UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 6, 2005
COVENTURE INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 000-31539 98-0231607
-------- ----------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
Tang Xing Shu Ma Building, Suite 418
Tang Xing Road
Xian High Tech Area
Xian, Shaanxi Province
China
(Address of principal executive offices) (zip code)
86-29-88323325
(Registrant's telephone number, including area code)
Copies to:
Marc J. Ross, Esq.
Thomas A. Rose, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement.
On December 6, 2005, Coventure International Inc.("Coventure"), entered
into and closed a share purchase agreement with Xian Xilan Natural Gas Co.,
Ltd., a corporation formed under the laws of the People's Republic of China
("Xilan" or the "Company"), and each of Xilan's shareholders (the "Purchase
Agreement"). Pursuant to the Agreement, Coventure acquired all of the issued and
outstanding capital stock of Xilan from the Xilan shareholders in exchange for
4,000,000 shares of Coventure common stock. Concurrently with the closing of the
Purchase Agreement and as a condition thereof, Coventure entered into an
agreement with John Hromyk, its President and Chief Financial Officer, pursuant
to which Mr. Hromyk returned 5,971,178 shares of Coventure common stock to
Coventure for cancellation. Mr. Hromyk was not compensated in any way for the
cancellation of his shares of Coventure Common Stock. Upon completion of the
foregoing transactions, Coventure had an aggregate of 5,051,022 shares of common
stock issued and outstanding. The shares of common stock issued to the
shareholders of Xilan were issued in reliance upon the exemption from
registration provided by Regulation S under the Securities Act of 1933, as
amended.
In connection with the acquisition of Xilan on December 6, 2005, John
Hromyk resigned as the sole officer of Coventure and the following executive
officers of Xilan were appointed as executive officers of Coventure:
Name Title
------------- -----------------------------
Minqing Lu Chief Executive Officer
Xiaogang Zhu Chief Financial Officer
Yuman Chen Vice President - Marketing
Liangzhong Li Vice President - Construction
Item 2.01 Completion of Acquisition or Disposition of Assets
Description of Xilan
Xilan was incorporated under the laws of the People's Republic of China on
January 8, 2000 and is headquartered in Xian, China in Shaanxi Province. Xilan
primarily engages in the transmission and distribution of natural gas to
commercial, industrial and residential customers.
Industry Overview
China's rapidly expanding economy is stretching the limits of its energy
resources. Currently, only 3% of China's total energy usage is natural gas,
while the world's average consumption of natural gas is 24% of total energy
usage. (source: US Energy Information Administration ("EIA"), August 2005) Over
the next 5 years, China's use of natural gas is generally expected to double.
China's domestic reserve of natural gas was estimated to be 53.3 trillion cubic
feet (tcf) at the beginning of 2005 (source: EIA August 2005). The country's
largest reserves are located in western and north central China, including the
Province of Shaanxi, the home of Xilan.
2
In order to meet the growth in natural gas demand, the PRC government has
encouraged private companies to invest in and build the natural gas
infrastructure. On December 27, 2002, the Ministry of Construction issued a
memorandum stating that regulation of the public utility industry (including gas
distribution) should be liberalized and foreign and private investment
participation should be encouraged and welcomed. The memorandum encouraged
private investment in the sector and provided a legal framework for private
urban natural gas distribution.
Business
End User Delivery of Natural Gas
Xilan is the sole authorized provider of natural gas to residential
customers in certain parts of the Xian area, including Lantian County and the
Baqiao District. The company is currently supplying natural gas to approximately
50,000 households in the Xian area. Via a connecting point with a high pressure
pipeline network from the government operated Shaanxi Natural Gas Company,
natural gas with much lower pressure is delivered to Xilan's residential,
commercial and industrial customers. The company owns approximately 120 km of
high pressure pipeline. It is the only private company in Shaanxi province to
own this type of high pressure pipeline.
The management is seeking to expand supply services to the Shangluo and
Ankang areas of Shaanxi province. Upon approval from the government, Xilan would
also have the exclusive right to provide natural gas to residential and
commercial end users in those areas. In order to obtain such approval, Xilan was
required to submit a project proposal for the feasibility of supplying gas to
each area. In Ankang, Xilan applied to the Urban and Rural Construction Bureau.
In Shangluo, applications were made to the Municipal Administration Bureau. The
approval process takes approximately four to six months and is pending.
Wholesale to Filling Stations
Xilan sells compressed natural gas to filling stations on a wholesale
basis. The stations, in turn, sell natural gas to taxis and buses in Xian which
operate on compressed natural gas (CNG) technology. Government statistics
indicate that there are currently 5,000 buses and 20,000 taxis using natural gas
in Xian. Each bus uses an average of 70 cubic meters of CNG per day and taxis
use an average of 30 cubic meters of CNG per day (source: Xian Clean Fuel
Vehicles Commission 2005).
In July 2005, Xilan purchased a Compressor Station which is operated in
proximity to the company's pipeline and which allows the company to compress and
transport natural gas via truck to retail gas stations. The company also plans
to develop a liquefied form of natural gas (LNG) that can be transported over
longer distances by gas tanker truck and which could expand the company's
geographical sales. The Company is currently conducting a feasibility study with
regard to LNG production. This study should be completed in June 2006. In order
to construct an appropriate LNG plant, Xilan will require approximately US$19
million (RMB 150 million), with construction of the plant completed by year end
2006, testing in October 2007 and production commencing in December 2007,
assuming
3
appropriate financing can be obtained. Xilan can begin the process with its
current licenses but in the future will require approval from Shaanxi
Development and Reform Commission for LNG production.
Retail Filling Stations
Based on company estimates, by the end of June 2005, the total demand for
compressed natural gas vehicular fuel in the Xian area was approximately one
million cubic meters per day. The company expects demand for natural gas as a
transport fuel to continue to increase based on government clean energy policy
as expressed in the proposal for the Eleventh Ten Year Plan (2006-2010) and the
end-user cost advantages of CNG fuel over gasoline. The company estimates that
the average filling station in Xian pumps approximately 12,000 cubic meters of
natural gas per day. Based on a company survey, as of November 1, 2005, there
were 31 filling stations in Xian pumping approximately 372,000 cubic meters of
CNG fuel per day, a figure well below estimated total demand.
Xilan is establishing three new company-operated gas stations in the Xian
metropolitan area, which will be completed by January 2006. Currently, the
company purchases natural gas for 1.16 RMB/cubic meter and will sell each cubic
meter for 1.90RMB net of VAT. The construction time for each filling station is
45-60 days and the cost is approximately US$600,000. The construction of
additional facilities is dependent upon the company acquiring sufficient
additional capital when needed.
The company believes that its vertically integrated operation should allow
Xilan to be able to surpass the average sales volume of competing stations,
estimated at 12,000 cubic meters per day, based on its proprietary supply of CNG
from its own pipeline.
Marketing
Xilan markets the end user delivery of the natural gas segment of the
business through advertising in the general media and direct solicitation of
real estate development companies and government officials. Xilan participates
in trade shows and conferences such as the 7th Xian Global Gas Fuels Technology
Equipment and Auto Service Station Exhibition which was held in June 2005. For
the retail filling station segment of the business, the company will target
advertising to taxi drivers, who are the largest segment of end-users of the
company's CNG fuel product. A discount loyalty card will be made available to
the professional driving community including taxi and bus drivers. Brochures,
radio and newspaper advertisements and point of sale displays will also be
utilized.
Suppliers
Currently, Xilan has only one natural gas supplier, the Shaanxi Natural Gas
Co., Ltd., a government owned enterprise. In the past, contracts were renewed on
an annual basis. However, as the volume of usage has increased, Shaanxi Natural
Gas has revised their policies, and contract terms are now six months and
subject to review prior to renewal. Company management reports that it does not
expect any issues or difficulty in continuing to renew the supply contracts
4
going forward. Price points for natural gas are strictly controlled by the
government and have remained stable over the past 3 years.
Customers
Residential/Commercial
Xilan supplies natural gas to approximately 50,000 residential customers in
Lantian County, Lintong and Baqiao Districts in the jurisdiction of Xian. These
residences include apartment blocks and small estates. Commercial customers
include small businesses like restaurants and office buildings.
Industrial
Within the Xian region there are several industries to which Xilan supplies
natural gas as a raw material for their production process including the Xiwei
Aluminum Company.
Wholesale to Filling Stations
Currently, Xilan supplies natural gas to several of the privately owned and
operated CNG filling stations in the Xian area. Upon the completion of
construction of their company-owned filling stations, Xilan will also supply
their own filling stations for sales to retail end users.
Intellectual Property
Xilan has applied for a service mark on the "Xilan" name, which is used in
connection with all services.
Research and Development
Xilan has not had any material research and development expenses over the
past two years. The company projects expenditures of approximately $100,000 for
research and development in 2006. The funding source for all research and
development expenses is expected to come from operating cash flows.
Employees
As of November 1, 2005, Xilan employed a total of 151 employees in the
following capacities: 8 management, 15 administrative, 46 operational, 66 sales,
9 R & D, and 7 finance. Xilan believes that it has a good working relationship
with its employees. The company is not a party to any collective bargaining
agreements.
Governmental and Environmental Regulation
To date, Xilan has been compliant with all registrations and requirements
for the issuance and maintenance of all licenses required by the applicable
governing authorities in China.
5
These licenses include:
o Qualified Urban Fuel Operator Business License authorized by the Shaanxi
Construction Bureau, the local office of the Ministry of Construction,
effective from January 2, 2004 to January 2, 2009. (License number
SHAANRANZHI 166)
o License to Supply, Install Equipment and Maintain Gas Fuel Lines issued by
the local Gas Fuels for Heating Bureau, an agency of the Ministry of
Construction and the Xian Natural Gas Management Bureau. (License number:
XIRAN 136)
o Safety and Inspection Regulation for Special Equipment Safety Inspection
Standards for High Pressure Pipeline and Technical Safety Inspection
Regulations from the Shaanxi Quality and Technology Inspection Bureau for
compressor stations and pressure storage tank system. (Approval letter
reference: 2004SHAANGUOCHUHAN033)
o Annual Safety Inspection of Lightning Conductor Equipment approved by the
Shaanxi Meteorology Bureau. (Certificate number 0005274)
The Citygate and Compressor Stations are approved by the local office of the
Ministry of Construction.
Fuel service station standards are subject to regulation by the Ministry of
Construction, the General Administration of Quality Supervision, and the Bureau
of Inspection and Quarantine of the People's Republic of China. Certificates
will be issued upon satisfactory inspection of service stations.
There are various standards that must be met for filling stations including
handling and storage of gas, tanker handling, and compressor operation. These
standards are regulated by the Local Ministry of Construction and the Gas Field
Operation Department of the Municipal Administration Committee. Inspections will
be carried out by the Municipal Development and Reform Commission which will
issue a certificate for the handling of dangerous chemical agents.
Standards for the design and construction of filling stations must conform
to GB50156-2202 and technology standard BJJ84-2000.
Competition
The three largest state owned energy companies, CNPC (China National
Petroleum Corporation) Group, SINOPEC, and CNOOC are principally engaged in the
upstream supply of energy and are major players in exploration and
transportation of oil and gas. They build much of the country's high pressure
pipeline infrastructure. Natural gas is distributed to smaller regional firms
that redistribute the gas to the end user, either through lower pressure
pipeline networks, or via tankers in the form of liquid natural gas (LNG).
The company is aware of two privately owned companies in China which may be
considered to be direct competitors of the company: Xinjiang Guanghui LNG
Development Corporation Ltd and Xin'Ao Gas Field Ltd. Xinjiang Guanghui LNG
Development Corporation Ltd is primarily involved in the transportation of LNG
6
via tanker truck to storage facilities from natural gas wells. Xin'Ao Gas Field
Ltd. is a publicly owned company traded on the Hong Kong Exchange, distributing
natural gas via pipeline, doing business in 13 provinces and municipalities that
have a combined population of 31 million. Neither Xinjiang Guanghui nor Xin'Ao
is approved to supply natural gas to any area in which Xilan is currently
operating.
Currently, there are approximately 31 filling stations in Xian City.
Thirteen of these stations are state owned enterprises. The other 18 stations
are privately owned with the majority of these being single station operators.
The company believes that it can effectively compete with the stations based
upon its organization, experience and financial resources.
Description of Property
Xilan's properties are located in Lantian county, Baqiao District and
Gaoxin District of Xian, Shaanxi province. Xilan owns a 120km high-pressure
underground pipeline network and two Citygate stations (terminals) with
accompanying buildings and equipment. Xilan leases the main office building
where they are headquartered and three filling station sites.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Some of the statements contained in this Form 8-K that are not historical
facts are "forward-looking statements" which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Form 8-K, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:
1. Our ability to attract and retain management, and to integrate and maintain
technical information and management information systems;
2. Our ability to raise capital when needed and on acceptable terms and
conditions;
3. The intensity of competition; and
4. General economic conditions.
All written and oral forward-looking statements made in connection with this
Form 8-K that are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
7
Nine Months Ended September 30, 2005 Compared To Nine Months Ended September 30,
2004
Revenue. For the nine-month period ended September 30, 2005 as compared to
the nine-month period ended September 30, 2004, the Company generated net
revenues of $2,714,042 and $701,615 respectively, reflecting an increase of
$2,012,427 or 287%. The increase in revenues was due to increased construction
and installation revenue as the company signed new residential and commercial
customers. These customers pay approximately 60% of the construction costs up
front and the balance is paid as part of the monthly natural gas bill.
Gross profit. The Company achieved a gross profit of $1,298,743 for the
nine months ended September 30, 2005, an increase of $1,034,828 or 392%,
compared to $263,915 for the nine months ended September 30, 2004. Gross margin,
as a percentage of revenues, increased from 37.6% for the nine months ended
September 30, 2004, to 47.9% for the nine months ended September 30, 2005. The
increase in gross profit is due to the increased construction and installation
activity. The increase in gross margin is attributable to the margins that are
received during construction and installation, the company works with gross
margins that are approximately 50%, mostly due to the low cost of labor.
Operating expenses. The Company incurred operating expenses of $432,343 for
the nine months ended September 30, 2005, an increase of $39,818 or 10%,
compared to $392,525 for the nine months ended September 30, 2004. This increase
represents our continued development and implementation of our strategy to
develop the filling station business, as well as administering the increased
construction and installation activity. Aggregated selling expenses of $299,352
account for expenses related to costs associated with sales and marketing of the
Company's products. Operating expenses include general and administrative
expenses of $132,991 for the first nine months of 2005 and relate to cost of
maintaining the company's facilities, salaries and planning the initial roll out
of the filling station business.
Net income. The Company's net income was $736,802 for the nine months ended
September 30, 2005, an increase of $865,091 compared to $(128,289) for the nine
months ended September 30, 2004. The increase was fully attributed to the growth
of construction and installation fees.
Twelve Months Ended December 31, 2004 Compared To Twelve Months Ended December
31, 2003
Revenue. The Company generated revenues of $884,413 for the twelve months
ended December 31, 2004, a decrease of $687,880 or -43.8%, compared to
$1,572,293 for the twelve months ended December 31, 2003. The decrease in
revenue was due to the completion of the first phase of construction and
installation necessary to bring new customers into our system. This work was
completed ahead of time and accounts for the relatively minor amount of
construction and installation work in the same period of 2004. Due to the rapid
pace of the work completed in 2003, the company was able to focus on signing new
customers in 2004, hence the surge in construction and installations in 2005.
8
Gross profit. The Company achieved a gross profit of $370,367 for the
twelve months ended December 31, 2004, a decrease of $143,535 or 28%, compared
to $513,902 for the twelve months ended December 31, 2003. Gross margin, as a
percentage of revenues, decreased from 41.9% for the twelve months ended
December 31, 2003, to 32.7% for the twelve months ended December 31, 2004. The
decrease in gross margin was attributed to the 57% decrease in construction and
installation activity in 2004, this segment of our business, although not a
monthly recurring business is highly profitable with gross margins that are
nearly 50%.
Operating expenses. The Company incurred operating expenses of $487,718 for
the twelve months ended December 31, 2004, an increase of $42,499 or 9%,
compared to $530,217 for the twelve months ended December 31, 2003. These
operating expenses are related to increased sales and marketing costs to sign
new residential and commercial customers that were put on line in 2005. In
addition the company began to address the filling station strategy, identifying
possible locations for the filling stations and commencing the process of
applying to the proper governmental agencies for all necessary approvals and
licenses to construct the new filling stations.
Net Income. Net income decreased to ($161,768), a decrease of $240,982,
from $79,214. This loss can be attributed to increased marketing efforts to new
residential and commercial customers as well as the decline in revenues
associated with construction and installation activities that were completed
ahead of schedule.
Liquidity and Capital Resources
As of September 30, 2005 the Company had $1,001,243 cash and cash
equivalents on hand compared to $65,177 cash and cash equivalents as of
September 30, 2004. Based on past performance and current expectations, we
believe our cash and cash equivalents, cash generated from operations, as well
as future possible cash investments, will satisfy our working capital needs,
capital expenditures and other liquidity requirements associated with our
operations. The Company had net cash flows provided by operations of $69,256 for
the nine month period ended September 30, 2005 as compared to net cash provided
by operations of $396,079 in the corresponding period last year. The decrease in
net cash flows from operations in the current period as compared to
corresponding period last year was mainly due to an increase in accounts
receivables of $297,892 during the nine month period ended September 30, 2005.
Cashflows from investing activities resulted in net usage of $2,671,533 in
the current period as compared to net usage of $374,638 in the corresponding
period last year. The greater usage in the current period was mainly due to
advance payments made to equipment suppliers for investments necessary to
construct and build the filling stations. The Company had inflows from
investment activities of $3,503,897 during the nine month period ended September
30, 2005, the company issued 29,000,000 shares of common stock.
The majority of the Company's revenues and expenses were denominated
primarily in Renminbi ("RMB"), the currency of the People's Republic of China.
9
There is no assurance that exchange rates between the RMB and the U.S. Dollar
will remain stable. The Company does not engage in currency hedging. Inflation
has not had a material impact on the Company's business.
Executive Officers and Board of Directors
Below are the names and certain information regarding the Company's
executive officers, directors and director nominees following the acquisition of
Xilan:
Name Age Position
------ ---- ---------
Minqing Lu 43 Chief Executive Officer and Director*
Xiaogang Zhu 51 Chief Financial Officer
Yuman Chen 35 Vice President - Marketing
Liangzhong Li 44 Vice President - Construction
Qinan Ji 48 Chairman of the Board*
Bo Chen 48 Vice Chairman of the Board*
John Hromyk 44 Director
--------------
* Director nominee.
Officers are elected annually by the Board of Directors, at our annual
meeting, to hold such office until an officer's successor has been duly
appointed and qualified, unless an officer sooner dies, resigns or is removed by
the Board.
Background of Executive Officers and Directors
Qinan Ji, Chairman of the Board of Directors
Mr. Ji joined Xilan as the Chairman of the Board of Directors in 2005. In
1996, he founded the Anxian Hotel in Weinan City in Shaanxi Province. In 2001,
he formed the Xian Sunway Technology and Industry Co., Ltd. He has more than 20
years experience in the energy and petroleum industries in operational,
administrative, management and government relations roles. He received a
Bachelor of Economy Management from North West University (Shaanxi).
Bo Chen, Vice Chairman of the Board of Directors
Mr. Chen was named Vice Chairman of the Board of Directors of Xilan in
October 2005. He is currently the President of Bodisen Biotech, Inc., a publicly
listed company on the AMEX (symbol: BBC), and is one of its original founders
and stockholders having joined that company in 2000. From August 1997 to August
2001, Mr. Chen was Chief Operations Officer and Chief Technology Officer of
Shaanxi Bodisen Chemical Co., Ltd. From July 1994 to December 1997, he was the
Chief Executive Officer and President of Yang Ling Shikanglu Chemical Technology
Development Co., Ltd. He received his Bachelor of Science degree from Shaanxi
Normal College in July 1984.
10
Minqing Lu, Chief Executive Officer, Member of the Board of Directors
Mr. Lu joined Xilan in February 2005. He is Chief Executive Officer and
serves on the Board of Directors. From February 1999 to May 2002, he was the
executive director of Beijing Peixinkenu Investment Consultancy Company. From
May 2002 to July 2004, he was President of Fenghua Aidi Air Service Company in
Beijing. He received a Certificate of Management in July 1994 from Central Party
College.
Xiaogang Zhu, Chief Financial Officer
Mr. Zhu joined Xilan as the Chief Financial Officer in January 2005. He
spent 16 years working at the Ministry of General Logistics 3546 Company and his
last position there was manager of the Finance Department. From September 2000
to December 2004, Mr. Zhu was the Vice General Manager and CFO of Xian Dapeng
Biotech Co., Ltd. He received a Bachelor of Accounting degree from Xian Jiaotong
University.
Yuman Chen, Vice President, Marketing
Ms. Chen joined Xilan in the beginning of 2000. She has spent the last five
years at Xilan serving in the finance department until January 2001 when she
became the manager of the Operations Department. In January 2005, she became the
Vice President of Marketing Development and Customer Support. She received a
Bachelors Degree in Management from North West University (Shaanxi) in July
1996.
Liangzhong Li, Vice President, Construction
Mr. Li joined the company in February 2005. He has 15 years experience in
the natural gas industry. He is Vice President of Construction and oversees the
construction pipeline networks and installation of gas fittings. From 1999 to
2002, he was Vice General Manager of Leqing Pipeline of Liquefied Oil Gas
Company in Zhejiang Province. From 2002 to 2004, he was Vice General Manager and
Manager of Construction Department in Leqing Natural Gas Company. He received a
certificate of literature from North West University (Shaanxi) in July 1986.
John Hromyk, Director
John Hromyk has been Coventure's sole director since August 30, 2001 and
was President and Chief Financial Officer of Coventure from August 30, 2001
through December 6, 2005. From May 1999 to June 2001, he was the sole proprietor
of Banded Peak Venture Services, a business development and
management-consulting firm located in Calgary, Alberta. Banded Peak Venture
Service is presently inactive. For three years prior, he was the founder and
president of Hillside Estate Winery Ltd. located in Penticton, British Columbia.
Hillside Estate Winery, Ltd. is an established winery which produces a small
number of high quality varietal wines which are sold through its wine shop and
to specialty stores and restaurants. From June 1985 to April 1996, Mr. Hromyk
was a contract magazine publisher for numerous Canadian regional and national
periodicals. Educated in Vancouver, British Columbia Mr. Hromyk studied
11
biological sciences from 1980 to 1984 at Vancouver Community College (Langara)
and at the University of British Columbia. He also completed a Diploma Program
in Business Administration and Marketing from Capilano College in North
Vancouver in 1986.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation that Xilan has paid or that has accrued on behalf of Xilan's chief
executive officer and other executive officers with annual compensation
exceeding $100,000 during the years ended December 31, 2004, 2003 and 2002.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
-------------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------------ ------------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Award(s) Options/ LTIP Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) ($) SARs (#) Payouts ($) sation ($)
------------------------- ----------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
Huai'pu Zhang 2004 5,000 -0- -0- -0- -0- -0- -0-
President, CEO 2003 5,000 -0- -0- -0- -0- -0- -0-
And Director 2002 5,000 -0- -0- -0- -0- -0- -0-
EQUITY COMPENSATION PLAN INFORMATION
There has been no common stock authorized for issuance with respect to any
equity compensation plan as of the fiscal year ended December 31, 2004.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 7, 2005
with respect to the beneficial ownership of the Company's outstanding common
stock following the acquisition of Xilan by (i) any holder of more than five
(5%) percent; (ii) each of the named executive officers, directors and director
nominees; and (iii) our directors, director nominees and named executive
officers as a group. Except as otherwise indicated, each of the stockholders
listed below has sole voting and investment power over the shares beneficially
owned.
Common Stock Percentage of
Name of Beneficial Owner (1) Beneficially Owned Common Stock
Minqing Lu 173,913 3.4%
Qinan Ji 1,482,899(2) 29.3%(2)
Bo Chen 515,942(3) 10.2%(3)
Yangling Bodisen Biotech
Development Co, Ltd. 515,942(3) 10.2%
12
John Hromyk -- --
Xiang Ji 364,058 7.2%
Shaohu Jia 270,145 5.3%
Xian Sunway Technology
& Industry Co., Ltd 718,841(2) 14.2%
All officers, directors and
director nominees as a group 2,172,754(2)(3) 42.9%
(4 persons)
(1) Except as otherwise indicated, the address of each beneficial owner is
c/o Xian Xilan Natural Gas Co., Ltd., Tang Xing Shu Ma Building, Suite 418,
Tang Xing Road, Xian High Tech Area, Xian, Shaanxi Province, China.
(2) Of which 718,841 shares are owned by Xian Sunway Technology & Industry
Co., Ltd. ("Sunway"). Qinan Ji owns 42.1% of Xian Sunway and may be deemed
to beneficially own such shares.
(3) Of which 515,942 shares are owned by Yangling Bodisen Biotech
Development Co, Ltd. ("Bodisen"). Mr. Chen is President, a member of the
Board of Directors and a 23% stockholder of Bodisen and may be deemed to
beneficially own such shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2005, Xilan loaned $77,169 to Qinan Ji, Chairman of the Board. The
loan was made on a interest free basis and was repaid in its entirety in October
2005.
In July 2005, Xilan loaned $94,393 to Xian Sunway Technology & Industry
Co., Ltd., a principal shareholder of Xilan. The loan was made on an interest
free basis and was repaid in its entirety on November 2005.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 30,000,000 shares of common stock
at a par value of $0.0001 per share and 5,000,000 shares of preferred stock, par
value $.0001. As of December 7, 2005, there were 5,051,022 shares of common
stock of the Company issued and outstanding and no shares of preferred stock
outstanding.
Holders of the Company's common stock are entitled to one vote for each
share on all matters submitted to a stockholder vote. Holders of common stock do
not have cumulative voting rights. Therefore, holders of a majority of the
shares of common stock voting for the election of directors can elect all of the
directors. Holders of the Company's common stock representing a majority of the
voting power of the Company's capital stock issued, outstanding and entitled to
13
vote, represented in person or by proxy, are necessary to constitute a quorum at
any meeting of stockholders. A vote by the holders of a majority of the
Company's outstanding shares is required to effectuate certain fundamental
corporate changes such as liquidation, merger or an amendment to the Company's
articles of incorporation.
Holders of the Company's common stock are entitled to share in all
dividends that the board of directors, in its discretion, declares from legally
available funds. In the event of liquidation, dissolution or winding up, each
outstanding share entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over the common stock. The Company's common stock has
no pre-emptive rights, no conversion rights and there are no redemption
provisions applicable to the Company's common stock.
Market for Common Equity
On March 17, 2004, the Company approved for listing on the Over-the-Counter
Bulletin Board under the symbol "CVNI". The following table sets forth the range
of high and low closing bid quotations for our common stock since our common
stock was listed on the Over-the-Counter Bulletin Board. The quotations
represent inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions.
Period High Low
December 6, 2005 $11.00 $2.10
October 31, 2005 $7.00 $2.24
July 31, 2005 $6.00 $0.50
April 30, 2005 $2.90 $1.05
January 31, 2005 $7.25 $0.45
October 30, 2004 $0.45 $0.45
July 31, 2004 $1.50 $0.25
April 30, 2004 $0.30 $0.30
The Securities Exchange Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in penny stocks. Penny
stocks are generally equity securities with a price of less than $5.00, other
than securities registered on certain national securities exchanges or quoted on
the Nasdaq system, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system. The penny stock rules require a broker-dealer, prior to a transaction in
a penny stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the Commission, which: (a) contains a
description of the nature and level of risk in the market for penny stocks in
both public offerings and secondary trading; (b) contains a description of the
broker's or dealer's duties to the customer and of the rights and remedies
available to the customer with respect to a violation to such duties or other
requirements of Securities' laws; (c) contains a brief, clear, narrative
description of a dealer market, including bid and ask prices for penny stocks
and significance of the spread between the bid and ask price; (d) contains a
14
toll-free telephone number for inquiries on disciplinary actions; (e) defines
significant terms in the disclosure document or in the conduct of trading in
penny stocks; and (f) contains such other information and is in such form as the
Commission shall require by rule or regulation. The broker-dealer also must
provide, prior to effecting any transaction in a penny stock, the customer: (a)
with bid and offer quotations for the penny stock; (b) the compensation of the
broker-dealer and its salesperson in the transaction; (c) the number of shares
to which such bid and ask prices apply, or other comparable information relating
to the depth and liquidity of the market for such stock; and (d) monthly account
statements showing the market value of each penny stock held in the customer's
account.
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules; the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for our stock and, as a result, stockholders may have
difficulty selling those securities.
Recent Sales of Unregistered Securities
We did not complete any unregistered sales of our common stock during our
fiscal year ended July 31, 2005.
Dividends
There are no restrictions in our articles of incorporation or bylaws that
prevent us from declaring dividends. The Delaware General Corporation Law,
however, does prohibit us from declaring dividends where, after giving effect to
the distribution of the dividend:
1. We would not be able to pay our debts as they become due in the usual
course of business; or
2. Our total assets would be less than the sum of our total liabilities
plus the amount that would be needed to satisfy the rights of shareholders who
have preferential rights superior to those receiving the distribution.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding, nor is its
property the subject of a pending legal proceeding, that is not in the ordinary
course of business or otherwise material to the financial condition of the
Company's business.
15
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On December 6, 2005, in connection with the acquisition of Xilan, the
Company terminated the services of Manning Elliot, Chartered Accountants, as
Coventure's independent auditor. Manning Elliot, Chartered Accountants performed
the audits for the two year period ended July 31, 2005, which reports for the
two years ended July 31, 2005 and 2004 did not contain any adverse opinion or a
disclaimer of opinion, nor was it qualified as to audit scope or accounting
principles but did carry a modification as to going concern. During Coventure's
two most recent fiscal years and during any subsequent interim period prior to
the December 6, 2005 termination as Coventure's independent auditors, there were
no disagreements with Manning Elliot, Chartered Accountants, with respect to
accounting or auditing issues of the type discussed in Item 304(a)(iv) of
Regulation S-B.
On December 7, 2005 Coventure provided Manning Elliot with a copy of this
disclosure and requested that it furnish a letter to Coventure, addressed to the
SEC, stating that it agreed with the statements made herein or the reasons why
it disagreed.
On December 7, 2005, Coventure's board of directors approved the engagement
of the firm of Kabani & Company, Inc. as Coventure's independent auditors.
During Coventure's two most recent fiscal years or any subsequent interim period
prior to engaging Kabani & Company, Inc., Coventure had not consulted Kabani &
Company, Inc. regarding any of the accounting or auditing concerns stated in
Item 304(a)(2) of Regulation S-B.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's directors and executive officers are indemnified as provided
by the Delaware General Corporation Law and the Company's Bylaws. These
provisions state that the Company's directors may cause the Company to indemnify
a director or former director against all costs, charges and expenses, including
an amount paid to settle an action or satisfy a judgment, actually and
reasonably incurred by him as a result of him acting as a director. The
indemnification of costs can include an amount paid to settle an action or
satisfy a judgment. Such indemnification is at the discretion of the Company's
board of directors and is subject to the Securities and Exchange Commission's
policy regarding indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
Item 3.02 Unregistered Sales of Equity Securities.
See Item 2.01.
Item 4.01 Changes in Registrant's Certifying Accountant.
16
See Item 2.01.
Item 5.01 Changes in Control of Registrant.
See Item 2.01.
Item 5.02 Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers.
See Item 1.01.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
In connection with the acquisition of Xilan, the Company is changing its
fiscal year end to December 31.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of business acquired.
(b) Pro forma financial information.
(c) Exhibits
Exhibit
Number Description
--------------------------------------------------------------------------------
10.1 Share Purchase Agreement made as of December 6, 2005 among Coventure
International Inc., Xian Xilan Natural Gas Co., Ltd. and each of
Xilan's shareholders.
10.2 Return to Treasury Agreement between Coventure International Inc.
and John Hromyk, dated December 6, 2005.
16.1 Letter from Manning Elliot, Chartered Accountants, dated December 7,
2005
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COVENTURE INTERNATIONAL INC.
Dated: December 7, 2005 By: /s/ MINQING LU
--------------
Minqing Lu,
Chief Executive Officer
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Xi'an Xilan Natural Gas Company, LTD.
We have audited the accompanying balance sheet of Xi'an Xilan Natural Gas
Company, LTD. (the "Company") as of December 31, 2004 and the related statements
of operations, stockholders' equity and cash flows for the years ended December
31, 2004 and 2003. 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 audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). 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 financial position of Xi'an Xilan Natural Gas
Company, LTD as of December 31, 2004 and the results of its operations and its
cash flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
November 13, 2005
1
XI'AN XILAN NATURAL GAS CO., LTD
BALANCE SHEET
DECEMBER 31, 2004 AND SEPTEMBER 30, 2005 (UNAUDITED)
ASSETS
December 31, September 30,
2004 2005
(unaudited)
CURRENT ASSETS:
Cash & cash equivalents $ 62,998 $ 1,001,243
Accounts receivable, net 4,944 308,065
Other receivable 23,405 57,902
Receivable from related party - 171,563
Inventory 46,442 25,864
Advances to suppliers 725 297,712
Prepaid expense 200 16,961
------------------ ------------------
Total current assets 138,712 1,879,311
PROPERTY AND EQUIPMENT, net 5,267,344 5,405,515
CONTRACT IN PROGRESS: 377,497 -
OTHER ASSET: - 2,491,411
------------------ ------------------
$ 5,783,554 9,776,237
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable & accrued expense $ 97,238 $ 163,974
Other payable 60,666 261,772
Unearned revenue 931,440 215,724
------------------ ------------------
Total current liabilities 1,089,344 641,470
STOCKHOLDERS' EQUITY:
Common stock;
10,000,000 registered and 30,000,000 unregistered shares issued and outstanding 4,832,396
69,000,000 registered shares issued and outstanding 8,336,893
Cumulative translation adjustment 572 199,859
Accumulated deficit (142,215) 515,582
Statutory reserve 3,457 82,433
------------------ ------------------
Total stockholders' equity 4,694,210 9,134,767
------------------ ------------------
$ 5,783,554 $ 9,776,237
================== ==================
2
XI'AN XILAN NATURAL GAS CO., LTD
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
For the Years For the Nine Months
Ended December 31, Ended September 30,
(unaudited)
2004 2003 2005 2004
--------------- ---------------- ---------------- ----------------
Revenue
Natural gas revenue $ 306,306 $ 237,312 $ 1,065,017 $ 211,990
Construction / installation revenue 578,107 1,334,981 1,649,025 489,625
--------------- ---------------- ---------------- ----------------
Total revenue 884,413 1,572,293 2,714,042 701,615
Cost of revenue
Natural gas cost 226,944 94,617 830,527 157,065
Construction / installation cost 287,102 963,775 584,772 280,635
--------------- ---------------- ---------------- ----------------
514,046 1,058,392 1,415,299 437,700
Gross profit 370,367 513,902 1,298,743 263,915
Operating expenses
Selling expenses 387,768 344,242 299,352 282,924
General and administrative expenses 142,449 143,476 132,991 109,600
--------------- ---------------- ---------------- ----------------
Total operating expenses 530,217 487,718 432,343 392,525
--------------- ---------------- ---------------- ----------------
Income (loss) from operations (159,850) 26,183 866,400 (128,609)
Non-operating income (expense):
Gain on conversion of debt - 82,763 - -
Interest expense - (13,396) - -
Interest income 1,618 524 894 541
Other expense (3,535) (242) (468) (221)
--------------- ---------------- ---------------- ----------------
Total non-operating income (expense) (1,918) 69,649 426 321
--------------- ---------------- ---------------- ----------------
Net income (loss) before income tax (161,768) 95,833 866,826 (128,289)
Income tax - 16,618 130,024 -
--------------- ---------------- ---------------- ----------------
--------------- ---------------- ---------------- ----------------
Net income (loss) $ (161,768) $ 79,214 $ 736,802 $ (128,289)
=============== ================ ================ ================
Basic and diluted weighted average shares outstanding 40,000,000 10,082,192 69,000,000 40,000,000
=============== ================ ================ ================
Basic and diluted net income (loss) per share $ (0.00) $ 0.01 $ 0.01 $ (0.00)
=============== ================ ================ ================
3
XI'AN XILAN NATURAL GAS CO., LTD
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Cumulative Total
stock translation Statutory Accumulated stockholders'
shares Amount adjustment Reserve deficit equity
------------ ------------- -------------- ------------- ------------- -----------
Balance, December 31, 2002 10,000,000 $ 1,207,729 $ - $ - $ (56,204) $ 1,151,525
Net income for the year ended December 31, 2003 - - - - 79,214 79,214
Conversion of debt to equity 30,000,000 3,624,667 - - - 3,624,667
Statutory reserve - - - 3,457 (3,457) -
------------ ------------- -------------- ------------- ------------- -----------
Balance, December 31, 2003 40,000,000 4,832,396 - 3,457 19,553 4,855,406
Cumulative translation adjustment - - 572 - - 572
Net loss for the year ended December 31, 2004 - - - - (161,768) (161,768)
------------ ------------- -------------- ------------- ------------- -----------
Balance December 31, 2004 40,000,000 $ 4,832,396 $ 572 $ 3,457 $ (142,215) $ 4,694,210
============ ============= ============== ============= ============= ===========
4
XI'AN XILAN NATURAL GAS CO., LTD
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
For the Nine Months
For the Years Ended September 30,
Ended December 31, (unaudited)
2004 2003 2005 2004
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (161,768) $ 79,214 $ 736,802 $ (128,289)
Adjustments to reconcile net income (loss) to net cash
provided in operating activities:
Gain on conversion of debt - (82,763) - -
Loss on disposal of property 3,242 - - -
Depreciation and amortization 314,453 260,765 204,426 235,757
(Increase) / decrease in assets:
Accounts receivable (4,943) 1,482 (297,892) (16,543)
Inventory (46,440) - 21,271 (56,848)
Other receivable (6,525) (5,715) (33,390) 4,193
Receivable from related party - - (168,666) -
Advances to suppliers 14,982 15,500 (291,955) 15,706
Prepaid expense (99) (101) (16,474) (597)
Contract in progress 118,537 (363,523) 379,584 496,014
Increase / (decrease) in current liabilities:
Accounts payable (64,344) (1,590,145) (1,128,496) 26,814
Payable to related party (917,642) 4,501,535 - (120,818)
Other payable (2,854) (1,999,673) 1,388,554 (6,271)
Unearned revenue 777,436 (174,197) (724,508) (53,040)
----------- ----------- ----------- -----------
Net cash provided by operating activities 24,035 642,379 69,256 396,079
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on purchase of equipment (5,981) (282,917) (222,195) (374,638)
Advance payment on purchase of equipment - other asset - - (2,449,338) -
Proceeds from disposal of property 1,208 - - -
----------- ----------- ----------- -----------
Net cash used in investing activities (4,773) (282,917) (2,671,533) (374,638)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term loan - (362,441) - -
Stock issued for cash - - 3,503,897 -
----------- ----------- ----------- -----------
Net cash provided by (used) in financing activities - (362,441) 3,503,897 -
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents - - 36,625 -
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 19,262 (2,980) 938,245 21,441
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 43,736 46,716 62,998 43,736
----------- ----------- ----------- -----------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 62,998 $ 43,736 $ 1,001,243 $ 65,177
=========== =========== =========== ===========
5
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Xi'an Xilan Natural Gas Co, Ltd. (The "Company") was incorporated on January 8,
2000 in Xi'an city in the Shaanxi province, China. The core business of the
Company is distribution of natural gas to commercial, industrial and residential
customers, construction of pipeline networks, and installation of natural gas
fittings and parts for end-users. The Company has an exclusive permit to provide
gas utility service in Lantian County and Baqiao District of Xi'an city, China.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
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 those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and cash in time deposits,
certificates of deposit and all highly liquid debt instruments with original
maturities of three months or less.
Accounts and other receivable
Accounts and other receivable are recorded at net realizable value consisting of
the carrying amount less an allowance for uncollectible accounts, as needed.
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Reserves are recorded primarily on a
specific identification basis.
Advances to suppliers
The Company advances to certain vendors for purchase of its material. The
advances to suppliers are interest free and unsecured.
Inventory
Inventory is stated at the lower of cost, as determined on a first-in, first-out
basis, or market. Management compares the cost of inventories with the market
value, and allowance is made for writing down the inventories to their market
value, if lower. Inventory consists of material used in the construction of
pipelines.
6
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Property, equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives as follows:
Office equipment 5 years
Operating equipment 5-20 years
Vehicles 5 years
Buildings 30 years
At December 31, 2004, the following are the details of the property and
equipment:
Office equipment $ 17,419
Operating equipment 5,798,307
Vehicles 57,416
Buildings 167,274
Less: Accumulated depreciation (773,073)
------------
Net book value $ 5,267,344
============
September 30, 2005, the following are the details of the property and equipment
(unaudited):
Office equipment $ 19,775
Operating equipment 5,930,510
Vehicles 158,616
Buildings 189,073
Construction in process 106,178
Less: Accumulated depreciation (998,637)
------------
Net book value $ 5,405,515
============
Long-lived assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on its
review, the Company believes that, as of December 31, 2004 there were no
significant impairments of its long-lived assets.
7
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Contracts-in progress
Contracts in progress consist of cost of construction of pipelines for
customers.
Fair value of financial instruments
Statement of financial accounting standard No. 107, Disclosures about fair value
of financial instruments, requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff
accounting bulletin (SAB) 104. Revenue is recognized when services are rendered
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue. Revenue from gas sales is recognized when gas is pumped
through pipelines to the end users. Revenue from construction and installation
of pipelines is recorded when the contract is completed and accepted by the
customers. The construction contracts are usually completed within one to two
months time.
Deferred revenue
Deferred revenue represents prepayments by customers for gas purchases and
advance payments on construction and installation of pipeline contracts. The
Company records such prepayment as unearned revenue when the payments are
received.
Advertising Costs
The Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the year ended
December 31, 2004 and 2003 were insignificant.
Stock-based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value method. The
Company uses the intrinsic value method prescribed by APB 25 and has opted for
the disclosure provisions of SFAS No.123. No options have been granted for the
years ended December 31, 2004 and 2003 and for the nine months ended September
30, 2005.
8
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. At December 31, 2004 and September 30, 2005, there was
no significant book to tax differences.
LOCAL PRC INCOME TAX
Pursuant to the tax laws of China, general enterprises are subject to income tax
at an effective rate of 33%. The Company is in the natural gas industry whose
development is encouraged by the government. According to the income tax
regulation, any company engaged in the natural gas industry enjoys a favorable
tax rate. Accordingly, the Company's income is subject to a reduced tax rate of
15%.
At December 31, 2004, the Company had net operating loss of approximately
$162,000 all of which was generated in the Peoples Republic of China (PRC).
Under PRC income tax rules, net operating losses can be carried forward for 5
years. The Company has recorded a 100% valuation allowance on the gross amount
of deferred tax assets of $25,000 based on the uncertainty of its realization at
December 31, 2004. There were no other book to tax differences at December 31,
2004 and 2003.
A reconciliation of tax at United States federal statutory rate to provision for
income tax recorded in the financial statements is as follows:
For the Years For the Nine Months
Ended December 31, Ended September 30,
(unaudited)
2004 2003 2005 2004
------------- -------------- ----------- ------------
Tax provision (credit) at statutory rate (34%) 34% 34% (34%)
Foreign tax rate difference 19% (19%) (19%) 19%
Change in valuation allowance 15% - - 15%
Other 2%
------------- -------------- ----------- ------------
- 17% 15% -
============= ============== =========== ============
Foreign Currencies Translation
Assets and liabilities in foreign currency are recorded at the balance sheet
date at the rate prevailing on that date. Items of income statement are recorded
at the average exchange rate. Gain or loss on foreign currency transactions are
9
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
reflected on the income statement. Gain or loss on financial statement
translation from foreign currency are recorded as a separate component in the
equity section of the balance sheet as component of comprehensive income. The
functional currency of the Company is Chinese Renminbi.
Basic and diluted net loss per share
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
Statement of Cash Flows:
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Supplemental Disclosure to Cash Flows
During the year ended December 31, 2003 cash from financing and operating
activities exclude the effect of the conversion of debt to equity for $3,624,667
and gain on conversion of debt of 82,763.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure
About Segments of an Enterprise and Related Information" requires use of the
"management approach" model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company. SFAS
131 has no effect on the Company's consolidated financial statements as the
Company consists of one reportable business segment. All revenue is from
customers in People's Republic of China. All of the Company's assets are located
in People's Republic of China.
Recent Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We are evaluating the effect the adoption of this
interpretation will have on its financial position, cash flows and results of
operations.
10
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material effect on its consolidated financial position or results of operations.
The Company believes that the adoption of this standard will have no material
impact on its financial statements.
3. OTHER ASSET
Other asset consists of advance payments for purchases of certain equipment.
4. OTHER PAYABLE
Other payable consists of the following as of December 31, 2004:
Other accounts payable $ 26,360
Welfare payable 14,673
Tax payable 18,874
Other levies 759
----------
Total $ 60,666
==========
Other payable consists of the following as of September 30, 2005 (unaudited):
Other accounts payable $ 24,659
Welfare payable 13,433
Tax payable 220,280
Other levies 3,400
----------
Total $ 261,772
==========
5. SHAREHOLDERS' EQUITY
On January 1, 2003, the Company had 10,000,000 registered shares issued and
outstanding.
On December 30, 2003, the Company converted $ 3,624,667 of debt in to 30,000,000
shares of common stock. The Company recorded a gain on conversion of $82,763 as
a result of this transaction. The shares were recorded as paid in capital since
the shares were not registered.
The Company did not have any issuances of its stock in the year ended December
31, 2004.
During the nine months ended September 30, 2005, the Company issued 29,000,000
shares of common stock for $3,503,897 cash contribution (unaudited).
11
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
6. EMPLOYEE WELFARE PLAN
The Company has established its own employee welfare plan in accordance with
Chinese law and regulations. The Company makes annual contributions of 14% of
all employees' salaries to employee welfare plan. The total expense for the
above plan was $10,045 and $9,485 and $8,360 and $7,528 for the years ended
December 31, 2004 and 2003 and for nine month periods ended September 30, 2005
and 2004 (unaudited), respectively.
7. STATUTORY COMMON WELFARE FUND
As stipulated by the Company Law of the People's Republic of China (PRC) as
applicable to Chinese companies with foreign ownership, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:
(i) Making up cumulative prior years' losses, if any;
(ii) Allocations to the "Statutory surplus reserve" of at least 10% of income
after tax, as determined under PRC accounting rules and regulations, until
the fund amounts to 50% of the Company's registered capital;
(iii) Allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company's "Statutory common
welfare fund", which is established for the purpose of providing employee
facilities and other collective benefits to the Company's employees; and
(iv) Allocations to the discretionary surplus reserve, if approved in the
shareholders' general meeting.
The Company has appropriated $78,976 as reserve for the statutory surplus
reserve and welfare fund for the nine months ended September 30, 2005
(unaudited) and $3,547 for the year ended December 31, 2003. No allocation was
made for the year ended December 31, 2004 as the company had net loss from
operations.
8. EARNINGS PER SHARE
Earnings per share for the years ended December 31, 2004 and 2003 and for the
nine months ended September 30, 2005 and 2004 (unaudited) are determined by
dividing net income for the periods by the weighted average number of both basic
and diluted shares of common stock and common stock equivalents outstanding. At
December 31, 2004 and 2003 and September 30, 2005 and 2004, there were no
dilutive securities.
9. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company purchases all of the natural gas for resale from one vendor. No
amount was owing to this vendor at December 31, 2004 or at September 30, 2005.
Three major customers accounted for 84%, 92% and 82% of the construction revenue
for the years ended December 31, 2004 and 2003 and for the nine months ended
September 30, 2004 (unaudited), respectively. One customer accounted for 87% of
the construction revenue for the nine months ended September 30, 2005.
12
XI'AN XILAN NATURAL GAS CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
The Company's operations are carried out in the People's Republic of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in the People's Republic of China, by the general state of the People's Republic
of China`s economy. The Company's business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
10. RELATED PARTY TRANSACTIONS
The Company has receivable from related parties - shareholders of the Company in
the amount of $171,563 as of September 30, 2005 (unaudited).
11. SUBSEQUENT EVENT
The Company entered in to an agreement with one of its customer under which, the
Company will acquire certain equipment for $2,765,200 (RMB 22,300,000). The
Company paid $ 1,240,000 (RMB 10,000,000) on April 22, 2005. At September 30,
2005, $308,668 (RMB 2,489,262) is included in accounts receivable from this
customer, which will be adjusted against the purchase price at the date of
transfer of title to the equipment. The agreement stipulates that 100 days after
the advance payment, the equipment will be transferred to the Company. The
remaining unpaid balance will be paid by the Company through delivery of natural
gas to this customer at a specified price per cubic meter of gas.
13
CONVENTURE INTERNATIONAL, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 2005
(Unaudited)
The following Unaudited Pro Forma Statement of operations has been derived from
the audited financial statements of Coventure International, Inc., (A) for the
year ended July 31, 2005 and the audited financial statements of Xi'an Natural
Gas Co. (B) for the year ended December 31, 2004, the unaudited financial
statements of (B) for the nine months ended September 30, 2004 and September 30,
2005, respectively. The Pro Forma Statements of Operations reflects the
acquisition of B by A (a reporting company) on December 6, 2005 in an
acquisition accounted for using the reverse acquisition method of accounting and
assumes that such acquisition was consummated as of August 1, 2004.
The Pro Forma Statement of Operations and financial conditions should be read in
conjunction with the Financial Statements of A, the Financial Statements of B
and the Notes to the financial statements. The Pro Forma Statements do not
purport to represent what the Company's results of operations and financial
conditions would actually information and the assumption set forth in the foot
notes below, which management believes are reasonable.
A B Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
-------------- ------------- --------------- ----------------
Net Revenue $ 234,777 $ 2,896,840 $ - $ 3,131,617
Cost of revenue - 1,491,645 - 1,491,645
-------------- ------------- --------------- ----------------
Gross profit 234,777 1,405,195 - 1,639,972
Operating expenses 270,484 570,035 - 840,519
-------------- ------------- --------------- ----------------
Loss from operations (35,707) 835,159 - 799,452
Non-operating income (Expenses),
minority interest and income tax 57,881 (1,813) - 56,068
-------------- ------------- --------------- ----------------
Net gain (loss) $ 22,174 $ 833,347 $ - $ 855,521
============== ============= =============== ================
EARNINGS PER SHARE
Weighted -average number of
shares outstanding 7,022,000 40,000,000 (3) 20,204,088
============== ============= ================
Gain (Loss) per share $ 0.00 $ 0.02 $ 0.04
============== ============= ================
NOTES:
(1) Loss per share data shown above are applicable for both primary and fully
diluted.
(2) Weighted-average number of shares outstanding for the combined entity
includes all shares issued before the acquisition as if outstanding as of
August 1, 2004.
(3) Weighted average number of shares outstanding for combined entity includes
5,051,022 shares of A as of August 1, 2004 after talking in to account
4,000,000 shares issued to B and 5,971,178 shares of the principal
shareholder of A that were cancelled as a result of the merger. The
weighted average shares reflect a 4:1 stock split after the consumation of
the merger.
14
CONVENTURE INTERNATIONAL, INC.
PRO FORMA STATEMENT OF FINANCIAL CONDITIONS
AS ON JULY 31, 2005
(Unaudited)
The following unaudited Pro Forma Statement of financial conditions has been
derived from the audited financial statements of Conventure International, inc.
(A) as of July 31, 2005 and the unaudited financial statements of Xi'an Natural
Gas Co. (B) as of September 30, 2005. The unaudited Pro Forma Statements of
financial conditions reflects the acquisition of B by A (a reporting company) in
a merger using reverse acquisition method of accounting.
A B Pro Forma Pro Forma
(Historical) (Historical) Adjustment Combined
-------------- ------------- --------------- ----------------
ASSETS
Current Assets $ 23,490 $ 1,879,311 (1) $ (23,490) $ 1,879,311
Property & equipment, net 32,063 5,405,515 (1) (32,063) 5,405,515
Intangible assets, net - - - -
Other non-current assets - 2,491,411 2,491,411
-------------- ------------- --------------- ----------------
TOTAL ASSETS $ 55,553 $ 9,776,237 $ (55,553) $ 9,776,237
============== ============= =============== ================
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities $ 161,397 $ 641,470 (1) $ (161,397) $ 641,470
Long-term liabilities 5,493 - (1) (5,493) 0
Stockholders' equity;
Common stock 702 8,336,893 (2) (8,336,374) 2,075
(4) 1,556
Additional paid in capital 139,280 - (3) (139,280) 8,334,818
(2) 8,335,672
(4) (1,556)
Statutory reserve - 82,433 - 82,433
Subscription receivable - - - -
Accumulated other comprehensive gain (loss) (8,451) 199,859 (3) 8,451 199,859
Retained earnings (deficit) (242,868) 515,582 (3) 242,868 515,582
-------------- ------------- --------------- ----------------
Total stockholders' equity (deficit) (111,337) 9,134,767 111,337 9,134,767
-------------- ------------- --------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 55,553 $ 9,776,237 $ (55,553) $ 9,776,237
============== ============= =============== ================
NOTES;
(1) Elimination of assets and liabilities of A sold to A's principal stockholder
in return for 5,971,178 shares
(2) Recapitalization of B to account for issuance of 4,000,000 shares of A to
shareholders of B
(3) Elimination of pre-acquisition retained earnings of (A)
(4) To account for 4:1 stock split after merger
15