SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): August 1, 2000
BIOGAN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-31479 58-1832055
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
7213 POTOMAC DRIVE
BOISE, IDAHO 83704
(Address of Principal Executive Offices)
(208) 376-8500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name or former address, if changed since last report.)
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
Effective as of January 27, 2000, Biogan International, Inc. (the
"Company") entered into a Cooperative Joint Venture Contract (the "Joint Venture
Contract") with Hechi Industrial Co., Ltd., a private mining company organized
under the laws of the People's Republic of China ("Hechi"), to provide for the
formation of a Chinese cooperative joint venture called Guangxi Guanghe Metals
Co., Ltd. (the "Joint Venture").
In connection with the formation of the Joint Venture, the Company and
Hechi executed an Asset Purchase Agreement on August 1, 2000, which agreement
was dated effective as of July 1, 2000 (the "Asset Purchase Agreement"). The
Asset Purchase Agreement provides for the acquisition by the Company of certain
of the assets and assumption of certain of the liabilities of Hechi in exchange
for the issuance to Hechi of an aggregate of 31,300 shares of Series A
Convertible Preferred Stock and 16,800,000 shares of Common Stock of the
Company, which shares were delivered to the shareholders of Hechi, consisting of
approximately 380 individuals, and certain related third parties. The assets
purchased and liabilities assumed from Hechi consist of a 9% interest in the
Gaofeng Mining Co., Ltd., a 70% interest in the Guizhou Louxia Coal Co., Ltd.,
and all of the assets and liabilities of six operating divisions of Hechi as
follows: the Hechi Copper Refinery, the Non-Ferrous Metals Trading Company, the
Wuxu Mine, the Transportation Company, the Coal Company, and the Stone
Electronic Information Services Company.
The Asset Purchase Agreement additionally sets forth the intent of the
parties that the Board of Directors of the Company be comprised of seven
members, three of whom have been proposed by Gilles LaVerdiere, the President
and Chief Executive Officer of the Company, and four of whom have been proposed
by Hechi. Mr. LaVerdiere and the shareholders of Hechi have agreed to vote their
shares of capital stock of the Company for a period of three years in favor of
the election of directors to effectuate this composition of the Board.
On August 1, 2000, the Company filed with the Delaware Secretary of
State an Amended Certificate of Designations of Series A Convertible Preferred
Stock which fixed, altered and amended the rights, preferences, privileges and
restrictions relating to the Series A Convertible Preferred Stock. Each share of
Series A Convertible Preferred Stock is convertible, at the option of the holder
at any time after September 30, 2000, into 12,000 shares of the Company's Common
Stock. The shares of Series A Convertible Preferred Stock and Common Stock were
issued by the Company upon the execution of the Asset Purchase Agreement on
August 1, 2000.
On October 12, 2000, 133,699,097 shares of the Company's Common Stock
were issued and outstanding (including 28,800,000 shares of Common Stock
currently being held in escrow as security for the Company's obligations under
its 8% Secured Convertible Debentures Due 2002), and 31,300 shares of Series A
Convertible Preferred Stock were issued and outstanding. As a result of the
transactions with Hechi, the shareholders of Hechi collectively beneficially
own approximately 12.6% of the issued and outstanding shares of Common Stock of
the Company as of October 12, 2000 and collectively own 100% of the issued and
outstanding shares of Series A Convertible Preferred Stock. On an as-converted
basis, such individuals beneficially own approximately 75% of the issued and
outstanding capital stock of the Company.
Consequently, the shareholders of Hechi collectively have sufficient
voting power to control the outcome of all corporate matters submitted to the
vote of the Company's stockholders. Those matters could include the election of
directors, changes in the size and composition of the Board of Directors (and,
thereby, the qualification and appointment of officers of the Company), and
mergers and other business combinations involving the Company. In addition,
through Hechi's control of the Board of Directors and collective voting power,
the shareholders of Hechi may be able to control certain decisions, including
decisions with respect to the Company's dividend policy, access to capital
(including borrowing from third-party lenders and the issuance of additional
equity securities), and the acquisition or disposition of assets by the Company.
In addition, the concentration of voting power could have the effect of delaying
or preventing a change in control of the Company and may affect the market price
of the Company's Common Stock.
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Pursuant to the terms of the Asset Purchase Agreement executed on
August 1, 2000, the Company acquired, effective as of July 1, 2000, certain of
the assets and assumed certain of the liabilities of Hechi consisting of a 9%
interest in the Gaofeng Mining Co., Ltd., a 70% interest in the Guizhou Louxia
Coal Co., Ltd., and all of the assets and liabilities of six operating divisions
of Hechi as follows: the Hechi Copper Refinery, the Non-Ferrous Metals Trading
Company, the Wuxu Mine, the Transportation Company, the Coal Company, and the
Stone Electronic Information Services Company. All of the assets relate to the
mining and refining operations of Hechi.
Hechi is a private mining company organized under the laws of the
People's Republic of China. Hechi engages in the mining, refining and trading of
base metal products in the Guangxi Zhuang Autonomous Region of China. The
Company intends to use the acquired assets for the same purposes for which they
were used by Hechi.
The purchase price for the acquisition consisted of the issuance of
31,300 shares of Series A Convertible Preferred Stock of the Company and
16,800,000 shares of Common Stock of the Company. In addition, in accordance
with the terms of the Joint Venture Contract and the Asset Purchase Agreement,
the Company transferred all of the assets acquired and liabilities assumed from
Hechi to the Joint Venture in exchange for a 95% interest in the profits and
loss of the Joint Venture, and a 92% interest in the remaining assets of the
Joint Venture upon any liquidation or dissolution of the Joint Venture.
The acquisition has been accounted for using the purchase method of
accounting. The purchase price was approximately $24 million. The acquisition
was funded through the issuance of the Company's Common Stock and Series A
Convertible Preferred Stock. In determining the purchase price for the assets
acquired and liabilities assumed from Hechi, the Company took into account the
value of companies of similar industry and size to Hechi, comparable
transactions and the market for such companies generally.
3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
The following financial statements of Hechi Industrial Co., Ltd. are
included in this Current Report:
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS OF HECHI INDUSTRIAL COMPANY LIMITED FOR THE YEAR ENDED DECEMBER 31,
1999, AND FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000
Report of Independent Certified Public Accountants 5
Consolidated Financial Statements
Consolidated Balance Sheets 6
Consolidated Statements of Operations 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 10
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS OF HECHI INDUSTRIAL COMPANY LIMITED FOR THE PERIOD FROM JUNE 9, 1998
(DATE OF INCORPORATION) TO DECEMBER 31, 1998, AND FOR THE YEAR ENDED DECEMBER
31, 1999
Report of Independent Certified Public Accountants 19
Consolidated Financial Statements
Consolidated Balance Sheets 20
Consolidated Statements of Operations 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 24
4
HECHI INDUSTRIAL COMPANY LIMITED
THE BOARD OF DIRECTORS AND SHAREHOLDERS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Hechi Industrial
Company Limited, incorporated in the People's Republic of China with limited
liability, as of December 31, 1999 and June 30, 2000, and the related
consolidated statements of operations and retained earnings and cash flows for
the year ended December 31, 1999 and for the period from January 1, 2000 to June
30, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hechi Industrial
Company Limited at December 31, 1999 and June 30, 2000 and the results of its
operations and retained earnings and its cash flows for the year ended December
31, 1999 and for the period from January 1, 2000 to June 30, 2000, in conformity
with generally accepted accounting principles in the United States of America.
LAM, KWOK, KWAN & CHENG C.P.A. LIMITED
Certified Public Accountants, Hong Kong
Auditor - Lam Sing Hung
Practising certificate number - P00961
Hong Kong
5 OCT 2000
H372/JL/651/649
5
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
NOTES June 30, 2000 December 31, 1999
----- ----------------- -----------------
US$ US$
ASSETS
CURRENT ASSETS
Cash 2,227,366.03 425,720.74
Accounts and other receivables D 19,622,548.74 15,214,684.70
Inventories E 619,880.64 2,499,678.97
TOTAL CURRENT ASSETS 22,469,795.41 18,140,084.41
OTHER ASSET
Long term investment F 9,886,077.60 9,886,077.60
FIXED ASSETS, NET G 12,329,386.58 12,602,576.92
----------------- -----------------
TOTAL ASSETS $ 44,685,259.59 $ 40,628,738.93
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bills payable 664,251.21 724,637.68
Accounts and other payables 14,198,055.15 12,914,940.31
Accrued expenses 16,056.37 22,527.26
Short-term loans H 4,962,560.39 3,452,898.55
Taxes payable 705,740.65 365,284.26
TOTAL CURRENT LIABILITIES 20,546,663.77 17,480,288.06
MINORITY INTEREST 12,961.07 1,534.34
SHAREHOLDERS' EQUITY
Paid up capital 1,735,132.85 1,735,132.85
Retirement reserves K 22,390,501.90 21,411,783.68
TOTAL SHAREHOLDERS' EQUITY 24,125,634.75 23,146,916.53
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,685,259.59 $ 40,628,738.93
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
6
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------
Six months ended Year ended
NOTES June 30, 2000 December 31, 1999
----- ----------------- -----------------
US$ US$
REVENUE
Net sales 10,227,443.15 15,584,600.84
OPERATING COSTS AND EXPENSES
Cost of goods sold 8,964,349.83 13,547,097.40
Selling expenses 176,321.54 388,132.61
Administrative expenses 251,361.41 287,838.83
Start-up cost written off I - 192,454.65
9,392,032.78 14,415,523.49
----------------- -----------------
OPERATING INCOME 835,410.37 1,169,077.35
Interest income 1,834.41 50,986.41
Dividend received from investment 408,824.03 1,051,964.85
Other income 6,440.17 24,065.03
Interest expenses (155,616.16) (363,611.35)
Other expenses (3,549.86) (1,782.17)
----------------- -----------------
INCOME BEFORE INCOME TAX 1,093,342.96 1,930,700.12
Income tax J 114,624.74 286,021.49
----------------- -----------------
NET INCOME FOR THE PERIOD/YEAR $ 978,718.22 $ 1,644,678.63
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
7
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------
Six months ended Year ended
June 30, 2000 December 31, 1999
----------------- -----------------
US$ US$
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 978,718.22 1,644,678.63
Adjustments to reconcile net income to cash provided by/(used in)
operating activities:
Depreciation of fixed assets 318,172.01 634,233.79
Increase in accounts and other receivables (4,407,864.04) (1,648,391.52)
Decrease in inventories 1,879,798.33 292,262.94
Increase/(Decrease) in accounts and other payables 1,283,114.84 (2,466,582.81)
(Decrease)/Increase in bills payable (60,386.47) 724,637.68
Increase in taxes payable 340,456.39 385,509.34
Increase in minority interest 11,426.73 1,534.34
(Decrease)/Increase in accrued expenses (6,470.89) 12,046.58
Total net income adjustments (641,753.10) (2,064,749.66)
----------------- -----------------
Net cash provided by/(used in) operating activities 336,965.12 (420,071.03)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (44,981.67) (8,300.78)
----------------- -----------------
Net cash used in investing activities (44,981.67) (8,300.78)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term loans 1,509,661.84 797,101.45
----------------- -----------------
Net cash provided by financing activities 1,509,661.84 797,101.45
----------------- -----------------
NET INCREASE IN CASH 1,801,645.29 368,729.64
CASH AT BEGINNING OF PERIOD/YEAR 425,720.74 56,991.10
----------------- -----------------
CASH AT END OF PERIOD/YEAR $ 2,227,366.03 $ 425,720.74
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
8
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF DISCLOSURES OF CASH FLOW INFORMATION
Six months ended Year ended
June 30, 2000 December 31, 1999
----------------- -----------------
US$ US$
(a) CASH PAID DURING THE PERIOD/YEAR FOR
Interest paid $ 155,616.16 $ 363,611.35
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
9
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A - BACKGROUND
Hechi Industrial Company Limited (the "Company") is a company incorporated on
June 9, 1998 with limited liability in the People's Republic of China (the
"PRC") in accordance with the Chinese Laws and Regulations. It is principally
engaged in the copper refinery, production of sulfuric acid, securities trading
agent, trading of ores, coal and coke, ores processing, transportation services
and investments holding. The operations are mainly carried out in Guangxi
Province of the PRC.
The Company was founded by the staff of Hechi Prefecture Mining Company
("HPMC"), which is a state-owned enterprise. With the approval given by Hechi
Prefecture State-owned Assets Administration in 1998, the staff of HPMC were
allowed to acquire part of the assets and liabilities of the HPMC. The assets
and liabilities included the assets and the liabilities which were injected into
the Company and established the following branches in Guangxi province of the
PRC in accordance with the Chinese Laws and Regulations and 9% capital interest
of Gaofeng Mining Company Limited.
The particulars of the divisions are as follows:
Name Legal status
- ---- ------------
Hechi Copper Refinery Company Division
Non-ferrous Metals Trading Company Division
Coal Company Division
Wuxu Mine Company Division
Transportation Company Division
Stone Electronic Information Services Company Division
NOTE B - BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS
The financial statements were prepared in accordance with generally accepted
accounting principles in the United States of America ("US GAAP") as if those
standards had been applied consistently throughout the period/year. This basis
of accounting differs from that used in the statutory accounts of the Company,
which were prepared in accordance with the accounting principles and the
relevant financial regulations applicable to the PRC enterprises ("PRC GAAP").
The principal adjustments made to conform those statutory accounts under PRC
GAAP to US GAAP included in the following:
o Classification of investments;
o Recognition of sales, purchases and other income and expenses on an
accrual basis;
o Additional allowance for doubtful accounts;
o Additional provision for slow moving inventories;
o Capitalization of fixed assets; and
o Depreciation policies of fixed assets.
10
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS COMBINATIONS AND INVESTMENTS
For business combinations which have been accounted for under the purchase
method of accounting, the Company includes the results of operations of the
acquired business from the date of acquisition. Net assets of the company
acquired is recorded at their fair value at the date of acquisition. The excess
of the purchase price over the fair value of net assets acquired is included in
goodwill and other purchased intangibles in the accompanying consolidated
balance sheets.
Investment, for which the Company does not have the ability to exercise
significant influence, is accounted for under the cost method of accounting.
Dividends and other distributions of earnings from other investees, if any, are
included in income when declared. The Company periodically evaluates the
carrying value of its investment accounted for under the cost method of
accounting and as of June 30, 2000, such investment was recorded at the lower of
cost or estimated net realizable value.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. All significant intercompany balances and transactions have been
eliminated.
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are charged or credited to other comprehensive income. Revenue and
expenses are translated at average rates of exchange prevailing during the year.
Gains and losses on foreign currency transactions are included in other
expenses.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers all highly
liquid investments with maturities of three months or less at the time of
purchase and amounts repayable on demand by banks or advances from banks
repayable within three months or less from the date of advance to be cash
equivalents.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost, which
comprises materials, labor and manufacturing overhead costs that have been
incurred in bringing the inventories to their present location and condition; is
determined by the first-in, first-out method. Net realizable value is determined
as the estimated net selling price less all further costs of production and the
related cost of marketing, selling and distribution.
11
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE C - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
These assets are stated at cost less accumulated depreciation. The cost of an
asset comprises its purchase price and any directly attributable costs of
bringing the asset to its working condition and location for its intended use.
Subsequent expenditure relating to fixed asset is added to the carrying amount
of the assets if it can be demonstrated that such expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the use of
the assets. Depreciation is provided for in amounts sufficient to relate the
cost of depreciable assets to their estimated operating service lives, using the
straight-line method, after taking into account their estimated residual value
of 5% of cost, at the following rate per annum:
Buildings 2.375%
Mining structure 2.375% - 4.75%
Plant, machinery & equipment 4.75% - 19%
Transportation vehicles 4.75%
When the assets are sold or retired, any gain or loss resulting from their
disposal, being the difference between the net disposal proceeds and the
carrying amount of the assets, is included in the income statement accounts.
INCOME TAXES
Income taxes are provided on assessable profits of the accounts, which prepared
in accordance with the PRC GAAP, with the prevailing tax revenue rules.
Deferred taxes are provided on all significant temporary differences in
reporting certain transactions for financial accounting and tax purposes.
REVENUE RECOGNITION
a) Sales represent the invoiced value of goods supplied to customers, net
of discounts, returns, rebates and value-added tax. Sales are
recognized upon delivery of goods and transfer of title to customers.
b) Commission fee income is recognized as revenue when the agreed services
have been provided.
c) Dividend income is recognized when the company's right as a shareholder
to received payment is established.
d) Interest income is accrued on a time basis by reference to the
principal outstanding and at the interest rate applicable.
12
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE C - SUMMARY OF ACCOUNTING POLICIES (continued)
START-UP COSTS
Start-up costs represent preoperating or preopening costs incurred before
operations begin, as well as start-up costs incurred after operations begin, but
before normal capacity is reached. All start-up costs to be written off as and
when incurred.
USE OF ESTIMATES
In preparing the Company's financial statements in conformity with generally
accepted accounting principles, management are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE D - ACCOUNTS AND OTHER RECEIVABLES
June 30, 2000 December 31, 1999
----------------- -----------------
US$ US$
Trade receivable 13,337,384.38 7,908,447.47
Other receivable 7,929,625.10 8,950,640.80
21,267,009.48 16,859,088.27
Less : allowance for doubtful accounts (1,644,460.74) (1,644,403.57)
----------------- -----------------
$ 19,622,548.74 $ 15,214,684.70
================= =================
NOTE E - INVENTORIES
Inventories comprise of the following : June 30, 2000 December 31, 1999
----------------- -----------------
US$ US$
Raw materials 309,579.54 2,308,187.93
Finished goods 310,301.10 191,491.04
----------------- -----------------
$ 619,880.64 $ 2,499,678.97
================= =================
NOTE F - LONG TERM INVESTMENT
On June 9, 1998 the shareholders of the Company injected 9% capital interest of
Gaofeng Mining Company Limited into the Company. The profit sharing ratio of
this investment is 9%.
13
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------
NOTE G - FIXED ASSETS
The following is a summary of fixed assets
Useful lives June 30, 2000 December 31, 1999
------------ ----------------- -----------------
Year US$ US$
Buildings 40 4,550,064.23 4,550,064.23
Mining structure 20-40 339,064.39 339,064.39
Plant, machinery and equipment 5-20 7,861,995.99 7,817,014.32
Transportation vehicles 20 847,592.48 847,592.48
----------------- -----------------
13,598,717.09 13,553,735.42
Less : accumulated depreciation (1,269,330.51) (951,158.50)
----------------- -----------------
$ 12,329,386.58 $ 12,602,576.92
================= =================
NOTE H - SHORT-TERM LOANS
June 30, 2000 December 31, 1999
----------------- -----------------
US$ US$
Bank loans 4,237,922.71 2,728,260.87
Government loans 724,637.68 724,637.68
----------------- -----------------
$ 4,962,560.39 $ 3,452,898.55
================= =================
NOTE I - START-UP COSTS
Six months ended Year ended
June 30, 2000 December 31, 1999
----------------- -----------------
US$ US$
Amounts written off $ - $ 192,454.65
================= =================
The Accounting Standards Executive Committee has issued a Statement of Position
("SOP"), "Reporting on the Costs of Start-up Activities". The SOP requires all
start-up costs to be written off as and when incurred.
NOTE J - INCOME TAX
The income tax have been provided in accordance with the income tax regulations
of the PRC.
14
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------
NOTE K - RESERVES
PRC Statutory Retained
Share premium Reserves Earnings Total
----------------- ----------------- ----------------- -----------------
US$ US$ US$ US$
At January 1, 2000 18,408,000.46 450,567.48 2,553,215.74 21,411,783.68
Earning for the period from
January 1, 2000 to
June 30, 2000 - - 978,718.22 978,718.22
Transfer to PRC
statutory reserves - 146,807.73 (146,807.73) -
----------------- ----------------- ----------------- -----------------
At June 30, 2000 $ 18,408,000.46 $ 597,375.21 $ 3,385,126.23 $ 22,390,501.90
================= ================= ================= =================
Share premium represents the assets and liabilities contributed into the company
by the shareholders by reference to the percentage of their shareholding.
In accordance with the PRC regulations and the Company's articles of
association, the Company is required to transfer 15% of their income after
taxation to the reserves, which are non-distributable, before profit
distributions are made.
NOTE L - CONCENTRATION OF CREDIT AND OTHER RISKS
There are no fixed credit terms granted to its major customers. During the six
months ended June 30, 2000, sales to the three major customers accounted for
66.2% of the Company's sales. Management have reviewed the credit worthiness and
subsequent settlements made by the customers, and, in the opinion of management,
no provision or allowance for doubtful debt is considered necessary.
The Company produces all of its products in its plants and factories in the PRC.
The Company is subjected to the risk that political or economic upheaval in the
PRC could cause production disruptions and/or increases to its costs, although
no such events have occurred since the Company was incorporated.
NOTE M - SEGMENT INFORMATION
The Company's operations are dividend into operating segments using individual
products or services or groups of related products and services. The Company has
two operating segments: mineral trading and mineral-processing.
The mineral trading segment is comprised of operating branches that primarily
trade ore, minerals concentrate and coal. The operating branches included in the
mineral trading segment are Non-ferrous Metals Trading Company and Guizhou
Louxia Coal Mine Company Limited.
15
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE M - SEGMENT INFORMATION (continued)
The mineral-processing segment is comprised of operating branches that principal
activities are copper refinery and ore processing. The operating branches
included in the mineral-processing segment are Copper Refinery Company and Wuxu
Mine Company.
Each operating segment uses the same accounting principles as reported in Note
B, Basis of Preparation of the Financial Statements, and Note C, Summary of
Significant Accounting Policies, and the Company evaluates the performance of
each segment using before tax income or loss from continuing operations.
Transactions between segments are accounted for as each segment is an external
customer.
The Company's largest customer accounted for 26% of consolidated sales.
Segment information used to evaluate segments is as follows :-
June 30, 2000 December 31, 1999
----------------- -----------------
US$ US$
Assets :
Mineral Trading 1,414,569.43 1,004,637.39
Mineral Processing 11,621,368.67 11,155,370.89
Assets of nonreportable segments 651,641.61 791,746.01
Assets at corporation level not 10,438,055.04 10,195,162.24
allocated to operating segments
----------------- -----------------
Consolidated assets $ 24,125,634.75 $ 23,146,916.53
================= =================
Six Months Ended June 30, 2000
- --------------------------------------------------------------------------------------------------------------------------
Other
Mineral Trading Mineral Processing Segment Corporate Consolidated
- --------------------------------------------------------------------------------------------------------------------------
US$ US$ US$ US$ US$
Sales to external customers 4,322,148.09 5,879,841.35 25,453.71 - 10,227,443.15
Profit/(Loss) 308,490.32 465,997.78 (19,902.39) 338,757.25 1,093,342.96
Interest revenue 228.61 1,417.52 56.24 132.04 1,834.41
Interest expenses 1,078.28 154,502.72 7.16 28.00 155,616.16
Depreciation 17,883.15 265,360.24 34,928.62 - 318,172.01
Assets expenditure - 43,315.00 1,666.67 - 44,981.67
- --------------------------------------------------------------------------------------------------------------------------
16
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------------------
NOTE M - SEGMENT INFORMATION (continued)
Year Ended December 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
Other
Mineral Trading Mineral Processing Segment Corporate Consolidated
- --------------------------------------------------------------------------------------------------------------------------
US$ US$ US$ US$ US$
Sales to external customers 5,126,908.93 10,382,637.08 75,054.83 15,584,600.84
Profit/(Loss) 407,996.49 750,234.11 (74,723.54) 847,193.06 1,930,700.12
Interest revenue 49,204.29 1,733.31 48.81 50,986.41
Interest expenses 5,229.47 358,063.99 317.89 363,611.35
Depreciation 35,766.29 528,663.04 69,804.46 634,233.79
Assets expenditure - 6,152.22 2,148.55 8,300.77
- -------------------------------------------------------------------------------------------------------------------------
NOTE N - SUBSEQUENT EVENT - UNAUDITED
On January 27, 2000, the Company entered into a Cooperative Joint Venture
Contract (the "Joint Venture Contract") with Biogan International Inc.
("Biogan") a limited liability company organized and existing under the laws of
the state of Delaware of the United States of America, regarding the jointly
invest in and set up a co-operative joint venture in Guangxi Zhuang Autonomous
Region of the PRC.
The name of the Cooperative Joint Venture Company is Guangxi Guanghe Metals
Company Limited and has been incorporated under the laws and regulations of the
PRC on February 18, 2000. The legal address of Guangxi Guanghe Metals Company
Limited is No. 386, Xinjian Road, Hechi, Guangxi of the PRC.
The operation of Guangxi Guanghe Metals Company Limited shall be :
o Exploration, selection, smelting and sales of mineral products and
by-products;
o Manufacturing and sales of metal materials and non-metal materials,
raw coal, and coke.
Pursuant to the Joint Venture Contract the total investment of Guangxi Guanghe
Metals Company Limited shall be USD25,000,000. The total registered capital of
Guangxi Guanghe Metals Company Limited shall be USD10,000,000 and the
contributions of the registered capital of the Company and Biogan shall be
USD800,000 (8%) and USD9,200,000 (92%) respectively. However, The profit sharing
ratio of the Company and Biogan have been agreed as 5% and 95% respectively. At
June 30, 2000, the Company's share of contribution has not yet been made.
The Joint Venture Contract provides that :
o The term of the Joint Venture contract is thirty years commencing
from the date of issue of the business license and will be
automatically extended for ten years upon expiration, subject to the
approval of the original examination and approval PRC government
authorities.
o The Joint Venture contract can be terminated upon the unanimous
agreement between the Company and Biogan or in the event of a
material breach of contract by either party.
On March 15, 2000, the parties hereto also entered into a Share Acquisition
Agreement pursuant to which Biogan was to issue shares of its Series A
Convertible Preferred Stock to certain of the shareholders of the Company.
However, the parties terminated the Share Acquisition Agreement as the Share
Acquisition Agreement does not properly reflect the intent of the parties.
17
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE N - SUBSEQUENT EVENT - UNAUDITED (CONTINUED)
Pursuant to the terms of the Asset Purchase Agreement executed on August 1,
2000, the Company sold, effective as of July 1, 2000, certain of the assets and
assumed certain of the liabilities of the Company consisting of a 9% interest in
the Gaofeng Mining Company Limited, a 70% interest in the Guizhou Louxia Coal
Mine Company Limited and all of the assets and liabilities of six branches of
the Company as follows: the Copper Refinery Company, the Non-Ferrous Metals
Trading Company, the Wuxu Mine, the Transportation Company, the Coal Company,
and the Stone Electronic Information Company. Except the Stone Electronic
Information Company, all of the assets relate to the mining and refining
operations of the Company.
The purchase price for the acquisition consisted of the issuance of 31,300
shares of Series A Convertible Preferred Stock of Biogan and 16,800,000 shares
of Common Stock of Biogan. In addition, in accordance with the terms of the
Joint Venture Contract and the Asset Purchase Agreement, Biogan contributed all
of the assets acquired and liabilities assumed from the Company to the Guangxi
Guanghe Metals Company Limited in exchange for a 95% interest in the profits and
loss of Guangxi Guanghe Metals Company Limited and a 92% interest in the
remaining assets of Guangxi Guanghe Metals Company Limited upon any liquidation
or dissolution of Guangxi Guanghe Metals Company Limited.
18
HECHI INDUSTRIAL COMPANY LIMITED
THE BOARD OF DIRECTORS AND SHAREHOLDERS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Hechi Industrial
Company Limited, incorporated in the People's Republic of China with limited
liability, as of December 31, 1998 and December 31, 1999, and the related
consolidated statements of operations and retained earnings and cash flows for
the period June 9, 1998 (inception) to December 31, 1998 and the year ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
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.
We did not observe the taking of the physical inventories as of December 31,
1998, stated as US$2,791,941.91, since this date was prior to our initial
engagement as auditors for Hechi Industrial Company Limited. The Company's
records do not permit adequate retroactive tests of inventory quantities.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hechi Industrial
Company Limited at December 31, 1998 and December 31, 1999, and the results of
its operations and retained earnings and its cash flows for the period June 9,
1998 (inception) to December 31, 1998 and the year ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States of
America.
/S/ LAM, KWOK, KWAN & CHENG C.P.A. LIMITED
Certified Public Accountants, Hong Kong
Auditor - Lam Sing Hung
Practising certificate number - P00961
5 OCT. 2000
Hong Kong
19
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
NOTES December 31,
----- ---------------------------------------
1999 1998
----------------- -----------------
US$ US$
ASSETS
CURRENT ASSETS
Cash 425,720.74 56,991.10
Accounts and other receivables D 15,214,684.70 13,566,293.18
Inventories E 2,499,678.97 2,791,941.91
TOTAL CURRENT ASSETS 18,140,084.41 16,415,226.19
OTHER ASSET
Long term investment F 9,886,077.60 9,886,077.60
FIXED ASSETS, NET G 12,602,576.92 13,228,509.93
----------------- -----------------
TOTAL ASSETS 40,628,738.93 39,529,813.72
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bills payable 724,637.68 --
Accounts and other payables 12,914,940.31 13,381,523.12
Accrued expenses 22,527.26 10,480.68
Short-term loans H 3,452,898.55 2,655,797.10
Taxes payable 365,284.26 (20,225.08)
TOTAL CURRENT LIABILITIES 17,480,288.06 16,027,575.82
MINORITY INTEREST 1,534.34 --
SHAREHOLDERS' EQUITY
Paid up capital 1,735,132.85 1,735,132.85
Retirement reserves K 21,411,783.68 21,767,105.05
TOTAL SHAREHOLDERS' EQUITY 23,146,916.53 23,502,237.90
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 40,628,738.93 39,529,813.72
================= =================
The accompanying notes are an integral part of
these consolidated financial statements.
20
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period from
June 9, 1998
(Date of incorporation)
Year ended to
NOTES December 31, 1999 December 31, 1998
----- ------------------------ ------------------------
US$ US$
REVENUE
Net sales 15,584,600.84 13,653,713.77
Management fee income -- 72,819.24
15,584,600.84 13,726,533.01
OPERATING COSTS AND EXPENSES
Cost of goods sold 13,547,097.40 11,477,240.56
Selling expenses 388,132.61 215,086.14
Administrative expenses 287,838.83 267,171.44
Start-up cost written off I 192,454.65 67,292.17
14,415,523.49 12,026,790.31
------------------------ ------------------------
OPERATING INCOME 1,169,077.35 1,699,742.70
Interest income 50,986.41 4,553.33
Dividend received from investment 1,051,964.85 250,335.53
Other income 24,065.03 724.76
Interest expenses (363,611.35) (332,918.54)
Other expenses (1,782.17) (14,057.83)
------------------------ ------------------------
INCOME BEFORE INCOME TAX 1,930,700.12 1,608,379.95
Income tax J 286,021.49 249,275.36
------------------------ ------------------------
NET INCOME FOR THE YEAR/PERIOD 1,644,678.63 1,359,104.59
======================== ========================
The accompanying notes are an integral part of
these consolidated financial statements.
21
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from
June 9, 1998
(Date of incorporation)
Year ended to
December 31, 1999 December 31, 1998
------------------------ ------------------------
US$ US$
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,644,678.63 1,359,104.59
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation of fixed assets 634,233.79 317,342.80
Loss on disposals of fixed assets -- 5,457.20
Increase in accounts and other receivables (1,648,391.52) (6,876,894.94)
Decrease/(Increase) in inventories 292,262.94 (621,984.17)
(Decrease)/Increase in accounts and other payables (2,173,245.31) 5,355,076.75
Increase in bills payable 724,637.68 --
Increase/(Decrease) in taxes payable 92,171.84 (913,641.92)
Increase in minority interest 1,534.34 --
Increase in accrued expenses 12,046.58 8,886.23
Total net income adjustments (2,064,749.66) (2,725,758.05)
------------------------ ------------------------
Net cash used in operating activities (420,071.03) (1,366,653.46)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (8,300.78) (306,074.04)
------------------------ ------------------------
Net cash used in investing activities (8,300.78) (306,074.04)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of share capital -- 1,897,088.17
Proceeds from short-term loans 797,101.45 --
Repayment of short-term loans -- (167,369.57)
------------------------ ------------------------
Net cash provided by financing activities 797,101.45 1,729,718.60
------------------------ ------------------------
NET INCREASE IN CASH 368,729.64 56,991.10
CASH AT BEGINNING OF YEAR/PERIOD 56,991.10 --
------------------------ ------------------------
CASH AT END OF YEAR/PERIOD 425,720.74 56,991.10
======================== ========================
The accompanying notes are an integral part of
these consolidated financial statements.
22
HECHI INDUSTRIAL COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF DISCLOSURES OF CASH FLOW INFORMATION
For the period from
June 9, 1998
(Date of incorporation)
Year ended to
December 31, 1999 December 31, 1998
------------------------ ------------------------
US$ US$
(a) CASH PAID DURING THE YEAR/PERIOD FOR
Interest paid 363,611.35 332,918.54
======================== ========================
(b) NON-CASH FINANCING ACTIVITIES
On June 9, 1998 (date of incorporation), the shareholders of the Company
injected the following assets and liabilities into the Company as the
premium paid for the capital interest acquired by them.
For the period from
June 9, 1998
(Date of incorporation)
to
December 31,1998
-----------------------
US$
Cash 161,955.32
Accounts and other receivables 6,689,398.24
Inventories 2,169,957.74
Fixed assets 13,245,235.89
Short-term loans (2,823,166.67)
Accounts and other payables (8,026,446.37)
Taxes payable (893,416.84)
Accrued expenses (1,594.45)
Long term investment 9,886,077.60
-----------------------
20,408,000.46
=======================
The accompanying notes are an integral part of
these consolidated financial statements.
23
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BACKGROUND
Hechi Industrial Company Limited (the "Company") is a company incorporated on
June 9, 1998 with limited liability in the People's Republic of China (the
"PRC") in accordance with the Chinese Laws and Regulations. It is principally
engaged in the copper refinery, production of sulfuric acid, securities trading
agent, trading of ores, coal and coke, ores processing, transportation services
and investments holding. The operations are mainly carried out in Guangxi
Province of the PRC.
The Company was founded by the staff of Hechi Prefecture Mining Company
("HPMC"), which is a state-owned enterprise. With the approval given by Hechi
Prefecture State-owned Assets Administration in 1998, the staff of HPMC were
allowed to acquire part of the assets and liabilities of the HPMC. The assets
and liabilities included the assets and the liabilities which were injected into
the Company and established the following divisions in Guangxi province of the
PRC in accordance with the Chinese Laws and Regulations and 9% capital interest
of Gaofeng Mining Company Limited.
The particulars of the divisions are as follows :
Name Legal status
- ---- ------------
Hechi Copper Refinery Company Division
Non-ferrous Metals Trading Company Division
Coal Company Division
Wuxu Mine Company Division
Transportation Company Division
Stone Electronic Information Services Company Division
NOTE B - BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS
The financial statements were prepared in accordance with generally accepted
accounting principles in the United States of America ("US GAAP") as if those
standards had been applied consistently throughout the year/period. This basis
of accounting differs from that used in the statutory accounts of the Company,
which were prepared in accordance with the accounting principles and the
relevant financial regulations applicable to the PRC enterprises ("PRC GAAP").
The principal adjustments made to conform those statutory accounts under PRC
GAAP to US GAAP included in the following :
o Classification of investments;
o Recognition of sales, purchases and other income and expenses on an
accrual basis;
o Additional allowance for doubtful accounts;
o Additional provision for slow moving inventories;
o Capitalization of fixed assets; and
o Depreciation policies of fixed assets.
24
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS COMBINATIONS AND INVESTMENTS
For business combinations which have been accounted for under the purchase
method of accounting, the Company includes the results of operations of the
acquired business from the date of acquisition. Net assets of the company
acquired is recorded at their fair value at the date of acquisition. The excess
of the purchase price over the fair value of net assets acquired is included in
goodwill and other purchased intangibles in the accompanying consolidated
balance sheets.
Investment, for which the Company does not have the ability to exercise
significant influence, is accounted for under the cost method of accounting.
Dividends and other distributions of earnings from other investees, if any, are
included in income when declared. The Company periodically evaluates the
carrying value of its investment accounted for under the cost method of
accounting and as of December 31, 1999, such investment was recorded at the
lower of cost or estimated net realizable value.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. All significant intercompany balances and transactions have been
eliminated.
25
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are charged or credited to other comprehensive income. Revenue and
expenses are translated at average rates of exchange prevailing during the year.
Gains and losses on foreign currency transactions are included in other
expenses.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers all highly
liquid investments with maturities of three months or less at the time of
purchase and amounts repayable on demand by banks or advances from banks
repayable within three months or less from the date of advance to be cash
equivalents.
INVENTORIES
Inventories are stated at the lower of cost or net realisable value. Cost, which
comprises materials, labor and manufacturing overhead costs that have been
incurred in bringing the inventories to their present location and condition; is
determined by the first-in, first-out method. Net realisable value is determined
as the estimated net selling price less all further costs of production and the
related cost of marketing, selling and distribution.
FIXED ASSETS
These assets are stated at cost less accumulated depreciation. The cost of an
asset comprises its purchase price and any directly attributable costs of
bringing the asset to its working condition and location for its intended use.
Subsequent expenditure relating to fixed asset is added to the carrying amount
of the assets if it can be demonstrated that such expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the use of
the assets. Depreciation is provided for in amounts sufficient to relate the
cost of depreciable assets to their estimated operating service lives, using the
straight-line method, after taking into account their estimated residual value
of 5% of cost, at the following rate per annum :
Buildings 2.375%
Mining structure 2.375% - 4.75%
Plant, machinery & equipment 4.75% - 19%
Transportation vehicles 4.75%
When the assets are sold or retired, any gain or loss resulting from their
disposal, being the difference between the net disposal proceeds and the
carrying amount of the assets, is included in the income statement accounts.
26
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided on assessable profits of the accounts, which prepared
in accordance with the PRC GAAP, with the prevailing tax revenue rules.
Deferred taxes are provided on all significant temporary differences in
reporting certain transactions for financial accounting and tax purposes.
REVENUE RECOGNITION
a) Sales represent the invoiced value of goods supplied to
customers, net of discounts, returns, rebates and value-added
tax. Sales are recognized upon delivery of goods and transfer
of title to customers.
b) Commission fee income and management fee income are recognised
as revenue when the agreed services have been provided.
c) Dividend income is recognised when the company's right as a
shareholder to receive payment is established.
d) Interest income is accrued on a time basis by reference to the
principal outstanding and at the interest rate applicable.
START-UP COSTS
Start-up costs represent preoperating or preopening costs incurred before
operations begin, as well as start-up costs incurred after operations begin, but
before normal capacity is reached. All start-up costs to be written off as and
when incurred.
USE OF ESTIMATES
In preparing the Company's financial statements in conformity with generally
accepted accounting principles, management are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
27
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - ACCOUNTS AND OTHER RECEIVABLES
December 31,
-------------------------------------------
1999 1998
---- ----
US$ US$
Trade receivable 7,908,447.47 5,446,692.35
Other receivable 8,950,640.80 9,764,004.40
16,859,088.27 15,210,696.75
Less : allowance for doubtful accounts (1,644,403.57) (1,644,403.57)
-------------------- --------------------
15,214,684.70 13,566,293.18
==================== ====================
NOTE E - INVENTORIES
Inventories comprise of the following : December 31,
-------------------------------------------
1999 1998
---- ----
US$ US$
Raw materials 2,308,187.93 1,786,276.00
Finished goods 191,491.04 1,005,665.91
-------------------- --------------------
2,499,678.97 2,791,941.91
==================== ====================
NOTE F - LONG TERM INVESTMENT
On June 9, 1998 the shareholders of the Company injected 9% capital interest of
Gaofeng Mining Company Limited into the Company. The profit sharing ratio of
this investment is 9%.
NOTE G - FIXED ASSETS
The following is a summary of fixed assets
December 31,
-------------------------------------------
Useful lives 1999 1998
------------ ---- ----
Year US$ US$
Buildings 40 4,550,064.23 4,550,064.23
Mining structure 20 - 40 339,064.39 339,064.39
Plant, machinery and equipment 5 - 20 7,817,014.32 7,808,713.54
Transportation vehicles 20 847,592.48 847,592.48
-------------------- --------------------
13,553,735.42 13,545,434.64
Less : accumulated depreciation (951,158.50) (316,924.71)
-------------------- --------------------
12,602,576.92 13,228,509.93
==================== ====================
28
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - SHORT-TERM LOANS
December 31,
-------------------------------------------
1999 1998
---- ----
US$ US$
Bank loans 2,728,260.87 2,293,478.27
Government loans 724,637.68 362,318.83
-------------------- --------------------
3,452,898.55 2,655,797.10
==================== ====================
NOTE I - START-UP COSTS
For the period
Year ended from June 9, 1998 to
December 31, 1999 December 31, 1998
----------------- ----------------
US$ US$
Amounts written off 192,454.65 67,292.17
================= ================
The Accounting Standards Executive Committee has issued a Statement of Position
("SOP"), "Reporting on the Costs of Start-up Activities". The SOP requires all
start-up costs to be written off as and when incurred.
NOTE J - INCOME TAX
The income tax have been provided in accordance with the income tax regulations
of the PRC.
29
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - RESERVES
PRC Statutory Retained
Share premium Reserves Earnings Total
------------- -------- -------- -----
US$ US$ US$ US$
At June 9, 1998 -- -- -- --
Premium on new issue
of share capital 20,408,000.46 -- -- 20,408,000.46
Earning for the period from
June 9, 1998 to
December 31, 1998 -- -- 1,359,104.59 1,359,104.59
Transfer to PRC
statutory reserves -- 203,865.69 (203,865.69) --
-------------------- --------------------- ----------------- ------------------
At December 31, 1998 20,408,000.46 203,865.69 1,155,238.90 21,767,105.05
Earning for the year
ended December 31, 1999 -- -- 1,644,678.63 1,644,678.63
Transfer to PRC
statutory reserves -- 246,701.79 (246,701.79) --
-------------------- --------------------- ----------------- ------------------
At December 31, 1999 20,408,000.46 450,567.48 2,553,215.74 23,411,783.68
==================== ===================== ================= ==================
Share premium represents the assets and liabilities contributed into the company
by the shareholders by reference to the percentage of their shareholding.
In accordance with the PRC regulations and the Company's articles of
association, the Company is required to transfer 15% of their income after
taxation to the reserves, which are non-distributable, before profit
distributions are made.
NOTE L - CONCENTRATION OF CREDIT AND OTHER RISKS
There are no fixed credit terms granted to its major customers. During the
period ended December 31, 1998 and the year ended December 31, 1999, sales to
the three major customers accounted for 42.3% and 50.4% of the Company's sales
respectively. Management have reviewed the credit worthiness and subsequent
settlements made by the customers, and, in the opinion of management, no
provision or allowance for doubtful debt is considered necessary.
The Company produces all of its products in its plants and factories in the PRC.
The Company is subjected to the risk that political or economic upheaval in the
PRC could cause production disruptions and/or increases to its costs, although
no such events have occurred since the Company was incorporated.
30
HECHI INDUSTRIAL COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - SUBSEQUENT EVENT
On January 27, 2000, the Company entered into a Cooperative Joint Venture
Contract (The "Contract") with Biogan International Inc. ("Biogan"), a
corporation organized and existing under the laws of the State of Delaware of
the United States of America, regarding the jointly invest in and set up a
co-operative joint venture in Guangxi Zhuang Autonomous Region of the PRC.
The name of the Cooperative Joint Venture Company ("JVC") is Guangxi Guanghe
Metals Co., Ltd. and has been incorporated under the laws and regulations of the
PRC on February 17, 2000. The legal address of the JVC is No. 386, Xinjian Road,
Hechi, Guangxi of the PRC.
The operation of the JVC shall be :
o Exploration, selection, smelting and sales of mineral products and
by-products;
o Manufacturing and sales of metal materials and non-metal materials, raw
coal, and coke.
Pursuant to the Contract the total investment of the JVC shall be USD25,000,000.
However, the amount of contributions of both parties and the time schedule of
making the contributions is not mentioned in the Contract. The total registered
capital of the JVC shall be USD10,000,000 and the contributions of the
registered capital of the Company and Biogan shall be USD800,000 (8%) and
USD9,200,000 (92%) respectively. However, The profit sharing ratio of the
Company and Biogan have been agreed as 5% and 95% respectively.
The Contract provides that :
o The term of the JVC is thirty years commencing from the date of issue
of the business license and will be automatically extended for ten
years upon expiration, subject to the approval of the original
examination and approval PRC government authorities.
o The JVC can be terminated upon the unanimous agreement between the
Company and Biogan or in the event of a material breach of contract by
either party.
(b) Pro Forma Financial Information
The accompanying financial statements include the balance sheet of Biogan
International, Inc. (a development stage company) as of June 30, 2000 and
related statements of operations, statements of changes in stockholders' equity,
and statements of cash flows for the period from inception (February 5, 1988)
through June 30, 2000.
In the third quarter of 1999, Biogan International, Inc. undertook a plan to
acquire business assets in China and to negotiate a controlling interest in a
joint venture. The plan was ultimately consummated as of July 1, 2000. This
report includes a pro forma consolidated balance sheet of Biogan International,
Inc. and consolidated subsidiaries, together with related statements of
operations, statements of changes in stockholders' equity and statements of cash
flows for the six months ended June 30, 2000, illustrating the joint venture
arrangement as if it had taken place on January 1, 2000.
The following financial statements are included in this Current Report:
Page
----
Index to Financial Statements 31
Independent Auditor's Report 32
Balance Sheet as of June 30, 2000 33
Statements of Operations 34
Statements of Changes in Stockholders' Equity 35
Statements of Cash Flows 36
Notes to Financial Statements 37
31
October 10, 2000
Stockholders and Board of Directors
BIOGAN INTERNATIONAL, INC.
Boise, Idaho
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying balance sheets of Biogan International, Inc. (a
development stage company) ("Biogan") as of June 30, 2000, and the related
statements of operations, statements of changes in stockholders' equity and
statements of cash flows, for the period from inception (February 5, 1988)
through June 30, 2000. I have also audited the pro forma balance sheet of Biogan
and its subsidiaries, and related statements for the six months ended June 30,
2000, reflecting Biogan's July 1, 2000 entry into a joint venture arrangement as
if it had taken place on January 1, 2000. These financial statements are the
responsibility of Biogan's management. My responsibility is to express an
opinion on these financial statements based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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 statements as a whole. I
believe my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements and pro forma financial statements
referred to above present fairly, in all material aspects, the financial
position of Biogan and its consolidated subsidiaries as of June 30, 2000, and
the results of its operations and cash flows for the period from inception
(February 5, 1988) through June 30, 2000, together with pro forma statements of
operations and cash flows for the six months ended June 30, 2000, in conformity
with generally accepted accounting principles.
/S/ DENNIS W. BERSCH
Dennis W. Bersch, CPA
Milwaukee, WI
32
BIOGAN INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
(With Auditor's Report of October 10, 2000)
BALANCE SHEET AND PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 2000
ASSETS
------
Pro Forma
Consolidation Biogan
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,131,148 $ 53,782
Prepaid expenses 1,988 1,988
Cash in escrow (Note 8) 1,000,000 1,000,000
Accounts receivable 19,622,549 --
Inventories 619,881 --
-------------- --------------
Total current assets $ 24,375,566 $ 1,055,770
FIXED ASSETS:
Fixed assets (Note 1) 13,633,433 34,716
Less: accumulated depreciation (1,292,016) (22,685)
-------------- --------------
Total fixed assets $ 12,341,417 $ 12,031
OTHER ASSETS:
Investment in operating mine $ 9,886,078 --
Trade names and licenses acquired 800,000 --
Deferred debenture issue costs & discount
- net of accumulated amortization 454,484 454,484
Deferred debenture redemption premium
- net of accumulated amortization 454,484 454,484
Common stock pledged as collateral (Note 8) 28,800 28,800
Investment in Joint Venture (Note 9) -- 850,000
-------------- --------------
Total other assets $ 11,623,846 $ 1,787,768
-------------- --------------
Total assets $ 48,340,829 $ 2,855,569
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 12,897,001 $ 34,694
Note payable - related to Hechi asset purchase 2,000,000 --
Notes payable - stockholders 95,000 95,000
Working capital loans (Note 1) 4,962,560 --
Accrued foreign income tax 705,741 --
Other accrued liabilities 86,353 70,297
-------------- --------------
Total current liabilities $ 20,746,655 $ 199,991
LONG TERM LIABILITIES:
Convertible debentures (Note 7) 2,000,000 2,000,000
Redemption premium 500,000 500,000
-------------- --------------
Total liabilities $ 23,246,655 $ 2,699,991
MINORITY INTEREST:
Minority interest in investment 800,000
Minority interest in earnings 61,897 --
-------------- --------------
$ 861,897 $ --
STOCKHOLDERS' EQUITY:
Preferred stock - par value $.001; 10,000,000
shares authorized; 31,300 shares subscribed,
no shares outstanding 31 --
Paid in capital - preferred stock 14,662,658 --
Common stock - par value $.001; 300,000,000
shares authorized
85,386,710 shares issued and outstanding
28,800,000 shares issued and pledged as collateral
16,800,000 subscribed 130,987 114,187
Paid in capital - common stock 12,196,529 4,326,475
Contributed capital (Note 4) 852,500 852,500
Statutory reserves 597,375 --
Deficit accumulated during development stage (5,137,584) (5,137,584)
Retained earnings 929,781 --
-------------- --------------
Total stockholders' equity $ 24,232,277 $ 155,578
-------------- --------------
Total liabilities and stockholders' equity $ 48,340,829 $ 2,855,569
============== ==============
The accompanying notes are an integral part of these financial statements.
33
BIOGAN INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
(With Auditor's Report of October 10, 2000)
STATEMENTS OF OPERATIONS
for the periods ended June 30, 2000
Pro Forma
Consolidated From
from Feb. 5, 1988
Jan. 1, 2000 (inception)
------------- -------------
REVENUE $ 10,227,443 $ 8,620
COST OF REVENUE
Direct costs 8,964,350 --
------------- -------------
Gross profit $ 1,263,093 $ 8,620
OPERATING EXPENSES
Selling expenses 176,321 --
Administrative expenses 596,710 2,542,245
------------- -------------
Total operating expenses $ 773,031 $ 2,542,245
------------- -------------
Operating income (loss) $ 490,062 $ (2,533,625)
OTHER INCOME AND (EXPENSES)
Interest expense $ (204,582) $ (100,810)
Interest income 3,764 7,393
Dividend income 408,824 --
Miscellaneous expense (3,638) (5,580)
Other income (Note 4) 177,640 171,447
------------- -------------
Total other income and (expense) $ 382,008 $ 72,450
EXTRAORDINARY ITEM
Extraordinary financing expense, net of taxes -- (2,676,409)
------------- -------------
Income before minority interests and income taxes $ 872,070 $ (5,137,584)
Less: Minority share in income of Joint Venture (48,936) --
------------- -------------
Income before taxes 823,134 (5,137,584)
INCOME TAXES (114,625) --
------------- -------------
Net income (loss) after income tax $ 708,509 $ (5,137,584)
============= =============
EARNINGS PER COMMON SHARE OUTSTANDING
Weighted average number of
common shares outstanding 85,828,954 85,127,025
Profit (loss) per share $ 0.01 $ (0.06)
============= =============
Fully diluted weighted average number of
common shares outstanding 96,856,655 95,178,335
Profit (loss) per share $ 0.01 $ (0.05)
============= =============
The accompanying notes are an integral part of these financial statements.
34
BIOGAN INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
(With Auditor's Report of October 10, 2000)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From February 5, 1988 (inception) through June 30, 2000
and Pro Forma for the six months ended June 30, 2000
Shares Issued
-------------------------- Paid-in
Common Preferred Common Preferred Capital -
Stock Stock Stock Stock Preferred
------------ ------------ ------------ ------------ ------------
Shares issued
1988 2,250,000 -- $ 2,250 -- --
1989 21,387,347 -- 21,387 -- --
1998 413,826 -- 413 -- --
To management
1995 43,400,000 -- 43,399 -- --
For professional services:
1995 320,000 -- 320 -- --
1996 1,026,149 -- 1,026 -- --
1997 800,746 -- 801 -- --
1998 488,365 -- 489 -- --
For loan payments:
1995 121,000 -- 121 -- --
1997 405,948 -- 407 -- --
1998 240,564 -- 241 -- --
Extraordinary financing expense:
1995 12,575,085 -- 12,575 -- --
1996 1,607,950 -- 1,608 -- --
1997 75,600 -- 75 -- --
1998 (3,553,000) -- (3,553) -- --
For dispute settlement:
1995 106,030 -- 106 -- --
For private offering:
1995 336,000 -- 336 -- --
1996 1,939,840 -- 1,940 -- --
1997 1,502,750 -- 1,503 -- --
92,500 -- 93 -- --
Shares cancelled
1999 (150,000) -- (150) -- --
Capital contributed by stockholder
1999 -- -- -- -- --
2000 -- -- -- -- --
Common stock issued to escrow agent
2000 28,800,000 -- 28,800 -- --
Loss accumulated during the development stage -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Equity at June 30, 2000 114,186,700 -- $ 114,187 -- --
Pro forma effect of business combination:
Subscription of preferred stock -- 31,300 -- $ 31 $14,662,658
Subscription of common stock 16,800,000 -- 16,800 -- --
Statuatory reserves acquired in business combination -- -- -- -- --
Retained income of consolidated Joint Venture -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Pro forma equity at June 30, 2000 130,986,700 31,300 $ 130,987 $ 31 $14,662,658
============ ============ ============ ============ ============
(CONTINUED BELOW)
Statuatory
Paid-in Reserves -
Capital - Contributed Retained Joint
Common Capital Earnings Venture Equity
------------ ------------ ------------ ------------ ------------
Shares issued
1988 $ 22,750 $ -- $ -- $ -- $ 25,000
1989 197,352 -- -- -- 218,739
1998 16,089 -- -- -- 16,502
To management
1995 17,893 -- -- -- 61,292
For professional services:
1995 2,880 -- -- -- 3,200
1996 283,926 -- -- -- 284,952
1997 150,558 -- -- -- 151,359
1998 28,553 -- -- -- 29,042
For loan payments:
1995 11,979 -- -- -- 12,100
1997 93,009 -- -- -- 93,416
1998 64,625 -- -- -- 64,866
Extraordinary financing expense:
1995 3,131,196 -- -- -- 3,143,771
1996 400,380 -- -- -- 401,988
1997 18,825 -- -- -- 18,900
1998 (884,697) -- -- -- (888,250)
For dispute settlement:
1995 10,497 -- -- -- 10,603
For private offering:
1995 72,414 -- -- -- 72,750
1996 439,111 -- -- -- 441,051
1997 297,747 -- -- -- 299,250
8,808 -- -- -- 8,901
Shares cancelled
1999 (57,420) -- -- -- (57,570)
Capital contributed by stockholder
1999 -- 176,500 -- -- 176,500
2000 -- 676,000 -- -- 676,000
Common stock issued to escrow agent
2000 -- -- -- -- 28,800
Loss accumulated during the development stage -- -- (5,137,584) -- (5,137,584)
------------ ------------ ------------ ------------ ------------
Equity at June 30, 2000 $ 4,326,475 $ 852,500 $(5,137,584) $ -- $ 155,578
Pro forma effect of business combination:
Subscription of preferred stock -- -- -- -- 14,662,689
Subscription of common stock 7,870,054 -- -- -- 7,886,854
Statuatory reserves acquired in business combination -- -- -- 597,375 597,375
Retained income of consolidated Joint Venture -- -- 929,781 -- 929,781
------------ ------------ ------------ ------------ ------------
Pro forma equity at June 30, 2000 $12,196,529 $ 852,500 $(4,207,803) $ 597,375 $24,232,277
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
35
BIOGAN INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
(With Auditor's Report of October 10, 2000)
STATEMENTS OF CASH FLOWS
for the period ended June 30, 2000
Pro Forma
Consolidated From
from Feb. 5, 1988
Jan. 1, 2000 (inception)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 708,509 $ (5,137,584)
------------- -------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Stock issued for services $ -- $ 546,348
Shares cancelled -- (57,570)
Interest expense -- 28,920
Dispute settlement -- 10,603
Subsidiaries losses -- 158,380
Stock subscription loss -- 101,006
First development stage loss -- 142,733
Depreciation 321,356 22,835
Amortization 126,033 126,033
Accounts receivable (12,557,864) 34,695
Prepaid expenses (1,988) --
Inventories 1,879,798 --
Accounts payable 1,189,989 70,295
Accrued foreign income tax 340,456 --
Accrued expenses (139,098) (1,988)
------------- -------------
Net cash provided by (used in) operating activities $ (8,132,809) $ (3,955,294)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets $ (44,982) $ (35,113)
Disposal of fixed assets -- 475
Minority interest in Joint Venture 60,363 --
Investment in companies -- (158,380)
Investment in cooperative Joint Venture (1,850,000) (1,850,000)
------------- -------------
Net cash provided by (used in) investing activities $ (1,834,619) $ (2,043,018)
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable - stockholder $ -- $ 60,000
Notes payable -other -- 176,461
Proceeds of short-term loans 1,509,662 --
Repayments of notes and loans payable (45,000) --
Other -- (228)
Trade names and licenses acquired (1,000,000) --
Deferred financing costs (535,000) (535,000)
Issuance of common stock -- 821,952
Extraordinary financing expense -- 2,676,409
Capital contributed by stockholder 10,676,000 852,500
Bond proceeds 2,000,000 2,000,000
------------- -------------
Net cash provided by (used in) financing activities $ 12,605,662 $ 6,052,094
------------- -------------
Increase in cash and cash equivalents $ 2,638,234 $ 53,782
Cash at beginning of period 492,914 --
------------- -------------
Cash at end of period $ 3,131,148 $ 53,782
============= =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 204,582 $ 11,701
Income taxes accrued 114,625 --
Common stock issued as collateral -- 28,800
The accompanying notes are an integral part of these financial statements.
36
BIOGAN INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Summary
- ----------------
Biogan International, Inc. ("Biogan") has been a development stage company since
its inception in 1988. Biogan sought to develop and market new and innovative
technologies, thereby increasing stockholder wealth as well as attracting
additional investors in capital markets. During the process, Biogan evaluated
multiple business opportunities, and terminated, spun off or otherwise disposed
of projects that were deemed unprofitable, not viable, or not in the best
interests of the stockholders.
Recently, Biogan successfully negotiated with Hechi Industrial Co., Ltd., of
Guangxi Zhuang Autonomous Region of the People's Republic of China, to form a
cooperative joint venture, which management believes has the potential to
provide a long-term revenue stream to Biogan. This transaction removes the
substantial doubt about Biogan's ability to continue as a going concern which
was expressed in prior financial reports, and terminates its status as a
development stage company. The details of this transaction are disclosed in the
subsequent events footnote (Note #8) and give rise to the pro forma financial
statements presented in this report.
The following paragraphs of this footnote, and additional footnotes may apply to
either the cumulative development stage company report, the pro forma
consolidated report, or both.
Method of Accounting
- --------------------
Assets, liabilities, revenues and expenses are recognized on the accrual basis
of accounting. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
- -------------------------
For purposes of the statements of cash flows, Biogan considers all short-term
investments in interest-bearing accounts, securities and other instruments with
an original maturity of three months or less, to be equivalent to cash.
Fixed Assets
- ------------
Fixed assets are stated at cost, less accumulated depreciation and amortization,
computed using the straight-line method over their estimated useful lives that
range from five to fifty years.
The following table sets forth the fixed assets owned by Biogan as of June 30,
2000 and by the pro forma subsidiaries, as well as depreciation expenses and
accumulated depreciation amounts:
Pro Forma Pro Forma
Biogan Subsidiaries Consolidated
------ ------------ ------------
Office equipment $ 34,716 $ -- $ 34,716
Building -- 4,550,064 4,550,064
Mining structure -- 339,065 339,065
Plant, machinery & equipment -- 7,861,996 7,861,996
Transportation vehicles -- 847,592 847,592
--------------------------------------------
Total 34,716 13,598,717 13,633,433
Less: accumulated depreciation (22,685) (1,269,331) (1,292,016)
--------------------------------------------
Net fixed assets $ 12,031 $12,329,386 $12,341,417
============================================
Depreciation expense for the
period ended June 30, 2000 $ 22,685 $ 318,172 $ 341,007
============================================
37
Deferred Debenture Issue Costs, Discount and Redemption Premium
- ---------------------------------------------------------------
Biogan issued secured convertible debentures on March 8, 2000, as discussed in
Note 7. The discount and letter of credit costs associated with the issuance of
such debentures and the redemption premium are being amortized over the life of
the debenture, subject to acceleration in the event of early extinguishment.
Intangibles
- -----------
Intangibles are evaluated for impairment when events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable through
the estimated future cash flows resulting from the use of these assets. When any
such impairment exists, the related assets will be written down to fair value.
This policy is in accordance with SFAS 121, "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of".
Principles of Consolidation
- ---------------------------
The pro forma consolidated financial statements include the accounts of Biogan
(the parent company) and the combined divisions, consolidated subsidiaries and
investments of Guangxi Guanghe Metals Co., Ltd. (the "Joint Venture"). After
conversion of Chinese currency to U.S. dollars, all significant inter-company
accounts and transactions have been eliminated
Foreign Currency Translation and Transactions
- ---------------------------------------------
For the pro forma consolidated financial statements, the financial position and
results of operations of Biogan's foreign subsidiaries are determined using the
local currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the exchange rate in effect as of the balance
sheet date. Income statement accounts are translated at the average rate of
exchange prevailing during the period. Translation adjustments arising from the
use of differing exchange rates from period to period are included in the
accumulated other comprehensive income account in stockholders' equity.
Working Capital Loans
- ---------------------
The branches and divisions of the Company have lines of credit with government
agencies and local banks at interest rates ranging from 10% to 19.2%. These are
classified as current because they are all callable at the option of the lender.
Net Income (Loss) Per Share
- ---------------------------
Basic earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. The following reflects amounts reported in the financial statements:
From Feb. 5, 1988 (inception)
---------------------------------------
Weighted Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------
Income (Loss) available to common stockholders
- basic earnings per share ($5,137,584) 85,127,025 ($ 0.06)
---------------------------------------
Pro Forma for the period ended June 30, 2000
---------------------------------------------
Weighted Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------------
Income available to common stockholders
- basic earnings per share $ 708,509 85,828,954 $ 0.01
Effect of dilutive securities
- convertible preferred stock -- 8,538,701 --
- warrants (Note 8) -- 489,000 --
- stock options (Note 5) -- 2,000,000 --
--------------------------------------
Income available to common stockholders
- fully diluted earnings per share $ 708,509 96,856,655 $ 0.01
38
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method of SFAS 109.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
NOTE 2 - IN KIND DIVIDEND
On August 19, 1999, in conjunction with its business plan to prepare for an
acquisition, Biogan organized an Idaho corporation named R-Tec Holding, Inc.
("R-Tec"), into which Biogan transferred its 50% ownership interest in
IntorCorp, Inc., which had no recorded book value, in exchange for 4,266,797
shares of R-Tec common stock. On September 27, 1999, Biogan agreed to prepare
for the distribution of all of its R-Tec common stock to Biogan stockholders of
record as of September 15, 1999, at a rate of one share of R-Tec stock for each
20 shares of Biogan common stock. As of the balance sheet date, the stock
remains in escrow for the benefit of the distributees, pending final approval of
the SEC for trading. This transaction has no tax consequences.
NOTE 3 - BUSINESS RISKS
With the execution and consummation of the Joint Venture agreement, Biogan
essentially removes the substantial doubt about its ability to continue as a
going concern, but significant business risks remain.
The majority of Biogan's consolidated resources for the immediate future are
expected to be involved with the mining of base metal ores and processing and
marketing of refined products for use as raw materials by third parties. Risks
inherent in the mining industry include the reliability of management's
estimates of the quantity and quality of practically extractable ore deposits,
unpredictable government and environmental regulation, competition, and the
continuation of markets sufficient to absorb the supply without depressing
effects on prices.
Biogan owns and essentially controls the Joint Venture, which is overseas, in a
remote area of only modest development and subject to foreign government
policies. Biogan plans to ameliorate this particular risk through the
acquisition of political risk insurance, but the arrangements for such insurance
have not been completed as of the date of this report.
NOTE 4 - RELATED PARTY TRANSACTIONS
Notes Payable - Stockholders
- ----------------------------
Notes payable at June 30, 2000, consisted of the following:
Ronald J. Tolman:
Note dated November 13, 1996 bearing an annual interest rate of 10%.
Note is unsecured and is payable on demand. Payments are applied
first to any unpaid interest. $ 40,000
Note dated September 7, 1999 bearing an annual interest rate of 10%.
Note is unsecured and is payable on demand. 5,000
Rulon L. Tolman:
Note dated November 13, 1996 bearing an annual interest rate of 10%.
Note is unsecured and is payable on demand. Payments are applied
first to any unpaid interest. 40,000
Note dated April 29, 1999 bearing an annual interest rate of 10%.
Note is unsecured and is payable on demand. Payments are applied
first to any unpaid interest. 10,000
----------
Total $ 95,000
==========
39
Other Income
- ------------
Ron Tolman, Rulon Tolman and Jacque Tolman had accrued wages for past services
of $96,600, $63,800 and $10,800, respectively, for a total of $171,200. These
stockholders have forgiven their respective wages, resulting in other income in
the amount of $171,200. Subsequent to the audit date, an agreement was reached
with management which awaits ratification by the board of directors committing
Biogan to restore the forgiven wages using any future benefits which may arise
from the use of the net operating loss carryforwards.
Contributed Capital
- -------------------
At the inception of the business planning process, which led ultimately to the
creation of the Joint Venture, a group of active Biogan shareholders (insiders)
agreed to place 10,474,836 of their shares of Biogan common stock into the hands
of Gilles LaVerdiere, the President and head of the new management team. A total
of $852,500 of funds generated by the sale of some of those shares, plus
personal funds of Gilles LaVerdiere, were contributed before June 30, 2000 for
use by Biogan to pay professionals and other expenses, and otherwise advance the
business plan.
NOTE 5 - STOCK OPTIONS
On December 18, 1988, Biogan's board of directors reserved 2,000,000 shares of
common stock for issuance under a stock incentive plan to be adopted by Biogan's
board of directors. As of June 30, 2000, Biogan had not adopted a stock
incentive plan and, accordingly, no options have been granted.
NOTE 6 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, restricted cash, receivables, accounts payable, accrued
expenses and other liabilities, approximate fair value because of immediate or
short-term maturity of these financial instruments. The underlying carrying
amount reported for long-term debt and capital leases approximates fair value
because, in general, the interest on the underlying instruments fluctuates with
market rates.
NOTE 7 - CONVERTIBLE DEBENTURE
On March 30, 2000, Biogan completed an offering of its 8% Secured Convertible
Debentures due February 28, 2002 in the aggregate amount of $2,035,000. The
debentures are secured by a standby letter of credit in the amount of $1,200,000
issued by a financial institution, and are further secured by 28,800,000 shares
of Biogan's common stock which are currently being held in escrow as security
for payment of the debenture. Interest accrues at a rate of 8% per annum from
March 30, 2000 and is due on a quarterly basis, or on the date of conversion to
common stock of Biogan, or at the final due date of the debenture.
Biogan may, at its option, offer to redeem the debentures at a 25% premium, but
each such offer entitles the debenture holders, within ten days, at their
option, to convert all or a portion of the debenture into shares of common stock
of Biogan. This conversion option is available at any time until the maturity
date, but the debenture holders may not convert more than one-third of the
original principal amount of the debenture during any 30 calendar day period,
nor sell more than that number of shares. The conversion rate is equal to the
lower of the per share price of $.4166 or the average of the closing bid price
for the previous five days multiplied by 80%, and may be discounted even further
in the event certain features of the debenture are breached. The debentures may
not be converted if such conversion would result in the holder and its
affiliates holding more than 9.99% of Biogan's common stock.
In the event that Biogan serves a redemption notice to the holder of a
debenture, the redemption price shall be equal to 125% of the outstanding
principal and interest balance of the debenture. In the event of a redemption
notice, the debenture holder will retain conversion rights as stated above, up
to a maximum of 50% of the amount subject to the redemption. Biogan may not
serve any redemption notice without having the necessary cash or credit
facilities immediately available to cover the full redemption price.
In connection with the issuance of the debentures, Biogan issued to the
debenture holders three-year warrants to purchase up to an aggregate of 489,000
shares of common stock at $.60 per share, subject to certain adjustments. The
shares into which the debentures are convertible and the shares underlying the
warrants are subject to a registration rights agreement requiring Biogan to
register such securities for resale under the Securities Act of 1933, as amended
(the "Act"), at its own expense.
40
NOTE 8 - SUBSEQUENT EVENT
In September 1999, Biogan entered into an agreement with Gilles LaVerdiere who
became President of Biogan and, along with certain other shareholders,
contributed substantial capital, and begin negotiations to form a business
combination with a group of Chinese investors who had acquired an interest in
certain Chinese mining and refining operations, all of which had been formerly
operated by the Hechi Prefecture Government, of Guangxi Province, People's
Republic of China.
An agreement to form a cooperative joint venture under Chinese business law was
reached between these parties during September 1999. Continued negotiations
resulted in the development of the joint venture contract (the "Joint Venture
Contract") signed in January, 2000. A license to operate the Joint Venture, to
be known as Guangxi Guanghe Metals Co., Ltd., was granted by the Prefecture on
February 18, 2000. Reliable certified audits and the preparation of U.S. GAAP
financial statements for these assets, under the name Hechi Industrial Company
Ltd., were performed by a Hong Kong firm of Certified Public Accountants at both
December 31, 1999, and June 30, 2000. That balance sheet was used as the pricing
basis for the purchase of these interests by Biogan, in exchange for shares of
both preferred and common stock of Biogan.
Biogan and Hechi executed the Asset Purchase Agreement on August 1, 2000, to be
effective as of July 1, 2000 (the "Asset Purchase Agreement"). The Asset
Purchase Agreement provides for the acquisition by Biogan of the assets and
assumption of liabilities described in the audits of Hechi, in exchange for the
issuance to Hechi of an aggregate of 31,300 shares of Series A Convertible
Preferred Stock and 16,800,000 shares of Common Stock of Biogan. The assets
purchased and liabilities assumed include a 9% interest in the Gaofeng Mining
Co., Ltd., a 70% interest in the Guizhou Louxia Coal Mine Company, Ltd., and all
of the assets and liabilities of six operating divisions in the Hechi area as
follows: the Hechi Copper Refinery, Ltd., the Non-Ferrous Metals Trading
Company, the Wuxu Mine Company, the Transportation Company, the Coal Company,
and the Stone Electronic Information Services Company.
The primary capital of the Joint Venture is stated at $10,000,000, of which
$9,000,000 is to be paid by Biogan in cash, as described below, and $1,000,000
is to consist of trade names and rights, processes, customer relationships and
business licenses, with Biogan being credited $200,000 for its share, and Hechi
credited $800,000 for its share. As a result, capital is divided at 92% for
Biogan and 8% for Hechi. One of the liabilities assumed from Hechi is a payment
of $2,000,000 due to the Hechi Prefecture Government, and it was agreed that
this amount would be paid in the short term to the Hechi Prefecture to
extinguish that portion of payables included in the purchase.
As a further provision of the business plan and related agreements, Biogan is to
transfer all of the acquired assets and assumed liabilities to the Joint
Venture, in exchange for a note, which will have precedence in liquidation ahead
of the stated capital, but which may, from time to time, be liquidated with
available funds.
Profits of the Joint Venture are to be shared on the basis of 95% for Biogan and
5% for Hechi. Hechi's separate minority interests of 8% of stated capital and 5%
of earnings or retained earnings are set forth individually on the pro forma
balance sheet.
The Joint Venture Contract which requires Biogan to contribute an aggregate of
$9,000,000 in cash provides that $2,000,000 is to be paid within three months of
the receipt of the Joint Venture business license. As described in Note 7,
Biogan completed an offering of secured convertible debentures in the aggregate
amount of $2,000,000 to finance this requirement. As of the balance sheet date,
Biogan has paid $850,000 to the Joint Venture, and has transferred $1,000,000 to
an escrow agent, shown on the balance sheet as restricted cash, to be available
to the Joint Venture in the near future.
Additional requirements call for Biogan to effect a 1-for-12 reverse split of
its common stock, change Biogan's name to HMZ Metals, Inc., and decrease the
number of shares held by Biogan insiders as described in Note #4 under
contributed capital.
The shares of Series A Convertible Preferred Stock include preferential rights
on liquidation, dissolution, or winding up of affairs of Biogan but are not
entitled to dividends.
41
NOTE 9 - EQUITY
Biogan has capital stock on June 30, 2000 as follows:
Preferred Stock: $.001 par value, 10,000,000 shares authorized,
no shares issued or outstanding
Common Stock: $.001 par value, 300,000,000 shares authorized,
114,186,710 shares issued and outstanding
Biogan has pledged or restricted its common stock as follows:
- 18,287,073 Rule 144 restricted shares
- 28,800,000 restricted shares pledged as collateral relating to the
issuance of the convertible debentures (Note 7)
- 480,000 warrants expiring on February 28, 2003 relating to the
issuance of the convertible debentures (Note 7)
- 9,000 warrants expiring on February 28, 2003 relating to the
issuance of the convertible debentures (Note 7)
- 2,000,000 shares authorized for a stock incentive plan. (Note 5)
No shares have been issued relating to this plan.
Biogan has pro forma capital stock on June 30, 2000 as follows:
Preferred Stock: $.001 par value, 10,000,000 shares authorized
Shares subscribed but un-issued relating to
Joint Venture (Note 8) 31,300
Common Stock: $.001 par value, 300,000,000 shares authorized
Shares issued, outstanding and unrestricted 67,099,637
Shares restricted as 144 stock 18,287,073
Shares issued and pledged as collateral
relating to convertible debenture (Note 7) 28,800,000
Shares subscribed but un-issued relating to
Joint Venture (Note 8) 16,800,000
NOTE 10 - INCOME TAXES
The total of all deferred tax assets and liabilities at June 30, 2000 are as
follows:
June 30, 2000
-------------
Total deferred tax assets $ 890,000
Total deferred tax liabilities 0
-------------
$ 890,000
Valuation allowance 890,000
-------------
Net deferred income taxes $ 0
=============
Deferred tax assets include the tax benefits of U.S. federal net operating
losses of $2,210,000, state net operating losses of $2,080,000, and tax credits
of approximately $22,500. The net operating losses and credits expire at various
dates beginning in 2010 and continuing through 2019.
The pro forma statements report income tax accruals due to the operations of the
Joint Venture and the foreign taxes thereon. Income for the period prior to the
acquisition of the assets will be taxable in a foreign jurisdiction while income
subsequent to the acquisition will be taxed both in the foreign jurisdiction and
the United States at the highest corporate effective rate. Foreign tax credits
will be available to preclude the incidence of double taxation.
The effective tax rate in the foreign jurisdiction of China is 33%. To encourage
foreign investments in China, the Chinese government has approved a three-year,
15% incentive tax rate for certain regions of the country. The Joint Venture has
operations in one of the regions that is covered under the incentive tax rate
plan. The pro forma balance sheet contains an accrued foreign income tax
liability of $705,741. This represents the 18% rate differential between the
Chinese effective tax rate and the incentive rate on taxable income realized by
the Joint Venture since inception of the tax incentive period through June 30,
2000. Uncertainty exists as to whether the Joint Venture will ultimately realize
the benefits of the reduced incentive rate.
42
NOTE 11 - EFFECT OF SUBSEQUENT BUSINESS COMBINATION
The consolidating schedule below is furnished to provide a reconciliation from
the development stage columns of the balance sheets and operating statements to
the pro forma columns, to show the breakdown of the $24,125,635 purchase price
paid by Biogan, and the combination, after several eliminations, of those
business assets and liabilities with the Biogan assets into the format of Biogan
as an operating company.
BIOGAN INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
PRO FORMA CONSOLIDATING SCHEDULE BALANCE SHEET
June 30, 2000
Assets of Hechi Cooperative
Biogan Shareholders Joint Venture Eliminations Consolidated
--------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 53,782 $ 2,227,366 $ 850,000 $ -- $ 3,131,148
Prepaid expenses 1,988 -- -- -- 1,988
Escrowed cash 1,000,000 -- -- -- 1,000,000
Joint venture notes receivable -- -- -- -- --
Accounts receivable -- 19,622,549 8,350,000 (8,350,000) 19,622,549
Inventories -- 619,881 -- -- 619,881
Joint Venture assets -- -- 24,125,635 (24,125,635) --
--------------------------------------------------------------------------------------------
Total current assets $ 1,055,770 $ 22,469,796 $ 33,325,635 $(32,475,635) $ 24,375,566
--------------------------------------------------------------------------------------------
FIXED ASSETS --
Office equipment 34,716 -- -- -- 34,716
Building -- 4,550,064 -- -- 4,550,064
Mining structure -- 339,065 -- -- 339,065
Plant, machinery & equipment -- 7,861,996 -- -- 7,861,996
Transportation vehicles -- 847,592 -- -- 847,592
Accumulated depreciation (22,685) (1,269,331) -- -- (1,292,016)
--------------------------------------------------------------------------------------------
Total fixed assets $ 12,031 $ 12,329,386 -- -- $ 12,341,417
--------------------------------------------------------------------------------------------
OTHER ASSETS
Investments -- 9,886,078 -- -- 9,886,078
Trade names and licenses -- -- 800,000 -- 800,000
Deferred bond issue costs 454,484 -- -- -- 454,484
Un-amortized bond conversion
premium 454,484 -- -- -- 454,484
Common stock pledged as
collateral 28,800 -- -- -- 28,800
Investment in Joint Venture 850,000 -- -- (850,000) --
--------------------------------------------------------------------------------------------
Total other assets $ 1,787,768 $ 9,886,078 $ 800,000 $ (850,000) $ 11,623,846
--------------------------------------------------------------------------------------------
Total assets $ 2,855,569 $ 44,685,260 $ 34,125,635 $(33,325,635) $ 48,340,829
============================================================================================
43
BIOGAN INTERNATIONAL, INC. AND CONSOLIDATED SUBSIDIARIES
PRO FORMA CONSOLIDATING SCHEDULE BALANCE SHEET
June 30, 2000
(continued)
--------------------------------------------------------------------------------------------
Assets of Hechi Cooperative
Biogan Shareholders Joint Venture Eliminations Consolidated
--------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable 34,694 12,862,307 -- -- 12,897,001
Commitments to local government -- 2,000,000 -- -- 2,000,000
Notes payable - stockholders 95,000 -- -- -- 95,000
Short-term loans -- 4,962,560 -- -- 4,962,560
Accrued taxes of foreign
subsidiaries -- 705,741 -- -- 705,741
Other accrued liabilities 70,297 16,056 -- -- 86,353
Joint Venture payable -- -- -- -- --
---------------------------------------------------------------------------------------------
Total current liabilities $ 199,991 $ 20,546,664 $ -- $ -- $ 20,746,655
---------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Convertible debentures 2,000,000 -- -- -- 2,000,000
Debenture redemption premium 500,000 -- -- -- 500,000
Joint Venture liability to Biogan -- -- 24,125,635 (24,125,635) --
---------------------------------------------------------------------------------------------
Total long-term liabilities $ 2,500,000 $ -- $ 24,125,635 $(24,125,635) $ 2,500,000
---------------------------------------------------------------------------------------------
Total liabilities $ 2,699,991 $ 20,546,664 $ 24,125,635 $(24,125,635) $ 23,246,655
---------------------------------------------------------------------------------------------
MINORITY INTEREST
Minority interest in investment -- -- -- 800,000 800,000
Minority interest in earnings -- 12,961 -- 48,936 61,897
---------------------------------------------------------------------------------------------
Total minority interest -- 12,961 -- 848,936 861,897
STOCKHOLDERS' EQUITY
Preferred stock at par value -- 31 -- -- 31
Paid in capital - preferred stock -- 15,688,265 -- (1,025,607) 14,662,658
Common stock at par value 114,187 16,800 -- -- 130,987
Paid in capital - common stock 4,326,475 8,420,539 -- (550,485) 12,196,529
Contributed capital 852,500 -- 10,000,000 (10,000,000) 852,500
Statutory reserves -- -- -- 597,375 597,375
Retained earnings (deficit) (5,137,584) -- -- 929,781 (4,207,803)
---------------------------------------------------------------------------------------------
Total stockholders' equity $ 155,578 $ 24,125,635 $ 10,000,000 $(10,048,936) $ 24,232,277
---------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 2,855,569 $ 44,685,260 $ 34,125,635 $(33,325,635) $ 48,340,829
=============================================================================================
44
BIOGAN INTERNATIONAL, INC. AND CONSLIDATED SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
for the six months ended June 30, 2000
--------------------------------------------------------------------------------------------
Assets of Hechi Cooperative
Biogan Shareholders Joint Venture Eliminations Consolidated
--------------------------------------------------------------------------------------------
Revenue - net $ -- $ 10,227,443 $ -- $ -- $ 10,227,443
COST OF REVENUE
Direct costs -- 8,964,350 -- -- 8,964,350
---------------------------------------------------------------------------------------------
Gross profit -- $ 1,263,093 $ -- $ -- $ 1,263,093
---------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling expenses $ -- 176,321 -- -- 176,321
Administrative expenses 345,349 251,361 -- -- 596,710
---------------------------------------------------------------------------------------------
Total operating expenses $ 345,349 $ 427,682 $ -- $ -- $ 773,031
---------------------------------------------------------------------------------------------
-
Operating income $ (345,349) $ 835,411 $ -- $ -- $ 490,062
---------------------------------------------------------------------------------------------
-
OTHER INCOME AND (EXPENSE) -
Interest expense (48,966) (155,616) -- -- (204,582)
Interest income 1,930 1,834 -- -- 3,764
Dividend income -- 408,824 -- -- 408,824
Stock restitution expense -- -- -- -- -
Miscellaneous expense (88) (3,550) -- -- (3,638)
Other income 171,200 6,440 -- -- 177,640
---------------------------------------------------------------------------------------------
Total other income and $ 124,076 $ 257,932 $ -- $ -- $ 382,008
(expense)
Income before minority interest and
income taxes (221,273) 1,093,343 -- -- 872,070
Minority income -- -- -- (48,936) (48,936)
Income taxes -- (114,625) -- -- (114,625)
---------------------------------------------------------------------------------------------
Net income (loss) $ (221,273) $ 978,718 $ -- $ (48,936) $ 708,509
=============================================================================================
45
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS,
CONTINUED
(c) Exhibits
2.1 Asset Purchase Agreement dated effective as of July
1, 2000 by and between the Company and Hechi*
10.1 Cooperative Joint Venture Contract for Guangxi Guanghe Metals
Co., Ltd. dated January 27, 2000 by and between the
Company and Hechi*
23.1 Consent of Lam, Kwok, Kwan & Cheng C.P.A. Limited,
Independent Certified Public Accountants
23.2 Consent of Dennis W. Bersch, CPA, Independent Certified
Public Accountant
99.1 Articles of Association of Guangxi Guanghe Metals
Co., Ltd.*
- --------------
* Filed with the Securities and Exchange Commission on August 15, 2000 as an
exhibit to the registrant's Form 8-K dated August 1, 2000 and incorporated
herein by reference.
46
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 hereunto duly authorized.
BIOGAN INTERNATIONAL, INC.
Date: October 24, 2000 By: /s/ RONALD TOLMAN
--------------------------------------
Ronald Tolman, Chief Financial Officer
47