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 March 31, 2003
[ ] 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.
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(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)
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 58,048,193 shares
outstanding as of May 15, 2003.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
As At As At
March 31 June 30
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 416,946 $ 914,838
Due from related party 3,044,483 2,579,157
Prepaid expenses 839,012 1,016,958
Other receivables 211,784 22,197
------------ ------------
Total Current Assets 4,512,225 4,533,150
PROPERTY AND EQUIPMENT, net 131,006 222,460
------------ ------------
OTHER ASSETS
Due from related party 9,906,907 9,906,907
Notes Receivable 11,881 11,881
Investing in related parties 4,590,302 4,590,302
Long-term Investment 4,409,546 4,469,600
Restricted cash 4,000,000 4,000,000
------------ ------------
22,918,636 22,978,690
------------ ------------
TOTAL ASSETS $ 27,561,867 $ 27,734,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 905,368 $ 1,092,231
Accrued expenses 526 301,127
Due to related party consultants 1,837,202 2,012,522
Short-term loan (include convertible
debenture) 2,319,596 1,883,428
Other liabilities 430,849 434,644
------------ ------------
Total Current Liabilities 5,493,541 5,723,952
------------ ------------
OTHER LIABILITIES
Long-term debt 3,744,800 3,744,800
Convertible debentures, net of discount
0 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 0 0
------------ ------------
Common stock par value $.01 per share; authorized
100,000,000 shares; issued and outstanding
57,848,193 shares (2002 - 54,123,189) 578,482 541,232
Additional paid in capital 33,441,060 30,281,736
Accumulated deficit (15,677,733) (13,899,433)
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (17,499) (17,788)
------------ ------------
18,374,310 16,905,747
Less: Treasury stock, at cost, 78,420 common shares
(784) (784)
------------ ------------
Total Stockholders' Equity 18,323,526 16,904,963
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,561,867 $ 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 and Comprehensive Income
(unaudited) (unaudited)
Nine Nine
Months Months
Ended Ended
March 31, March 31,
2003 2002
------------ ------------
SALES $ 3,156,270 $ 10,295,927
COST OF SALES 1,970,470 3,687,800
------------ ------------
GROSS PROFIT 1,185,800 6,608,127
OPERATING EXPENSES
Research and development 0 471,111
General and administrative 1,714,804 2,050,333
Related party consultants 306,711 687,531
Collection provision 95,332 338,067
Advertising 13,267 0
Selling 1,076,295 1,396,471
Depreciation 44,004 560,612
------------ ------------
TOTAL OPERATING EXPENSES 3,250,413 5,504,125
OPERATING INCOME (LOSS) (2,129,936) 1,104,002
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OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee (60,054) 0
Interest income 188,772 3,638
Interest expense (369,303) (193,746)
Other income 526,898 1,366,608
Other expense 0 (44,145)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 286,313 1,132,355
INCOME (LOSS) BEFORE TAX AND MINORITY INTERESTS (1,778,300) 2,236,357
INCOME TAX
INCOME (LOSS) BEFORE MINORITY INTERESTS (1,778,300) 2,236,357
MINORITY INTERESTS IN SUBSIDIARYS'-INCOME 0 1,329,006
NET INCOME (LOSS) (1,778,300) 907,351
============ ============
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 289 (17,356)
------------ ------------
COMPREHENSIVE INCOME $ (1,778,011) $ 889,995
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 52,121,619 48,636,028
Common stock equivalents 0 2,249,495
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Diluted 52,121,619 50,885,523
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $(0.034) $0.019
Diluted $(0.034) $0.018
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
(unaudited) (unaudited)
Three Three
Months Months
Ended Ended
March 31, March 31,
2003 2002
------------ ------------
SALES $ 1,913,585 $ 2,993,603
COST OF SALES 1,116,395 824,477
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GROSS PROFIT 797,190 2,169,126
OPERATING EXPENSES
Research and development 0 93,125
General and administrative 536,563 717,516
Related party consultants 103,440 273,385
Collection provision 73,331 95,140
Advertising 1,489 0
Selling 279,805 344,741
Depreciation 12,842 265,587
------------ ------------
TOTAL OPERATING EXPENSES 1,007,470 1,789,494
OPERATING INCOME (LOSS) (210,280) 379,632
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OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee (43,576) 0
Interest income 62,863 297
Interest expense (101,999) (66,772)
Other income 355,215 405,228
Other expense 0 25,331
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 272,503 364,084
INCOME BEFORE TAX AND MINORITY INTERESTS 62,223 743,716
INCOME TAX
INCOME BEFORE MINORITY INTERESTS 62,223 743,716
MINORITY INTERESTS IN SUBSIDIARYS'-INCOME 0 (693,162)
NET INCOME $ 62,223 $ 43,424
============ ============
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 0 (7,130)
------------ ------------
COMPREHENSIVE INCOME $ 62,223 $ 43,424
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 53,436,165 53,134,369
Common stock equivalents 2,421,656 1,912,574
------------ ------------
Diluted 55,857,821 55,046,943
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $0.001 $ 0.001
Diluted $0.001 $ 0.001
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)
Nine Months Nine Months
Ended Ended
March 31, March 31,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $(1,778,300) $ 907,351
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 91,453 560,612
Loss on investment at equity 60,054 0
Noncash compensation expense on equities issued for services 50,835 287,250
Noncash interest expense - convertible debenture 69,905 64,513
Impaired assets written off 2,662 0
Changes in operating assets and liabilities:
Decrease (Increase) in operating
assets:
Accounts receivable 0 16,578
Due from related party (465,326) (4,940,630)
Prepaid expenses 177,947 (573,904)
Inventories 0 2,452
Other receivables (189,587) 74,037
Other assets 0 60,058
Increase (Decrease) in operating liabilities:
Accounts payable (186,864) 146,325
Accrued expenses (300,601) 667,054
Due to related party consultants (175,319) 448,832
Other liabilities (3,795) (284,702)
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Net Cash Used by Operating Activities (2,646,936) (2,564,174)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment 0 (34,447)
Due from related party 0 (5,940,000)
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Net Cash Used by Investing Activities 0 (5,974,447)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term loans 753,716 0
Cash paid on short-term loan (1,749,200) 0
Cash received for shares, options and warrants issued 3,144,238 7,769,032
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Net Cash Provided by Financing Activities 2,148,755 7,769,032
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 290 (22,078)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (497,892) (791,667)
CASH AND CASH EQUIVALENTS, beginning of the period 914,838 1,026,400
CASH AND CASH EQUIVALENTS, end of the period 416,946 234,733
=========== ===========
Supplemental disclosures of cash flows information and noncash investing and
financing activities:
For the nine month ended March 31, 2003, the Company paid cash for interest
expenses of $299,380. Noncash compensation expense on equities issued for
services was $50,835.
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 March 31, 2003 and nine months ended March 31, 2003 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. The Company
Tengtu International Corp.(the "Company")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. Substantially all these
activities are carried out through the company's subsidiary, Beijing Tengtu
United Electronics Development Co., Ltd.("TUC" or Tengtu United), a joint
venture. The Company has an equity interest in TUC of 57%, and its joint venture
partner, Tengtu China, owns the remaining 43%.
Tengtu China entered into a joint venture with a division of the
Chinese Ministry of Education, on behalf of TUC, for the creation of the China
Broadband Education Resource Center ("CBERC"), CBERC was established in January
2003 for the transmission of various educational content and tools to 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.
Although TUC's equity interest in each of the joint ventures is over
50%, it 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 TUC has the ability to exercise significant influence, but not
control, over the investees.
The Company, through Tengtu United, has advanced $4,469,000 for the
formation of CBERC and the LBERCs. CBERC was officially established in January
2003, but there were no operations for the three months ended March 31, 2003,
and therefore, no equity earnings or losses were recorded. For the three months
ended March 31, 2003, Shaanxi LBERC had limited operations which resulted in an
equity loss of $(43,576) which brings the total equity loss in the nine months
ended March 31, 2003 to $(60,054). This loss reduces the investment at March
31,2003 to $4,409,546.
2. Due from Related Party
The Company has engaged Tengtu China, as its agent, to conduct all of
Tengtu United's business. 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 March 31, 2003:
Current Assets
Balance at June 30,2002 $ 2,579,157
Advances related to working capital for operations 643,099
Profits from operations,
net of minority interest (177,773)
------------
Due from Related Party $ 3,044,483
============
Payment processes slower than those experienced in North America are
not unusual in China, especially when dealing with a number of levels of
government. In recognizing the different environment in which it is operating in
China, the Company has classified $9,906,907 of due from Tengtu China to
long-term assets as of March 31, 2003.
The totals of both current and long-term due from related party
include a collection provision of $703,047.
In addition to the above receivable, the Company has advanced approximately
$4,590,000 to Tengtu China to fund the operations of TUC. This amount has been
classified as Investing in related parties on the March 31, 2003 balance sheet,
and the June 30, 2002 balance sheet has been revised to conform to this
presentation change.
3. 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.
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 March 31,
2003 was $62,708. The total interest income for the nine month period was
$188,124.
4. 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 March 31, 2003 was
$52,146. The total interest expense for the nine month period was $152,973.
5. 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 March 31, 2003 and June 30, 2002, respectively). The total interest
expense for the quarter ended March 31, 2003 was $49,853 which included
amortization of the discount on the convertible debenture of $23,605. The total
interest expense for the nine month period was $151,007 which included
amortization of the discount on the convertible debenture of $69,904.
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.
6. Related Party Transactions
Orion Capital Inc. ("Orion"), a significant shareholder of the
Company, advanced $31,576 to the Company for the general corporate and
administrative expenditures during the quarter, which increased the balance of
advance from Orion to $889,108 as of that date. The advance is due on demand and
is interest free. Subsequent to March 31, 2003, the Company paid Orion $250,000
and Orion used the balance of the advance of $639,108 to purchase units,
consisting of two Special Warrants, issued by the company at a price of $1.00
per unit.
During the quarter ended March 31, 2003, the Company incurred
consulting expenses of $103,440 from officers and directors of the Company or
companies controlled by these officers and directors (March 31, 2002 -
$273,385). The consulting expense for the nine month period was $306,711 (March
31, 2002 - $687,531).
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, William Ballard, Orion's controlling shareholder and the company's
Chairman of the Board, provides consulting services to the Company. The term was
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. For the nine month period ended March 31, 2003, 125,004 shares
of common stock were issued to Orion and a charge to compensation expense of
$50,835 was recorded. The contract expired at the end of December 2002. As of
the date of the report, there is no new agreement between Orion and the Company.
7. 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 carry forwards. 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.
8. 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. (see Note 9.)
9. Subsequent events
In March, 2003, the Company was served with a statement of claim
which was issued in the Ontario Superior Court of Justice. The plaintiff in the
action is B.D. Clark & Associates, Ltd. ("BDC") and the Company is the
defendant. The statement of claim alleges that BDC did not receive certain
payments due to it under two contracts beginning March 21, 1997 and ending June,
2001 which obligated BDC to provide consulting services to the Company.
Plaintiff seeks the following relief: (1) declarations that the Company has
breached its obligations under both contracts; (2) approximately $9,028,998 in
damages for breach of both contracts; (3) pre- and post-judgment interest; (4)
costs of the action; and (5) other relief as the Court deems appropriate.
The Company believes that it has meritorious defences to the statement
of claim and intends to vigorously defend the action.
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 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 content software to Chinese K-12 schools;
o sales of special software products for learning applications, resources
management, distance learning and web/internet applications contained in
the "Total Solution" software package;
o development of the China Broadband Education Resource Centre ("CBERC") with
a division of the Chinese Ministry of Education, the National Center for
Audio/Visual Education ("NCAVE"). CBERC is an electronic resource centre
and portal containing educational materials that are transmitted to schools
that download them daily via satellite and that are accessible by Internet;
o development of Local Broadband Education Resource Centers ("LBERCs") with
several Chinese provinces. The LBERCs will connect with CBERC and contain
their own educational and other materials as mandated by the provincial
branches of the Chinese Ministry of Education. Like CBERC, content will be
transmitted to schools daily via satellite and will also be available via
Internet;
o sales of turn-key electronic resource centres and portals to schools and
school districts;
o sales of computer hardware and systems integration services to Chinese
schools; and
o the provision of information technology training to teachers.
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.
Tengtu has undertaken 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.
As a result of the restructuring 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 the 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. Of the 460 sets of satellite equipment sold in
the second quarter, 440 of them were sold to ShaanXi LBERC joint venture.
Because the restructuring was substantially completed during the second
quarter, the new business model began to produce significant results in the
third quarter ended March 31,2003, when sales have increased dramatically
compared with the first two quarters. Tengtu United sales for the three months
ended March 31, 2003 were $1,913,585. This total included sales of 37 sets of
equipments supported by buyer's credit line through the Agricultural Bank of
China for $700,020, 6 Portals for $346,500, 1,000 sets of Satellite connectivity
equipment for $412,991, 680 Total Solution Platform for $342,783, 2,102 sets of
CD for $30,981, and other products for $58,565.
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.
Liquidity and Capital Resources for the Nine Months Ended March 31, 2003 and
2002
Nine Months Ended March 31, 2003
For the nine months ended March 31, 2003, net cash used by operating
activities totalled $2,646,936. The net loss for the nine months, $(1,778,300),
includes non-cash charges for depreciation and amortization of $91,453, equity
loss on investment of $60,054, non-cash compensation expenses associated with
the issuance of common shares for services of $50,835, and non-cash interest
expense of $69,905 related to convertible debenture.
Cash was further decreased by the increase of $465,326 in due from
Tengtu China, and an increase of $189,587 in other receivables. The decrease in
prepaid expenses resulted in a favourable change of $177,947 to operating cash
flow.
The Company used the cash raised in private placements to reduce its
outstanding accounts payable and accrued expenses. For the nine months ended
March 31, 2003, the accounts payable and accrued expenses have decreased
$487,465.
The Company did not make any investments during the quarter ended
March 31,2003.
Net cash flow from financing activities was $2,148,755. In the nine
months ended March 31, 2003, the Company borrowed, on a short-term basis,
$753,717 from Orion Capital Incorporated ("Orion") for general corporate and
administrative purposes. Orion's controlling shareholder is William Ballard, the
Chairman of the Company's Board of Directors. This increased the balance of the
advance from Orion to $889,108 at March 31, 2003. Subsequent to March 31, 2003,
the Company paid Orion $250,000 and Orion used the balance of the advance of
$639,108 to purchase Units, consisting of two Special Warrants, issued by the
Company at a price of $1.00 per unit. 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 $0.75.
On July 5, 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
on November 30, 2002.
The net cash flow from financing activities was $3,144,238. The
primary source of these funds was private placements to purchase Units, at a
price of $1.00 per unit.
CONTRACTUAL OBLIGATIONS
The following summarizes the Company's contractual obligations at March 31,
2003.
- ----------------------------------------------------------------------------------------
Payment Due by Period
- ----------------------------------------------------------------------------------------
Contractual Obligation Total Less than 1 year 1-3 years 4-5 years After 5 years
- ----------------------------------------------------------------------------------------
Short-term loans $2,319,596 $2,319,596 (1) (2)
- ----------------------------------------------------------------------------------------
Long-term loans
$3,744,800 $3,744,800 (3)
- ----------------------------------------------------------------------------------------
Total
Contractual
Obligation $6,064,396 $2,319,596
- ----------------------------------------------------------------------------------------
(1) Part of the short-term loan is borrowed from Orion. As of March 31, 2003,
the balance of Orion loan is $889,108. The loan is due on demand and interest
free. Subsequent to the date of the report, the company paid Orion $250,000 and
Orion used the balance of the loan to purchase units consisting of two Special
Warrants at a price of $1.00 per unit.
(2) The rest of the 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.
Nine Months Ended March 31,2002
For the nine months ended March 31, 2002, net cash used by operating
activities totaled $2,564,174.
The net income for the period, $907,351, included such noncash items as
depreciation and amortization ($560,612), noncash compensation expenses
associated with the issue of shares of Common Stock for services ($287,250) and
noncash interest expense related to convertible debentures ($64,513).
This was offset by increases in operating assets associated with the start of
Phase II of Operation Morning Sun. Operation Morning Sun required $4,940,630 in
working capital for operations during the nine months, due mainly to delays in
collecting accounts receivable. 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 the Company.
Another use of cash related to a $573,904 increase in prepaid expenses.
Included in
Prepaid expenses are advances of $345,633 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.
Net cash used in investing activities included $5,974,447 advanced to Tengtu
China for the development of CBERC ($4.50 million) and the Shan Dong province
LBERC ($1.44 million).
Net cash flow from financing activities was $7,769,032. The primary source
of these funds was private placements of shares of Common Stock totaling
$7,740,532. 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 in August 2001.
OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
Revenues
2003 2002
------ ------
$3,156,270 $10,295,927
Nine Months Ended March 31, 2003
As discussed above, the Company underwent a major restructuring of
its marketing strategy and product mix in China. 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 new business opportunities going
forward.
In addition, the system wide marketing strategy is consistent with
the requirements of the Agriculture Bank of China credit facility, The Company's
restructuring 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 sales in those two quarters.
As a result of the new business model and its marketing strategy and
product mix, sales started to increase in the third quarter of 2003. Tengtu
United sales for the nine months ended March 31, 2003 were $3,156,270. This
total included sales of 37 sets of equipments supported by Buyer's Credit Line
for $700,020, 6 Portals for $346,500, Satellite connectivity equipment for
$1,086,169, Total Solution Platforms for $374,790, Educational CD-ROMS for
$106,275 and other products for $473,116. Total Tengtu United/Tengtu China
operations accounted for 99% of the consolidated sales. Other miscellaneous
revenue from TIC Beijing accounted for the remaining $69,400 in revenue.
Nine Months Ended March 31, 2002
The Company's sales for the nine months ended March 31, 2002 were
$10,217,407. 96% of these sales were derived from Tengtu United sales to 8,627
schools under Phase II of Operation Morning Sun. This total included
installation of Total Solution platforms in 5,055 schools ($8,574,337 in
revenues), selling educational CD-ROMs to 2,126 schools ($1,090,712) and
shipping satellite equipment to 1,108 schools ($96,432). Most of this activity
took place from late August, 2001 to December 2001, and in March 2002, due to
fact that schools were closed for the July and August summer break, and in
January and February for Winter Break and New Year holidays.
Other sources of revenue for Tengtu United include installation
projects in Inner Mongolia and Henan province ($292,945), sale of Microsoft
products ($43,159) and other sales ($119,822).
Gross Profit (Loss)
2003 2002
------ ------
$1,185,800 $6,608,127
Nine Months Ended March 31, 2003
For the nine months ended March 31, 2003, the overall gross margin
associated with Tengtu United sales was 39%. The low overall gross margins were
due to the low margins for new products. The gross margin for equipment
supported by the Agricultural Bank of China credit Line was 26%, 32% for
Satellite connectivity equipment, and 57% for e-portals.
Nine Months Ended March 31, 2002
The overall gross margins associated with sales under Operation Morning
Sun were 69%: 74% for Total Solution platforms and 40% for satellite equipment
and 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. Most of the school computers where the
platforms were installed in this nine-month period were already equipped with
appropriate operating software.
The gross margin on other Tengtu United sales was $182,795 and the loss
on sales by Edsoft (H.K.) and TIC Beijing was $143,430. Edsoft (H.K.)'s
operations effectively ceased in January 2002.
General and Administrative Expenses
2003 2002
------ ------
$1,714,804 $2,050,333
For the nine months ended March 31, 2003, general and administrative
expenses decreased $270,206 compared to the same period in 2002. The decrease
was mainly due to an expense credit of $335,529 from the Company's joint-venture
partner, Tengtu China. The total general and administrative expenses incurred by
Tengtu United amounted to $410,093. At the Company's principal office in
Toronto, a majority of the expenses were legal and professional fees of $602,023
and financing related expenses of $530,029.
Nine Months Ended March 31, 2002
The general and administrative expenses incurred by Tengtu United
amounted to $564,790 and were comparable to previous periods. The major
components of the remaining balance were legal and professional fees ($640,960)
and travel expenses ($173,690) related to activities in the Company's Toronto
and Vancouver offices. The Company's Vancouver office was closed in order to
lower expenses.
Related Party Consultants
2003 2002
------ ------
$306,711 $687,531
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 as compensation for
consulting services.
Collection Provision
2003 2002
------ ------
$95,332 $338,067
The expense for the nine months ended March 2003 represents an
estimate of potential uncollectible accounts associated with sales by Tengtu
United in the first nine months of the fiscal year. Compared to the period in
2002, the lower amount in 2003 was primarily due to the lower sales. This
provision is included in due from related party.
Selling Expense
2003 2002
------ ------
$1,076,295 $1,396,471
In the nine months ended March 31, 2003, selling expense was lower
compared with the same period of 2002. It is primarily due to lower sales and
Tengtu United's focus on the restructuring of its business in China.
In the nine months ended March 31, 2002, 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
2003 2002
------ ------
$91,453 $560,612
As Tengtu China manages the Company's joint venture in China, the
Company has not made any significant purchases of equipment in past years. The
2003 amount included $44,004 charged to general and administrative expenses and
$47,449 charged to cost of sales. Amortization of $560,612 in 2002 includes
amortization of the costs associated with two software and content license
agreements. TIC Beijing's only income was rental income. The main cost associate
with the revenue generated was amortization expense on the equipments. We
included this amortization expensed in the cost of goods sold applying the
accounting matching principle.
Equity Losses in Investee
2003 2002
------- ------
$(60,054) $ 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
2003 2002
------ ------
$188,772 $3,638
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 earned for the nine months ended March 31, 2003 is $188,772.
Interest Expense
2003 2002
------ ------
$(369,303) $(193,746)
For the nine months ended March 31 2003, interest expense consists of
interest on the Top Eagle loan, Quest Ventures loan and the Ming Shen Bank loan
in China. The expense for the same period in 2002 consisted of interest on the
Top Eagle loan and a H.K. $2,000,000 (approximately US$250,000) loan to EdSoft
Canada, which was eliminated pursuant to a settlement in May 2002. The increase
was primarily due to the interest on the Quest Ventures loan and the Ming Shen
Bank loan.
Other Income
2003 2002
------ ------
$494,371 $1,366,608
Other income consisted primarily of was credits for value added tax
(VAT) paid in China for Tengtu United's sales. In the nine months ended March
31, 2003, other income also included a $210,000 reversal of over accrual of
consulting fees, a $37,885 reversal of over accrual of legal fees, and $36,310
in cash recovered from the sale of the assets of Iconix, a former investee of
the Company.
Minority interest
2003 2002
------ ------
$ 0 $1,329,006
Minority interest represents Tengtu China's 43% interest in the
operating profits of the joint venture company, Tengtu United.
OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Revenues
2003 2002
------ ------
$1,913,585 $2,993,603
As a result of the new business model and its marketing strategy and
product mix, sales started to increase in the third quarter of 2003. Tengtu
United sales for the three months ended March 31, 2003 were $1,913,585. This
total included sales of 37 sets of equipments supported by the Agricultural Bank
of China Credit Line for $700,020, 6 Portals for $346,500, 1,000 sets of
Satellite connectivity equipment for $412,991, 680 sets of Platform for
$342,783, 2,102 packages of CD for $30,981, and other products for $58,565.
Total Tengtu United/Tengtu China operations accounted for 99% of the
consolidated sales. Other miscellaneous revenue from TIC Beijing accounted for
the remaining $21,744 in revenue.
The Company's sales for the three months ended March 31, 2002 were
$2,993,603. 99% of these sales were derived from Tengtu United sales to 2,016
schools under Phase II of Operation Morning Sun. This total included installing
Total Solution platforms in 1,775 schools ($2,803,835 in revenues), selling
educational CD-ROMS to 169 schools ($83,911) and shipping satellite equipment to
72 schools ($6,736). Other sources of revenue for Tengtu United include sale of
Microsoft and other products ($74,781).
Gross Profit (Loss)
2003 2002
------ ------
$797,190 $2,169,126
For the three months ended March 31, 2003, the overall gross
margin associated with Tengtu United/Tengtu China sales was 42%. The low overall
gross margin was due to the low margins for new products. The gross margin for
equipment supported by the Agricultural Bank of China credit Line was 26%, 36%
for Satellite connectivity equipment, and 57% for e-portals.
For the three months ended March 31, 2002, the overall gross margin
associated with sales under Operation Morning Sun was 75%,almost all of which
was related to sales of Total Solution Platforms. Costs of Total Solution
platforms and satellite equipment were similar to the prior quarter.
General and Administrative Expenses
2003 2002
------ ------
$536,563 $717,516
For the three months ended March 31, 2003, general and administrative
expenses were $536,563. The general and administrative expenses incurred by
Tengtu United amounted to $194,729. The major components of the remaining
balance were legal and professional fees of $132,047, and financing related
costs of $154,729.
For the three months ended March 31, 2002, general and
administrative expenses were $717,516. The major components of this balance were
legal and professional fees and travel expenses related to activities in the
Company's Toronto office.
Related Party Consultants
2003 2002
------ ------
$103,440 $273,385
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 for the three months ended March 2003.
Collection Provision
2003 2002
------ ------
$73,331 $95,140
The expense for the three months ended March 2003 represents an
estimate of potential uncollectible accounts associated with sales by Tengtu
United. Compared to the same period in 2002, the lower amount was primarily due
to the lower sales. This provision is included in due from related party.
Selling Expense
2003 2002
------ ------
$279,805 $344,741
In the three months ended March 31, 2003, selling expense was lower
compared with the same period of 2002. This is primarily due to lower sales.
In the three months ended March 31, 2002, 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
2003 2002
------ ------
$16,314 $265,587
As Tengtu China manages the Company's joint venture in China, the
Company has not made any significant purchases of equipment in past years. The
2003 amount included $12,842 charged to general and administrative expenses and
$3,472 charged to cost of sales. Amortization of $265,587 in the three months
ended March 31, 2002 included amortization of the costs associated with two
license agreements. TIC Beijing's only income was rental income. The main cost
associate with the revenue generated was amortization expense on the equipments.
We included this amortization expensed in the cost of goods sold applying the
accounting matching principle.
Equity Losses in Investee
2003 2002
------- ------
$(43,576) $ 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
2003 2002
------ ------
$62,862 $ 297
The interest income was earned by a $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 earned for the three months ended March 31, 2003 is $62,862.
Interest Expense
2003 2002
------ ------
$(101,999) $(66,772)
For the three months ended March 31 2003, the expense consists of
interest on the Top Eagle loan, and the Ming Shen Bank loan in China. The
interest expense for the same period in 2002 consisted of interest on the Top
Eagle loan and the loan to EdSoft Canada, which was eliminated pursuant to a
settlement in May 2002. The increase was primarily due to the interest on the
Ming Shen Bank loan.
Other Income
2003 2002
------ ------
$355,215 $405,228
In the three months ended March 31, 2003, the other income included
$106,245 credits for value added tax paid in China for Tengtu United's sales, a
$210,000 reversal of over accrual of consulting fees, a $37,855 reversal of over
accrual of legal fees, and a $1,115 purchase credit for video.
Minority interest
2003 2002
------ --------
$ 0 $693,162
Minority interest represents Tengtu China's 43% interest in the
operating profits of the joint venture company, Tengtu United.
Critical Accounting Policies
- ----------------------------
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles or GAAP in the United
States. The preparation of those financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities at the date of our financial statements. Actual results may differ
from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or
uncertainties, and potentially result in materially different results under
different assumptions and conditions. We have described below what we believe
are our most critical accounting policies.
1. Consolidated Financial Statements
The Company's principal activities are carried out through Beijing
Tengtu United Electronics Development Co., Ltd.(" TUC" or "Tengtu United"), a
57% owned Chinese joint venture company. In the opinion of management, the
Company controls TUC because the protective rights enjoyed by the minority
interest holder do not rise to the level of participating rights as described in
EITF 96-16, therefore TUC is consolidated into our financial statements.
2. Equity Method for Investments in CBERC & LBERC
Tengtu China, the Company's joint venture partner in TUC, established
two joint ventures on behalf of TUC: one with a division of the Chinese Ministry
of Education,CBERC, and second, the Shaanxi Province Broadband Education
Resource Center, an LBERC. The Company, through TUC, has advanced $4,469,600 for
the formation of CBERC and LBERC. The Company accounts for these investments
using equity method. 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 company has the ability to exercise
significant influence, but not control, over the investees.
3. Due from Related Party
The Company has engaged Tengtu China, as its agent, to conduct all of
TUC's business with any Chinese government entity. As agent, Tengtu China and
its affiliated and related companies administer the daily operations of TUC:
paying operating expenses, collecting receivables and remitting net operating
profits to the Company. 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. So we use the term "Due from
related party" to describe the amount due from Tengtu China.
Payment processes slower than those experienced in North America are
not unusual in China, especially when dealing with different levels of
government. In recognizing the environment in which it is operating in China,
the Company has classified $9,906,907 of due from Tengtu China to long-term
assets as of March 31, 2003.
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 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
$703,047 at March 31, 2003. The Company believes any credit risk beyond this
amount would be negligible.
At March 31, 2003, the Company had $4,416,946 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 nine months ended March 31, 2003, 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 nine months ended March 31, 2003 and
2002, 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 416,946 416,946
---------- ----------
Total $ 416,946 $ 416,946
========== ==========
Accounts payable
United States $ 802,712 $ 802,712
Foreign 102,656 102,656
---------- ----------
Total $ 905,368 $ 905,368
========== ==========
Long-term debt
United States $ - $ -
Foreign 3,744,800 3,744,800
---------- ----------
Total $3,744,800 $3,744,800
========== ==========
Cash and cash equivalents and accounts payable are short-term financial
instruments, and as such are not subject to significant market risk. Market risk
for the long-term debt is considered minimal as the fair value of the debt,
which is based on current rates at which the Company could borrow funds with
similar remaining maturities, approximates its carrying value.
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 May 05, 2003, an evaluation was performed under the supervision
and with the participation of the Company's management for the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management 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 Management 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 May 5, 2002.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
In March, 2003, the Company was served with a statement of claim which
was issued in the Ontario Superior Court of Justice. The plaintiff in the action
is B.D. Clark & Associates, Ltd. ("BDC") and the Company is the defendant. The
statement of claim alleges that BDC did not receive certain payments due to it
under two contracts beginning March 21, 1997 and ending June, 2001 which
obligated BDC to provide consulting services to the Company. Plaintiff seeks the
following relief: (1) declarations that the Company has breached its obligations
under both contracts; (2) approximately US$9,028,998 in damages for breach of
both contracts; (3) pre- and post-judgment interest; (4) costs of the action;
and (5) other relief as the Court deems appropriate.
The Company believes that it has meritorious defences to the statement
of claim and intends to vigorously defend the action.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
On February 10, February 20, April 24 and May 3, 2003, the Company sold
units consisting of two Special Warrants each to non-U.S. investors in private
placements in the following amounts:
Date Number of Units Aggregate Proceeds
- ---- ---------------- ------------------
February 10, 2003 250,000 $250,000
February 20, 2003 677,968 $677,968
April 24, 2003 250,000 $250,000
May 3, 2003 640,000 $640,000*
------- --------
Totals 1,817,968 $1,817,968
* These Units were issued to Orion Capital Incorporated, a company beneficially
owned by William Ballard, the Chairman of the Company's Board of Directors, in
satisfaction of $640,000 in short term loans made by Orion to the Company.
The February 20, 2003 offering was conducted through Dundee Securities
Corporation which was paid a commission of $47,457.76.
The Special Warrants entitle the holders to acquire, for no additional
consideration, up to 3,635,936 shares of the Company's common stock and warrants
to acquire an additional 1,817,968 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.
In February, 2003, the Company sold 75,000 units consisting of two
shares of the company's common stock and one warrant to purchase common stock
for $.75 per share to two 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 3. Defaults Upon Senior Securities
- ------- -------------------------------
The Company defaulted on its quarterly interest payment to Top Eagle
Holdings Limited on a $1,500,000 Floating Convertible Debenture which was due on
December 15, 2001. Pursuant to the terms of the Debenture interest accrued on
the unpaid interest at the same rate as other sums under the Debenture plus an
additional 5%. The necessary payment was made in May, 2002. In addition, the
quarterly payments due for March, 2002 and June, 2002 have also been made.
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.
In April, 2000, the Company's common stock was delisted from trading
on the over-the-counter bulletin board. This constitutes an Event of Default
under the Top Eagle Debenture 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.
On September 30, 2002, Pak Kwan Cheung was removed as one of the
Company's Directors. If Pak Kwan Cheung is no longer a Director or our Chief
Executive Officer, it 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,
which is currently $4.00.
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
and has requested that an additional 5% in interest be paid on the Debenture
pursuant to its terms.
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 Form of Special Warrant issued to investors in a private placements which
closed in June, 2002 through February, 2003 (filed as part of our Form 10-K
filed on October 15, 2002 and incorporated herein by reference);
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 (filed as part of our Form 10-K/A filed on February 20, 2003
and incorporated herein by reference);
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. (filed as part of our Form
10-K/A filed on February 20, 2003 and incorporated herein by reference);
10.35 English version of January 1, 2003 Amendment to Joint Venture Agreement
between Tengtu International Corp. and Tengtu China.
11.1 Statement of Computation of Per Share Earnings
21.1 List of Subsidiaries
(b) No reports on Form 8-K have been filed for the fiscal quarter ended March
31, 2003.
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: May 16, 2003 John Watt
------------ --------------------------------
(Name)
/s/ John Watt
--------------------------------
(Signature)
President
---------
(Title)
Date: May 16, 2003 Judy Ye
------------- -------
(Name)
/s/ Judy Ye
------------------------------
(Signature)
Controller and Interim 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: May 16, 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, Judy Ye, 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: May 16, 2003
/s/ Judy Ye
- ------------
Judy Ye
Controller and Interim Chief Financial Officer