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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, 2004
[ ] 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
--------------------------------- ----------------------
(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
----------------------------------------------------
(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 108,021,239 shares
outstanding as of April 29, 2004.
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 the Chinese
government; 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
MARCH 31, JUNE 30,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 681,284 $ 283,802
Due from related party 6,611,780 3,593,607
Prepaid expenses 752,049 811,269
Other receivables 54,770 154,011
------------ ------------
Total Current Assets 8,099,884 4,842,689
------------ ------------
------------ ------------
PROPERTY AND EQUIPMENT, net 64,040 82,688
------------ ------------
OTHER ASSETS
Due from related party 14,497,209 14,497,209
Notes receivable 11,881 11,881
Long-term investment 3,492,279 4,392,793
------------ ------------
Total Other Assets 18,001,369 18,901,883
------------ ------------
------------ ------------
TOTAL ASSETS $ 26,165,293 $ 23,827,260
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 200,026 $ 752,647
Accrued expenses 26,400 1,446
Due to related party consultants 1,207,714 1,207,714
Short-term loan less discount 1,030,187 1,454,404
Deferred tax payable 132,470 0
Other liabilities 644,992 650,310
------------ ------------
Total Current Liabilities 3,241,790 4,066,520
------------ ------------
COMMITMENTS
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 150,000,000 shares; issued
78,099,659 shares (June 30, 2003-
66,736,223); outstanding 78,021,239(June 30,2003-66,657,803) 780,212 666,578
Additional paid in capital 38,099,118 34,872,453
Accumulated deficit (15,941,779) (15,761,845)
Cumulative translation adjustment (13,263) (15,662)
------------ ------------
22,924,288 19,761,524
Less: Treasury stock, at cost, 78,420 common shares (784) (784)
------------ ------------
Total Stockholders' Equity 22,923,504 19,760,740
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,165,293 $ 23,827,260
============ ============
2
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003
------------ ------------
SALES $ 5,847,118 $ 3,156,270
COST OF SALES 2,947,279 1,970,470
------------ ------------
2,899,839 1,185,800
------------ ------------
OPERATING EXPENSES
General and administrative 1,403,119 1,728,071
Related party consultants 308,553 306,711
Collection provision 224,638 95,332
Selling 696,208 1,076,295
Depreciation 45,380 44,004
------------ ------------
2,677,898 3,250,413
------------ ------------
Operating Income/Loss 221,941 (2,064,613)
OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee (103,234) (60,054)
Interest income 933 188,772
Interest expense (291,108) (369,303)
Other income 826,538 526,898
------------ ------------
433,129 286,313
------------ ------------
Income (loss) before income tax and
minority interests 655,070 (1,778,300)
Income tax (132,470) --
Minority interest in subsidiarys' Income (Loss) (702,535) --
------------ ------------
Net Loss $ (179,935) $ (1,778,300)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 74,066,341 52,121,619
Common stock equivalents
------------ ------------
Diluted 74,066,341 52,121,619
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic (0.002) (0.034)
Diluted (0.002) (0.034)
3
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003
------------ ------------
SALES $ 1,652,146 $ 1,913,585
COST OF SALES 586,540 1,116,395
------------ ------------
1,065,606 797,190
------------ ------------
OPERATING EXPENSES
General and administrative 445,637 538,052
Related party consultants 120,004 103,440
Collection provision 64,315 73,331
Selling 160,294 279,805
Depreciation 17,945 12,842
------------ ------------
808,195 1,007,470
------------ ------------
Operating Income/Loss 257,411 (210,280)
OTHER INCOME (EXPENSE)
Equity earnings (loss) in investee (89,349) (43,576)
Interest income 450 62,863
Interest expense (94,597) (101,999)
Other income 231,723 355,215
------------ ------------
48,227 272,503
------------ ------------
Income before income tax and minority interests 305,638 62,223
Income tax (46,992) --
Minority interest in subsidiary's-Income (Loss) (249,216) --
------------ ------------
Net Income $ 9,430 $ 62,223
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 77,940,662 53,436,165
Common stock equivalents 7,817,944 3,921,656
------------ ------------
Diluted 85,758,606 57,357,821
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic 0.000 0.001
Diluted 0.000 0.001
4
TENGTU INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss: ($ 179,935) ($1,778,300)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 45,380 91,453
Changes on investment at equity 900,514 60,054
Noncash compensation expense on shares issued for services 0 50,835
Noncash interest expense - convertible debenture 212,013 69,905
Impaired Assets Write Off (26,732) 2,662
Changes in operating assets:
Due from related party (3,018,173) (465,326)
Prepaid expenses 59,220 177,947
Other receivables 99,242 (189,587)
Accounts payable (552,621) (186,864)
Accrued expenses 24,953 (300,601)
Due to related party consultants 0 (175,319)
Deferred income tax payable 132,470 0
Other liabilities (5,318) (3,795)
----------- -----------
Net Cash Used by Operating Activities (2,308,986) (2,646,936)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term loans 609,770 753,716
Cash paid on short-term loans (300,000) (1,749,200)
Cash received for shares and options issued 2,394,299 3,144,238
----------- -----------
Net Cash Provided by Financing Activities 2,704,069 2,148,754
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,399 290
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 397,482 (497,892)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of the period 283,802 914,838
CASH AND CASH EQUIVALENTS, end of the period $ 681,284 $ 416,946
=========== ===========
5
Supplemental disclosures of cash flows information and non-cash investing and
financing activities:
For the nine months ended March 31, 2004, the Company paid cash for interest
expenses of $75,056 (March 31, 2003-$245,912).
On December 15, 2003 the Company entered into an agreement with Top Eagle
Holdings, Ltd. ("Top Eagle") pursuant to which it paid Top Eagle $300,000 and
issued to Top Eagle a new convertible debenture in the principal amount of $1.2
million due December 15, 2004 in exchange for an outstanding convertible
debenture in the principal amount of $1.5 million held by Top Eagle. During the
nine months ended March 31, 2004 $212,013 of non-cash interest expenses was
recorded. Please refer to note 4 for more information.
During the nine months ended March 31, 2003, 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 $609,770 to the Company
for general operating and administrative expenses. On November 6, 2003, Orion
converted $600,000 of the short-term loan into the Company's common stock at
$0.50 per share.
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
6
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 nine
months ended March 31, 2004 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/A 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"), which was,
until April 5, 2004, a joint venture. The Company had an equity interest in TUC
of 57%, and its former joint venture partner, Tengtu China, owned the remaining
43%.
On September 15, 2003, the Company signed an agreement with the
beneficial owner of Tengtu China that allowed the Company to purchase the 43%
interest of Tengtu China in TUC for 30 million common shares of the Company. The
agreement also gives proxy control to the Company of a number of other entities
in China owned by Tengtu China's beneficial owner. The agreement was approved by
the Company's shareholders at the Company's annual shareholders meeting held on
January 20, 2004 and closed on April 5, 2004.
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. The interest in CBERC held by Tengtu China is currently in
the process of being transferred to TUC.
Tengtu China has sought to form joint ventures with various Chinese
provinces on behalf of TUC. One joint venture was formed in Shaanxi province and
three others were in the process of being organized when the Company changed its
focus away from this structure involving Local Broadband Education Resource
Centers ("LBERC") at the Provincial level. Originally, the Company planned to
establish a number of Provincial LBERCs which would connect to CBERC and contain
their own educational and other materials mandated by the Provinces.
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
with the smaller turn-key portals at the local level. This strategy has led to
the installation of twenty-four turn-key portals to date and has shifted the
Company's near term business priorities from establishing capital-intensive
Provincial LBERC joint ventures to district and county-level LBERCs using
turn-key portals.
Therefore, the current Provincial LBERC projects have been abandoned,
except for the Shaanxi LBERC which had already been operating. 6.6 million RMB
(approximately $800,000) invested in Shandong provincial LBERC has been returned
to the Company. As at the date of report, the Company was in the process of
taking the necessary steps for the return of the remaining 3.4 million RMB from
Shandong. A strategy for incorporating Provincial level LBERCs may be revisited
as the Chinese educational market matures.
Although TUC's equity interest in the LBERC joint ventures is
over 50%, it does not control the joint ventures due to participating rights
exercised by the minority interest holder in the management of the joint
ventures. The investment, 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, originally advanced $4,469,000
for the formation of CBERC and the LBERCs. The Company adjusted the long term
investment account by $800,000 for the nine months ended March 31, 2004 because
the Company received a refund of $800,000 (6.6 million RMB) from the Shandong
provincial LBERC, as discussed above. For the nine months ended March 31, 2004,
both CBERC and Shaanxi LBERC had limited operations which resulted in an equity
loss of $103,234. This loss reduced the investment at March 31, 2004 to
$3,492,279.
2. Due from Related Party
The Company had engaged Tengtu China, as its agent, to conduct all of
TUC's business. As agent, Tengtu China administered the daily operations of TUC:
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 at March 31, 2004:
7
Current Assets
Balance at June 30, 2003 $3,593,607
Money returned by Shandong LBERC
retained in Tengtu China 800,000
Fund Advance to Tengtu China 980,000
Profits from operations,
net of minority interest 1,238,173
----------
Due from Related Party $6,611,780
==========
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 March 31, 2004.
The totals of both current and long-term due from related party are
net of a reserve for collection of $951,690 and minority interest of $4,078,379.
3. SHORT-TERM DEBT
At March 31, 2004, short-term debt consisted of a $1,200,000
convertible debenture issued to Top Eagle Holdings, Ltd. ("Top Eagle") on
December 15, 2003 as described in Note 4. Orion , a significant shareholder of
the Company, which is owned by the Chairman of the Company's Board of Directors,
advanced $609,770 to the Company for general, operating and administrative
expenses during the nine months ended March 31, 2004. On November 6, 2003, Orion
converted $600,000 of such short-term loan into the Company's common stock at
$0.50 per share.
4. Convertible Debenture
On December 15, 2003 the Company entered into an agreement with Top
Eagle pursuant to which it paid Top Eagle $300,000 and issued to Top Eagle a new
convertible debenture in the principal amount of $1.2 million, due December 15,
2004, in exchange for an outstanding convertible debenture in the principal
amount of $1.5 million held by Top Eagle. The principal and accrued interest on
the new convertible debenture are convertible into the Company's common stock at
a conversion price which is 80% of the then market price of the Company's common
stock. The debenture further provides that up to $200,000 of the principal was
convertible into common stock at the rate of $.50 per share if such conversion
right was elected on or prior to January 31, 2004. However, no such election was
made.
The convertible debenture includes a "beneficial conversion feature",
which means that the loan can be converted into the Company's common stock at a
price lower than market price of the stock on the date the debenture was issued.
The Company recorded a discount of $346,417 against the face amount of the debt
to recognize the beneficial conversion feature. Of this amount, $166,417 was
amortized to interest expense; the remainder of the discount will be amortized
over the next nine months.
5. Related Party Transactions
During the nine months ended March 31, 2004, the Company incurred
consulting expenses of $308,553 from officers and directors of the Company.
Consulting expenses for the nine months ended March 31, 2003 were $306,711.
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 $132,470 of
deferred tax payable for the nine months ended March 31,2004, because Tengtu
United generated $1,766,272 in net income before income tax and minority
interest and it is in its third profitable tax year.
8
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.
8. Commitments and Contingencies
The Company has contracted with Agricultural Bank of China ("ABC") to
have ABC provide financing to eligible customers of the Company. ABC will
provide up to 80% of the contracted selling price of the Company to the
customer. TUC is to provide a guaranty to the bank for any financing provided.
As of March 31, 2004, ABC was reviewing its commitment in view of the
Restructuring transaction which closed on April 5, 2004 and the substitution of
TUC for Beijing Jiade Science and Technology Group Co. Ltd. as guarantor.
The Company believes that ABC will continue this commitment.
In January 2004, the Company's joint venture partner, Tengtu China,
defaulted on the repayment of a loan with a principal balance of approximately
RMB 17 million (approximately $2,054,000) with the Hua Xia Bank of China,
Chaoyang Branch. The bank agreed to extend the term for repayment of the loan
for six months in exchange for a payment of RMB 1 million (approximately
$121,000), which was advanced to Tengtu China by the Company, and a guarantee of
the loan from Tengtu United.
9. Presentation
Certain amounts in the March 31, 2003 financial statements have been
reclassified to conform to the March 31, 2004 presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
We are currently engaged, through Tengtu United, 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 the Central Broadband Education Resource Center
("CBERC") with a division of the Chinese Ministry of Education, the
National Center for Audio/Video Education. CBERC is an electronic
resource center 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 Local Broadband Education Resource Centers ("LBERCs")
through the 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.;
o sales of computer hardware and systems integration services to Chinese
schools; and
o the provision of information technology training to teachers.
While we have instructed Tengtu China to conduct all of Tengtu United's
business with all Chinese government entities in the past, Tengtu United is now
starting to deal directly with these entities and we plan to have all of our
business, with the exception of electronic publishing, and joint ventures such
as CBERC, run directly through Tengtu United. At the present time, Tengtu China,
as Tengtu United's agent, administers some of the daily operations of Tengtu
United, such as paying operating expenses, collecting receivables and remitting
net operating profits to Tengtu United.
9
RECENT BUSINESS DEVELOPMENTS
RESTRUCTURING
On January 20, 2004, our shareholders approved a Restructuring whereby
we acquired the 43% of Tengtu United that we did not already own, and all of the
net profits generated by its business, in exchange for 30 million shares or our
common stock. We closed the Restructuring on April 5, 2004, at which time all
conditions to closing other than the transfer of CBERC to Tengtu United were
met. We waived this condition because we have filed for the necessary approvals
for the CBERC transfer and believe that there is a high likelihood that it will
be accomplished by May 30, 2004.
On March 31, 2004, Tengtu announced that Tengtu United has signed
a General Framework Agreement for Cooperation (the Agreement) with Microsoft
(China) Co. Along with Microsoft (China) Co., we developed "Education Resource
for Office" which combines our Total Solution product with Miscrosoft's Office
2003. Education Resource for Office is an educational resource application
solution which contains educational resources which can be tailored by teachers
to meet their needs using Microsoft products. We are already promoting the
Education Resource for Office in the Western Rural School Project funded by the
PRC central and local governments and are in the process of introducing it to
the overall PRC Chinese K-12 education market.
As of May, 2004, the Agricultural Bank of China ("ABC") is reviewing
its commitment to provide up to 80% financing to our customers to purchase our
products. The review is being done because of the Restructuring and because of
Tengtu United was substituted as guarantor on the loans for Beijing Jiade
Science and Technology Group Co., Ltd., the previous guarantor. We believe ABC
will continue the commitment.
LIQUIDITY AND CAPITAL RESOURCES FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND
2003
Nine Months Ended March 31, 2004
For the nine months ended March 31, 2004, net cash used by operating
activities totaled $2,308,986. The net loss for the nine months was $179,935.
Other cash changes from operating activities include non-cash changes for
depreciation of $45,380, impaired assets write-off of $26,732, equity changes on
investment of $900,514, and non-cash interest expense of $212,013 related to the
Top Eagle convertible debenture.
Cash decreased as a result of the increase of $3,018,173 in due from
Tengtu China, which includes 57%, or 1,238,173 of the profit earned by Tengtu
United for the nine months ended March 31, 2004 and an $800,000 refund from
Shandong LBERC which represents a return of the capital put into the project by
the Company. We also advanced $980,000 to Tengtu China during this period. The
Company used cash received from a private placement to pay down $552,621 of its
accounts payable and other liabilities of $5,318. The decrease in prepaid
expenses of $59,220 and other receivable of $99,242, and increases in accrued
expenses of $24,953 and deferred income tax payable of $132,470 resulted in a
favorable change to operating cash flow.
We did not make any investments during the nine months ended March 31,
2004.
Net cash flow from financing activities was $2,704,069. It includes the
Orion short-term loan of $609,770, a principal payment of $300,000 for Top Eagle
convertible debenture, and $2,394,299 of cash received from a private placement
of units of common stock and common stock purchase warrants, as well as from the
exercise of warrants.
Cash on hand is not sufficient to meet our capital investment plans and
operating requirements for the next 12 months. We are planning to raise
additional funds to meet the cash requirements for our operations, including the
CBERC project. There can be no assurance that such financing will be available,
or if available, that it will be on acceptable terms.
Nine Months Ended March 31, 2003
For the nine months ended March 31, 2003, net cash used by operating
activities was $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, non-cash interest expense
of $69,905 related to convertible debenture, and an impaired assets write-off of
$2,662.
Cash was further decreased by the increase of $465,326 in due from
Tengtu China for working capital advances and net profits from operations, and
an increase of $189,587 in other receivables. The decrease in prepaid expenses
resulted in a favorable change of $177,947 to operating cash flow.
The Company used the cash raised in private placements, primarily in
the second quarter of fiscal 2003, to reduce its outstanding accounts payables.
For the nine months ended March 31, 2003, the accounts payable and accrued
expenses decreased $186,864, and $300,601. Cash was further reduced by the
decrease of due to related party consultants of $175,319, and other liabilities
of $3,795.
10
The Company did not make any investments for the nine months ended
March 31, 2003.
Net cash flow from financing activities was $2,148,754. It includes the
Orion short term loan of $753,716, $1,749,200 for payment of principal and
interest on another loan, and $3,144,238 of cash received from a private
placement of common shares.
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations at March 31, 2004 are as follows:
First, there is a $1,200,000 convertible debenture held by Top Eagle Holdings,
Ltd. due December 15, 2004.
Second, we are also 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 in January 2003. In January 2004,
a new agreement was reached between Tengtu Untied and CBERC, pursuant to which
the payment due in January, 2004 was extended by six months.
Third, we have guaranteed bank debt owed by Tengtu China. In January,
2004, our joint venture partner, Tengtu China, defaulted on the repayment of a
loan with a principal balance of approximately RMB 17 million (approximately
$2,054,000) with the Hua Xia Bank of China, Chaoyang Branch. The bank agreed to
extend the term for repayment of the loan for six months in exchange for a
payment of RMB 1 million (approximately $121,000) which was loaned to Tengtu
China by the Company, and a guarantee of the loan from Tengtu United. The loan
guarantee was made for the following reasons: the monies borrowed by Tengtu
China had been used for Tengtu United operations, Tengtu China's operations
consist solely of acting as agent in conducting Tengtu United's operations and a
lawsuit by the bank might result in Tengtu China's accounts being frozen up to
the amount of the loan, thereby impairing Tengtu China's ability to effectively
act as Tengtu United's agent.
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 NINE MONTHS ENDED MARCH 31, 2004 AND 2003
Revenues and Gross Margin
During the nine months ended March 31, 2004, we continued the
restructuring of our marketing strategy and product mix in China engaging the
marketplace on a district-by-district basis. Tengtu United sales for the nine
months ended March 31, 2004 and 2003 were $5,847,118 and $3,156,270
respectively. Please refer to the chart below for more information about
revenues and gross margin for the nine months ended March 31, 2004.
NINE MONTHS REVENUES AND GROSS MARGIN %
-------------------------------------- ----------------------------------------
March 31, 2004 March 31, 2003
-------------------------------------- ----------------------------------------
- -----------------------------------------
Product Revenues GM % Revenues GM %
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Software products $ 3,411,221 69% $ 827,564 57%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Satellite Equipment $ 1,434,316 30% $ 1,047,546 30%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Systems Integration Services $ 1,001,279 12% $ 700,021 26%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Other Products and Services $ 302 $ 581,139 39%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Total: $ 5,847,118 50% $ 3,156,270 42%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
11
"GM %" means the gross margin percentage in the table above.
General and Administrative Expenses
- -----------------------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$1,403,119 $1,728,071
For the nine months ended March 31, 2004, general and administrative
expenses were $1,403,119. The general and administrative expenses incurred by
Tengtu United amounted to $909,415. The major components of the remaining
balance were legal and professional fees of $322,700, public relations related
costs of $76,000, and $26,000 of expenses incurred by TIC Beijing. The expenses
were reduced by $324,952 compared to the same period of last year. The decrease
was primarily due to a reduction in legal fees of $139,000, accounting fees of
$33,000, travel related expenses of $31,000, salaries expenses of $84,000, and
TIC-Beijing related costs of $22,000.
Related Party Consultants
- -------------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$308,553 $306,711
Related party consultants' expense relates to staff that manages
technical developments and financing activities in North America and China.
Collection Provision
- --------------------
March 31, 2004 March 31, 2003
------------------- ----------------
$224,638 $95,332
The collection provision 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
- ---------------
March 31, 2004 March 31, 2003
----------------- ----------------
$696,208 $1,076,295
The majority of selling expenses relates to staff salary and travel
expenses in the marketing department in Tengtu China. The expense was $380,078
lower than the same period of last year. The cost saving is due to the closing
of several branch offices of Tengtu United.
Interest Income
- ---------------
March 31, 2004 March 31, 2003
----------------- ----------------
$ 933 $188,772
Interest income decreased by $187,839 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.
12
Interest Expense
- ----------------
March 31, 2004 March 31, 2003
----------------- ----------------
$291,108 $369,303
For the nine months ended March 31, 2004, interest expense principally
was the interest on the convertible debenture held by Top Eagle net of a
reversal of approximately $15,500 for over-accrual of interest expense for a
short-term loan. The interest expense for the nine months ended March 31, 2003
consisted of interest on the Top Eagle debenture, a loan from Quest Ventures,
Ltd. and the Ming Shen Bank loan in China.
The decrease in interest expense for the nine months ended March 31,
2004 is due to the repayment of the Ming Shen and Quest Ventures loans in the
year ended June 30, 2003.
Other Income
- ------------
March 31, 2004 March 31, 2003
----------------- ----------------
$826,538 $526,898
Other income is principally the credits for value added tax paid in
China for Tengtu United's sales. The Chinese government has tax incentive
policies for high technology enterprises such as Tengtu United. Tengtu United is
entitled to the credit of value added tax and the company applies for the tax
credit from the Chinese government on a monthly basis. The lower amount in 2003
was primarily due to the lower sales.
Income tax expense
- ------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$132,470 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 $132,470 of
deferred tax payable for the nine months ended March 31, 2004, because Tengtu
United generated $1,766,272 of net income before income tax and minority
interest and it is in its third profitable tax year.
Minority interest
- ----------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$702,535 0
Minority interest represents Tengtu China's 43% interest in the
operating profits of the joint venture company, Tengtu United.
OPERATING RESULTS FOR THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Revenues and Gross Margin
Tengtu United sales for the three months ended March 31, 2004 and 2003
were $1,652,146, and $1,913,585 respectively. Please refer to the chart below
for more information about revenues and gross margin for the quarter.
13
Q3 REVENUES AND GROSS MARGIN %
-------------------------------------- ----------------------------------------
March 31, 2004 March 31, 2003
-------------------------------------- ----------------------------------------
- -----------------------------------------
Product Revenues GM % Revenues GM %
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Software products $ 1,279,836 74% $ 720,264 59%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Satellite Equipment $ 128,135 49% $ 412,991 36%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Systems Integration Services $ 244,174 23% $ 700,021 26%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Other Products and Services $ - $ 80,309 49%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
Total: $ 1,652,145 64% $ 1,913,585 41%
- ----------------------------------------- ------------------------ ------------- ------------------------ ---------------
"GM %" means the gross margin percentage in the table above.
General and Administrative Expenses
- ------------------------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$445,637 $538,052
For the three months ended March 31, 2004, general and administrative
expenses were $445,637. The general and administrative expenses incurred by
Tengtu United amounted to $340,727. The major components of the remaining
balance were legal and professional fees of $46,500, and public relations
related costs of $34,500. The expenses decreased by $92,415 compared to the same
period of last year. The decrease was primarily due to a reduction in legal fees
of $28,000, accounting fees of $10,000, salaries expenses of $38,000, and
TIC-Beijing related costs of $13,000.
Related Party Consultants
- -------------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$120,004 $103,440
Related party consultants' expense relates to staff that manages
technical developments and financing activities in North America and China.
Tengtu United hired two more executives starting from October 2003.
Collection Provision
- --------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$64,315 $73,331
The expense represents an estimate of potential uncollectible accounts
associated with sales by Tengtu United. The lower amount in 2004 was primarily
due to the lower sales. This provision is included in due from related party.
Selling Expense
- ---------------
March 31, 2004 March 31, 2003
----------------- ----------------
$160,294 $279,805
14
The majority of selling expenses relates to staff salary and travel
expenses in the marketing department in Tengtu China. The expense was $119,511
lower than the same period of last year. The cost saving is due to the closing
of several branch offices in Tengtu United.
Interest Income
- ---------------
March 31, 2004 March 31, 2003
----------------- ----------------
$ 450 $62,863
Interest income decreased by $62,413 compared with the 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
- ----------------
March 31, 2004 March 31, 2003
----------------- ----------------
$94,597 $101,999
For the three months ended March 31, 2004, interest expense principally
consisted of the interest on the debenture held by Top Eagle Holdings, Ltd. of
$81,233. The interest expense for the three months ended March 31, 2003
consisted of interest on the Top Eagle debenture, and the Ming Shen Bank loan in
China.
Other Income
- ------------
March 31, 2004 March 31, 2003
----------------- ----------------
$231,723 $355,215
Other income is principally the credits for value added tax paid in
China for Tengtu United's sales. Chinese government has a tax incentive policy
for high technology enterprises. Tengtu United is entitled to the credit for
value added tax and the company applies for the tax credit on a monthly basis
from Chinese government. The lower amount in 2002 was primarily due to the lower
sales.
Income tax expense
- ------------------
March 31, 2004 March 31, 2003
----------------- ----------------
$46,992 0
We accrued $46,992 of deferred tax payable for the quarter ended March
31, 2004, because Tengtu United generated $626,566 of net income before income
tax and minority interest and it is in its third profitable tax year.
Minority interest
- -----------------
March 31, 2004 March 31, 2003
----------------- ----------------
$249,216 0
Minority interest represents Tengtu China's 43% interest in the
operating profits of the joint venture company, Tengtu United.
15
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. 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 our
administrative offices are located in Toronto, Canada. We grant credit to our
customers principally in China.
We perform certain credit evaluation procedures and do not require
collateral. We believe that credit risk is limited because we routinely assess
the financial strength of our customers, and based upon factors surrounding the
credit risk of our customers, establish an allowance for uncollectible accounts.
As a consequence, we believe that our accounts receivable credit risk exposure
beyond such allowances is limited.
We established an allowance for doubtful accounts of $951,690 at
March 31, 2004. We believe any credit risk beyond this amount would be
negligible.
At March 31, 2004, we had $681,284 of cash in banks which was
uninsured.
We do not require collateral or other securities to support
financial instruments that are subject to credit risk.
For the nine months ended March 31, 2004, more than 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 nine months ended March 31, 2004 and
2003, 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 681,284 681,284
-------- --------
Total $681,284 $681,284
======== ========
Accounts payable
United States $ 97,035 $ 97,035
Foreign 102,991 102,991
-------- --------
Total $200,026 $200,026
======== ========
16
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, we have no substantial exposure to
foreign currency exchange risk. Cash is maintained by each subsidiary in its
local currency.
Item 4. Controls and Procedures
On May 13, 2004, 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.
In connection with the Restructuring, during the quarter ended March
31, 2004, our management continued its work to establish a more effective
financial reporting system with Tengtu United. We continued to provide
additional training to the staff in the accounting department of Tengtu United
with respect to U.S. Generally Accepted Accounting Principles ("GAAP") and the
necessary steps to convert financial information into a format compatible with
U.S. GAAP. There have been no other significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to March 31, 2004.
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Securityholders
- -----------------------------------------------------------
An annual meeting of our shareholders was held on January 20, 2004. The
annual meeting was called to consider the following matters:
1. To ratify our acquisition of the remaining 43% of our joint venture in China,
Beijing Tengtu United Electronics Development Co., Ltd. that we do not own and
all of the net profits to be generated by it in the future, in exchange for the
issuance of 30,000,000 shares of our common stock to the estate of Fan Qi Zhang,
one of our Directors until his death on October 24, 2003 (the "Restructuring");
2. To elect William O.S. Ballard, Thomas Pladsen and John McBride as Directors,
to serve until the next Annual Meeting of Stockholders or until their successors
shall be elected and qualified; and
3. To ratify the Board of Directors' selection of Moore Stephens, P.C. as
independent public accountants for the fiscal year ending June 30, 2004.
As of the November 21, 2003 record date for the meeting, there were
75,556,239 shares of our common stock outstanding. A total of 29,112,310 shares
were present at the meeting in person or by proxy, constituting a quorum of at
least 33% of our outstanding common stock issued and entitled to vote at the
meeting.
Each of the above proposals was passed by an affirmative vote of a
majority of the shareholders present in person or by proxy. The voting for each
was as follows:
17
Proposal 1
For Against Abstain
- ---------- ----------- ----------
27,165,657 8,000 2,320
Proposal 2
William O.S Ballard
For Against Abstain
- ---------- ----------- ----------
26,691,977 0 0
Thomas Pladsen
For Against Abstain
- ---------- ----------- ----------
26,691,977 0 0
John McBride
For Against Abstain
- ---------- ----------- ----------
26,691,977 0 0
Proposal 3
For Against Abstain
- ---------- ----------- ----------
26,687,617 20 4320
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Index of Exhibits required by Item 601 of regulation S-K:
3.3 Certificate of Amendment to our Certificate of Incorporation dated
February 11, 2004 (filed as an exhibit to our registration statement on
Form S-1 (333-114445) and incorporated herein by reference);
10.15 Top Eagle Holdings, Ltd. Flooding Convertible Debenture due December 15,
2004 (filed as an exhibit to our registration statement on Form S-1
(333-114445) and incorporated herein by reference);
10.23 Letter agreement, dated December 15, 2003 between Top Eagle Holdings, Ltd.
and us regarding restructuring of convertible debenture (filed as an
exhibit to our registration statement on Form S-1 (333-114445) and
incorporated herein by reference);
10.38 Agreement dated February 12, 2004 between Tengtu International Corp. and
Zhou Liying (filed as an exhibit to our registration statement on Form S-1
(333-114445) and incorporated herein by reference);
10.39 English Translation of March 31, 2004 Cooperation Agreement between Tengtu
United and Microsoft (China) Co., Ltd. (filed as an exhibit to our
registration statement on Form S-1 (333-114445) and incorporated herein by
reference);
11.1 Statement re: Computation of Per Share Earnings for the Nine Months and
Three Months ended March 31, 2004;
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;
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
18
(b) Reports Filed on Form 8-K
On April 26, 2004, we filed a Form 8-K attaching a press release concerning,
among other things, the joint launch with Microsoft (China) of the Tengtu
Education Resource for Microsoft (R) Office at the Forum on Software for
Computerized Education in Beijing, China on April 23, 2004 and statements by
management concerning 18 month and five year sales targets for the product.
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 12, 2004 John Watt
----------------- -----------------------
(Name)
/s/ John Watt
-----------------------
(Signature)
President
-----------------------
(Title)
Date: May 12, 2004 Judy Ye
----------------- -----------------------
(Name)
/s/ Judy Ye
-----------------------
(Signature)
Chief Financial Officer
-----------------------
(Title)
19