 1998, respectively.
5. IMPAIRMENT OF GOODWILL
During the fiscal year ended June 30, 1998, the Company recorded an
impairment loss of $180,000 from the write down of goodwill. As a
result of the loss for the year ended June 30, 1998, and the necessary
revisions to the projected future undiscounted cash flows, there was no
longer justification for the carrying value of goodwill resulting from
the Company's investment in a joint venture of $200,000 ($100,000 cash
and 2,000,000 common shares valued at $.05 per share) purchased in June
1996. Fair value of goodwill was based on the present value of
estimated expected future cash flows from the related assets. As of
June 30, 1998, goodwill of $200,000 and related accumulated
amortization of $20,000 was written off.
F-31
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES
For the current year, none of the Company's operating subsidiaries will
be included in its federal income tax return as these are all foreign
entities and are therefore ineligible for consolidation.
The Company has accumulated approximately $5,330,000 of operating
losses that may be used to offset future federal taxable income. The
utilization of the losses expires in years from 2005 to 2019. Due to an
ownership change in the year ended June 30, 1996, annual utilization of
approximately $265,000 of the losses is expected to be limited to an
estimated $60,000 by current provisions of section 382 of the internal
revenue code, as amended.
As the Company is not liable for either current or deferred income
taxes for the years ended June 30, 1999 and 1998, respectively, no
provision is shown on the statement of operations. The Company has
recorded a deferred tax asset of approximately $1,813,000 at June 30,
1999 and $1,486,000 at June 30, 1998 due principally to net operating
losses. A valuation allowance of an identical amount has been recorded
as the Company believes that it is more likely than not that the losses
will not be utilized. The allowance has the effect of reducing the
carrying value of the deferred tax asset to $0. The valuation allowance
increased approximately $327,000 and $717,000 during the years ended
June 30, 1999 and 1998, respectively. The Company is a U.S. company
that operates through a branch office in Canada. As a U.S. company, it
is required to file an income tax return and report those branch
operations. The income tax returns have generated the above net
operating losses.
The net operating losses for the Company's Chinese joint venture and
subsidiaries, total approximately $6,230,000. Net operating losses in
china can be carried forward for five years. The Company's chinese net
operating losses expire between 2002 and 2004.
7. CONCENTRATION OF CREDIT RISK
The Company operates through subsidiaries located principally in
Beijing, China and an investee in Toronto, Canada; the administrative
office is in Vancouver, Canada. The Company grants credit to its
customers in both geographic regions.
The Company performs certain credit evaluation procedures and does not
require collateral. The Company believes that credit risk is limited
because the Company routinely assesses the financial strength of its
customers, and based upon factors surrounding the credit risk of its
customers, establishes an allowance for uncollectible accounts and, as
a consequence, believes that its accounts receivable credit risk
exposure beyond such allowances is limited.
F-32
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company established an allowance for doubtful accounts at June 30,
1999 of $209,981. The Company believes any credit risk beyond this
amount would be negligible.
At June 30, 1999, the Company had approximately $96,700 of cash in
banks uninsured. The Company did not have balances in excess of the
federally insured amounts in U.S. banks. The Company does not require
collateral or other securities to support financial instruments that
are subject to credit risk.
For the fiscal years ended June 30, 1999 and 1998 no customer accounted
for more than 10% of total sales.
8. COMMITMENTS AND CONTINGENCIES
a. The Company has entered into a number of operating leases for office
space. The minimum rental payments on these leases are as follows:
YEAR ENDING
JUNE 30,
-----------
2000 $ 80,810
2001 66,075
2002 51,340
---------
TOTAL $ 198,225
=========
Rent expense for the years ended June 30, 1999 and 1998 has been charged as
follows:
YEAR ENDED JUNE 30,
1999 1998
---- ----
GENERAL AND ADMINISTRATIVE EXPENSE $ 54,551 $ 790,065
RESEARCH AND DEVELOPMENT 0 110,810
SELLING EXPENSE 8,900 79,531
COST OF SALES 52,114 72,257
---------- ----------
TOTAL RENT EXPENSE $ 115,565 $1,052,663
========== ==========
F-33
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has contracts with various executives and consultants. The
minimum cash compensation due under these contracts is as follows:
YEAR ENDING
JUNE 30,
--------
2000 273,750
-------
b. The Company leased office space under an operating lease expiring in
July 2001. In May 1998, the Company terminated its lease agreement and
rent expense of approximately $538,000 was accrued as of June 30, 1998,
representing the remainder of the lease payments due under such lease.
The liability of $538,000 is included in accrued expenses at June 30,
1999 and is part of rent expense within the statement of operations for
the year ended June 30, 1998.
c. The Company is committed to contribute $6,000,000 to the joint
venture (see Note 5) and to begin making deferred compensation payments
to its related party consultants (see Notes 2 and 10) upon the
completion of its next major financing. However, the timing of the
payment of deferred compensation and additional contributions is
discretionary and not defined in any agreement. The Company's board of
directors has not defined a "major financing transaction," and such
definition will be wholly within its discretion.
9. RELATED PARTY TRANSACTIONS
In the normal course of business with the joint venturer, the Company
generated a receivable balance of $293,287, which represents the net
balance of advances to and from the company during the year ended June
30, 1999. The Company advanced $30,000 to one of the officers during
the year.
During 1999 and 1998, respectively, the Company incurred consulting and
related expenses of approximately $787,400 and $952,700 from officers
and directors of the Company or its subsidiaries or companies
controlled by these officers and directors. Approximately $249,500 of
the amount incurred in fiscal year 1998 was paid during the same year.
No payments have been made for the amounts incurred in fiscal year
1999.
Of the total expenses incurred, approximately $243,750 for both 1999
and for 1998 represents the value of common shares issued for services
to two officers. The officers entered into agreements with the Company
in the year ended june 30, 1997 that entitled them to receive 500,000
and 100,000 shares, respectively, at the date the agreements were
signed. Deferred compensation of $731,250 was recorded in the year
ended June 30, 1997, and is being amortized over the three year term of
each agreement.
F-34
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTIONS
The Company's Board of Directors approved two stock option plans for
its employees, consultants and directors totaling 5,000,000 shares. The
first stock option plan was approved on December 29, 1998 for two (2)
million shares. The second stock option plan was approved on August 31,
1999 for three (3) million shares. Both plans were approved by the
shareholders of the company. The maximum number of shares granted to
any individual under the two stock option plans is 300,000 shares. The
following were granted stock options under the first plan in March,
1999 (1997 plan), but have not yet exercised the options.
Pak Cheung, Chairman and CEO 300,000 shares
Barry Clark, President and Director 300,000 shares
Jack Lian, Director 300,000 shares
Hai Nan, Director 300,000 shares
Xiao Feng Lin, President, Tengtu United 300,000 shares
Greg McLelland, Vice President 150,000 shares*
Simon Hui, VP Finance and Controller 75,000 shares
Michael Meakes, VP - Iconix 50,000 shares
Other Employees 300,000 shares**
Gordon Reid, Director 75,000 shares
John Watt, Director 75,000 shares
Michael Nikiforuk, Director 75,000 shares
TOTAL 2,300,000 shares
* On April 8, 1997, the Company entered into an agreement with Gregory
McLelland to provide consulting services and to serve as an officer of
the Company. The term of the agreement is three years. The agreement
provides a $125,000 annual salary, 100,000 shares of common stock upon
signing of the agreement and options to purchase 50,000 shares of
common stock annually for three years.
** To various employees of Tic Beijing and Tengtu United who are not
officers or directors of the Company.
The shortfall in the 1997 plan was made up from shares included in the
1999 plan.
The following were granted stock options under the 1999 plan but have
not yet exercised the options:
Simon Hui, VP Finance and Controller 75,000 shares
All of the stock options granted under the 1997 plan, except for
150,000 issued to Greg McLelland (see above and the following
paragraph), had an exercise price greater than the market price on the
date of grant, and therefore, no compensation expense has been
recognized for these options. The contractual life of the options under
both plans cannot exceed ten years from the date of grant. The Board of
Directors determines the life, but has not yet done so for the options
granted.
The following table summarized information concerning currently
outstanding and exercisable stock options.
F-35
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTIONS (CONTINUED)
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE AT
EXERCISE PRICE AT JUNE 30, 1999 CONTRACTUAL LIFE JUNE 30, 1999
-------------- ---------------- ---------------- -------------
$.25 150,000 8.0 YEARS 150,000
.218 1,850,000 9.5 YEARS 1,850,000
Greg McLelland was granted options on April 8, 1997 to purchase 150,000
shares of common stock at one-third of the market price of the stock at
the date of grant. The options are vested equally over three years,
beginning with the year ended June 30, 1997. At June 30, 1999, there is
no remaining contractual life. Because the exercise price of the
options was below the market price at the date of grant, the Company
has recorded deferred compensation expense of $150,000 in accordance
with APB Opinion No. 25 And related interpretations. The deferral is
being recognized ratably over three years, with $50,000 being charged
to operations for the years ended June 30, 1999 and 1998. Had the
company elected to recognize compensation expense for all options
granted using the fair value method prescribed by SFAS 123, the
Company's net loss and net loss per share would be the pro forma
amounts indicated below:
YEARS ENDED JUNE 30,
--------------------
1999 1998
---- ----
NET LOSS AS REPORTED $ (1,886,399) $ (4,402,014)
PRO FORMA NET LOSS (2,176,401) (4,416,348)
LOSS PER SHARE AS REPORTED (.10) (.23)
PRO FORMA LOSS PER SHARE (.11) (.23)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted
average fair value of stock options granted to employees used in
determining pro forma amounts is estimated at $1.31 for Mr. McLelland's
150,000 options and $.15 for the remaining 1,850,000.
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model for the pro forma amounts
with the following weighted average assumptions:
F-36
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. STOCK OPTIONS (CONTINUED)
JUNE 30, 1999 JUNE 30, 1997
------------- -------------
RISK FREE INTEREST RATE 4.5 6.5
EXPECTED LIFE 2.0 1.8
EXPECTED VOLATILITY 13.7 16.2
EXPECTED DIVIDENDS NONE NONE
11. AUTHORITATIVE PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting comprehensive income" and SFAS No. 131, "Disclosures about
segments of an enterprise and related information". Both are effective
for financial statements for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
SFAS No. 131 changes how operating segments are reported in the annual
financial statements and requires the reporting of selected information
about operating segments in interim financial reports issued to
shareholders.
Both standards have been adopted in these financial statements. In
February 1998, the FASB issued SFAS No. 132, "Employers disclosure
about pensions and other postretirement benefits", which is effective
for fiscal years beginning after December 15, 1997. The modified
disclosure requirements are not expected to have a material impact on
the Company's results of operations, financial position or cash flows.
The fasb issued SFAS No. 133 "Accounting for derivative instruments and
hedging activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities.
SFAS No. 133 Requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the
derivative and how it is designated, for example, gains or losses
related to changes in the fair value of a derivative not designated as
a hedging instrument is recognized in earnings in the period of the
change, while certain types of hedging may be initially reported as a
component of other comprehensive income (outside earnings) until the
consummation of the underlying transaction.
SFAS No. 133 Is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Initial application of SFAS No. 133
Should be as of the beginning of a fiscal quarter; on that date,
hedging relationships must be designated anew and documented pursuant
to the provisions of SFAS No. 133. Earlier application of all the
provisions of SFAS No. 133 is not to be applied retroactively to the
financial statements of prior periods. The company will evaluate the
new standard to determine any required new disclosures or accounting.
F-37
<PAGE>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. SUBSEQUENT EVENT
a. In July, 1999, the Company incorporated a holding company, Edsoft
Platforms (Canada) Inc. ("Edsoft") in which it owns 55%. Edsoft owns
100% of a newly incorporated company, Edsoft Platforms (H.K.) Limited
which markets educational software in Hong Kong. The Company will
contribute technology and a group of private investors, in July 1999,
has advanced approximately $250,000 into edsoft as a shareholder's
loan, bearing a 10% interest rate. One half of the loan can be
converted into common shares of the Company at $3 per share if the loan
is not paid in full after 3 years.
13. LITIGATION
In December 1998 one of the Company's Chinese subsidiaries reached a
court settlement with one of its suppliers that requires the subsidiary
to return approximately $93,500 of inventory to the supplier. This
amount has been removed from inventory and the liability is included in
accounts payable at June 30, 1999.
14. PRESENTATION
Certain amounts in the June 30, 1998 financial statements have been
reclassified to correspond with the June 30, 1999 presentation.
15. SUBSEQUENT EVENT (UNAUDITED)
a. EQUITY FINANCING
The Company is negotiating for additional equity financing of
approximately $5,000,000, which will be contributed to Edsoft Platforms
(H.K.) Limited (see Note 12). The potential investor will then own
approximately 20% of that company.
16. ALLOWANCE FOR BAD DEBTS
FOR THE
YEAR ENDED BALANCE- CHARGED TO CHARGED TO BALANCE-
JUNE 30, BEGINNING EXPENSE OTHER ACCTS. DEDUCTIONS ENDING
-------- ------- ------- ------------ ---------- ------
1998 $ -- $ 66,900 $ -- $ -- $ 66,900
1999 $ 66,900 143,081 -- -- 209,981
F-38
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
AS AT AS AT
SEPT 30,2000 JUNE 30, 2000
(UNAUDITED)
----------- -------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 707,044 919,091
ACCOUNTS RECEIVABLE, NET OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS
OF $200,097 75,989 36,009
DUE FROM RELATED PARTY 96,890 170,123
PREPAID EXPENSES 14,779 3,715
INVENTORIES 0 18,071
OTHER RECEIVABLES 14,803 5,588
----------------------------
TOTAL CURRENT ASSETS 909,505 1,152,597
----------------------------
PROPERTY AND EQUIPMENT, NET 902,208 967,840
----------------------------
OTHER ASSETS
NOTES RECEIVABLE 71,940 71,940
ADVANCE TO DIRECTOR 67,511 60,011
LICENSE FEES 118,750 125,000
OTHER ASSETS 10,325 30,454
----------------------------
268,526 287,405
----------------------------
TOTAL ASSETS $ 2,080,239 2,407,842
============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 1,710,440 $ 1,690,658
ACCRUED EXPENSES 442,890 419,160
RELATED PARTY LOAN PAYABLE 100,000 100,000
DUE TO RELATED PARTY CONSULTANTS 1,565,026 1,415,026
OTHER LIABILITIES 470,704 414,197
----------------------------
TOTAL CURRENT LIABILITIES 4,289,060 4,039,041
----------------------------
OTHER LIABILITIES
RELATED PARTY LOANS PAYABLE 255,490 255,490
CONVERTIBLE DEBENTURE, NET OF DISCOUNT 1,213,688 1,194,334
----------------------------
1,469,178 1,449,824
----------------------------
STOCKHOLDERS' DEFICIT
PREFERRED STOCK, PAR VALUE $.01 PER SHARE;
AUTHORIZED 10,000,000 SHARES;
ISSUED -0- SHARES
COMMON STOCK, PAR VALUE $.01 PER SHARE;
AUTHORIZED 100,000,000 SHARES;
ISSUED 23,890,607 SHARES 238,907 238,907
ADDITIONAL PAID IN CAPITAL 11,871,444 11,871,444
ACCUMULATED DEFICIT (15,782,209) (15,184,374)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
CUMULATIVE TRANSLATION ADJUSTMENT (5,357) (6,216)
----------------------------
(3,677,215) (3,080,239)
LESS: TREASURY STOCK, AT COST,
78,420 COMMON SHARES (784) (784)
----------------------------
TOTAL STOCKHOLDERS' DEFICIT (3,677,999) (3,081,023)
----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 2,080,239 2,407,842
============================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-39
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<S> <C>
SALES $ 1,143,446
COST OF SALES 1,035,967
------------
GROSS PROFIT 107,479
============
OPERATING EXPENSES
GENERAL AND ADMINISTRATIVE 382,472
RELATED PARTY CONSULTANTS 180,000
SELLING 73,765
DEPRECIATION AND AMORTIZATION 13,504
------------
649,741
------------
OTHER INCOME (EXPENSE)
INTEREST INCOME 5,436
INTEREST EXPENSE (61,009)
------------
(55,573)
------------
NET LOSS $ (597,835)
============
NET LOSS PER COMMON SHARE [BASIC AND DILUTED] $ (0.025)
WEIGHTED AVERAGE NUMBER OF SHARES 23,890,607
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-40
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME(LOSS) DEFICIT INCOME(LOSS)
------ ------ ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 2000 23,890,607 238,907 11,871,444 -- (15,184,374) (6,216)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT -- 0 0 859 0 859
COMPREHENSIVE INCOME:
NET LOSS -- -- -- (597,835) (597,835) --
------------
(596,976)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE SEPTEMBER 30, 2000 23,890,607 $ 238,907 $ 11,871,444 $(15,782,209) $ (5,357)
============ ============ ============ ============ ============
TREASURY UNAMORTIZED
STOCK AT DEFERRED STOCKHOLERS'
COST COMPENSATION DEFICIT
----------- ------------ ----------
BALANCE JUNE 30, 2000 (784) 0 (3,081,023)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY ADJUSTMENT 0 0 859
COMPREHENSIVE INCOME:
NET LOSS -- -- (597,835)
------------ ------------ ------------
BALANCE SEPTEMBER 30, 2000 $ (784) $ 0 $ (3,677,999)
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-41
<PAGE>
<TABLE>
<CAPTION>
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
NET LOSS $(597,835)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 73,392
NONCASH INTEREST EXPENSE-
CONVERTIBLE DEBENTURE 19,354
CHANGES IN OPERATING ASSETS
AND LIABILITIES
DECREASE(INCREASE)ON OPERATING ASSETS:
ACCOUNTS RECEIVABLE (39,980)
DUE FROM RELATED PARTY 73,233
PREPAID EXPENSES (11,064)
INVENTORIES 18,071
OTHER RECEIVABLES - CURRENT (9,215)
ADVANCE TO DIRECTOR (7,500)
OTHER ASSETS 20,129
INCREASE (DECREASE)IN OPERATING LIABILITIES:
ACCOUNTS PAYABLE 19,782
ACCRUED EXPENSES 23,730
DUE TO RELATED PARTY CONSULTANTS 150,000
OTHER LIABILITIES 56,507
---------
NET CASH USED BY OPERATING ACTIVITIES (211,396)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY AND EQUIPMENT (1,510)
---------
NET CASH USED BY INVESTING ACTIVITIES (1,510)
---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 859
---------
INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS (212,047)
CASH AND CASH EQUIVALENTS,
BEGINNING OF QUARTER 919,091
---------
CASH AND CASH EQUIVALENTS, END OF QUARTER 707,044
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-42
<PAGE>
NOTES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary in order to make the
financial statements not misleading have been included. Results for the three
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in tengtu international corp. (The "Company") and subsidiary's
annual report on form 10-K for the fiscal year ended June 30, 2000.
The accompanying unaudited consolidated financial statements do not
contain comparative columns for the interim period ended September 30, 1999. The
company has only recently gained the capability of producing quarterly financial
statements, filing its first Form 10-Q for the fiscal quarter ended December 31,
1999.
1. Principles of Consolidation
In accordance with Cccounting Research Bulletin 51, the Company has
charged to income the losses applicable to the minority interests of
subsidiaries where such losses were in excess of the minorities' interests in
the equity capital of the joint venture and subsidiaries, including any
guarantees or commitments from minority owners for further capital
contributions.
2. Long-term Debt
On December 23, 1999, the Company received cash in the amount of
$1,500,000 in exchange for a four year floating convertible debenture
("debenture") convertible into shares of tengtu's $.01 par value common stock
("common stock") and a separate common stock warrant ("warrant") for the
purchase of 1,500,000 shares of common stock. The purchaser of the debenture and
warrant is Top Eagle Holdings Limited, a British Virgin Islands company ("Top
Eagle"). The Debenture is due December 15, 2003 and provides for accrual of
interest beginning December 15, 2000 at a rate equal to the best lending rate of
the Hong Kong and Shanghai banking corporation plus two percent (approximately
9% as at September 30, 2000). The debenture is convertible into the Company's
common stock at a conversion price of $.50 during the first year, $1.00 during
the second year, $2.00 during the third year and $4.00 on any date thereafter.
The unpaid balance of principal and interest outstanding at maturity, if any,
may be converted by the holder into the Company's common stock at the then
existing market price minus twenty percent.
The warrant gives the holder the right to purchase 1,500,000 shares of
the Company's common stock at $1.00 Per share during the first year, $2.00 per
share during the second year and $4.00 thereafter. The warrant shall become void
three years after issuance. In connection with the purchase of the debenture and
warrant, the Company and Top Eagle entered into an investor rights agreement
which provides that on or before June 15, 2000, Top Eagle may purchase
additional convertible debentures for up to $3.5 million and receive additional
warrants on substantially the same terms. Top Eagle did not exercise these
rights. The investor rights agreement also provides the holder(s) of the
debenture, warrant and or the shares issued upon conversion or exercise thereof,
with registration and certain other rights. The effective interest rate of the
debenture is 8.5%.
Because no portion of the price paid by Top Eagle was for the warrants,
the warrants were assigned a value by the company and the debenture was
discounted by that amount. The interim financial statements reflect entries of
$346,154 for a discount to the debenture and paid in capital for the warrant.
This value was assigned as follows. On the date that the debenture and warrant
were sold to Top Eagle, the Company's stock was trading at $1.60 per share and
the warrant was exercisable at $1.00. Therefore, the warrant had a value between
$.00 And $.60 per share. The Company chose to value the warrant at $.30 per
share. The gross amount of the debenture and warrant were therefore $1.5 million
(debenture) plus $450,000 (warrant - $.30 X 1,500,000) for a total of $1.95
million. Of the $1.95 million, the warrant represents 23.08% ($450,000/$1.95
million). The discount to the debenture was calculated by multiplying the
percentage of the total represented by the warrant (23.08%) By the total
proceeds received from the sale ($1.5 million). The discount to the debenture
was therefore equal to $346,154 and the debenture was discounted to $1,153,846
($1.5 million - $346,154).
On the date the debenture was issued, the conversion price was $.50 And
the market price was $1.60. The conversion feature was valued at the full
adjusted amount of the debenture, after valuation of the warrant, of $1,153,846.
Because the debenture was immediately convertible, the full discount was charged
to interest expense for the fiscal year ended June 30, 2000.
3. Related Party Transactions
Due to the continued downsizing of the staff of the joint venture
(Tengtu United), the operations of the venture during the quarter ended
September 30, 2000 were carried out by the minority interest holder. At
September 30, 2000, the joint venture had a receivable balance of $96,980. At
June 30, 2000, the joint venture had a receivable balance from the minority
interest holder of $170,123. The Company advanced $7,500 to one of the officers
during the quarter.
During the quarter ended September 30, 2000, the Company incurred
consulting and related expenses of approximately $180,000 from officers and
directors of the company or its subsidiaries or companies controlled by these
officers and directors. Only $30,000 in payments have been made for the quarter.
In January 2000, the Company and Comadex Industries, Ltd. entered into
a consulting agreement for the employment of Pak Cheung as the Company's
Chairman and CEO. Pursuant to that agreement Comadex received 3,000,000 common
shares for past services rendered, resulting in a charge to related party
consultants expense of $750,000. If Pak Cheung is able to raise $3,000,000 or
more in capital for the Company or a 50% or more owned joint venture or
subsidiary, Comadex shall receive an option to purchase 1,000,000 shares of the
Company's common stock at the closing price on the day the capital is received
by the Company.
On September 9, 1999 a company director loaned $100,000 to the Company.
The loan bears interest at 6% per annum and is due in twelve months. The loan is
convertible at the option of the Company director at the rate of $0.35 Per
share, or into an aggregate of 285,14 shares of the Company's common stock. The
loan is guaranteed by another director of the company. At the date of the loan,
the Company's common stock was trading at $0.25 per share, therefore the loan
does not contain a beneficial conversion feature.
On April 1, 2000, the company entered into a contract with a consultant
which terminates in April, 2002. Under the terms of the contract the consultant
will receive $10,000 per month, 250,000 common shares of the Company under a
vesting schedule which coincides with that of the contract, and two options to
purchase the Company's common stock for $1 per share. Both options represent
37,500 shares. The first option will be granted by December 1, 2000, and the
second option after December 1, 2000 and before April 1, 2001.
4. H.K.$2,000,000 Loan to Edsoft Platforms (Canada) Ltd.
A group of private investors, in July 1999, advanced approximately
$250,000 into Edsoft Platforms (Canada), Inc., one of the Company's
subsidiaries, as a shareholder's loan, bearing a 10% interest rate. One half of
the loan can be converted into common shares of the Company at $3 per share if
the loan is not paid in full at the maturity date of July 27, 2002.
F-43
<PAGE>
5. License Fees
On June 21, 2000, the Company entered into a license agreement with
Netopia, Inc. The agreement grants the company a fee-bearing, nonexclusive
license right to promote and otherwise market netopia's web site product and
services to the Company's customers. The agreement shall continue in perpetuity
until terminated by either party. The cost of the agreement or $125,000 is being
amortized on a straight-line basis over five years. No amortization was recorded
for the year ended June 30, 2000 due to the short amortization period of nine
days.
6. Subsequent Events
A. On October 25, 2000, the Company entered into an investment
agreement with Swartz Private Equity, L.L.C. ("Swartz") (the "investment
agreement"). The investment agreement entitles the Company to issue and sell up
to $30 million of the Company's common stock to Swartz subject to a formula
based on the stock price and trading volume, from time to time over a three year
period, following the effective date of a registration statement on Form S-1.
The investment agreement defines each issuance and sale as a "put."
Under the investment agreement, Swartz will pay the Company a
percentage of the market price for each share of common stock during the 20
business days immediately following the date the Company elects to sell stock to
swartz in a put is used to determine the price swartz will pay and the number of
shares the Company will issue in return. For each share of common stock, Swartz
will pay the Company the lesser of:
- the "market price" for each share, minus $.075; Or - 92% of the
"market price" for each share.
The "market price is the lowest bid price during the 20 day period preceding a
put.
Each time the Company sells shares of its common stock to swartz, it
will also issue five year warrants to Swartz to purchase its common stock in an
amount corresponding to 10% of the number of shares in the put. Each warrant
will be exercisable at 110% of the market price for the applicable put.
As consideration for making its financing commitment to the Company,
Swartz was issued a warrant to purchase 1,200,000 shares of the Company's common
stock exercisable at $.745 per share until October 25, 2005.
b. On October 6, 2000, Iconix International, Inc.'s ("Iconix") assets
and business were sold for $3,333,000. The Company owns 44% of Iconix and is
expected to receive a gain from the sale over what it invested in Iconix of
$580,000 over the next 12 months. The Company has received $220,000 of the
proceeds of the Iconix sale to date.
F-44
<PAGE>
