FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...........to...............
Commission File Number 000-29957
TENGTU INTERNATIONAL CORP.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0407366
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
236 Avenue Road Toronto, Ontario Canada M5R 2J4
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(Address of Principal Executive Offices)
(Zip Code)
(416) 963-3999
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(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PREVIOUS FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: there were 55,435,691 shares
outstanding as of September 30, 2002.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
As At As At
September 30, June 30,
2002 2002
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 236,025 $ 914,838
Due from related party 3,503,575 2,579,157
Prepaid expenses 1,004,634 1,016,958
Other receivables 26,682 22,197
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Total Current Assets 4,770,916 4,533,150
PROPERTY AND EQUIPMENT, net 167,823 222,460
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OTHER ASSETS
Due from related party 14,497,209 14,497,209
Notes receivable 11,881 11,881
Equity Investment 4,450,755 4,469,600
Restricted cash 4,000,000 4,000,000
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22,959,845 22,978,690
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TOTAL ASSETS $ 27,898,584 $ 27,734,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,099,792 $ 1,092,231
Accrued expenses 347,652 301,127
Due to related party consultants 2,000,080 2,012,522
Short-term loan 2,029,856 1,883,428
Other liabilities 420,748 434,644
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Total Current Liabilities 5,898,128 5,723,952
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OTHER LIABILITIES
Long-term debt 3,744,800 3,744,800
Convertible debentures, net of discount 1,383,368 1,360,585
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Total Long-term Liabilities 5,128,168 5,105,385
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STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share;
authorized 10,000,000 shares;
issued -0- shares -- --
Common stock par value $.01 per share;
authorized 100,000,000 shares;
issued 55,514,111 shares and
outstanding 55,435,691 shares at September 30, 2002
(June 30, 2002 - 54, 201, 609 and 54,123,189) 554,357 541,232
Additional paid in capital 30,545,841 30,281,736
Accumulated deficit (14,208,743) (13,899,433)
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (18,383) (17,788)
------------ ------------
16,873,072 16,905,747
Less: Treasury stock, at cost, 78,420 common shares
(784) (784)
------------ ------------
Total Stockholders' Equity 16,872,288 16,904,963
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,898,584 $ 27,734,300
============ ============
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
-2-
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited) (unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2002 2001
---- ----
SALES $ 1,908,506 $ 3,241,315
COST OF SALES 543,914 1,181,633
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GROSS PROFIT 1,364,592 2,059,682
OPERATING EXPENSES
Research and development 2,968
General and administrative 746,147 538,210
Related party consultants 102,279 218,727
Collection provision 63,132 165,283
Advertising 302 72
Selling 440,151 538,702
Depreciation 12,466 21,706
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TOTAL OPERATING EXPENSES 1,367,445 1,482,700
OPERATING INCOME (LOSS) (2,853) 576,982
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OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee (18,845) --
Interest income 236 2,333
Interest expense (144,574) (80,017)
Other income 279,180 405,725
Other expense (40,911)
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TOTAL OTHER INCOME (EXPENSE) 115,997 287,130
INCOME (LOSS) BEFORE TAX AND MINORITY INTERESTS 113,144 864,112
------------ ------------
INCOME TAX 130,913 --
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS (17,769) 864,112
------------ ------------
MINORITY INTERESTS IN SUBSIDIARYS' INCOME 291,541 --
------------ ------------
NET INCOME (LOSS) $ (309,310) $ 864,112
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 50,703,411 46,282,701
Common stock equivalents 2,777,820
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Diluted 50,703,411 49,060,521
EARNINGS (LOSS) PER COMMON SHARE:
Basic (0.006) 0.019
------------ ------------
Diluted (0.006) 0.018
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The accompanying notes are an integral part of the unaudited
consolidated financial statements.
-3-
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited) (unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) (309,310) 864,112
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 51,975 80,665
Loss on investment at equity 18,845 --
Noncash compensation expense on equities issued for services 23,959 108,727
Noncash interest expense - convertible debenture 22,784 19,354
Impaired assets written off 2,662 --
Changes in operating assets and liabilities:
Decrease (Increase) in operating assets:
Accounts receivable -- 13,766
Due from related party (924,418) (3,928,515)
Prepaid expenses 12,324 (89,428)
Inventories -- (6,414)
Other receivables (4,485) 74,037
Other assets -- 60,059
Increase (Decrease) in operating liabilities:
Accounts payable 7,561 169,461
Accrued expenses 46,525 142,095
Due to related party consultants (12,442) 30,000
Other liabilities (13,896) (58,531)
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Net Cash Used by Operating Activities (1,077,916) (2,520,612)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- (1,402)
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Net Cash Used by Investing Activities -- (1,402)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term loans 395,628 --
Cash paid on short-term loan (249,200) --
Cash received for shares, options and warrants issued 253,270 2,146,700
---------- ----------
Net Cash Provided by Financing Activities 399,698 2,146,700
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(595) (11,287)
DECREASE IN CASH AND CASH EQUIVALENTS (678,813) (386,601)
---------- ----------
CASH AND CASH EQUIVALENTS, beginning of the period 914,838 1,026,400
CASH AND CASH EQUIVALENTS, end of the period 236,025 639,799
========== ==========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
-4-
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 fairly present
the interim financial information have been included. Results for the three
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2003. For further
information, refer to the consolidated financial statements and notes thereto
included in Tengtu International Corp. and Subsidiaries' annual report on Form
10-K for the fiscal year ended June 30, 2002.
1. Principles of Consolidation
Tengtu International Corp. (the "Company") was incorporated in
Delaware on May 6, 1988 as Galway Capital Corporation. On May 24, 1996 the
Company changed its name to Tengtu International Corp. The Company's principal
activities are carried out through Beijing Tengtu United Electronics
Development, Co. Ltd. ("Tengtu United") a 57% owned Chinese joint venture
company. The Company also has two subsidiaries, TIC Beijing Digital Pictures
Co., Ltd. ("TIC Beijing") (wholly owned) and Edsoft Platforms (Canada) Ltd.
("Edsoft Canada") (60.2% owned). The subsidiary Edsoft Platforms (H.K.) Ltd.
("Edsoft H.K."), which was wholly owned by Edsoft Canada, was shutdown in fiscal
2002. These subsidiaries had limited operations during the three months ended
September 30, 2002.
Tengtu United is a provider of distance learning and e-education
solutions, training and methodologies, in support of China's goals to modernize
its K-12 education system.
The Company contributed capital of $20,430,000 to Tengtu United, in
which the minority Chinese partner, Tengtu China, has a 43% interest. No portion
of the $20,430,000 has been allocated to the minority as the joint venture
agreement that concerns the subsidiary assigns all rights to that contribution
to the Company.
The Company and Tengtu China agreed that the contribution of software
and hardware Tengtu China 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. Tengtu China also contributed a contract to Tengtu United 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.
Tengtu United has certain investments in the joint ventures with the
divisions or provincial branches of the Chinese Ministry of Education. Although
the Company's equity interest in each of the joint ventures is over 50%, the
Company does not control the joint ventures due to participating rights
exercised by the minority interest holders in the management of the joint
ventures. The investments, therefore, are accounted for using the equity method
of accounting as the Company has the ability to exercise significant influence,
but not control, over the investees. (see Note 4).
-5-
2. Due from related party
The Company has instructed Tengtu China to conduct all of Tengtu
United's business with any Chinese government entity. Tengtu China administers
the daily operations of Tengtu United: paying operating expenses, collecting
receivables and remitting net operating profits to the Company. The Company has
recorded the following amounts as due from Tengtu China as at September 30,
2002:
Current Assets
Prior year balance $ 2,579,157
Advances related to working capital for operations 474,112
Profits from operations,
net of minority interest 450,306
------------
Due from Related Party $ 3,503,575
============
Payment processes slower than those experienced in North America are
not unusual in China, especially when dealing with a number of levels of
government. Furthermore, in order to support the continuous expansion of China
operations, the Company does not expect the repayment of working capital
advances made to Tengtu China in the near term. In recognizing the different
environment in which it is operating in China, the Company has classified
US$14,497,209 of due from Tengtu China as long-term as of September 30, 2002.
The totals of both current and long-term due from related party
include a collection provision of $670,847.
3. Prepaid Expenses
The majority of prepaid expenses is an advance of $577,675 to a
software development company for work related to the Company's participation in
the development of a central educational portal and repository in China. Also
included in the prepaid expenses is $232,739 related to the warrants issued to
Swartz Private Equity L.L.C. ("Swartz") in October 2000 as a fee for making an
equity line available to the Company. The warrants are being amortized on a
straight-line basis over their life of five years.
4. Equity Investment
Tengtu China is entering into a joint venture, the China Broadband
Education Resource Center ("CBERC"), with a division of the Chinese Ministry of
Education on behalf of TUC. CBERC is established for the transmission of various
educational tools to individual schools for an annual fee.
Tengtu China is also forming joint ventures with various Chinese
Provinces on behalf of TUC. One of these has already been formed in Shaanxi and
three others are in the process of being organized. Each of these joint ventures
is a Local Broadband Education Resource Center ("LBERC"). They will connect to
CBERC and will contain their own educational and other materials mandated by the
Provinces. This content will also be transmitted to individual schools for an
annual fee.
The Company, through Tengtu United, has advanced $4,469,600 for the
formation of CBERC and the LBERCs. The Company accounts for these investments on
the equity basis (see Note 1). CBERC has not been officially established as at
September 30, 2002, hence, no equity earnings or losses are recorded. For the
three months ended September 30, 2002, Shaanxi LBERC had limited operations
which resulted in an equity loss of $18,845.
5. Restricted Cash
The $4,000,000 in restricted US dollar denominated deposits at the
Min Sheng Bank (of China) is used to secure a long-term loan from the same bank
(see note 7).
-6-
6. Short-term loans
On June 6, 2002 the Company received a bridge loan of $4,000,000 from
Quest Ventures Ltd. ("Quest"). The loan is due on November 30, 2002 and earns
interest at 12% annually, compounded monthly. The loan is collateralized by a
security interest in all of the Company's property and a pledge of 10,015,812 of
the Company's common stock owned by Orion Capital Incorporated ("Orion"), the
Company's largest shareholder. Orion has also guaranteed the loan, and Mr.
William Ballard, Orion's beneficial owner and the Chairman of the Company's
Executive Committee, has guaranteed the payment of $2,500,000 due on or before
July 5, 2002. This payment was paid by July 5, 2002, relieving Mr. Ballard of
his guarantee. The balance of the loan at September 30, 2002 was $1,500,000.
Subsequently, another $1,300,000 was paid to Quest on October 22, 2002, which
reduced the loan balance to $200,000. In the event of a default, Quest loan
agreement and Quest will have the rights granted to it pursuant to a General
Security Agreement under which it has been granted security interests in all of
the Company's assets. For the three months ended September 30, 2002, the
interest expense on the Quest Ventures loan was $45,804.
Orion advanced $395,628 to the Company for the general corporate and
administrative expenditures during the quarter, which brings the total
short-term loan from Orion to $529,858. Subsequent to the quarter ended
September 30, 2002, Orion advanced an additional $94,605 to the Company to be
used for general corporate purposes. The advance is due on demand and is
interest free.
7. Long-term Debt
On June 26, 2002, the Company borrowed approximately $3,745,000 in
Chinese renminbi from Min Sheng Bank (of China). This line of credit bears
interest at 5.58% and is payable in full on June 26, 2007. This line of credit
is fully secured by $4,000,000 in restricted US dollar denominated deposits at
the Min Sheng Bank. The interest expense in the three months ended September 30,
2002 was $48,006.
8. Convertible Debenture
Pursuant to a $1,500,000 convertible debenture issued to Top Eagle
Holdings, Ltd. ("Top Eagle") in December, 1999 and due December, 2003, the
Company makes quarterly interest payments at a rate equal to the best lending
rate of The Hong Kong and Shanghai Banking Corporation plus two percent
(approximately 7% and 9% at September 30, 2002 and 2001, respectively). The
total interest expense for the quarter ended September 30, 2002 was $50,763,
which included the amortization of the discount on the convertible debenture of
$22,784.
During the fiscal quarter ended March 31, 2002, the Company defaulted
on its quarterly interest payment to Top Eagle which was due on December 15,
2001. While the amount due was subsequently paid, the failure to timely pay
interest is an "Event of Default" which gives Top Eagle the right, at its
option, and in its sole discretion, to consider the Debenture immediately due
and payable, without presentment, demand, protest or notice of any kind. Upon an
Event of Default, the amounts due under the Debenture may be paid in cash, or
stock, at the prevailing conversion price set forth in the Debenture.
As of the date of this report, Top Eagle has not taken any action
based on any Event of Default. However, it has the right to do so at any time.
9. Related Party Transactions
During the quarter ended September 30, 2002, the Company incurred
consulting expenses of $102,279 from officers and directors of the Company or
companies controlled by these officers and directors (September 30, 2001 -
$218,727).
In October 1999, the Company entered into a consulting agreement with
Comadex Industries, Ltd. ("Comadex") to retain the services of Pak Kwan Cheung
as Chairman of the Board of Directors and Chief Executive Officer. The terms of
the agreement include the following: (1) Comadex will receive a consulting fee
of $10,000 per month; (2) Comadex shall receive an incentive of 1% of the
capital raised by him in excess of $3,000,000 by Mr. Cheung for the Company; (3)
Comadex shall receive 1% of the Company's net profits if the Company exceeds
pre-set profit targets and its audited pre-tax profits exceed that target(s) -
no such targets have been set by the Board of Directors; (4) Comadex shall
receive certain payments in the event the agreement is terminated without cause
or if the Company is merged into or acquired by another company.
The Agreement with Comadex and Mr. Cheung is currently the subject of
a pending arbitration, which was commenced by those parties on or about
September 25, 2002. The Statement of Claim filed in the arbitration alleges that
Cheung and Comadex performed their obligations under the Consultant Agreement,
that Cheung was terminated without cause and that Cheung and Comadex are
entitled to the benefits and entitlements under the Consultant Agreement. As of
the date of this report, the Company cannot determine if there will be any
potential material liabilities associated with the arbitration beyond those
called for by the terms of the Consultant Agreement. On September 30, 2002, Pak
Kwan Cheung was removed as one of the Company's Directors.
-7-
Under a contract dated December 21, 2000 between the Company and
Orion Capital Inc. ("Orion"), a significant shareholder of the Company, William
Ballard, will provide consulting services to the Company for a twenty-four month
period that commenced in December 2000. As compensation for the services, the
Company agreed to issue Orion 20,834 shares of Common Stock each month. During
the quarter ended September 30, 2002, 62,502 shares of Common Stock were issued
to Orion and a charge to compensation expense of $23,959 was recorded.
As of November 15, 2002, Orion has advanced $624,463 on short-term
basis to the Company for general corporate and administrative expenditures. The
advance is due on demand and is interest free.
Pursuant to a July 30, 2002 amended stock purchase agreement, the
Company sold 1,000,000 shares of common stock to Mr. Fan Qi Zhang for $500,000
or $0.50 per share. The sale included 500,000 attached warrants to purchase
common stock at $.75 per share. The Company received half of the $500,000 on
June 12, 2002. Another $250,000 from Mr. Zhang was received in July 2002. Mr.
Zhang is a member of the Company's Board of Directors and is the Chief Executive
Officer and principal owner of the Company's joint venture partner, Tengtu
China.
10. Taxes
None of the subsidiaries are eligible to be consolidated into the
Company's U.S income tax return, therefore, separate income tax provisions are
calculated for the Company and each of its subsidiaries. For U.S. income tax
purposes, the Company has recorded a deferred tax asset due to net operating
loss carryforwards. The asset has been offset by a full valuation allowance, as
the Company believes it is more likely than not that the losses will not be
utilized. Tengtu United has an income tax "holiday" for its first profitable and
four subsequent years as computed on a Chinese Tax basis, which is a hybridized
cash basis of accounting. This holiday reduces income taxes by 100% for years
one and two, and by 50% for years three through five. Tengtu United recorded net
incomes in fiscal years ended June 30, 2001 and 2002. Consequently, the 50% of
the regular income tax rate is applied to the incomes of fiscal 2003, which is
estimated at 15%. In the quarter ended September 30, 2002, Tengtu United
recorded pre-tax income of approximately $808,900 and an estimated income tax
expense of $130,913.
11. Litigation
The Company is party to litigation in the normal course of business.
In management's opinion, the litigation will not materially affect the Company's
financial position, results of operation or cash flow.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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OVERVIEW
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Tengtu International Corp.'s (the "Company") business focuses on K-12
e-education in China which has approximately 800,000 schools and 250 million
students. Through the Company's joint venture ("Tengtu United") and joint
venture partner ("Tengtu China"), and, along with other companies, the Company
works in cooperation with the Chinese central and Provincial Ministries of
Education to implement an information technology solution for the Chinese
schools to fulfill China's goal of making IT-based education and distance
learning available to 90% of K-12 schools by 2010. Specifically, the Company is
engaged in the following businesses:
o sales of educational software to Chinese K-12 schools;
o development of the China Broadband Education Resource Centre
("CBERC") along with National Center for Audio/Visual Education
("NCAVE"). CBERC is an electronic resource center and portal
containing educational materials that are transmitted to schools
which download them daily via satellite and which will be accessible
by Internet;
o development of Local Broadband Education Resources Centres ("LBERC"),
along with several Chinese Provinces. The LBERCs will connect with
CBERC and, in addition, will contain their own educational and other
materials as mandated by the Provincial Ministries of Education. Like
CBERC, content will be transmitted to schools daily via satellite and
will also be available via Internet;
o sales of computer hardware and systems integration services to
Chinese schools; and
o teacher training in the use of information technology in education.
The Company has instructed Tengtu China to conduct all of Tengtu
United's business with any Chinese government entity. Tengtu United's Total
Solution platform makes available via Intranet or Internet a comprehensive set
of tools for computerized class instruction, on-line learning, school office
administration, and management of educational and multimedia resources. The
Total Solution platform is designed, in co-operation with NCAVE, to accommodate
broadband Internet connections via satellite and cable and we believe it is an
ideal tool to support distance learning.
The Total Solution platforms are being installed under Operation
Morning Sun, a project awarded to Tengtu China (on behalf of Tengtu United) by
the Chinese Ministry of Education and through contracts with provincial
education ministries.
In April 2001 Tengtu China entered into a cooperation agreement with
the Ministry of Education under which Tengtu United agreed to be the Ministry's
operating and development partner for its (1) distance learning network in China
and (2) CBERC. A similar initiative has been undertaken with provinces such as
ShanDong, Sichuan, Shaanxi and Fujian for the development of LBERCs.
In the fiscal year ended June 30, 2001 Tengtu United launched
Operation Morning Sun in over 20 provinces, installing 3,017 Total Solution
platforms in Phase I of the project. Phase II of Operation Morning Sun was
launched in July 2001. 7292 Total Solution platforms were installed in the
fiscal year ended June 30, 2002. In addition, 3,245 sets of satellite equipment
and 1,748 packages of educational CD-ROM's were sold to schools in fiscal 2002.
In the first quarter of fiscal 2003 (three months ended September 30, 2002),
1,181 Total Solution platforms were installed, 6 sets of satellite equipment and
58 packages of educational CD-ROM's were sold to schools. The September quarter
has always been a low sales period due to the fact that schools were closed for
the July and August summer break. In the same period last year (three months
ended September 30, 2001), Tengtu United installed 1,743 Total Solution
platforms, 300 sets of satellite equipment, and 650 packages of educational
CD-ROM's were distributed to Chinese schools. Compared to the same period in
2001, the rate of installations was slow in the current quarter for two reasons:
(1) the Company and its joint venture partner were adjusting the product mix and
performing and developing software upgrades, which the Company believes will
benefit on-going operations, and (2) the Company and its joint venture partner
were focusing on building the portal infrastructure for CBERC and LBERC.
Tengtu China administers the daily operations of Tengtu United:
paying operating expenses, collecting receivables and remitting net operating
profits to Tengtu United. The amount of working capital required to carry out
Operation Morning Sun has been higher than anticipated due to slow collections
of accounts receivable by Tengtu China. This in turn has caused delays in Tengtu
China's payment of net operating profits to Tengtu United.
The Company believes that payment processes slower than those
experienced in North America are not unusual in China, especially when dealing
with a number of levels of government; however, the Company and Tengtu China are
taking steps in conjunction with the Ministry of Education to reduce the payment
cycle. In the quarter ended September 30, 2002, Tengtu China and the
Agricultural Bank of China ("the Bank") entered into an agreement for the
provision of an $18.5 million buyer's credit line to be made available to the
Company's customers (K-12 and vocational schools) for the purchase of the
Company's products and services. Tengtu China provides the guarantee for each
loan that schools withdraw from the credit line. The implementation of this
agreement can potentially shorten the collection cycle of accounts receivables.
-9-
As Operation Morning Sun is expanded, Provincial Ministry of
Education contracts are signed and the CBERC project is launched, the Company
anticipates that Tengtu United will benefit from a number of revenue sources,
including:
o E-education application software and equipment. Many of the K-12
schools in China will require e-education application software such
as the Total Solution platform.
o CBERC and LBERC connectivity fees for K-12 schools with e-education
curriculum content and other learning resources.
o User fees for students studying outside of the K-12 school system.
The Company's future success is dependent on its ability to raise
additional capital to fund its new projects such as CBERC and LBERCs. Currently,
the Company has the following capital commitments:
The total capital requirement for the CBERC joint venture is RMB
71 million, or approximately $8,576,800, of which RMB 21 million, or
approximately $2,536,800, has been funded. An additional RMB 30 million, or
approximately $3,624,000, is required within 12 months after the establishment
of the CBERC joint venture Company, which the Company believes will occur before
the end of 2002, and RMB 20 million, or approximately $2,416,000, within 18
months after the establishment of the CBERC joint venture company. The total
outstanding capital commitment to the CBERC joint venture is therefore currently
RMB 50 million, or approximately $6,040,000.
The total capital requirement for the ShanDong LBERC joint venture
is RMB 56 million, or approximately $6,764,800, of which RMB 10 million, or
approximately $1,208,000, has been made through Tengtu China. An RMB 20 million,
or approximately $2,416,000, capital investment which was due by December 31,
2001 has not yet been made. Despite this, Tengtu China and the joint venture
partner of ShanDong LBERC have proceeded with the agreement and construction of
a central portal for the ShanDong Province. The total outstanding capital
commitment to the ShanDong LBERC joint venture is currently RMB 46 million, or
approximately $5,556,800.
The capital commitment to Sichuan LBERC joint venture is RMB 6
million, or approximately $724,800. The Sichuan LBERC has not yet been
established under Chinese law and the timing of the required capital
contribution has not yet been determined.
The capital commitment to Fujian LBERC joint venture is RMB 8
million, or approximately $966,400. The Fujian LBERC has not yet been
established under Chinese law and the timing of the required capital
contribution has not yet been determined.
The Company currently does not have adequate funds available to
fulfill all capital commitments. The Company's ability to fulfill these capital
commitments is dependent upon (i) whether Tengtu China can collect sufficient
funds from accounts receivable in China and/or (ii) whether the Company will be
able to raise additional financing. There can be no assurance that such
financing will be available, or that it will be available on acceptable terms,
if available at all. The Company is currently pursuing a number of financing
initiatives. However, if the Company is unsuccessful, the Company may have to
alter its business plan accordingly.
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
Three Months Ended September 30, 2002
- -------------------------------------
For the three months ended September 30, 2002, net cash used by
operating activities totaled $1,077,917. The net loss for the quarter,
$(309,310), includes non-cash charges for depreciation and amortization of
$51,975, equity loss on investment of $18,845, non-cash compensation expenses
associated with the issuance of common shares for services of $23,959, non-cash
interest expense of $22,784 related to convertible debentures, and impaired
assets write-off of $2,662, resulting in a net cash decrease of $(189,085).
Cash was further decreased by the increase of $924,418 in due from Tengtu
China for working capital advances and net profits from operations. The decrease
in prepaid expenses resulted in a favorable change of $12,324 to operating cash
flow. In addition, a small increase of $4,485 in other receivables negatively
impacted cash flow.
-10-
The increase of $7,561 in accounts payable and $46,525 in accrued
expenses are related to normal operating activities, which increased operating
cash flow by $54,086. Due to related party consultants and other liabilities had
small decreases of $12,442 and $13,896 respectively. After the elimination of
several positions at the Company's head office, the compensation expenses paid
to the related party consultants were reduced significantly. Hence, no
compensation was deferred for the three months ended September 30, 2002.
The Company did not make any investments during the quarter.
Net cash flow from financing activities was $399,698. In the three
months ended September 30, 2002, the Company borrowed, on a short-term basis,
$395,628 from Orion Capital Incorporated ("Orion") for general corporate
administrative use. Orion is owned by William Ballard, the Chairman of the
Company's Board of Directors.
On July 4, 2002, the Company paid $249,200 to Quest Ventures Ltd.
("Quest") to reduce the outstanding principal of a loan made on June 6, 2002 to
$1,500,000. Subsequently, another $1,300,000 was paid to Quest in October and
November 2002, which reduced the loan balance to $200,000. In the event of a
default, Quest will have the rights granted to it pursuant to a General Security
Agreement under which it has been granted security interests in all of the
Company's assets.
The net cash received from shares and options issued was $253,270 of
which $250,000 was received in July 2002 from Fan Qi Zhang to purchase units
consisting of two common shares and one warrant to purchase common shares at
$.75 per share. The price of each unit was $1.00. Mr. Zhang is a member of the
Company's Board of Directors and is the Chief Executive Officer and principal
owner of the Company's joint venture partner. In addition, $3,270 was received
to exercise 15,000 previously issued options, but shares have not been issued as
of September 30, 2002.
For the three months ended September 30, 2002, total cash paid for
the interest expense was $121,123 and 62,502 shares were issued for consulting
services. In addition, 250,000 shares of common stock were issued to 1334945
Ontario Limited on July 18, 2002 pursuant to a settlement agreement with Gregory
Mavroudis and 1334945 Ontario Limited.
Subsequent to the quarter ended September 30, 2002, Orion advanced an
additional $94,605 to the Company for the general corporate use, which brings
the total short-term loan from Orion to $624,463. The advance is due on demand
and is interest free.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations at
November 15, 2002.
Contractual Payments Due by Period
Obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- ----------- ----- ---------------- ----------- ----------- -------------
Short-term loans $ 824,463 $824,463 (1)
Long-term loans $5,244,800 $1,500,000 (2) $3,744,800 (3)
Total Contractual $6,069,263 $824,463 $1,500,000 $3,744,800
Obligations
(1) The short-term loan consists of $200,000 from Quest and $624,463 from
Orion. $1,300,000 of the loan from Quest Ventures was paid in October and
November 2002. The remainder of $200,000 is due November 30, 2002.
(2) The $1,500,000 convertible debenture issued to Top Eagle Holdings, Ltd. is
due December 15, 2003.
(3) The $3,744,800 long-term loan secured by $4,000,000 deposited in the same
bank, Min Sheng Bank, is due June 26, 2007.
Three Months Ended September 30, 2001
- ---------------------------------------
For the three months ended September 30 2001, net cash used by
operating activities totaled $2,520,612.
The net income for the period, $864,112, included such non-cash
charges as depreciation and amortization $80,665, non-cash compensation expenses
associated with the issue of shares of Common Stock for services $108,727, and
non-cash interest expense related to convertible debentures $19,353, resulting
in a net cash increase of $1,072,857.
-11-
This increase in cash was offset by increases in operating assets
associated with the start of Phase II of Operation Morning Sun. Operation
Morning Sun required $1,488,516 in working capital for operation in the quarter,
due mainly to delays in collecting accounts receivable related to sales in the
fourth quarter of fiscal 2001. In addition to the working capital required for
Operation Morning Sun, the Company advanced $1,000,000 to start work on the
CBERC project and $1,440,000 on signing of the ShangDong province contract.
These funds are being used to develop curriculum and broadcast material for the
CBERC and a local portal and content for the ShangDong province contract.
Net cash used in investing activities was minimal; $1,402 was used to
purchase office equipment.
Net cash flow from financing activities was $2,146,700. The sources
of these funds included a private placement of Common Stock in August 2001 under
which the Company sold a total of 1,722,113 shares of Common Stock for
$2,118,199 or $1.23 per common share. $1,440,000 of these funds were used to
fund the start of Tengtu United's new contract in China with the ShangDong
province, and the remainder is being used for general corporate purposes. In
addition, Swartz exercised warrants to purchase 100,000 shares of Common Stock
at a price of $0.285 per share during the quarter ended September 30, 2001.
OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 and 2001
Revenues
- --------
2002 2001
------ ------
$1,908,506 $3,241,315
Compared to the same period in 2001, revenues were lower for the quarter
ended September 30, 2002 for two main reasons: (1) the Company and its joint
venture partner were adjusting the product mix and performing and developing
software upgrades, which the Company believes will benefit on-going operations,
and (2) The Company and its joint venture partner were focusing on building the
portal infrastructure for CBERC and LBERC.
During the three months ended September 30, 2002, Tengtu United
installed 1,181 Total Solution platforms at an average unit price of $1,549, for
total revenue of $1,828,036, or 96% of sales. Tengu China also installed 6 sets
of satellite equipment for $3,097 and 58 resource CDs for $3,696. Sales of other
e-education products and services through Tengtu China were $45,139. The total
Tengtu United/Tengtu China operations accounted for 99% of sales. Other
miscellaneous revenue from TIC Beijing accounted for the remaining $27,542 in
revenue.
Tengtu United sales for the three months ended September 30, 2001 were
$3,241,315. 91% of these sales were derived from sales to 2,693 schools under
Operation Morning Sun. This total included installing Total Solution platforms
in 1,678 schools and installing Total Solution platforms with satellite
equipment in 65 schools (revenue of $2,719,081), selling educational CD-ROMs to
650 schools ($54,503 in revenue) and shipping satellite equipment to 300 schools
($124,451 in revenue). Most of this activity took place in late August and
September 2001 due to fact that schools were closed for the July and August
summer break. Other sources of revenue for Tengtu United include installation
projects in Inner Mongolia and Henan province ($255,596 in revenue), sale of
Microsoft products ($41,391 in revenue) and other sales ($23,843 in revenue).
Sales of educational software and services by TIC Beijing were $22,450.
Gross Profit (Loss)
- -------------------
2002 2001
------ ------
$1,364,592 $2,059,682
For the three months ended September 30, 2002, the overall gross
margin associated with sales under Operation Morning Sun was 74%, of which
$1,364,099 was for Total Solution platforms at 75% or $1,155 per platform, $915
was for satellite equipment at 30%, $402 was for educational CD-ROMs at 11%, and
$18,999 was for other educational software and services, at 42%. The platforms
contributed to almost all of the gross profit, and the gross margin is
consistent with the rate in the same period last year.
For the three months ended September 30, 2001, overall gross margins
associated with sales under Operation Morning Sun were 72%: 76% for Total
Solution platforms, 36% for satellite equipment and 2% for educational CD-ROMs.
-12-
General and Administrative Expenses
- -----------------------------------
2002 2001
------ ------
$746,147 $538,210
For the three months ended September 30, 2002, general and
administrative expenses increased $207,937 compared to the same period in 2001.
An increase of $171,553 in the administrative expenses related to China
operations contributed to the most of the increases. The remaining increases are
due to the higher legal and audit fees of Tengtu International Corp.
For the three months ended September 30, 2001, the general and
administrative expenses incurred by Tengtu United amounted to $102,825 and were
comparable to previous periods. The major components of the remaining balance
were legal fees and travel expenses for activities in the Company's Toronto and
Vancouver offices.
Related Party Consultants
- -------------------------
2002 2001
------ ------
$ 102,279 $ 218,727
Related party consultants' expense decreased due to the elimination of some
executive positions and the lower market values for the shares issued to
consulting services.
Collection Provision
- --------------------
2002 2001
------ ------
$63,132 $165,283
The collection provision represents an estimate of potential bad debts
associated with sales by Tengtu United in China. This provision is included in
due from related party. Compared to the same period in 2001, the amount of
collection provision is lower in the three months ended September 30, 2002 due
to lower sales in China.
Selling Expense
- ---------------
2002 2001
------ ------
$440,151 $538,702
In the three months ended September 30, 2002, selling expense
decreased primarily due to lower sales and Tengtu United's focus on the
collection of accounts receivables.
In the three months ended September 30, 2001, selling expenses
related almost entirely to the launch of Phase II of Operation Morning Sun by
Tengtu United. A primary component of these expenses relates to setting up
offices in various provinces and providing training to clients. As a percentage
of sales, selling expenses are higher in the first quarter of each fiscal year
because the schools are closed in July and August.
Equity Losses in Investee
- -------------------------
2002 2001
------- ------
$(18,845) $ 0
The equity losses in investee relate to the Company's investment in
the Shaanxi LBERC joint venture. The joint venture was established at the end of
fiscal 2002 and had limited operations for the three months ended September 30,
2002. The loss was primarily due to the start-up expenses for the joint venture.
-13-
Interest Expense
- ----------------
2002 2001
------ ------
$144,574 $ 80,017
The interest expense for the three months ended September 30, 2002 consists
of interest on the Top Eagle loan, Quest Ventures loan and the Ming Shen Bank
loan in China. The interest expense for the same period in 2001 consisted of
interest on the Top Eagle loan and the H.K. $2,000,000 loan to EdSoft Canada,
which was eliminated pursuant to a settlement in May 2002. The increase was
primarily due to the interests on the Quest Ventures loan and the Ming Shen Bank
loan.
Other Income
- ------------
2002 2001
------ ------
$279,180 $405,725
Other income consists of credits for value added tax (VAT) paid in China for
the sales related to Operation Morning Sun.
Minority Interests in Subsidiary's Income
- -----------------------------------------
2002 2001
------ ------
$291,541 $ 0
Pursuant to the joint venture agreement, 43% of Tengtu United's net profit
was allocated to Tengtu China and a $291,541 minority interest was recorded for
the three months ended September 30, 2002.
For the three months ended September 30, 2001, Tengtu United's net profits
did not exceed its accumulated losses from prior years. Accordingly, no minority
interest expense was recorded for the three months ended September 30, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
The Company operates through subsidiaries located in Beijing, China
and grants credit to customers in this geographic region. The Company's
administrative office is located in Toronto, Canada.
The Company performs certain credit evaluation procedures and does
not require collateral. The Company believes that credit risk is limited because
it routinely assesses the financial strength of its customers, and based upon
factors surrounding the credit risk of customers, establishes an allowance for
uncollectable accounts. Therefore, the Company believes its accounts receivable
credit risk exposure beyond such allowances is limited.
The Company established an allowance for doubtful accounts of $670,847 at
September 30, 2002, which are reserves against related party receivables. The
Company believes any credit risk beyond this amount would be negligible.
At September 30, 2002, the Company had approximately $4,236,000 of cash in
banks uninsured.
The Company does not require collateral or other securities to support
financial instruments that are subject to credit risk.
For the three months ended September 30, 2002, approximately 99% of sales
were generated through Tengtu United. Receivables related to these sales
transactions are grouped together with amounts due from a related party, Tengtu
China, in the Company's financial statements. For the three months ended
September 30, 2002 and 2001, while the Company recorded sales pursuant to
agreements with the Chinese Ministry of Education, no single school customer
accounted for more than 10% of total sales.
-14-
MARKET RISK SENSITIVE INSTRUMENTS
- ---------------------------------
FINANCIAL INSTRUMENT CARRYING VALUE FAIR VALUE
- -------------------- -------------- ----------
Instruments entered into for trading purposes
NONE
Instruments entered into for
other than trading purposes
Cash and Cash equivalents
United States $ - $ -
Foreign 236,025 236,025
---------- ----------
Total $ 236,025 $ 236,025
========== ==========
Accounts payable
United States $ 945,651 $ 945,651
Foreign 154,141 154,141
---------- ----------
Total $1,099,792 $1,099,792
========== ==========
The financial instruments are short-term and are not subject to significant
market risk. Substantially all financial instruments are settled in the local
currency of each subsidiary, and therefore, the Company has no substantial
exposure to foreign currency exchange risk. Cash is maintained by each
subsidiary in its local currency.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in the Management's Discussion and Analysis section above.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, levels of activity,
performance or achievement of the Company, or industry results, to be materially
different from any future results, levels of activity, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in the United States, China and Canada; the ability of the Company to
implement its business strategy; the Company's access to financing; the
Company's ability to successfully identify new business opportunities; the
Company's ability to attract and retain key executives; the Company's ability to
achieve anticipated cost savings and profitability targets; changes in the
industry; competition; the effect of regulatory and legal restrictions imposed
by foreign governments; the effect of regulatory and legal proceedings and other
factors discussed in the Company's Form 10 and 10-K filings. As a result of the
foregoing and other factors, no assurance can be given as to the future results
and achievements of the Company. Neither the Company nor any other person
assumes responsibility for the accuracy and completeness of these statements.
Item 4. Controls and Procedures
- ------- -----------------------
As of November 14, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the President and Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the President and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective in ensuring that material information relating to the
Company with respect to the period covered by this report was made known to
them.
Based upon their evaluation of the Company's internal controls within
90 days of the date of this report, the President and Chief Financial Officer of
the Company have determined that the effectiveness of such controls is
satisfactory. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to November 14, 2002.
-15-
PART II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
Pursuant to a contract with Orion Capital Incorporated ("Orion"),
William Ballard is to provide consulting services to the Company for a 24-month
period that commenced in December 2000. As compensation for the services
provided under the consulting agreement, the Company is obligated to issue Orion
20,834 shares of Common Stock each month. During the quarter ended September 30,
2002, the Company issued 62,502 shares of Common Stock to Orion. The issuance of
the shares was accomplished in reliance upon Section 4(2) of the Securities Act.
The facts relied upon for the exemption are that Mr. Ballard and Orion are
accredited investors.
Pursuant to a July 30, 2002 amended stock purchase agreement, the
Company sold 1,000,000 shares of common stock and 500,000 warrants to FanQi
Zhang. Mr. Zhang was granted registration rights with respect to the common
stock and the common stock into which the warrants are exercisable. The warrants
are exercisable until a date that is one year after a registration statement is
declared effective including the shares of common stock into which the warrants
are exercisable. The issuance of the common stock was accomplished in reliance
upon Regulation S under the Securities Act. The facts relied upon for the
exemption are that Mr. Zhang is a non-U.S. person as defined under Regulation S.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
Index of Exhibits required by Item 601 of regulation S-K:
3.1 Articles of Incorporation (filed as part of our Form 10 filed on May 25,
2000 and incorporated herein by reference);
3.2 By-Laws (filed as part of our Form 10 filed on May 25, 2000 and
incorporated herein by reference);
4.1 Stock Purchase Agreement for Purchasers in private placements in October and
November, 2001;
4.2 Amended Warrants issued to investors in private placements in October and
November, 2001;
4.3 Special Warrant issued to investors in a private placement which closed June
20, 2002;
5.1 Opinion re: Legality of the securities being registered;
10.1 English Translation of Agreement between National Center for Audio Visual
Education and Tengtu Culture and Education Electronics Development Co., Ltd.
Dated September 20, 2000 - referred to as "Operation Morning Sun" (filed as part
of our Form 10-Q filed on November 14, 2000 and incorporated herein by
reference);
10.2 English Translation of Cooperation Agreement among the Chinese National
Center for Audio/Visual Education of the Ministry of Education, Tengtu China and
Legend Group (filed as part of our Form 10-Q filed on November 14, 2000 and
incorporated herein by reference);
10.3 English Translation of Qwai Zhou Normal University Attached High School
Thousand Mega Campus Network System Agreement with Tengtu China and Qwai Zhou
Qin Hwa Yuen Information Technology Development Co., Ltd. dated July 28, 2000
(filed as part of our Form 10-Q filed on November 14, 2000 and incorporated
herein by reference);
10.4 English Translation of Zhong Yau Normal College Campus Network Contract
with Tengtu China dated September 10, 2000 (filed as part of our Form 10-Q filed
on November 14, 2000 and incorporated herein by reference);
-16-
10.5 English Translation of Inner Mongolia 1st High School Campus Network
Contract with Tengtu China dated August 25, 2000 (filed as part of our Form 10-Q
filed on November 14, 2000 and incorporated herein by reference);
10.6 English Translation of Equipment Lease contract between TIC Beijing Digital
Pictures Co., Ltd and Beijing Hwa Yue Advertisement Co., Ltd. dated August 8,
2000 (filed as part of our Form 10-Q filed on November 14, 2000 and incorporated
herein by reference);
10.7 1999 Non-Qualified Stock Option Incentive Plan (filed as part of our Form
10 filed on May 25, 2000 and incorporated herein by reference);
10.8 English Translation of Microsoft Cooperation Agreement(filed as part of our
Form 10 filed on May 25, 2000 and incorporated herein by reference);
10.10 Tengtu United Joint Venture Agreement and the amendment thereto (filed as
part of our Form 10 filed on May 25, 2000 and incorporated herein by reference);
10.11 Employment agreement between Tengtu and Jing Lian (filed as part of our
Form 10 filed on May 25, 2000 and incorporated herein by reference);
10.12 Consulting agreement between Comadex Industries, Ltd. and Tengtu (filed as
part of our Form 10 filed on May 25, 2000 and incorporated herein by reference);
10.13 Top Eagle Holdings, Ltd. Convertible Debenture and Warrant Purchase
Agreement (filed as part of our Form 8-K dated December 23, 1999 and
incorporated herein by reference);
10.14 Top Eagle Holdings, Ltd. Investor Rights Agreement (filed as part of our
Form 8-K dated December 23, 1999 and incorporated herein by reference);
10.15 Top Eagle Holdings, Ltd. Convertible Debenture (filed as part of our Form
8-K dated December 23, 1999 and incorporated herein by reference);
10.16 Top Eagle Holdings, Ltd. Common Stock Warrant (filed as part of our Form
8-K dated December 23, 1999 and Incorporated herein by reference);
10.17 English translation of February 13, 2001 Cooperation Agreement between
National Center for Audio/Visual Education and Tengtu Culture and Education
Electronics Development Co., Ltd. on Carrying out "Operation Morning Sun - Phase
II" (filed as part of our Form 10-Q filed on May 15, 2001 and incorporated
herein by reference);
10.18 January 17, 2001 Letter of Agreement between Tengtu International Corp.
and the Centre for Education and Training (filed as part of our Form 10-Q filed
on May 15, 2001 and incorporated herein by reference);
10.19 English translations of April 9, 2001 Cooperation Agreement on
Establishment of "Morning Sun Resources Center under National Center for
Audio/Visual Education of Ministry of Education" and supplemental memorandum
between Tengtu China and us (filed as part of our Form 10-Q filed on May 15,
2001 and incorporated herein by reference);
10.20 English translation of Extension to Operation Morning Sun (filed as part
of our Form 10-Q filed on May 15, 2001 and incorporated herein by reference);
10.21 Additional Supplemental Agreement between Tengtu China and us dated April
25, 2001 (filed as part of our Form S-1/A filed on August 7, 2001 and
incorporated herein by reference);
10.22 ShanDong Province Cooperation Agreement dated August 17, 2001 (English
translation) (filed as part of our Form 10-K on September 28, 2001 and
incorporated herein by reference);
10.23 Tengtu International Corp. Investment Agreement with Swartz Private
Equity, L.L.C. dated October 25, 2000 (filed as part of our Form 10-Q filed on
November 14, 2000 and incorporated herein by reference);
-17-
10.24 December 21, 2001 Agreement between Tengtu International Corp. and
Lifelong.com, Inc. (filed as part of our Form 10-Q filed on May 20, 2002 and
incorporated herein by reference);
10.25 English Translation of Cooperation Agreement effective September 1, 2001
between the Ministry of Education of the ShanDong Province and Beijing Tengtu
Tian Di Network Co., Ltd. (filed as part of our Form 10-Q filed on May 20, 2002
and incorporated herein by reference);
10.26 English Translation of September 18, 2001 Memorandum of Cooperation,
Establishment of Shaanxi Provincial Education Resources Center by and among Li
Gen Juan, Director of Shaanxi Provincial Center for Audio/Visual Education, Suan
Pai Yau, Tin Pang and Wu Oi Juan, Deputy Directors of Shaanxi Provincial Center
for Audio/Visual Education, and Lin Xiao Feng, President of Tengtu Culture &
Education Electronics Development Co., Ltd. (filed as part of our Form 10-Q
filed on February 19, 2002 and incorporated herein by reference);
10.27 English Translation of Cooperation Agreement between the Center for
Audio/Visual Education, Department of Education, Fujian Province and Tengtu
TianDi Network Co., Ltd. (filed as part of our Form 10-Q filed on May 20, 2002
and incorporated herein by reference);
10.28 Loan Agreement among Tengtu International Corp., Orion Capital
Incorporated and Quest Ventures, Ltd. (filed as part of our registration
statement on Form S-1 filed on August 14, 2002 and incorporated herein by
reference);
10.29 July 22, 2002 Supplemental Agreement between Tengtu International Corp.
and Lifelong.com, Inc. (filed as part of our registration statement on Form S-1
filed on August 14, 2002 and incorporated herein by reference);
10.30 English Translation of July 22, 2002 Cooperation Agreement between the
National Center for Audio and Visual Education and Beijing Jiade Tengtu Science
and Technology Group Companies (filed as part of our registration statement on
Form S-1 filed on August 14, 2002 and incorporated herein by reference);
10.31 English translation of December 18, 2002 Framework Agreement between
Shaanxi Provincial Center for Audio Visual Education and Beijing Tengtu TianDi
Network Co., Ltd. (filed as part of our registration statement on Form S-1 filed
on August 14, 2002 and incorporated herein by reference);
10.32 Amended understanding between Tengtu China and Tengtu International Corp.
Governing Activities in China Relating to Operation Morning Sun National Center
For Audio/Visual Education and the Ministry of Education, dated as of April 25,
2001 (filed as part of our registration statement on Form S-1 filed on August
14, 2002 and incorporated herein by reference);
10.33 English translation of Cooperation Agreement between the Agriculture Bank
of China and Beijing Jiade Tengtu Scientific and Technology Group entered into
in September, 2002.
10.34 English translation of Strategic Cooperation Agreement dated July 16, 2002
between Lan Chao (Beijing Electronics Information Industry Co., Ltd. and Beijing
Tengtu Science & Technology Group Co., Ltd.
(b) No reports on Form 8-K have been filed for the fiscal quarter ended
September 30, 2002.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENGTU INTERNATIONAL CORP.
--------------------------------
(Registrant)
Date: November 19, 2002 John Watt
----------------- --------------------------------
(Name)
/s/ John Watt
--------------------------------
(Signature)
President
--------------------------------
(Title)
Date: November 19, 2002 Peng Lin
----------------- --------------------------------
(Name)
/s/ Peng Lin
--------------------------------
(Signature)
Chief Financial Officer
--------------------------------
(Title)
-19-
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
I, John Watt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tengtu International
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ John Watt
John Watt
President
-20-
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
I, Peng Lin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tengtu International
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Peng Lin
Peng Lin
Chief Financial Officer
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