UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 19, 2002
BIOGAN INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-31479 | 58-1832055 | |
(Commission File Number) | (IRS Employer Identification No.) |
150 KING STREET WEST, SUITE 2315, TORONTO, ONTARIO, CANADA M5H 1J9 |
(Address of Principal Executive Offices) (Zip Code) |
(416) 214-3270 |
(Registrant's telephone number, including area code) |
813 BERIAULT, SUITE 203, LONGEUEIL, QUEBEC, CANADA |
(Former Name or Former Address, if Changes Since Last Report) |
Item 7.
FINANCIAL STATEMENTS AND EXHIBITS
On August 2, 2002, Biogan International, Inc. filed a Current Report on Form 8-K with respect to the acquisition of certain assets of Hechi Industrial Co., Ltd., a Chinese mining corporation. Such Form 8-K was filed without the audited and pro forma financial information required by Rule 3-05 (a) and (b) and Article 11 of Regulation S-X. This Current Report on Form 8-K/A provides annual audited and pro forma financial information in compliance with the requirements of Rule 3-05 and Article 11 of Regulation S-X, however, the first quarter audited and pro forma financial information required by the regulation will be filed by amendment to this Form 8-K/A.
(a) Financial Statements of the Business Acquired
Audited combined annual financial statements of Guangxi Guanghe Metals Co., Ltd., Hechi copper refinery plant. Wuxu mining plant and 9% equity interest in Gaofeng Mining Co., Ltd. for the years ended December 31, 2001 and 2000.
(b) Pro Forma Financial Information
Biogan International, Inc. Pro Forma Condensed Consolidated Financial Information for the year ended December 31, 2001.
(c) Exhibits
| EXHIBIT NO. | EXHIBIT | ||
| 23 | Consent of Independent Auditors | ||
| 99 | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURE
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.
| BIOGAN INTERNATIONAL, INC. |
Date: October 1, 2002 | By: /s/ Gilles Laverdiere |
| Name: Gilles Laverdiere |
| Date: October 1, 2002 | By: /s/ Robert Doyle |
| Name: Robert Doyle | |
| Title: Chief Financial Officer | |
Independent Auditors' Report
KPMG-A(2002)AR No.0239
The Board of Directors and Cooperative Joint Venture Partners
Guangxi Guanghe Metals Co., Ltd.:
We have audited the accompanying combined balance sheets of Guangxi Guanghe Metals Co., Ltd., Hechi Copper Refinery Plant, Wuxu Mining Plant and 9% equity interest in GaoFeng Mining Co., Ltd., (collectively "Acquired Operations") as of December 31, 2001 and 2000, and the related combined statements of operations and comprehensive income/loss, investors' equity, and cash flows for the years then ended. These combined financial statements are the responsibility of the Acquired Operations' management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 2(a) regarding basis of preparation, Acquired Operations is part of a group of companies that are under common control of the shareholders of Acquired Operations. In preparing these combined financial statements certain expenses and revenues have been allocated among these commonly owned and controlled companies. Such allocations involve judgment. As a result, the combined financial statements of Acquired Operations may not necessarily be indicative of the results of operations that would have been achieved if the operations had been carried out by or as an independent entity.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Acquired Operations as of December 31, 2001 and 2000, and the combined results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
KPMG Huazhen
Beijing, People's Republic of China
April 19, 2002, except as to notes 1(b) and 16, which are as of July 19, 2002
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT , WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD
COMBINED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
| Note | 2001 | 2000 |
ASSETS | |||||
Cash |
| 7,752,903 | 3,541,903 | ||
Trade accounts receivable, less allowance for doubtful accounts of RMB 2,165,742 in 2001 and RMB 2,165,742 in 2000 | |||||
| 3 | 8,721,017 | 11,754,274 | |||
Short-term loans to a related party | 8 | 11,100,000 | 8,900,000 | ||
Amounts due from related parties | 8 | 3,808,122 | 1,270,720 | ||
Time deposits with maturity over | |||||
three months but within one year | 9(f) | - | 14,000,000 | ||
Prepayments to suppliers | 10 | 4,237,751 | 17,102,070 | ||
Prepaid expenses and other current assets |
| 873,280 | 945,985 | ||
Inventories | 4 | 20,320,462 | 20,729,223 | ||
Total current assets |
| 56,813,535 | 78,244,175 | ||
9% equity interest in GaoFeng | |||||
Mining Co., Ltd. | 5 | 6,860,000 | 6,860,000 | ||
Property, plant and equipment | |||||
Land use right | 6 | 887,640 | 877,300 | ||
Property, plant and buildings |
| 28,453,672 | 28,453,672 | ||
Machinery and equipment |
| 34,286,803 | 34,205,968 | ||
Office equipment |
| 34,485 | 24,799 | ||
Motor vehicles |
| 1,296,726 | 924,926 | ||
Less: Accumulated depreciation | |||||
| (18,432,658 | ) | (15,662,764 | ) | |
Net property, plant and equipment |
| 46,526,668 | 48,823,901 | ||
Deferred income taxes | 7 | - | - | ||
TOTAL ASSETS |
| 110,200,203 | 133,928,076 |
See accompanying notes to combined financial statements.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD
COMBINED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
| Note | 2001 | 2000 |
Liabilities and investors' equity | |||
Short-term borrowings | 9 | 32,460,000 | 38,500,000 |
Short-term loans from a related party | 8 | 16,440,000 | 18,680,000 |
Notes payable - |
| 9,500,000 | |
Trade accounts payable |
| 2,695,355 | 2,401,331 |
Income taxes payable | 7 | 1,525,354 | 1,525,354 |
Accrued expenses and other payables |
| 4,635,501 | 5,871,069 |
Total current liabilities | |||
| 57,756,210 | 76,477,754 | |
Total liabilities |
| 57,756,210 | 76,477,754 |
Commitments and Contingencies | 16 | - | - |
Total investors' equity |
| 52,443,993 | 57,450,322 |
total liabilities and investors' equity |
| 110,200,203 | 133,928,076 |
See accompanying notes to combined financial statements.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
COMBINED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME / LOSS
Years ended December 31, 2001 and 2000
(Expressed in Renminbi Yuan)
| Note | 2001 | 2000 |
Net sales |
| 91,520,938 |
| 98,455,319 | |
Cost of sales |
| 90,837,248 |
| 89,193,278 | |
Gross profit |
| 683,690 |
| 9,262,041 | |
Selling, general and administrative expenses |
| 4,664,266 |
| 6,995,309 | |
Operating (loss) / income |
| (3,980,576 | ) | 2,266,732 | |
Other income / (expenses) | |||||
Dividend income | 5 | 3,221,566 |
| 5,340,394 | |
Insurance compensation | 13 | 2,192,349 |
| - | |
Commission income |
| - |
| 2,165,742 | |
Interest income |
| 582,709 |
| 417,539 | |
Other income |
| 112,607 |
| 280,448 | |
Interest expenses |
| (3,763,870 | ) | (3,232,673 | ) |
Other expenses |
| (149,548 | ) | (45,199 | ) |
(Loss) / income before income taxes |
| (1,784,763 | ) | 7,192,983 | |
| |||||
Income taxes | 7 | - |
| 1,525,354 | |
Net (loss) / income |
| (1,784,763 | ) | 5,667,629 | |
Other comprehensive income |
| - |
| - | |
Comprehensive (loss) / income |
| (1,784,763 | ) | 5,667,629 |
See accompanying notes to combined financial statements.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO, LTD.
COMBINED STATEMENTS OF INVESTORS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
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| Total | ||||
| Paid-in | Contributed | Retained | investors' | ||||
| capital | capital | earnings | equity | ||||
| (Note 12(b)) | (Note 12(c)) | ||||||
BALANCE AT JANUARY 1, 2000 | - | 43,047,682 | - | 43,047,682 | ||||
Capital contributions from investor | 14,075,405 | - | - | 14,075,405 | ||||
Capital distributed to investor | - | (5,340,394 | ) | - | (5,340,394 | ) | ||
Net income | - | - | 5,667,629 | 5,667,629 | ||||
| ||||||||
BALANCE, AT DECEMBER 31, 2000 | 14,075,405 | 37,707,288 | 5,667,629 | 57,450,322 |
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| Total |
|
| Paid-in |
| Contributed |
| Retained |
| investors' |
|
| capital |
| capital |
| earnings |
| equity |
|
| (Note 12(b)) |
|
|
| (Note 12(c)) |
| ||
BALANCE AT JANUARY 1, 2001 | 14,075,405 |
| 37,707,288 |
| 5,667,629 |
| 57,450,322 |
|
Capital distributed to investor | - |
| (3,221,566 | ) | - |
| (3,221,566 | ) |
Net loss | - |
| - |
| (1,784,763 | ) | (1,784,763 | ) |
BALANCE, AT DECEMBER 31, 2001 | 14,075,405 |
| 34,485,722 |
| 3,882,866 |
| 52,443,993 |
|
See accompanying notes to combined financial statements.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
| 2001 | 2000 |
Cash flows from operating activities: |
|
|
| |
Net (loss) / income | (1,784,763 | ) | 5,667,629 | |
Adjustments to reconcile net (loss) / income to net cash | ||||
provided by operating activities: |
|
|
| |
Provision for bad and doubtful debts | - |
| 2,165,742 | |
Depreciation and amortization | 2,769,894 |
| 2,744,595 | |
Interest earned from time deposit | (368,761 | ) | (330,044 | ) |
Dividend income | (3,221,566 | ) | (5,340,394 | ) |
Changes in assets and liabilities: |
|
|
| |
Inventories | 408,761 |
| (9,445,822 | ) |
Trade accounts receivable, gross | 3,033,257 |
| 17,546,607 | |
Amounts due from related parties | (2,537,402 | ) | (1,270,720 | ) |
Prepayments to suppliers | 12,864,319 |
| (7,929,801 | ) |
Prepaid expenses and other current assets | (257,339 | ) | 1,965,166 | |
Trade accounts payable | 294,024 |
| (5,282,382 | ) |
Notes payable | (9,500,000 | ) | 3,500,000 | |
Income taxes payable | - |
| 1,525,354 | |
Accrued expenses and other payables | (1,235,568 | ) | (28,401,210 | ) |
Net cash provided by / (used in) operating activities | 464,856 |
| (22,885,280 | ) |
Cash flows from investing activities: |
|
|
| |
Proceeds from withdrawal of time deposit | 14,000,000 |
| - | |
Proceeds from interest earned from time deposit | 698,805 |
| - | |
Short-term loans to a related party | (2,200,000 | ) | (2,900,000 | ) |
Capital expenditures | (472,661 | ) | (462,251 | ) |
Cash paid for time deposit | - |
| (14,000,000 | ) |
Net cash provided by / (used in) investing activities | 12,026,144 |
| (17,362,251 | ) |
See accompanying notes to combined financial statements.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
2001 | 2000 |
| ||||
Cash flows from financing activities: | ||||
Proceeds from capital contributions from investors | - | 14,075,405 | ||
Proceeds from short-term borrowings | - | 29,000,000 | ||
Repayment of short-term loans | (6,040,000 | ) | - | |
Repayment of short-term loans from a related party | (2,240,000 | ) | (1,000,000 | ) |
Net cash (used in) / provided by financing activities | (8,280,000 | ) | 42,075,405 |
|
Net increase in cash | 4,211,000 | 1,827,874 | ||
Cash at beginning of year | 3,541,903 |
| 1,714,029 |
|
Cash at end of year | 7,752,903 |
| 3,541,903 |
|
The Acquired Operations paid RMB 3,130,513 and RMB 3,076,390 for interest during the years ended December 31, 2001 and 2000, respectively. The Acquired Operations did not pay any income taxes or capitalize any interest during the years ended December 31, 2001 and 2000. There are no non-cash investing and financing activities during these two years.
Noncash Financing and Investing Activities
Dividend income of RMB 3,221,566 and RMB 5,340,394 recognized in the form of reduction in contributed capital in 2001 and 2000, respectively, as if the 9% equity interest in GaoFeng Mining Co., Ltd. had been in existence throughout the relevant periods.
See accompanying notes to combined financial statements.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT , WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
1 | BACKGROUND INFORMATION AND SUBSEQUENT EVENTS |
(a) | Background information |
| On June 8, 1998 Hechi Prefecture Mining Company ("HPMC"), a state-owned entity incorporated in July 1993 in Guangxi Zhuang Autonomous Region in the People's Republic of China (the "PRC"), and Hechi Industrial Company Limited ("HIL") a limited company in Guangxi Zhuang Autonomous Region of the PRC on June 9, 1998, signed an agreement to transfer certain assets from HPMC to HIL. In consideration, HPMC was granted 40,000,000 shares of stock of HIL and subsequently allocated the shares to 379 of its former employees, who then become the shareholders of HIL. The assets transferred were: |
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| Approvals were obtained from Hechi Prefecture Administration Office in Guangxi Zhuang Autonomous Region to transfer the assets to HIL. Pursuant to the approval letter dated July 24, 1998 issued by Hechi Prefecture State-owned Administration, the purchase consideration for these net assets was deemed to be RMB 126 million which the former employees are required to pay the purchase consideration. Pursuant to a confirmation letter dated June 30, 2000 issued by Hechi Prefecture Finance Bureau, the local government agreed that it will not repossess the assets within 15 years even if the individual shareholders do not pay the RMB 126 million purchase price. |
| Biogan International Inc. ("Biogan") is a limited liability company incorporated in the State of Delaware of the United States and is publicly traded on the Over The Counter Market in the Unites States of America. |
| Guangxi Guanghe Metals Co., Ltd. ("GGMC") a co-operative joint venture between HIL and Biogan, was established in the PRC on February 18, 2000 and has been granted an operating period of 30 years. The total investment of GGMC is U.S.$ 25 million and registered capital is U.S.$ 10 million, of which HIL shall contribute U.S.$ 0.8 million and Biogan shall contribute U.S.$ 9.2 million. |
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT , WUXU MINING PLANT AND 9% EQUITY INTEREST
IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
1 BACKGROUND INFORMATION AND SUBSEQUENT EVENTS (continued)
(b) Subsequent events
In accordance with the Joint Venture Contract dated July 19, 2002 signed among GGMC, HIL and Biogan (BVI) International Inc., Biogan has agreed to assign its interest in GGMC to Biogan (BVI) International, Inc., a limited liability company organized and existing under the laws of British Virgin Islands. The Former Cooperative Joint Venture Contract dated January 27, 2000 shall be amended and replaced by this Contract. Biogan (BVI) International, Inc. is also obligated to make an additional capital contribution to GGMC of U.S.$ 7.3 million cash and intellectual property rights and trademark rights amounting to U.S.$0.2 million by September 1, 2003.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICE |
(a) Basis of preparation
The combined financial statements for the years ended December 31, 2001 and 2000 (the "relevant periods") reflect the combined financial position, results of operations and cash flows of businesses of GGMC, Copper Refinery, Wuxu Mine and GaoFeng Investment. These combined financial statements have been prepared using the predecessor's historical cost basis as if the Acquired Operations had been in existence throughout the relevant period and as if the business activities of GGMC, Copper Refinery, Wuxu Mine and GaoFeng Investment had been conducted throughout the relevant periods. Predecessor's historical cost represents the costs that HPMC incurred in purchasing the relevant assets and not the RMB 126 million referred to in note 1.
Prior to the formation of the Acquired Operations, the Acquired Operations' historical financial statements include unallocated general and administrative expenses. These expenses were allocated to the Acquired Operations by using specific identification method for those periods, except for salaries and welfare for administrative staff, depreciation of office building and motor vehicles, which specific identification method was not practical, were allocated based on actual working hours, floor area and actual usage, respectively, as disclosed in note 8. Management believes that the method of allocation of general and administrative expenses are reasonable and that the combined financial statements include all revenues and costs directly and indirectly related to the Acquired Operations' operations for the relevant periods.
The accounting policies adopted in the preparation of the accompanying financial statements are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP").
The combined financial statements include the accounts of GGMC, Copper Refinery, Wuxu Mine and GaoFeng Investment. All significant inter-company balances and transactions have been eliminated.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICE (continued)
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
(c) Translation of foreign currency
The Acquired Operations adopts Reminbi Yuan ("RMB"), the national currency of the PRC, as its functional currency, since it is the currency that the Acquired Operations conducts its primary economic activities. Foreign currency transactions during the year are translated into RMB at the applicable rates of exchange quoted by the People's Bank of China ("PBOC rates") prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into Renminbi at the applicable PBOC rates at the balance sheet date.
(d) Cash
The Acquired Operations considers cash on hand and deposits in banks and money market accounts with matures less than 3 months to be cash.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average method for all inventories.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization.
The depreciation of property, plant and equipment is calculated on a straight-line basis over the anticipated useful life of the asset less 5% residual value. The respective anticipated useful lives of property, plant and equipment are as follows:
Property and plant | 20-30 years |
Machinery and equipment | 15-20 years |
Office equipment | 5 years |
Motor vehicles | 5 years |
Land use rights are amortized on a straight-line basis over 30 years.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFEN MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICE (continued)
(g) GaoFeng Investment
GaoFeng Investment is held as a long-term investment and accounted for using cost method. Dividends are recognized as income when declared. Loss in value in the investment which is other than a temporary decline would be recognized in the statement of operations when incurred.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Acquired Operations accounts for long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying value of the asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the asset exceeds the fair value of the assets. An asset to be disposed of is reported at the lower of the carrying value or fair value, less costs to sell.(i) Fair Value of Financial Instruments
Financial assets of the Acquired Operations include cash, trade accounts receivable, short-term loans to a related party, amounts due from related parties, prepayments to suppliers, time deposits, prepaid expenses and other current assets. Financial liabilities of the Acquired Operations include short-term borrowings, short-term loans from a related party, trade accounts payable, notes payable and other payables and accrued expenses. The Acquired Operations does not hold or issue financial instruments for trading purposes. The Acquired Operations had no positions in derivative contracts as of December 31, 2001 and 2000 respectively.The fair values of all financial instruments approximate their carrying amounts due to the nature or short-term maturity of these instruments.
(j) Income TaxesThe Acquired Operations utilizes the liability method to determine the provision for income taxes. Deferred tax assets are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates when the differences are expected to be reversed.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICE (continued)
(k) Revenue Recognition
Revenue from the sale of goods and rendering of services are recognized when products are shipped or services are rendered and the significant risks and rewards of ownership have been transferred to the customer.
(l) Retirement BenefitsThe Contributions payable under the Acquired Operations' retirement plans are charged to the combined statements of operation according to the contribution determined by the plans.
(m) Recently Issued Accounting StandardsIn June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 142 after its adoption.
The Acquired Operations adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 is adopted in full, are not amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized and tested for impairment prior to the full adoption of SFAS No. 142.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
Upon adoption of SFAS No. 142, the Acquired Operations is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. The Acquired Operations will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Acquired Operations will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
| 3 | TRADE ACCOUNTS RECEIVABLE, NET |
| |||
2001 | 2000 | ||||
| Trade accounts receivable, gross | 10,886,759 | 13,920,016 | |||
Less: Provisions for doubtful accounts | (2,165,742 | ) | (2,165,742 | ) | |
| Trade accounts receivable, net | 8,721,017 | 11,754,274 | |||
All of the trade accounts receivable are current with aging less than one year. |
| 4 | INVENTORIES | |||
2001 | 2000 | |||
| Raw materials | 12,885,358 | 10,772,465 | ||
Work-in-progress | 2,789,570 | 4,844,179 | ||
Finished goods | 2,688,058 | 3,503,946 | ||
| Low value consumables | 1,957,476 | 1,608,633 | ||
| 20,320,462 | 20,729,223 | |||
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
| 5 | GAOFENG INVESTMENT | |||
2001 | 2000 | |||
| GaoFeng Investment, at cost | 6,860,000 | 6,860,000 | ||
This investment represents a 9% of the equity interest in GaoFeng Mining Company Limited ("GMCL"). GMCL is an operating polymetallic mine and ore processing facility located in Nandan County, Guangxi Zhuang Autonomous Region in the PRC. GMCL obtained its renewed Mining Permit from the Ministry of Land and Natural Resources on May 26, 2000. The Permit allows GMCL to mine an area 3.6517 kilometers² for a period of 17 years ending May 2017. The mineral deposits, primarily including tin, lead, zinc and antimony, on the property are currently being mined using underground mining methods. | ||||
GMCL is incorporated as a limited liability company by the following four shareholders: | ||||
Shareholders | Percentage | Number of representatives of the board of directors | ||
| HuaXi Group Company | 51% | 5 | ||
| Guangxi Develop&Investment Co., Ltd. | 20% | 2 | ||
| NanXing Company Limited | 20% | 2 | ||
| HIL | 9% | 1 |
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST
IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
| 5 | GAOFENG INVESTMENT (continued) |
The following financial information of GMCL is prepared under generally accepted accounting principles in the PRC and has been extracted from the December 31, 2001 and 2000 financial statements. The following summary financial information are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the PRC and are not be suitable for any purpose other than for statutory reporting. |
As of December 31 | |||||
2001 | 2000 | ||||
(unaudited) | (unaudited) | ||||
Current assets | 200,702,995 | 249,315,772 | |||
Total assets | 383,679,696 | 447,645,641 | |||
| Current liabilities | 201,432,590 | 278,206,575 | |||
| Total liabilities | 240,548,179 | 311,846,407 | |||
For the year ended December 31 | |||||
2001 | 2000 | ||||
(unaudited) | (unaudited) | ||||
| Sales | 276,318,563 | 334,285,071 | |||
| Cost of sales | 178,907,369 | 172,272,305 | |||
| Gross margin | 97,411,194 | 162,012,766 | |||
Selling, general and administrative expenses | 60,049,957 | 59,359,073 | |||
| Net income | 43,131,076 | 71,491,223 | |||
| In 1990, GMCL executed an agreement with Guangxi Zhuang Autonomous Region People's Government to sell 30% of its mineral products to the Nandan County Government at the market price at the time of the sale. | |
The Acquired Operations received dividend income of RMB 3,221,566 and RMB 5,340,394 during the years ended December 31, 2001 and 2000, respectively. Based on estimated future dividends to be received, no provision for diminution in value of the investment is necessary. |
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST
IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
| 6 | LAND USE RIGHT | |||
2001 | 2000 | |||
| Land use right, at cost | 887, 640 | 877,300 |
|
| 7 | TAXATION | |||
| Income tax | ||||
| The income tax rate applicable to the Acquired Operations is 33%. | ||||
Income tax attributable to income consists of: | ||||
2001 | 2000 | |||
PRC income taxes - 1,525,354 | - | 1,525,354 | ||
Deferred income tax (benefit) expense | - | - | ||
- | 1,525,354 |
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
| 7 | TAXATION (continued) | |||||
The income tax reconciliation consists of: | ||||||
| 2001 | 2000 | |||||
(Loss) / income before tax | (1,784,763 | ) | 7,192,983 | |||
Increase (reduction) in income taxes resulting from: | ||||||
Non-deductible provision for bad and doubtful | - | 2,165,742 | ||||
Non-taxable dividends received from investment | (3,221,566 | ) | (5,340,394 | ) | ||
Others | 496,050 | 603,953 | ||||
Taxable (loss) / income | (4,510,279 | ) | 4,622,284 | |||
| - | 1,525,354 |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2001 and 2000 are presented below. | |
| Deferred tax assets: | ||||||
| 2001 | 2000 | ||||
Provision for bad and doubtful trade accounts receivable | - | 714,695 | ||||
Net operating loss carryforwards | 1,488,392 |
| - | |||
Write-off of other receivable | 16,988 | 36,543 | ||||
Total deferred tax assets | 1,505,380 | 751,238 | ||||
| Valuation allowance | (1,505,380 | ) | (751,238 | ) | ||
Deferred tax asset, net of valuation allowance | - | - |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income and tax planning in making these assessments. |
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
8 | RELATED PARTIES TRANSACTIONS |
|
| Relationship with the Acquired Operations |
|
| Name of related parties | Relationship with the Acquired Operations |
| HIL | Chinese investor with 8% share holding |
| Biogan | Foreign investor with 92% share holding |
|
|
|
| Short-term loans to and from a related party as of December 31, 2001 and 2000 are summarized as: | ||
Interest rate | 2001 | 2000 | |||
Short-term loans to a related party -- HIL | 6.70% | 5,100,000 | 2,900,000 | ||
Non interest bearing | 6,000,000 | 6,000,000 | |||
11,100,000 | 8,900,000 | ||||
Short-term loans from a related party -- HIL | 7.56% | 13,000,000 | 13,100,000 | ||
7.20% | 2,780,000 | 3,180,000 | |||
18.00% | - | 2,400,000 | |||
Non interest bearing | 660,000 | - | |||
16,440,000 | 18,680,000 | ||||
| All loans to and from related party are unsecured and payable on demand. | |||||
Amounts due from related parties as of December 31, 2001 and 2000 are summarized as: | |||||
| 2001 | 2000 | Note | ||||
Amounts due from related parties | ||||||
-- HIL | 3,131,539 | 1,111,670 | (i) | |||
-- Biogan | 676,583 | 159,050 | (ii) | |||
| 3,808,122 | 1,270,720 | |||||
Note | ||||||
| (i) | Amount due from HIL mainly represents trading balances with HIL, interest payable to HIL and expenses paid or received by HIL on behalf of the Acquired Operations. | |||||
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND 9% EQUITY INTEREST IN
GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Expressed in Renminbi Yuan)
8 RELATED PARTIES TRANSACTIONS (continued)
| (ii) | Amount due from Biogan mainly represents professional expenses paid by the Acquired Operations on behalf of Biogan. |
Material transactions with related parties during 2001 and 2000 are summarized as follows:
2001 | 2000 | ||||||
| sales | interest | interest |
| sales | interest | interest |
| HIL | 1,326,197 | 1,502,805 | 167,500 | 3,550,072 | 2,337,047 | - | |
Details of expenses allocated from HIL to the Acquired Operations during the years ended December 31, 2001 and 2000 are as follows:
| Basis of allocation | 2001 | 2000 | |
| General and administrative expenses: | |||
| -Salaries and staff welfare | Actual working hours | 33,571 | 34,083 |
| -Depreciation: | |||
| -Office building | Floor area | 71,628 | 71,628 |
| -Motor Vehicles | Actual usage | 195,553 | 185,725 |
| 300,752 | 291,436 | ||
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
9 SHORT-TERM BORROWINGS
Short-term borrowings as of December 31, 2001 and 2000 are as follows:
2001 | ||||||
Lender | Drawdown date | Due date | Interest rate | Amount | Note | |
RMB | USD | |||||
| Bank of China (USD loan) | April 20, 2001 | February 20, 2002 | 7.248% | $1,000,000 | (a) | |
June 8, 2001 | February 26, 2002 | 7.248% | $1,000,000 | (a) | ||
| Bank of China (RMB loan) | May 25, 2001 | March 25, 2002 | 6.696% | 3,000,000 | (b) | |
July 4, 2001 | January 4, 2002 | 6.696% | 1,500,000 | (b) | ||
July 27, 2001 | January 27, 2002 | 6.696% | 2,000,000 | (c) | ||
August 31, 2001 | February 28, 2002 | 6.696% | 4,400,000 | (b) | ||
December 10, 2001 | June 10, 2002 | 6.696% | 2,000,000 | (b) | ||
| Finance Development Company of Hechi Finance Bureau | November 1, 1999 | November 30, 2000 | Interest free | 3,000,000 | (d) | |
| Total short-term borrowings by currency | 15,900,000 | $2,000,000 | ||||
| RMB equivalent | 32,460,000 | |||||
2000 | ||||||
| Bank of China) | December 26, 2000 | March 30, 2001 | 6.696% | 5,000,000 | (c) | |
| (RMB loan | December 29, 2000 | January 29, 2001 | 5.022% | 12,000,000 | (e) | |
October 9, 2000 | May 9, 2001 | 7.020% | 1,500,000 | (b) | ||
December 1, 2000 | April 1, 2001 | 6.696% | 2,000,000 | (b) | ||
November 13, 2000 | May 13, 2001 | 6.696% | 1,000,000 | (b) | ||
May 25, 2000 | May 25, 2001 | 6.435% | 7,000,000 | (f) | ||
August 31, 2000 | August 31, 2001 | 6.435% | 7,000,000 | (f) | ||
| Finance Development Company of Hechi Finance Bureau | November 1, 1999 | November 30, 2000 | Interest free | 3,000,000 | (d) | |
| Total short-term borrowings | 38,500,000 | |||||
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
9 SHORT-TERM BORROWINGS (continued)
(a) These loans are secured by the RMB 24,460,000 of land use right of HIL.
(b) These loans are secured by the RMB 34,590,000 of machinery and equipment of the Copper Refinery.
(c) These loans are secured by the RMB 7,540,000 of land use right of HIL.
(d) This loan is guaranteed by HIL. The Copper Refinery has failed to repay the loan on its due date, November 30, 2000 and is currently in default of the loan. According to the default provisions of the loan agreement, interest accrues during the default period at two times the agreed upon rate. However, the loan agreement does not state an interest rate. Management maintains that the interest rate is zero percent, and the Acquired Operations is currently in the process of negotiating with the lender and will repay the loan once the final amount is agreed upon. Accordingly, the Acquired Operations has not accrued any amounts for double interest payment since the event of default (See note 16).
(e) This loan is guaranteed by Nan Fang Chemical Refinery Plant ("Nanfang"), an unrelated company of the Acquired Operations. The Acquired Operations has not had any transaction with Nanfang during the years ended December 31, 2001 and 2000.
(f) These loans are secured by the time deposits of U.S.$ 1,700,000 held by the Company.
GUANGXI GUANGHE METALS CO., LTD.., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
10 PREPAYMENTS TO SUPPLIERS
2001 | 2000 | |
Debao Copper Mining Co., Ltd. | - | 11,592,201 |
Others | 4,237,751 | 5,509,869 |
| 4,237,751 | 17,102,070 |
The amount of prepayments to suppliers as of December 31, 2000 mainly represents lump-sum deposit of about RMB 12 million paid to the supplier in negotiating the long-term supply contract at the end of 2000, which was refunded to the Acquired Operations in 2001.
11 CONCENTRATION OF RISK
(a) Concentration of Credit risk
The carrying amounts of cash, time deposits, trade accounts receivable and other current assets, except for prepayments, represent the Acquired Operations' maximum exposure to credit risk in relation to financial assets.
The majority of the Acquired Operations' trade accounts receivable relate to sales of blister copper to Yinxian Dongqian Lake Metal Co., Ltd., a third party operated in mining and refining industry. The Acquired Operations performs ongoing credit evaluations of its customer's financial condition and generally does not require collateral on trade accounts receivable. The Acquired Operations maintains an allowance for doubtful accounts with the amount of RMB 2,165,742. Sales to Yinxian Dongqian Lake Metal Co., Ltd., represented approximately 8% and 10% of sales during the years ended December 31, 2001 and 2000, respectively and trade accounts receivable from this same customer represented approximately 49% and 64% of total trade accounts receivable as of December 31, 2001 and 2000, respectively.
Details of the short-term loans to a related party and amounts due from related parties are disclosed in note 8.
No other financial assets carry a significant exposure to credit risk.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9%EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
11 CONCENTRATION OF RISK (continued)
(b) Concentration of Economic risk
The Acquired Operations' operations may be adversely affected by significant political, economic, and social uncertainties in the PRC. In addition, the ability to negotiate and implement specific projects in a timely and favorable manner may be impacted by political considerations unrelated to or beyond the control of the Acquired Operations. Although the PRC government has been pursuing economic reform polices for the past 18 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered. There is also no guarantee that the PRC government's pursuit of economic reforms will be consistent or effective and as result, changes in the rate or method of taxation, reduction in tariff protection and other import restrictions, and changes in state policies affection the industries to which the Acquired Operations sells its products, may have a negative effect on its operation results and financial conditions.
(c) Concentration of Currency risk
Substantially all of the revenue-generating operations of the Acquired Operations are transacted in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchanges as quoted by the People's Bank of China. However, the unification of the exchange rate does not imply convertibility of RMB into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People's Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the People's Bank of China or other institutions requires submitting a payment application form together with suppliers' invoices, shipping documents and signed contract.
(d) Concentration of Business risk
The Acquired Operations conducts its principal operations in China and accordingly is subject to special considerations and significant risks not typically associated with investments in equity securities of the United States and Western European companies. These include risks associated with, among others, the political, economic and legal environment influence of the State Council over substantially all aspects of its operations and competition in the mining and refining industry.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
11 CONCENTRATION OF RISK (continued)
(e) Concentration of Interest rate risk
The interest rates and terms of repayment of short-term borrowings of the Acquired Operations are disclosed in Note 9.
(f) Concentration of Supply risk
The Acquired Operations' largest domestic supplier of copper concentrate is Debao Copper Mining Co., Ltd., whose products covered one third of the Copper Refinery's total purchases during the years ended December 31, 2001 and 2000, respectively.
12 REGISTERED CAPITAL, PAID-IN CAPITAL AND CONTRIBUTED CAPITAL
(a) The total investment called for under the terms of the cooperative joint venture contract is U.S.$ 25 million, of which the total amount of registered capital of the Acquired Operations shall be U.S.$ 10,000,000 as described below:
| 2001 and 2000 | ||
Percentage of equity | ||
| Required registered capital | U.S.$9,200,000 | 92% |
| Biogan | 800,000 | 8% |
| HIL | ||
| U.S.$10,000,000 | 100% | |
The profit sharing ratio between Biogan and HIL is 95% and 5%, respectively.
According to the Cooperative Joint Venture Contract for GGMC dated January 27, 2000, HIL shall make all its capital contribution in kind in a lump sum to GGMC after GGMC has been issued its business license, while Biogan shall make its capital contribution in four installments of U.S.$ 0.2 million made once GGMC's business license being issued, U.S.$ 0.3 million made before or on February 20, 2000, U.S.$ 1.5 million made within 3 months of issuance of the Business License and U.S.$ 7 million made within 18 months of issuance of the Business License. As of December 31, 2001, HIL has not made its contribution to GGMC while Biogan has contributed U.S.$ 1.7 million.
GGMC obtained its approval certificate from Hechi Foreign Trade and Economic Co-operation Administration of the PRC on February 16, 2000, and the business license on February 18, 2000 issued by the State Administration of Industry and Commerce of the PRC.
GUANGXI GUANGHE METALS CO., ltd., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
12 REGISTERED CAPITAL, PAID-IN CAPITAL AND CONTRIBUTED CAPITAL (continued)
(b) As of December 31, 2001 and 2000, Biogan has contributed cash totaling U.S.$1,700,000 into the Acquired Operations. The Contribution schedules are presented below:
| Date | Amount | |
| |||
First contribution | April 17, 2000 | U.S.$ 850,000 | |
Second contribution | August 22, 2000 | 850,000 | |
|
| U.S.$ 1,700,000 | |
RMB equivalent |
| 14,075,405 |
Hechi Huaxin Certified Public Accountants has verified the contributions and issued Capital Verification Report on May 10, 2000 and June 28, 2001, respectively.
(c) Capital contributions from investor represent capital contributed by HIL in Copper Refinery and Wuxu Mine before January 1, 2000.
13 INSURANCE COMPENSATION
The Copper Refinery received insurance proceeds in October 2001 from its insurance company, as compensation for equipment destroyed in a fire that occurred at the Copper Refinery during 1996. Due to the uncertainty related to the collection of the insurance claim, a loss was recognized in 1996 when the accident occurred.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECMEBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
14 SEGMENT INFORMATION
The Acquired Operations manages and evaluates its operations in reportable segments as follows:
GGMC, the corporate headquarters, is mainly engaged in overall management of the Acquired Operations and conducted commercial business in the PRC. It will hold the GaoFeng Investment which represents ownership interests in a mining and concentrating company, incorporated in Guangxi Zhuang Autonomous Region of the PRC and owns the mining right to a non-ferrous metal and mineral reserve in the same location. HIL currently holds the 9% equity interest in GMCL.
The Copper Refinery is mainly engaged in the producing of blister copper. All customers of the Copper Refinery are local copper refinery plants located in the PRC. Major suppliers of the Copper Refinery are local copper factories located in the PRC.
The Wuxu Mine is mainly engaged in processing of zinc powder, lead and antimony. All sales were conducted with local refinery companies. Major suppliers are the local mining companies located in the PRC.
The segments are determined primarily because the Acquired Operations manages their production separately, distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics. In view of the fact that the Acquired Operations operates only in the PRC, no geographical segment information is presented.
The Acquired Operations evaluates the performance and allocates resources to its operating segments on an operating income basis. The accounting policies of the Acquired Operations' segments are the same as those described in note 2. The dividend income, income taxes and corporate administrative costs and assets are not allocated to the operating segments, but instead, are recorded in corporate headquarters directly. Summarized financial information concerning the Acquired Operations' reportable segments as of and for the years ended December 31, 2001 and 2000 are shown in the following table:
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED 31, 2001 and 2000
(Expressed in Renminbi Yuan)
14 SEGMENT INFORMATION (continued)
| |||||||
| Copper | Wuxu | ||||||
| GGMC | Refinery | Mine | Total | ||||
December 31, 2001 | |||||||
| Net sales to external customers | - | 81,405,753 | 10,115,185 | 91,520,938 | |||
| Pre-tax operating losses | 2,100,426 | (3,064,748 | ) | (820,441 | ) | (1,784,763 | ) |
| Net assets | 17,445,283 | 32,517,104 | 2,481,606 | 52,443,993 | |||
| Total assets | 19,633,988 | 85,095,179 | 5,471,036 | 110,200,203 | |||
| Interest income | 371,575 | 210,071 | 1,063 | 582,709 | |||
| Interest expenses | 521,004 | 3,178,036 | 64,830 | 3,763,870 | |||
| Depreciation and amortization | 2,609 | 2,653,005 | 114,280 | 2,769,894 | |||
| Income taxes | - | - | - | - | |||
| Capital expenditures | 1,200 | 262,835 | 208,626 | 472,661 | |||
December 31, 2000 | |||||||
| Net sales to external customers | 10,737,989 | 75,386,391 | 12,330,939 | 98,455,319 | |||
| Pre-tax operating earnings | 4,496,766 | 2,666,185 | 30,032 | 7,192,983 | |||
| Net assets | 18,566,423 | 35,581,852 | 3,302,047 | 57,450,322 | |||
| Total assets | 34,237,088 | 75,634,935 | 24,306,053 | 134,178,076 | |||
| Interest income | 361,502 | 54,593 | 1,444 | 417,539 | |||
| Interest expenses | 402,903 | 2,825,050 | 4,720 | 3,232,673 | |||
| Depreciation and amortization | 427 | 2,619,365 | 124,803 | 2,744,595 | |||
| Income taxes | 1,525,354 | - | - | 1,525,354 | |||
| Capital expenditures | 12,800 | 449,452 | - | 462,252 |
Reconciling information between reportable segments and the Acquired Operations' combined financial totals for the years December 31, 2001 and 2000 are shown in the following table:
| Assets | December 31 | |
| 2001 | 2000 | |
| Total assets for reportable segments | 110,200,203 | 134,178,076 |
| Elimination of receivables between segments | - | (250,000) |
| Total assets | 110,200,203 | 133,928,076 |
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
15 RETIREMENT BENEFITS
As stipulated by the PRC regulations, the Acquired Operations participates in a defined contribution retirement plan for its employees which is organized and administered by the municipal government.
The Acquired Operations is required to make annual contributions to the retirement plans, equal to 20% of the basic salaries of its employees. The Acquired Operations has no other material obligation for the payment of retirement benefits beyond the annual contributions described above. The Acquired Operations' contributions for the years ended December 31, 2001 and 2000 were RMB 325,098 and RMB 179,632, respectively.
Capital commitment
There were no material capital commitments existed as of December 31, 2001 and 2000 and for the two years then ended.
Contingent liabilities
The Acquired Operations has been advised by the legal counsel of Biogan and GGMC (the "Counselor") that, except for liabilities constituting or arising out of or relating to the business assumed by the Acquired Operations in the Reorganization, no other liabilities were assumed by the Acquired Operations, and the Acquired Operations is not jointly and severally liable for other debts and obligations incurred by HIL prior to the Reorganization.
As described in note 9(d), the Copper Refinery has failed to repay the loan on its due date and is currently in default of the loan. The Counselor stated in its legal letter to GGMC that according to the default payment clause of the loan agreement, GGMC may be liable for double interest payment as of the date of breach. However, management maintains that no interest will accrue nor will any penalties be assessed. As such, no additional liability for interest has been recorded in the financial statements since the event of default.
GUANGXI GUANGHE METALS CO., ltd., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT and 9% equity interest in Gaofeng Mining co., ltd.
NOTES TO COMBINED FINANCIAL STATEMENTS
years ended december 31, 2001 and 2000
(Expressed in Renminbi Yuan)
16 COMMITMENTS AND CONTINGENCIES (continued)
Environmental Remediation Costs
To date, the Acquired Operations has not incurred any significant expenditures for environmental remediation, is currently not involved in any environmental remediation, and has not accrued any amounts for environmental remediation relating to its operations. Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Acquired Operations. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect the Acquired Operations' ability to estimate the ultimate cost of remediation efforts.
These uncertainties include i) the exact nature and extent of the contamination at various sites including, but not limited to refining plant, land development areas, whether operating, closed or sold, ii) the extent of required cleanup efforts, iii) varying costs of alternative remediation strategies, iv) changes in environmental remediation requirements, and v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material.
Legal Proceedings
To date, the Acquired Operations has not involved in any claims and legal actions.
Priority claim of PRC government
As described in note 1, the Acquired Operations' business and operating assets were purchased by the former employees of HPMC, who are individually and collectively responsible to pay the purchase price of RMB 126 million within 15 years of the purchase date of July 1998. If the RMB 126 million has not been paid by July 2013, the PRC government has the right to repossess and reclaim the business sold and their operating assets.
GUANGXI GUANGHE METALS CO., LTD., HECHI COPPER
REFINERY PLANT, WUXU MINING PLANT AND
9% EQUITY INTEREST IN GAOFENG MINING CO., LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000
(Expressed in Renminbi Yuan)
16 COMMITMENTS AND CONTINGENCIES (continued)
Land use right
Without the final land use right certificates, the PRC government could legally repossess three pieces of land, as described in note 6, that the Wuxu Mine currently operates on.
The Counselor stated in its legal letter to GGMC that according to the agreement signed by HPMC and Hechi City Wuxu People's Government ("HCWPG") in May 2, 1993, for the establishment of Wuxu Mine, HPMC was to purchase from HCWPG 24,012 sq.m of land use right and pay the purchase price of RMB 612,000 within 8 years from 1993 while HCWPG agreed to facilitate the procedures of transferring the land use right certificates to HPMC. Non-provisional Land Use Right Certificate nor any document showing that GGMC has made full payment for the purchase price is available and therefore there is no legal evidence that GGMC owns or legally uses the land. Nevertheless, management believes that the final land use certificates will be obtained and the possibility of PRC government repossess the pieces of land is remote.
&nb sp;
BIOGAN INTERNATIONAL INC.
Pro Forma Condensed Consolidated Balance Sheet
(In thousands of U.S. dollars)
December 31, 2001
(Unaudited)
| GGMC | Biogan | Pro forma adjustments (note 2) | Pro forma consolidated |
| Assets | ||||||
| Current assets: | ||||||
| Cash | $ 937 | $ - | $ - | $ 937 | ||
| Trade accounts receivable | 1,054 | - | - | 1,054 | ||
| Amounts due from related parties | 1,801 | - | - | 1,801 | ||
| Prepayments to suppliers | 512 | - | 512 | |||
| Prepaid expenses and - | ||||||
| other assets | 106 | - | - | 106 | ||
| Inventories | 2,455 | - | - | 2,455 | ||
| 6,865 | - | - | 6,865 | |||
| Investment in Gaofeng Mining Co. Ltd. | 829 | 829 | ||||
| Property, plant and equipment | 5,621 | 6 | (6) | (a) | 5,621 | |
| Non-refundable deposits | - | 1,700 | 300 | (a) | ||
| (2,000 | )(c) | - | ||||
| $ 13,315 | $ 1,706 | $ (1,706 | ) | $ 13,315 |
LIABILITIES AND INVESTORS' EQUITY (DEFICIENCY)
| Current liabilities: | ||||||
| Short-term borrowings | $ 3,922 | $ 10 | $ 300 | (a) | $ 4,232 | |
| Due to related parties | 1,986 | 270 | - | 2,256 | ||
| Trade accounts payable | 326 | 500 | - | 826 | ||
| Income taxes payable | 184 | - | - | 184 | ||
| Other payables and accrued | ||||||
| expenses | 560 | 759 | - | 1,319 | ||
| 6,978 | 1,539 | 300 | 8,817 | |||
| Convertible debenture | - | 2,128 | 72 | (a) | 2,200 | |
| Non-controlling interest | - | - | 317 | (b) | 317 | |
| Investors' equity (deficiency) | 6,337 | (1,961 | ) | (2,000 | )(c) | |
| (2,039 | )(a) | |||||
| 1,961 | (a) | |||||
| (317 | )(b) | 1,981 | ||||
| $ 13,315 | $ 1,706 | $ (1,706) | $ 13,315 |
See accompanying notes to pro forma condensed consolidated financial statements.
BIOGAN INTERNATIONAL INC.
Pro Forma Condensed Consolidated Statement of Operations
(In thousands of U.S. dollars, except per share amounts)
Year ended December 31, 2001
(Unaudited)
| GGMC | Biogan | Pro forma adjustments | Pro forma consolidated | ||||
| (note 3) | |||||||
| Net sales | $ 11,057 | $ - | $ - | $ 11,057 | |||
| Cost of sales | 10,974 | - | - | 10,974 | |||
| Gross profit | 83 | - | - | 83 | |||
| Selling, general and | |||||||
| administrative expenses | 793 | 1,084 | - | 1,877 | |||
| Operating loss | (710 | ) | (1,084 | ) | - | (1,794 | ) |
| Other income (expense): | |||||||
| Dividend income | 389 | - | - | 389 | |||
| Insurance compensation | 265 | - | - | 265 | |||
| Interest income | 70 | - | - | 70 | |||
| Other income | 14 | - | - | 14 | |||
| Interest expense | (455 | ) | - | - | (455 | ) | |
| Other expenses | (18 | ) | (700 | ) | (718 | ) | |
| Non-controlling interest | - | - | (22) | (22) | |||
| Loss for the year | $ (445 | ) | $ (1,784 | ) | $ (22) | $ (2,251 | ) |
| Loss per share | (0.00 | ) | |||||
See See accompanying notes to pro forma condensed consolidated financial statements.
1. Basis of presentation:
The accompanying pro forma condensed consolidated balance sheet and statement of operations reflect the pro forma effect of the acquisition (the "Acquisition") of a 92% equity and 95% profits interest in Guangxi Guanghe Metals Co., Ltd. ("GGMC") by Biogan International Inc. ("Biogan") for a consideration of an additional cash payment of $300,000 (Biogan having already contributed $1,700,000), 16,800,000 common shares and 3,624,000 shares of Series B convertible preferred shares, which are convertible into, in the aggregate, 362,400,000 common shares following stockholder approval authorizing such increase in authorized capital. Biogan is also obligated to make an additional capital contribution to GGMC of $7.3 million by September 2003. As a result of the transaction, the former shareholders of GGMC will indirectly control 78.4% of the outstanding voting stock of Biogan and, as such, the transaction will be accounted for as a reverse takeover. However, since Biogan has no significant assets, other than a non-refundable deposit in relation to the acquisition of GGMC, the transaction is considered to be a capital transaction.
The pro forma condensed consolidated statement of operations assumes that the acquisition occurred at January 1, 2001. The pro forma condensed consolidated balance sheet assumes the acquisition occurred at December 31, 2001.
The pro forma condensed consolidated balance sheet and statement of operations have been prepared based on the audited financial statements of each of Biogan and GGMC for the year ended December 31, 2001. The accompanying pro forma condensed consolidated balance sheet and statement of operations should be read in conjunction with the consolidated financial statements of Biogan and GGMC, and the notes thereto.
The financial statements of Biogan are prepared in United States dollars. The financial statements of GGMC are prepared in Chinese Renminbi Yuan. For purposes of these pro forma condensed consolidated balance sheet and statement of operations, the balance sheet of GGMC has been translated into U.S. dollars at the exchange rate at December 31, 2001 and the condensed consolidated statement of operations has been translated at the average exchange rate for the U.S. dollars for the year ended December 31, 2001.
These pro forma condensed consolidated balance sheet and statement of operations are not necessarily indicative of the financial position or results of operations that would have been obtained if the acquisition had occurred on the dates assumed.
These pro forma condensed consolidated financial statements are based on information currently available. The accounting for the transaction, when completed, may differ based on information available at that time.
2. Pro forma condensed consolidated balance sheet:
The pro forma condensed consolidated balance sheet reflects the proposed acquisition as though it had occurred on December 31, 2001 and reflects the following:
(a) The acquisition of control of Biogan by the former shareholders of GGMC as a result of Biogan issuing 16,800,000 common shares and 3,624,000 Series B convertible preferred shares which are convertible into 362,400,000 common shares following stockholder approval authorizing such increase in authorized share capital and the payment of an additional $300,000. Since Biogan has no significant assets, other than a non-refundable deposit in relation to the acquisition of GGMC, the transaction is considered to be a capital transaction:
| (in thousands) | |
| Shareholders' deficiency of Biogan, December 31, 2001 | $ 1,961 |
| Fair value adjustments relating to: | |
| Property, plant and equipment | 6 |
| Convertible debentures | 72 |
| Adjusted shareholders' deficiency charged to investors equity | $ 2,039 |
(b) The 5% non-controlling interest in GGMC: | |
| Net assets of GGMC, December 31, 2001 | $ 6,337 |
| 5% thereof | 317 |
(c) To eliminate the $1,700,000 non-refundable deposit recorded by Biogan and additional payment of $300,000 on acquisition against GGMC's investors' equity.
3. Pro forma condensed consolidated statement of operations:
The pro forma condensed consolidated statement of operations reflects the proposed acquisition as though it had occurred on January 1, 2001 and reflects the loss per share with an adjusted outstanding number of common shares:
| Biogan weighted average shares outstanding | 89,437,432 |
| Common shares issued to GGMC | 16,800,000 |
| Common shares to be issued on stockholder approval | 362,400,000 |
| 468,637,432 |
EXHIBIT INDEX
EXHIBIT NO. | EXHIBIT | |
23 | Consent of Independent Auditors | |
99 | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
