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 December 31, 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
- --------------------------------- -----------------------------------------
(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)
206-5050 Kingsway, Burnaby, British Columbia, Canada M5X V5H
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Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PREVIOUS FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: there were 57,588,193 shares
outstanding as of February 18, 2003.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
As At As At
December 31, June 30,
2002 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 130,689 $ 914,838
Due from related party 2,701,119 2,579,157
Prepaid expenses 989,660 1,016,958
Other receivables
35,198 22,197
------------ ------------
Total Current Assets 3,856,666 4,533,150
PROPERTY AND EQUIPMENT, net 147,321 222,460
------------ ------------
OTHER ASSETS
Due from related party 14,497,209 14,497,209
Notes receivable
11,881 11,881
Long-term Investment 4,453,122 4,469,600
Restricted cash 4,000,000 4,000,000
------------ ------------
22,962,212 22,978,690
------------ ------------
TOTAL ASSETS $ 26,966,199 $ 27,734,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 950,182 $ 1,092,231
Accrued expenses 345,744 301,127
Due to related party consultants 2,006,092 2,012,522
Short-term loan (include convertible debenture) 2,264,418 1,883,428
Other liabilities 423,628 434,644
------------ ------------
Total Current Liabilities 5,990,063 5,723,952
------------ ------------
OTHER LIABILITIES
Long-term debt 3,744,800 3,744,800
Convertible debentures, net of discount
- 1,360,585
------------ ------------
Total Long-term Liabilities 3,744,800 5,105,385
------------ ------------
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 and outstanding
57,567,359 shares (2002 - 54,123,189) 574,674 541,232
Additional paid in capital 32,413,900 30,281,737
Accumulated deficit (15,739,956) (13,899,433)
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (17,499) (17,788)
------------ ------------
17,252,120 16,905,748
Less: Treasury stock, at cost, 78,420 common shares
(784) (784)
------------ ------------
Total Stockholders' Equity 17,231,336 16,904,963
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,966,199 $ 27,734,300
============ ============
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited) (unaudited)
Six Months Six Months
Ended Ended
December 31, December 31,
2002 2001
------------ ------------
SALES $ 1,172,833 $ 7,302,323
COST OF SALES 784,221 2,863,323
------------ ------------
GROSS PROFIT 388,611 4,439,000
OPERATING EXPENSES
Research and development 2,968 377,986
General and administrative 1,179,024 1,332,816
Related party consultants 203,271 414,145
Collection provision 22,001 242,927
Advertising 11,778
Selling 796,489 1,051,730
Depreciation 31,162 295,026
------------ ------------
TOTAL OPERATING EXPENSES 2,246,693 3,714,630
OPERATING INCOME (LOSS) (1,858,082) 724,370
------------ ------------
OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee (16,478) 0
Interest income 125,909 3,342
Interest expense (267,304) (126,974)
Other income 145,775 961,380
Other expense 29,659 (69,478)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 17,560 768,270
INCOME (LOSS) BEFORE TAX AND MINORITY INTERESTS (1,840,522) 1,492,640
INCOME TAX
INCOME (LOSS) BEFORE MINORITY INTERESTS (1,726,023) 1,492,640
MINORITY INTERESTS IN SUBSIDIARYS'-INCOME 0 635,844
NET INCOME (LOSS) $ (1,840,522) $ 856,796
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 51,478,634 52,682,685
Common stock equivalents - 2,043,668
------------ ------------
Diluted 52,682,685 50,276,159
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $(0.036) $0.018
Diluted $(0.036) $0.017
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited) (unaudited)
Three Months Three Months
Ended Ended
December 31, December 31,
2002 2001
------------ ------------
SALES $ 534,187 $ 4,061,008
COST OF SALES 321,319 1,681,689
------------ ------------
GROSS PROFIT 212,867 2,379,319
OPERATING EXPENSES
Research and development 0 377,986
General and administrative 432,877 794,606
Related party consultants 100,993 195,418
Collection provision 3,898 77,496
Advertising 11,476
Selling 398,920 513,028
Depreciation 18,696 273,320
------------ ------------
TOTAL OPERATING EXPENSES 966,860 2,231,854
OPERATING INCOME (LOSS) (753,992) 147,465
------------ ------------
OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee 2,367 0
Interest income 62,964 1,008
Interest expense (122,731) (46,957)
Other income 92,028 555,655
Other expense 4,489 (28,564)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 39,117 481,142
INCOME (LOSS) BEFORE TAX AND MINORITY INTERESTS (714,875) 628,607
INCOME TAX
INCOME (LOSS) BEFORE MINORITY INTERESTS (714,875) 628,607
MINORITY INTERESTS IN SUBSIDIARYS'-INCOME 0 635,844
NET LOSS $ (714,875) $ (7,237)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 52,253,857 49,472,296
Common stock equivalents - -
------------ ------------
Diluted 52,253,857 49,472,296
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $(0.014) $(0.000)
Diluted $(0.014) $(0.000)
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited) (unaudited)
Six Months Six Months
Ended Ended
December 31, December 31,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $(1,840,522) $ 856,796
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 72,477 307,527
Loss on investment at equity 16,478 -
Noncash compensation expense on equities issued for services 50,835 174,145
Noncash interest expense - convertible debenture 46,301 42,674
Impaired assets written off 2,662
Changes in operating assets and liabilities:
Decrease (Increase) in operating assets:
Accounts receivable - 16,578
Due from related party (121,962) (2,729,167)
Prepaid expenses 27,298 (771,543)
Inventories - 2,452
Other receivables (13,002) 74,037
Other assets - 195,486
Increase (Decrease) in operating liabilities:
Accounts payable (142,049) 365,624
Accrued expenses 44,617 80,620
Due to related party consultants (6,430) 317,832
Other liabilities (11,015) (314,754)
---------- ----------
Net Cash Used by Operating Activities (1,874,312) (1,381,693)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (5,895)
Due from related party - (5,940,000)
---------- ----------
Net Cash Used by Investing Activities - (5,945,895)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term loans 723,304
Cash paid on short-term loan (1,749,200)
Cash received for shares, options and warrants issued 2,115,770 7,740,450
---------- ----------
Net Cash Provided by Financing Activities 1,089,874 7,740,450
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 290 (10,228)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (784,149) 402,634
CASH AND CASH EQUIVALENTS, beginning of the period 914,838 1,026,400
CASH AND CASH EQUIVALENTS, end of the period 130,689 1,429,034
========== ==========
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
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 December 31, 2002 and six months ended December 31, 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 Subsidiary's 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
December 31, 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).
2. Due from related party
The Company has engaged Tengtu China, as its agent, to conduct all of
Tengtu United's business with any Chinese government entity. As agent, 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 December 31, 2002:
Current Assets
Prior year balance $ 2,579,157
Advances related to working capital for operations 643,099
Profits from operations,
net of minority interest (521,137)
------------
Due from Related Party $ 2,701,119
============
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 December 31, 2002.
The totals of both current and long-term due from related party
include a collection provision of $629,716.
3. Prepaid Expenses
The majority of prepaid expenses is an advance of $590,493 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 $186,191 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 being 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
December 31, 2002, therefore, no equity earnings or losses are recorded. For the
three months ended December 31, 2002, Shaanxi LBERC had limited operations
which resulted in an equity income of $2,367, which brings the total equity loss
in the six months ended December 31, 2002 to $(16,478).
5. Restricted Cash
$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). This deposit earns interest at 6.15% annually and the interest
income is paid on a semi-annual basis. The interest income for the three months
ended December 31, 2002 is $62,708. The total interest income for the six month
period is $125,416.
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 was due on November 30, 2002 and earned
interest at 12% annually, compounded monthly. The loan was 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 also guaranteed the loan, and William
Ballard, Orion's beneficial owner and the Chairman of the Company's Board of
Directors, 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, this
balance of $1,500,000 was paid in full to Quest by November 30, 2002. For the
quarter ended December 31, 2002, the interest expense on the Quest loan was
$19,519. For the six month period, the total interest expense was $65,323.
Orion advanced $327,676 to the Company for the general corporate and
administrative expenditures during the quarter, which brings the balance of
short-term loan from Orion to $857,532 as of December 31, 2002. Subsequent to
the quarter end, Orion advanced an additional $20,000 to the Company to be used
for general corporate purposes. The advance is due on demand and is interest
free.
The total short-term loan also included the convertible debenture net
of discount that has been reclassified from long-term debt to short-term debt
(see note 8).
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 quarter December 31, 2002 was
$52,820. The total interest expense for the six month period was $100,826.
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% at December 31, 2002 and June 30, 2002, respectively). The total interest
expense for the quarter ended December 31, 2002 was $50,391 which included the
amortization of the discount on the convertible debenture of $23,517. The total
interest expense for the six month period was $101,154 which included the
amortization of the discount on the convertible debenture of $46,301.
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.
Since the Top Eagle debenture is due on December 15, 2003, the
Company has reclassified the convertible debenture net of discount, $1,406,885
to short-term loan.
9. Related Party Transactions
During the quarter ended December 31, 2002, the Company incurred
consulting expenses of $100,993 from officers and directors of the Company or
companies controlled by these officers and directors (December 31, 2001 -
$195,418). The consulting expenses for the six month period was $203,271
(December 31, 2001 -- $414,145).
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.
Under a contract dated December 21, 2000 between the Company and
Orion Capital Inc. ("Orion"), a significant shareholder of the Company, William
Ballard, provides consulting services to the Company. The terms 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 December 31, 2002, 62,502 shares of Common
Stock were issued to Orion and a charge to compensation expense of $26,876 was
recorded.
For the six month period, 125,004 shares of common stock were issued
to Orion and a charge to compensatioin expense of $50,835 was recorded.
As of December 31, 2002, Orion has advanced $857,532 on short-term
basis to the Company for general corporate and administrative expenditures. The
advance is due on demand and is interest free.
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.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
- --------
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 China administers
the daily operations of Tengtu United: paying operating expenses, collecting
receivables and remitting net operating profits to Tengtu United.
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.
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 success of Tengtu's Total Solution application platform provided
an initial basis for the Company to establish its position in the China K-12
market as a leader in education solutions while enabling the Ministry of
Education policy objectives for IT education to be met at the individual school
level. Tengtu's software application enabled schools in less-advantaged areas to
provide a computerized learning environment in parity with schools in
economically advanced regions. Tengtu's software application therefore succeeded
in addressing the important priority objectives for the modernization of China's
education system, while providing an initial core profitable business for the
company.
When Tengtu China was awarded the co-operative agreements to be the
Chinese Ministry of Education's operating and development partner for the
national e-education portal and distance learning network (CBERC), and the key
strategic provincial portals (LBERCs), it required the Company to undergo major
readjustments in how it would engage the marketplace on a system-wide basis,
versus school-by-school, based on platform sales to individual schools.
Accordingly, now, instead of selling products to individual schools, the focus
is on selling products to entire schools district all at once. These
readjustments were required to address potentially significant new revenue
streams represented by the greater opportunities going forward.
Tengtu's distribution channels for its products and services will now
encompass a nation-wide satellite system and an education portal ("e-portal")
infrastructure at the provincial, local and city/district levels.
The Company believes that the new distribution channels will enable
Tengtu to rapidly increase the number of client schools for its software and
services more efficiently district-by-district, province by province and create
captive markets for its products and services under a system-wide marketing
approach.
While Tengtu will still be selling its software application platform,
its "Total Solution", it is now evolving to be able to offer a greater product
mix of not only platforms, but e-portals, satellite connectivity, "campus-end"
software and product for administration and e-learning in WAN and LAN systems,
system integration services, e-publishing content and training centers.
This has required Tengtu to undertake a major effort and commitment
of resources in the first and second quarters of fiscal 2003 to re-engineer its
product lines and to develop the portal infrastructure to support new business
opportunities going forward. At the same time, previous policies and strategies
with regard to marketing and payment of accounts have been re-adjusted to the
requirements of supporting growth of the business ahead. Specifically, Tengtu
has focused on the collection of past due receivables and e-portal design and
development. This has caused a slow-down of platform installations and
implementation of new marketing and distribution channels. This work is being
completed to ensure that platform sales and new streams of revenue will be
available to the Company as it engages the market at significant new levels in
the latter quarters of fiscal year 2003.
As a result of the foregoing activities, which constituted a
restructuring of Tengtu's business in China, and because schools were closed
during the quarter ended September 30, 2002, only 6 Total Solution platforms
were installed, 1,181 sets of satellite equipment, and 58 packages of
educational CD-ROM's were sold in the first quarter of fiscal 2003. Since
ShaanXi LBERC joint venture started its business the end of June 2002, it has
been purchasing and selling Tengtu products. Of the 1,181 sets of satellite
equipment sold in the first quarter of fiscal 2003, 66 of them were sold to
ShaanXi LBERC joint venture.
Because restructuring activities continued in the second quarter of
fiscal 2003 (three months ended December 31, 2002), only 22 Total Solution
platforms were installed, 460 sets of satellite equipment and 730 packages of
educational CD-ROM's were sold to schools. Of the 460 sets of satellite
equipment sold in the second quarter, 440 of them were sold to ShaanXi LBERC
joint venture.
With respect to the Company's focus on the collection of receivables,
in October 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.
Use of the Agriculture Bank credit facility also required Tengtu to adjust its
marketing strategy from school-by-school to district-by-district to efficiently
use the Bank's authority in each area. This strategy is in alignment with
Tengtu's overall system wide marketing strategy.
The Company believes that this credit facility will reduce its
receivable balances going forward and allow for a "pay as you go" client payment
policy giving the Company access to greater cash flow to sustain its operations
and growth in the market.
Six Months Ended December 31, 2002
- ----------------------------------
For the six months ended December 31, 2002, net cash used by
operating activities totaled $1,874,313. The net loss for the six months,
$(1,840,522), includes non-cash charges for depreciation and amortization of
$72,477, equity loss on investment of $16,478, non-cash compensation expenses
associated with the issuance of common shares for services of $50,835, non-cash
interest expense of $46,301 related to convertible debentures, and impaired
assets write-off of $2,662, resulting in a net cash decrease of $(1,651,769).
Cash was further decreased by the increase of $121,962 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 $27,298 to
operating cash flow. In addition, a small increase of $13,002 in other
receivables was primarily due to the increase of tax refund that has not yet
received.
The Company used the cash raised in private placements, primarily in
the second quarter of fiscal 2003, to reduce its outstanding accounts payables.
For the six months ended December 31, 2002, the accounts payable have decreased
$142,049. An increase of $44,617 in accrued expenses was primarily due to the
accrued legal expenses. Due to related party consultants and other liabilities
had small increases of $6,430 and $11,015 respectively. After the elimination of
several positions at the Company's head office, the compensation expenses paid
to related party consultants were reduced significantly. Therefore, no
compensation was deferred for the six months ended December 31, 2002.
The Company did not make any investments during the second quarter of
fiscal 2003.
Net cash flow from financing activities was $1,089,874. In the six months
ended December 31, 2002, the Company borrowed, on a short-term basis, $723,304
from Orion Capital Incorporated ("Orion") for general corporate administrative
purposes. 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, this balance of $1,500,000 was paid in full to Quest
by November 30, 2002.
The net cash received from shares and options issued was $2,115,770 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. Between October to December 2002,
the Company sold 1,725,000 Special Warrants to a group of non-U.S. investors in
two private placements for gross proceeds of $862,500. In the private placement
transactions, the Company issued an aggregate of 862,500 Units consisting of two
Special Warrants at a price of $1.00 per Unit for gross proceeds of $862,500.
Each outstanding special warrant entitles the holder to receive, without the
payment of additional consideration, one share of the Company's common stock and
one-half of one share warrant ("Purchase Warrants"). Each whole share warrant
entitles the holder thereof to purchase one additional share of common stock at
a price of $.75. In November 2002, the Company also sold 2,000,000 shares of
common stock and 1,000,000 attached warrants to a group of U.S. investors for
gross proceeds of $1,000,000 in a separate private placement. Each attached
warrant entitles the holder to purchase one additional share of common stock at
a price of $.75.
For the six months ended December 31, 2002, total cash paid for the
interest expense was $221,003. 125,004 shares of common stock were issued for
consulting services. 90,000 shares of common stock were issued for options
exercised.
Subsequent to the quarter ended December 31, 2002, Orion advanced an
additional $20,000 to the Company for the general corporate use, which brings
the total short-term loan from Orion to $877,532. The advance is due on demand
and is interest free.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations at
February 18, 2003.
- -----------------------------------------------------------------------------------------------------------------------------------
Payment Due by Period
- -----------------------------------------------------------------------------------------------------------------------------------
Contractual Obligation Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term loans $2,377,532 $2,377,532 (1) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term loans $3,744,800 $3,744,800 (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Total
Contractual
Obligation $6,122,332 $2,377,532 $3,744,800
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Part of the short-term loan is borrowed from Orion. As of December 31, 2002,
the balance of Orion loan is $857,532. Subsequently, Orion loaned another
$20,000 to the Company for general corporate use. The total short-term loan from
Orion is $877,532. The loan is due on demand and interest free.
(2) The rest of short-term loan is the $1,500,000 convertible debenture issued
to Top Eagle Holdings, Ltd. The loan 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.
Six Months Ended December 31, 2001
- ----------------------------------
For the six months ended December 31, 2001, net cash used by operating
activities totaled $1,381,693.
The net income for the period, $856,796, included such non-cash items as
depreciation and amortization $307,527, non-cash compensation expenses
associated with the issue of shares of Common Stock for services $174,145 and
non-cash interest expense related to convertible debentures $42,674.
This was offset by increases in operating assets associated with the start of
Phase II of Operation Morning Sun. Operation Morning Sun required $2,729,167 in
working capital for operations in the six months, due mainly to delays in
collecting accounts receivable. Collection of these balances under Operation
Morning Sun is longer than under normal business terms due to the funding
process inherent in the Chinese education system. The Company and its joint
venture partner are taking steps in conjunction with the Ministry of Education
to reduce the payment cycle. The Company and its joint venture are also
investigating other Chinese government programs operated in conjunction with
Chinese banks that would allow for faster collection of accounts receivable.
Another use of cash related to a $771,543 increase in prepaids. Included in
prepaids are advances of $157,958 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 prepaids are
advances of $500,000, net of $250,000 in amortization, to a company for use of
its e-education course content in China. Prior to distributing this content in
China, the Company must make further payments of $500,000 and negotiate a
licensing agreement.
Net cash used in investing activities included $5,940,000 advanced to
Tengtu China for the development of CBERC ($4.5 million) and the Shan Dong
province LBERC ($1.44 million).
Net cash flow from financing activities was $7,740,450. The primary source
of these funds was private placements of shares of Common Stock totaling
$7,711,950. In addition, Swartz Private Equity, LLC ("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 (See Legal Proceedings).
OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
Revenues
- - --------
2002 2001
------ ------
$1,172,833 $7,302,323
Six Months Ended December 31, 2002
As discussed above, during the six months ended December 31, 2002,
the Company underwent a major restructuring of its marketing strategy and
product mix in China. As the CBERC and LBERC projects proceed, Tengtu China will
now engage the marketplace on a system-wide basis versus school-by-school, as
was done previously, based on the platform sales to individual schools. At the
same time, Tengtu China has been focusing on re-engineering the Company's
product lines and developing the portal infrastructure to support the new
business opportunities going forward.
In addition, with the implementation of Agriculture Bank of China
credit facility, Tengtu China is required to adjust its marketing strategy from
school-to-school to district-by-district which is in alignment with the
Company's overall system wide marketing strategy. These major restructuring
steps required Tengtu to undertake a significant effort and commitment of
resources in the first and second quarter of fiscal 2003, thereby contributing
to a slow-down of platform installations.
Tengtu United sales for the six months ended December 31, 2002 were
$1,125,177. This total included sales of Total Solution platforms for $32,007,
sets of satellite equipment for $634,554, and educational CD-ROMs for $75,293.
More importantly, included in the sales was $535,715 other products and services
sales (34% of Tengtu United sales), which represented campus-end products,
teacher training materials, and technical support services. These sales will
grow to a bigger portion of overall Tengtu sales with the implementation of
Tengtu's new marketing strategy and new product mix. Total Tengtu United/Tengtu
China operations accounted for 97% of the consolidated sales. Other
miscellaneous revenue from TIC Beijing accounted for the remaining $47,656 in
revenue.
Six Months Ended December 31, 2001
Tengtu United sales for the six months ended December 31, 2001 were
$4,248,144. 95% of these sales were derived from sales to 6,723 schools under
Phase II of Operation Morning Sun. This total included installing Total Solution
platforms in 3,730 schools (revenue of $5,770,501), selling educational CD-ROMs
to 1,036 schools ($89,697 in revenue) and shipping satellite equipment to 1,957
schools ($1,006,801). Most of this activity took place from late August, 2001 to
December, 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 ($292,945), sale of Microsoft
products ($42,015) and other sales ($46,185). Sales of educational software and
services by Edsoft H.K. and TIC Beijing was $54,179.
Gross Profit (Loss)
- -------------------
2002 2001
------ ------
$388,611 $4,439,000
Six Months Ended December 31, 2002
For the six months ended December 31, 2002, the overall gross margin
associated with Tengtu United/Tengtu China sales was 36%, of which $22,561 was
for Total Solution platforms at 70%, $166,551 was for satellite equipment at
26%, $21,796 was for educational CD-ROMs at 29%, and $194,691 was for other
products and services, at 51%. The decrease in overall margin, as compare to the
same period last year, was due to the fact that the majority of gross profits
were generated by satellite equipment and campus-end products and services which
have lower average gross margins than platforms. Specifically, 506 sets of
satellite equipment sold to ShaanXi LBERC joint venture generate no gross profit
since Tengtu United is selling products to the joint venture at a discount in
order to help ShaanXi LBERC to establish its market shares quickly. In turn, the
profits that ShaanXi LBERC generated by selling Tengtu's products will be
realized in Tengtu's equity income for its share of ownership in the joint
venture.
Six Months Ended December 31, 2001
Overall gross margins associated with sales under Operation Morning Sun
were 67%: 73% for Total Solution platforms, 38% for satellite equipment and 17%
for educational CD-ROMs. Costs of Total Solution platforms were lower in this
period compared to fiscal 2001 primarily because the Microsoft operating system
was not required in most platforms sold. This was due to the fact that most of
the school computers where the platforms were installed in this six-month period
were already equipped with appropriate operating software. The gross margin on
other Tengtu United sales was $44,592 and the loss on sales by Edsoft Platform
(H.K.) Limited and TIC Beijing Digital Pictures Co., Ltd. was $100,316.
General and Administrative Expenses
- -----------------------------------
2002 2001
------ ------
$1,179,024 $1,332,816
For the six months ended December 31, 2002, general and
administrative expenses decreased $153,792 compared to the same period in 2001.
The decrease was mainly due to an expense credit of $277,838 from the Company's
joint-venture partner, Tengtu China. The total general and administrative
expenses incurred by Tengtu United amounted to $215,364. At the head office in
Toronto, majority of the expenses were legal and professional fees $470,976 and
financing related expenses $118,276. The Company also spent $50,810 in
communication and regulatory filings and $41,716 in travel related activities.
The general and administrative expenses incurred by Tengtu United
amounted to $388,283 and were comparable to previous periods. The major
components of the remaining balance were legal and professional fees $451,925
and travel expenses $132,163 related to activities in the Company's Toronto and
Vancouver offices.
Related Party Consultants
- -------------------------
2002 2001
------ ------
$203,271 $414,145
Related party consultants' expense relates to staff that manages technical
developments and financing activities in North America. 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
------ ------
$22,001 $242,927
The balance in the six months ended December 2002 represents an
estimate of potential uncollectible accounts associated with sales by Tengtu
United in the first six months of the fiscal year. Comparing to the same period
in 2001, the lower amount in 2002 was primarily due to the lower sales. This
provision is included in due from related party.
Selling Expense
- ---------------
2002 2001
------ ------
$796,489 $1,051,730
In the six months ended December 31, 2002, selling expense decreased
primarily due to lower sales and Tengtu United's focus on the restructuring of
its business in China. On the other hand, the selling expense as a percentage of
total sales was higher due to the fact that Tengtu United was also focusing on
implementing its new marketing strategy and sales distribution channels as part
of the overall restructure in China.
In the six months ended December 31, 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.
Depreciation and amortization
- -----------------------------
2002 2001
------ ------
$31,162 $295,026
As Tengtu China manages the Company's joint venture in China, the
Company has not made any significant purchases of equipment in past years.
Amortization of $258,250 in 2001 includes amortization of the costs associated
with two license agreements.
Equity Losses in Investee
- -------------------------
2002 2001
------- ------
$(16,478) $ 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. The loss was primarily due to the high start-up expenses for the
joint venture.
Interest Income
- ----------------
2002 2001
------ ------
$125,909 $3,342
The interest income was earned by the $4,000,000 restricted cash
deposit at Ming Shen Bank (of China). On June 26, 2002, the Company borrowed
approximately $3,745,000 in Chinese renminbi from Min Sheng Bank (of China).
This line of credit is fully secured by $4,000,000 in restricted US dollar
denominated deposits at the Min Sheng Bank. The restricted cash deposit earns
interest at 6.15% annually and the interest income is paid on a semi-annual
basis. The interest paid for the six months ended December 31, 2002 is $125,909.
Interest Expense
- ----------------
2002 2001
------ ------
$(267,304) $(126,974)
For the six months ended December 31 2002, The interest expense
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
------ ------
$145,775 $961,380
Majority of other income were credits for value added tax (VAT) paid
in China for Tengtu United's sales. In the six months ended December 31, 2002,
the other income also included $36,310 cash recovered from the sale of Iconix
subsidiary in 2000.
Minority interest
- -----------------
2002 2001
------ ------
$ 0 $635,844
Minority interest represents the Tengtu China's 43% interest in the
operating profits of the joint venture company, Tengtu United.
OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
Revenues
- --------
2002 2001
------ ------
$534,187 $4,061,008
As Tengtu United and Tengtu China continued their major restructure
of marketing strategy and product mix in conjunction with the implementation of
Agriculture Bank of China credit facility in the three months ended December 31,
2002, significant resources have been committed to these readjustments. This has
required a low-down of platform installations.
Tengtu United sales for the three months ended December 31, 2002 were
$514,074. This total included sales of Total Solution platforms for $22,715,
satellite equipment for $58,947, and educational CD-ROMs for $71,602. In
addition, included in the sales was $360,809 other products and services sales
(10% of Tengtu United sales), which represented campus-end products, teacher
training materials, and technical support services. These sales will grow to a
bigger portion of overall Tengtu sales with the implementation of Tengtu's new
marketing strategy and new product mix. Total Tengtu United/Tengtu China
operations accounted for 96% of the consolidated sales. Other miscellaneous
revenue from TIC Beijing accounted for the remaining $20,113 in revenue.
Tengtu United sales for the three months ended December 31, 2001 were
$4,029,279. 98% of these sales were derived from sales to 4,030 schools under
Phase II of Operation Morning Sun. This total included installing Total Solution
platforms in 1,987 schools (revenue of $3,051,421), selling educational CD-ROMs
to 386 schools ($35,193 in revenue) and shipping satellite equipment to 1,657
schools ($882,350). Other sources of revenue for Tengtu United include
installation projects ($37,349) and other sales ($22,966). Sales of educational
software and services by Edsoft H.K. and TIC Beijing were $31,730.
Gross Profit (Loss)
- -------------------
2002 2001
------ ------
$212,867 $2,379,319
For the three months ended December 31, 2002, the overall gross
margin associated with Tengtu United/Tengtu China sales was 41%. The gross
margin for Total Solution platforms was 69%, and 30% for educational CD-ROMs.
Majority of the gross profits, $175,692, was generated by other products and
services with gross margin of 49%. In the second quarter of fiscal 2003,
majority of the satellite equipment (440 sets) were sold to ShaanXi LBERC joint
venture at discount with no gross profits. The decrease in overall margin, as
compare to the same period last year, was due to the fact that the majority of
gross profits were generated by campus-end products and services which have
lower average gross margins than platforms.
Overall gross margins associated with sales under Operation Morning Sun
were 64%: 71% for Total Solution platforms, 38% for satellite equipment and 41%
for educational CD-ROMs. Costs of Total Solution platforms and satellite
equipment were similar to the prior quarter. The gross margin on other Tengtu
United sales was $15,723 and the loss on sales by Edsoft H.K. and TIC Beijing
was $58,535.
General and Administrative Expenses
- -----------------------------------
2002 2001
------ ------
$432,877 $794,606
For the three months ended December 31, 2002, general and
administrative expenses decreased $361,729 compared to the same period in 2001.
The decrease was mainly due to an expense credit of $277,838 from the Company's
joint-venture partner, Tengtu China. At the head office in Toronto, majority of
the expenses were legal and professional fees $168,566 and financing related
expenses $113,276. The Company also spent $37,200 in communication and
regulatory filings and $21,780 in travel related activities.
The general and administrative expenses incurred by Tengtu United
amounted to $285,458. The major components of the remaining balance were legal
and professional fees and travel expenses related to activities in the Company's
Toronto and Vancouver offices.
Related Party Consultants
- -------------------------
2002 2001
------ ------
$100,993 $195,418
Related party consultants' expense relates to staff that manages
technical developments and financing activities in North America. 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
------ ------
$3,898 $77,496
The balance in the six months ended December 2002 represents an
estimate of potential uncollectible accounts associated with sales by Tengtu
United in the first six months of the fiscal year. Compared to the same period
in 2001, the lower amount in 2002 was primarily due to the lower sales. This
provision is included in due from related party.
Selling Expense
- ---------------
2002 2001
------ ------
$398,920 $513,028
In the three months ended December 31, 2002, selling expense
decreased primarily due to lower sales and Tengtu United's focus on the
restructuring of its business in China. On the other hand, the selling expense
as a percentage of total sales was higher due to the fact that Tengtu United was
also focusing on implementing its new marketing strategy and sales distribution
channels as part of the overall restructure in China.
In the three months ended December 31, 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.
Depreciation and amortization
- -----------------------------
2002 2001
------ ------
$18,696 $273,320
As Tengtu China manages the Company's joint venture in China, the
Company has not made any significant purchases of equipment in past years.
Amortization of $258,250 in the three months ended December 31, 2001 includes
amortization of the costs associated with two license agreements.
Interest Income
- ----------------
2002 2001
------ ------
$62,964 $1,008
The interest income was earned by the $4,000,000 restricted cash
deposit at Ming Shen Bank (of China). On June 26, 2002, the Company borrowed
approximately $3,745,000 in Chinese renminbi from Min Sheng Bank (of China).
This line of credit is fully secured by $4,000,000 in restricted US dollar
denominated deposits at the Min Sheng Bank. The restricted cash deposit earns
interest at 6.15% annually and the interest income is paid on a semi-annual
basis. The interest paid for the three months ended December 31, 2002 is
$62,708.
Interest Expense
- ----------------
2002 2001
------ ------
$(122,731) $(46,957)
For the three months ended December 31 2002, The interest expense
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
------ ------
$92,028 $555,655
Majority of other income were credits for value added tax (VAT) paid
in China for Tengtu United's sales. In the six months ended December 31, 2002,
the other income also included $36,310 cash recovered from the sale of Iconix
subsidiary in 2000.
Minority interest
- -----------------
2002 2001
------ ------
$ 0 $635,844
Minority interest represents the Tengtu China's 43% interest in the
operating profits of the joint venture company, Tengtu United.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Company operates through subsidiaries located in Beijing, China and the
administrative offices are located in Vancouver and Toronto, 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 of $629,716 at
December 31, 2002. The Company believes any credit risk beyond this amount would
be negligible.
At December 31, 2002, the Company had $4,131,000 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 six months ended December 31, 2002, approximately 96% 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 six months ended December 31, 2002 and
2001, no customer accounted for more than 10% of total sales.
MARKET RISK SENSITIVE INSTRUMENTS
- ---------------------------------
FINANCIAL INSTRUMENT CARRYING VALUE FAIR VALUE
- -------------------- -------------- ----------
Instruments entered into for trading purposes
NONE
Instruments entered into for other than trading purposes
Cash and Cash equivalents
United States $ - $ -
Foreign 130,689 130,689
---------- ----------
Total $ 130,689 $ 130,689
========== ==========
Accounts payable
United States $ 808,520 $ 808,520
Foreign 141,662 141,662
---------- ----------
Total $ 950,182 $ 950,182
========== ==========
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 Forms 10, 10-K, 10-Q, 8-K and registration
statement 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 February 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 changes are necessary in the format of
financial reports from the Company's joint venture partner in China so that they
are more clearly understandable and more easily converted from reflecting
financial information using a cash method to an accrual method. The Company
plans to take steps with its joint venture partner to improve the financial
reports. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to February 14, 2002.
PART II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
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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 December 31,
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.
On October 22, 2002 and December 11 and 13, 2002, the Company sold
1,725,000 Special Warrants to non-U.S. investors in private placements for
$862,500. The Special Warrants entitle the holders to acquire, for no additional
consideration, up to 1,725,000 shares of the Company's common stock and warrants
to acquire an additional 862,500 shares of the Company's common stock at an
exercise price of $.75 per share.
Each Special Warrant may be converted into one share of common stock
and one-half of one share warrant at any time prior to 5:00 p.m. (Toronto time)
on the date that is the earlier to occur of: (a) the fifth business day after
the later of: (i) the date a receipt has been issued for the final prospectus
qualifying the distribution of the common stock and share warrants by the
Ontario Securities Commission; and (ii) the date the SEC declares effective a
registration statement on form S-1 for the common stock; and (b) 12 months after
the closing of the sale. In the event that the Special Warrants are not
converted prior to the above dates, they will be deemed converted without any
further action taken by the holders.
The issuance of the Special Warrants was conducted pursuant to
Regulation S under the Securities Act. Each of the Special Warrant purchasers is
a non-U.S. person as defined under Regulation S.
On November 12, 2002, the Company sold 1,000,000 units consisting
of two shares of the company's common stock and one warrant to purchase common
stock for $.75 per share to three investors for $1.00 per unit in a private
placement. The investors were granted registration rights with respect to the
common stock and the common stock into which the warrants are exercisable. The
warrants are exercisable for one year. The sale of the units was accomplished in
reliance upon Rule 506 of Regulation D and Section 4(2) under the Securities
Act. The facts relied upon for the exemption are that each of the investors
meets the definition of an "accredited investor" under Regulation D.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
On November 27, 2002, the Company held its Annual Stockholders Meeting.
Three matters were submitted to a vote of the securityholders at the Annual
Meeting. First, the following Directors were elected until the next Annual
Meeting, or until the election of their successors: John Watt, Fan Qi Zhang,
William O.S. Ballard, John McBride and Bin Huang. Each of the Directors has
previously served as Directors. 34,231,168 votes were cast for each of the
foregoing directors, 185,272 shares abstained from voting and no votes were cast
against any of the foregoing directors.
Second, the Board of Directors' selection of Moore Stephens, P.C. as
the Company's independent public accountants for the fiscal year ending June 30,
2002 was ratified by the securityholders. 34,231,168 votes were cast for
ratification of the selection of Moore Stephens, P.C., 45,500 votes were cast
against the ratification and 540 shares abstained from voting.
Third, an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of $.01 par value per share common
stock from 100,000,000 to 150,000,000 shares was approved by the
securityholders. 34,213,168 votes were cast for the amendment, 9,040 shares
abstained from voting and 281,255 shares voted against the amendment.
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);
4.3 Special Warrant issued to investors in a private placement which closed June
20, 2002;
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);
10.10 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);
10.12 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);
10.19 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);
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);
10.29 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 December
31, 2002.
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: February 19, 2003 John Watt
----------------- --------------------------------
(Name)
/s/ John Watt
--------------------------------
(Signature)
President
---------------------------------
(Title)
Date: February 19, 2003 Peng Lin
----------------- --------------------------------
(Name)
/s/ Peng Lin
--------------------------------
(Signature)
Chief Financial Officer
--------------------------------
(Title)
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: February 19, 2003
/s/ John Watt
John Watt
President
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: February 19, 2003
/s/ Peng Lin
Peng Lin
Chief Financial Officer