Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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.
--------------------------
(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
-------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(416) 963-3999
----------------------------------------------------
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
Yes No X
---- -----
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 72,656,239 shares
outstanding as of November 03, 2003.
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. Such
forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, levels of activity,
performance or achievement, 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; our ability to implement our business strategy; our access to
financing; our ability to successfully identify new business opportunities; our
ability to attract and retain key executives; our 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
our Forms 10, 10-K, 10-Q, 8-K, and amendments thereto, and registration
statement filings. As a result of the foregoing and other factors, no assurance
can be given as to our future results and achievements. Neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
1
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AS OF AS OF
SEPTEMBER 30 JUNE 30
------------ ------------
2003 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 167,653 $ 283,802
Due from related party 4,099,223 3,593,607
Prepaid expenses 788,364 811,269
Other receivables 68,153 154,011
------------ ------------
Total Current Assets 5,123,393 4,842,689
------------ ------------
PROPERTY AND EQUIPMENT, net 75,349 82,688
------------ ------------
OTHER ASSETS
Due from related party 14,497,209 14,497,209
Notes receivable 11,881 11,881
Long-term investment 4,369,802 4,392,793
------------ ------------
Total Other Assets 18,878,892 18,901,883
------------ ------------
------------ ------------
TOTAL ASSETS $ 24,077,634 $ 23,827,260
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 790,804 $ 752,647
Accrued expenses 1,577 1,446
Due to related party consultants 1,207,714 1,207,714
Short-term loans, including convertible debenture 1,594,833 1,454,404
Deferred tax payable 55,969 --
Other liabilities 652,879 650,310
------------ ------------
Total Current Liabilities 4,303,776 4,066,520
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
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
72,394,659 shares (June 30, 2002-
66,736,223); outstanding 72,316,239(June 30,2002-66,657,803) 723,162 666,578
Additional paid in capital 34,834,618 34,872,453
Accumulated deficit (15,770,732) (15,761,845)
Cumulative translation adjustment (12,407) (15,662)
------------ ------------
19,774,642 19,761,524
Less: Treasury stock, at cost, 78,420 common shares (784) (784)
------------ ------------
Total Stockholders' Equity 19,773,858 19,760,740
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,077,634 $ 23,827,260
============ ============
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
2
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------ ------------
SALES $ 1,908,456 $ 638,646
COST OF SALES 819,690 462,902
------------ ------------
1,088,766 175,744
------------ ------------
OPERATING EXPENSES
Research and development -- 2,968
General and administrative 475,275 746,147
Related party consultants 84,321 102,279
Collection provision 70,483 18,104
Advertising -- 302
Selling 322,899 397,569
Depreciation 7,296 12,466
------------ ------------
960,274 1,279,835
------------ ------------
Operating Income 128,492 (1,104,091)
OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee (22,991) (18,845)
Interest income 370 62,944
Interest expense (35,731) (144,574)
Other income 267,142 78,917
Other expense 6,619 --
------------ ------------
215,409 (21,558)
------------ ------------
Income (Loss) before income tax and
minority interests 343,901 (1,125,649)
Income tax (55,968) --
Minority interest in subsidiarys'-Income (Loss) (296,820) --
------------ ------------
Net Income (Loss) $ (8,887) $ (1,125,649)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 70,230,120 50,703,411
Common stock equivalents -- --
------------ ------------
Diluted 70,230,120 50,703,411
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic (0.00) (0.02)
Diluted (0.00) (0.02)
The accompanying notes are an integral part of the unaudited consolidated
Financial statements.
3
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($ 8,887) ($1,125,648)
Used by operating activities:
Depreciation and amortization 7,339 51,975
Loss on investment at equity 22,991 18,845
Noncash compensation expense on shares issued for services -- 23,959
Noncash interest expense - convertible debenture 23,689 22,784
Impaired assets write off -- 2,662
Due from related party (505,616) (45,372)
Prepaid expenses 22,905 12,324
Other receivables 85,859 (67,193)
Accounts payable 38,157 7,561
Accrued expenses 131 46,525
Due to related party consultants -- (12,442)
Deferred income tax payable 55,969 --
Other liabilities 2,569 (13,896)
----------- -----------
Net Cash Used by Operating Activities (254,894) (1,077,916)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term loans 116,741 395,628
Cash paid on short-term loans -- (249,000)
Cash received for shares and options issued 18,750 253,270
----------- -----------
Net Cash Provided by Financing Activities 135,491 399,698
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,254 (595)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (116,149) (678,813)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of the period 283,802 914,838
CASH AND CASH EQUIVALENTS, end of the period $ 167,653 $ 236,025
=========== ===========
Supplemental disclosures of cash flows information and noncash investing and
financing activities:
For the three month ended September 30, 2003, the Company paid cash for interest
expenses of $26,945 (September 30, 2002-$121,123).
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
4
NOTES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary in order to fairly present
the interim financial information have been included. Results for the three
months ended September 30, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2004. For further
information, please 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 30,2003.
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%.
On September 15, 2003, the Company signed an agreement with the
beneficial owner of Tengtu China that allows the Company to purchase the 43%
interest of Tengtu China in TUC for 30 million common shares of the Company. The
agreement would also give proxy control to the Company of a number of other
entities in China owned by Tengtu China's beneficial owner. The agreement is
subject to approval by the Company's shareholders and other conditions.
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 has sought to form joint ventures with various Chinese
provinces on behalf of TUC. One of these has already been formed in Shaanxi
province and three others were in the process of being organized. Each of these
joint ventures is a Local Broadband Education Resource Center ("LBERC"). Each
LBERC is to connect to CBERC and would contain their own educational and other
materials mandated by the Provinces. This content would also be transmitted to
individual schools for an annual fee.
5
Subsequent to entering into letters of intent to form
provincial LBERCs the Company concluded an arrangement with the Agricultural
Bank of China establishing a line of credit for client users of Tengtu products
and services including its turn-key portals. This enabled Tengtu to change its
business strategy to more quickly penetrate its market on a district-by-district
basis versus school-by-school. This strategy has led to the installation of
seventeen turn-key portals to date and has shifted our near term business
priorities from establishing capital-intensive Provincial LBERC joint-ventures
to district and county-level LBERCs using turn-key portals. Money already
invested in the Shandong provincial LBERC is in the process of being returned to
us. A strategy for incorporating provincial level LBERCs will be determined as
the market matures.
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 September 30,
2003, and therefore, no equity earnings or losses were recorded. For the three
months ended September 30, 2003, Shaanxi LBERC had limited operations which
resulted in an equity loss of $(22,991). This loss reduces the investment at
September 30, 2003 to $4,369,802.
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 amount as due from Tengtu China as at September 30, 2003:
Current Assets
Balance at June 30, 2003 $ 3,593,607
Profits from operations,
net of minority interest 505,616
------------
Due from Related Party $ 4,099,223
============
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 $14,497,209 of due from Tengtu China as a
long-term asset as of September 30, 2003.
The totals of both current and long-term due from related party
include a collection provision of $797,536.
3. SHORT-TERM DEBT
At September 30, 2003, short-term debt consists of $1,500,000
convertible debenture issued to Top Eagle Holdings, Ltd. ("Top Eagle") in
December 1999 and due on December 15, 2003 as described in Note 4. Orion Capital
Inc. ("Orion"), a significant shareholder of the Company, which is owned
beneficially by the Chairman of the Company's Board of Directors, advanced
$116,740.84 to the Company for the general operating and administrative expenses
during the quarter ended September 30, 2003. Also see Note 5.
6
4. Convertible Debenture
Pursuant to a $1,500,000 convertible debenture issued to Top Eagle in
December 1999 and due on December 15, 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 September 30, 2003).
The total interest expense for the quarter ended September 30, 2003 was $50,522,
which includes amortization of the discount on the convertible debenture of
$23,689.
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.
5. Related Party Transactions
In addition to the funds advanced during the quarter ended
September 30, 2003 (see Note 3), Orion advanced an additional $457,598 to the
Company after September 30, 2003 for general operation purposes. The advance is
due on demand and is interest free.
During the quarter ended September 30, 2003, the Company incurred
consulting expenses of $84,321.25 from officers and directors of the Company.
Consulting expenses for September 30, 2002 were $102,279.
6. Taxes
None of the Company's 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.
TUC has an income tax "holiday" for its first profitable and four
subsequent years as computed on a Chinese Tax basis, which is a hybridized cash
basis of accounting. This holiday reduces income taxes by 100% for years one and
two, and
by 50% for years three through five. The Company accrued $55,969 of deferred tax
payable for the quarter ended September 30,2003, because TUC generated $746,247
in net income before income tax and minority interest and it is in its third
profitable tax year.
7. 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.
7
8. Commitments and Contingencies
The Company has contracted with Agricultural Bank of China("ABC") to have
ABC provides financing to eligible customers of the Company. ABC will provide up
to 80% of the contracted selling price of the Company to the customer. The
Company provides a guaranty to the bank for any financing provided. As of
September 30, 2003, ABC has made loan commitments, but has not yet funded them.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
We are currently, indirectly through Tengtu United and our agent, Tengtu
China, engaged in the following lines of business:
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 CBERC with a division of the Chinese Ministry of
Education, the National Center for Audio/Video Education. 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 to be accessible by Internet;
o development of Provincial LBERCs with several Chinese Provinces and
sales of turn-key portals and electronic resource centers. It is
anticipated that 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 computer hardware and systems integration services to Chinese
schools; and
o the provision of information technology training to teachers.
We have instructed Tengtu China to conduct all of Tengtu United's
business with all Chinese government entities. Tengtu China, as Tengtu United's
agent, administers the daily operations of Tengtu United, such as paying
operating expenses, collecting receivables and remitting net operating profits
to Tengtu United.
RECENT BUSINESS DEVELOPMENTS
RESTRUCTURING
On September 15, 2003, Tengtu International Corp. entered into an agreement
with Tengtu China, Beijing Jiade Tengtu Technology Group Co., Ltd., Fan Qi Zhang
and Beijing Oriental Tai He Technology Development Co., Ltd. ("collectively the
"Tengtu China Group"), pursuant to a July 1, 2003 Terms Memorandum for a
restructuring pursuant to which Tengtu International Corp. is to acquire 100% of
Tengtu United and all of the profits generated by its business in China while
the Tengtu Group continues to operate that business (the "Restructuring
Agreement"). The Restructuring is more fully described in our Form 10-K/A for
the fiscal year ended June 30, 2003 and a Form 8-K filed with the SEC on October
24, 2003.
8
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
Three Months Ended September 30, 2003
For the three months ended September, 2003, net cash used by
operating activities totalled $254,894. The net loss for the three months was $
(8,887) Other cash changes by operating activities include non-cash charges for
depreciation and amortization of $7,339, equity loss on investment of $22,991,
and non-cash interest expense of $23,689 related to the convertible debenture.
Cash was decreased as a result of the increase of $505,616 in due
from Tengtu China which represents 57% of the profit earned by Tengtu UNited for
the quarter. The decrease in prepaid expenses of $22,905 and $85,859 of other
receivable resulted in a favourable change to operating cash flow. Cash was
increased as a result of the increase of accounts payable of $38,157, deferred
income tax payable of $55,969, accrued expenses of $132, and other liabilities
of $2,569.
We did not make any investments during the quarter ended September
30,2003.
Net cash flow from financing activities was $135,491 which includes
the Orion Capital Incorporated ("Orion") short term loan of $116,741 and $18,750
of cash received from exercising stock options. Orion is owned by William
Ballard, the Chairman of our Board of Directors.
CONTRACTUAL OBLIGATIONS
The following summarizes the Company's contractual obligations at September 30,
2003.
CONTRACTUAL OBLIGATION TOTAL PAYMENT DUE BY PERIOD
LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
Short-term loans $1,594,833 $1,594,833(1)(2)
Total Contractual Obligation $1,594,833 $1,594,833(1)(2)
Notes:
(1) The short-term loan includes the $1,500,000 convertible debenture less
discount issued to Top Eagle Holdings, Ltd. The loan is due December 15, 2003.
We are in the stage of preparing to renegotiate a new term of the loan with Top
Eagle Holdings, Ltd.
(2) The rest of the short-term loan is $116,741 borrowed from Orion. The
loan is due on demand and is interest free.
In addition to the foregoing, we are committed to fund CBERC as follows: RMB 30
million (approximately $3,624,000) within twelve months after the establishment
of CBERC and RMB 20 million (approximately $2,416,000) within eighteen months
after the establishment of CBERC. CBERC was established on January 13, 2003.
While we have shifted our focus from the Provincial LBERCs, we are also
committed to fund approximately RMB 110 million for them. We are planning to
raise additional funds to meet the cash requirements for CBERC project and the
needs of our operations for the next 12 months. There can be no assurance that
such financing will be available, or if available, that it will be on acceptable
terms.
OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Revenues
- --------
September 30, 2003 September 30, 2002
----------------- -----------------
$1,908,456 $638,646
9
As a result of our new business model, marketing strategy and product
mix, sales increased in the quarter ended September 30, 2003. Tengtu United
sales for the quarter were $1,908,154. This total included sales of 6 turn-key
portals for $254,083, 1,575 sets of Satellite connectivity equipment for
$423,212, 313 sets of the Total Solution Platform for $606,370, 118,223 packages
of CDs for $478,438, and Content License revenues of $146,051. Total Tengtu
United operations accounted for more than 99% of the consolidated sales. Other
miscellaneous revenue from TIC Beijing Digital Pictures, Ltd. accounted for the
remaining $302 in revenue.
During the quarter ended September 30, 2002, we underwent a major
restructuring of our marketing strategy and product mix in China. As the CBERC
and LBERC projects proceed, Tengtu United began to engage the marketplace on a
system-wide basis versus school-by-school, as was done previously. At the same
time, Tengtu United began focusing on re-engineering our product lines and
developing the portal infrastructure to support the new business opportunities
going forward.
In addition, with the implementation of Agricultural Bank of China
credit facility, Tengtu United is required to adjust its marketing strategy from
school-to-school to district-by-district, which is in alignment with our overall
system wide marketing strategy. These major restructuring steps required Tengtu
to undertake a significant effort and commitment of resources in the quarter
ended September 30, 2003, therefore, contributing to a slow-down of platform
installations.
During the three months ended September 30, 2002, Tengtu United only
installed 6 Total Solution platforms for total revenue of $9,292. The majority
of sales came from the installation of satellite equipment which generated
$575,607 in revenue. We also sold 58 resource CDs for $3,691. Sales of other
e-education products and services through Tengtu China were $22,513. The total
Tengtu United operations accounted for 96% of sales. Other miscellaneous revenue
from TIC Beijing accounted for the remaining $27,542 in revenue.
Gross Profit (Loss)
- -------------------
September 30, 2003 September 30, 2002
----------------- -----------------
$1,088,766 $175,744
For the three months ended September 30, 2003, the overall gross
margin associated with Tengtu United sales was 57%. The high overall gross
margin was due to the sales of turn-key portals at 91%, Total Solution Platforms
at 80%, and Content Licenses at 98%, while CD packages are at 17% and Satellite
equipment is at 34%.
For the three months ended September 30, 2002, the overall gross
margin associated with Tengtu United sales was 30%, of which Total Solution
platforms were 75%, $satellite equipment was 29% and CD-ROMs were 11%.
General and Administrative Expenses
- ------------------------------------
September 30, 2003 September 30, 2002
----------------- -----------------
$475,275 $746,147
For the three months ended September 30, 2003, general and
administrative expenses were $475,275. The general and administrative expenses
incurred by Tengtu United amounted to $222,821. The major components of the
remaining balance were legal and professional fees of $139,574, financing
related costs of $35,618, and $26,125 of expenses incurred by TIC Beijing. The
expenses were reduced by $270,872 compared to the same period of last year. The
decrease was primarily due to a reduction in legal fees of $114,000 and
accounting fees of $50,000.Cost savings from TUC accounted for other $52,000.
10
For the three months ended September 30, 2002, general and
administrative expenses increased $207,937 compared to the same period in 2001.
An increase of $171,553 in the administrative expenses related to China
operations contributed to most of the increase. The remaining increases were due
to the higher legal and audit fees of Tengtu International Corp.
Related Party Consultants
- -------------------------
September 30, 2003 September 30, 2002
----------------- -----------------
$84,321 $102,279
Related party consultants' expense relates to staff that manages
technical developments and financing activities in North America.
Collection Provision
- --------------------
September 30, 2003 September 30, 2002
----------------- -----------------
$70,484 $18,104
The expense represents an estimate of potential uncollectible
accounts associated with sales by Tengtu United. The lower amount in 2003 was
primarily due to the lower sales. This provision is included in due from related
party.
Selling Expense
- ---------------
September 30, 2003 September 30, 2002
----------------- -----------------
$322,899 $397,569
The majority of selling expenses relates to staff salary and travel
expenses in the marketing department in Tengtu China. The expense was $74,670
lower than the same period of last year. The cost saving is due to the closing
of several branch offices in Tengtu United.
Depreciation and Amortization
- -----------------------------
September 30, 2003 September 30, 2002
----------------- -----------------
$7,296 $12,466
As Tengtu China manages the joint venture in China, we have not made
any significant purchases of equipment in the past few years.
Equity Losses in Investee
- -------------------------
September 30, 2003 September 30, 2002
----------------- -----------------
$22,991 $18,845
11
The equity losses in investee relate to our investment in the Shaanxi
LBERC joint venture.
Interest Income
- ---------------
September 30, 2003 September 30, 2002
------------------ -----------------
$ 370 $62,944
Interest income decreased by $62,574 compared with same period last
year due to the termination of a loan agreement with Ming Shen Bank of China
("Ming Shen"). The loan was for approximately $3,745,000 and was collateralized
by a $4 million restricted U.S. dollar denominated deposit that earned interest
at 6.15% annually. We used the deposit to repay the loan.
Interest Expense
- ----------------
September 30, 2003 September 30, 2002
----------------- -----------------
$35,731 $144,574
For the three months ended September 30, 2003, interest expense was
the interest on the Top Eagle loan and a reversal of approximately $15,500 for
over-accrual of interest expense for a short-term loan. The interest expense for
the three months ended September 30, 2002 consisted of interest on the Top Eagle
loan, Quest Ventures loan and the Ming Shen Bank loan in China.
The decrease in interest expense for the quarter ended
September 30, 2003 is due to the repayment of the Ming
Shen and Quest Ventures loans in the year ended June 30, 2003.
Other Income
- ------------
September 30, 2003 September 30, 2002
----------------- -----------------
$267,142 $78,917
Other income is principally the credits for value added tax paid in
China for Tengtu United's sales.
Income tax expense
- -----------------
September 30, 2003 September 30, 2002
------------------ -----------------
$55,969 0
Tengtu United has an income tax "holiday" for its first profitable and
four subsequent years as computed on a Chinese Tax basis, which is a hybridized
cash basis of accounting. This holiday reduces income taxes by 100% for years
one and two, and by 50% for years three through five. We accrued $55,969 of
deferred tax payable for the quarter ended September 30,2003, because Tengtu
United generated $746,247 of net income before income tax and minority interest
and it is in its third profitable tax year.
12
Minority interest
- -----------------
September 30, 2003 September 30, 2002
------------------ -----------------
$296,820 0
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. Our critical accounting
policies are described in our Form 10K/A filed for the fiscal year ended June
30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------
We operate through subsidiaries located in Beijing, China and the
administrative offices are located in Toronto, Canada. We grant credit to its
customers principally in China.
We performs certain credit evaluation procedures and does not
require collateral. We believe that credit risk is limited because we routinely
assesses the financial strength of our customers, and based upon factors
surrounding the credit risk of our customers, establishes an allowance for
uncollectible accounts and, as a consequence, believes that our accounts
receivable credit risk exposure beyond such allowances is limited.
We established an allowance for doubtful accounts of $797,536 at
September 30, 2003. We believes any credit risk beyond this amount would be
negligible.
At September 30, 2003, we had $167,653 of cash in banks uninsured.
We does not require collateral or other securities to support
financial instruments that are subject to credit risk.
For the three months ended September 30, 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 our financial statements. For the three months ended September 30,
2003 and 2002, no customer accounted for more than 10% of total sales.
13
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 167,653 167,653
---------- ----------
Total $ 167,653 $ 167,653
========== ==========
Accounts payable
United States $ 598,677 $ 598,677
Foreign 192,127 192,127
---------- ----------
Total $ 790,804 $ 790,804
========== ==========
Cash and cash equivalents and accounts payable are short-term financial
instruments, and as such 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.
Item 4. Controls and Procedures
On September 22, 2003, an evaluation was performed under the
supervision and with the participation of our management for the effectiveness
of the design and operation of our disclosure controls and procedures. Based on
that evaluation, we concluded that our disclosure controls and procedures were
effective in ensuring that material information relating to us with respect to
the period covered by this report was reported.
Based upon their evaluation of our internal controls within 90 days
of the date of this report, our management has determined that changes are
necessary in the format of financial reports from our 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 September 300, 2003.
PART II - OTHER INFORMATION
---------------------------
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
We defaulted on our 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.
14
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, our 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 our
Directors. If Pak Kwan Cheung is no longer one of our Directors 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 May, 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);
15
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);
10.24 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);
16
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. (filed as part of
our Form 10-Q filed on March 19, 2003 and incorporated herein by
reference).
10.36 September 15, 2003 Restructuring Agreement (filed as exhibit 10.1 to
our Form 8-K/A filed on September 18, 2003 and incorporated herein by
reference);
11.1 Statement re: Computation of Per Share Earnings for the Fiscal Years
Ended June 30, 2003 and 2002;
12.1 Statement re: Computation of Ratios for the Fiscal Years Ended June 30,
2003, 2002 and 2001;
21.1 List of Subsidiaries;
31.1 Certification of John D. Watt pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002;
31.2 Certification of Judy Ye pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002;
17
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports Filed on Form 8-K
On September 18, 2003, we filed a Form 8-K and an amended Form 8-K
announcing the signing of the Restructuring Agreement and attaching a copy of
the agreement.
On October 24, 2003, we filed a Form 8-K attaching a press release from
the same day announcing the death of Fan Qi Zhang, one of our Directors and the
CEO and Beneficial owner of our joint venture partner and its affiliated
companies.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENGTU INTERNATIONAL CORP.
--------------------------------
(Registrant)
Date: November 14, 2003 John Watt
------------ --------------------------------
(Name)
/s/ John Watt
--------------------------------
(Signature)
President
--------------------------------
(Title)
Date: November 14, 2003 Judy Ye
------------ --------------------------------
(Name)
/s/ Judy Ye
--------------------------------
(Signature)
Chief Financial Officer
--------------------------------
(Title)
18