CHINA CONTINENTAL INC /UT/, 10-K, 1997-07-25

CHINA CONTINENTAL INC /UT/
10-K, 1997-07-25
GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
-------------------
FORM 10-K

(Mark One)

[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 1996
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from__________to__________.

Commission File No. 33-3276-D

CHINA CONTINENTAL, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)

Utah 87-0431063
------------------------- ------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

1801-1806 Hua Qin International Building, 340 Queen's Road Central, Hong Kong
-----------------------------------------------------------------------------
(Address of principal executive offices)

852-2542-2612
-------------
(Issuer's telephone number)

1140 Avenue of the Americas, Penthouse Floor, New York, New York 10036
-------------------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [ ] NO [x]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

The aggregate market value of voting stock held by non-affiliates of the
registrant based upon the closing sale price of the stock as reported on March
31, 1996, was $53,625,000.

As of March 31, 1996, 26,000,000 shares of Common Stock of the issuer were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------

None.

<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>

PART I

<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . 5

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 6

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . 8

Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . 14

Item 9. Changes in and Disagreements on Accounting and Financial Disclosure. . . . . . . . . . . . . . 14

PART III

Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . .. 14

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 16

Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . .. 18

PART IV

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . 18

Index to Financial Statements and Schedules . . . . . . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>

This Report contains, in addition to historical information,
forward-looking statements that involve risks and
uncertainties. These forward-looking statements include
statements regarding the Company's development, growth and
expansion plans and the sufficiency of the Company's liquidity
and capital. Such statements are based on management's current
expectations and are subject to a number of uncertainties and
risks that could cause actual results to differ materially
from those described in the forward-looking statements.

- 1 -
<PAGE>

PART 1

ITEM 1. BUSINESS
--------

The Company
- -----------

China Continental, Inc. (the "Company" or "CHCL") designs, installs and
sells plastic production lines on a turn-key basis and sells machinery and
equipment for the manufacture of plastic products. The major portion of sales
are to plastic manufacturers through China Fujian Foreign Trade Holdings Limited
in the People's Republic of China ("PRC" or "China"). The Company has completed
over 50 turn-key projects throughout the PRC, varying in size from $300,000 to
$5 million United States dollars. Typically turn-key projects take four to eight
months to complete, depending on size and complexity. The installation and
maintenance of production lines are handled jointly by the original equipment
manufacturers and the Company. The Company became a public company via a reverse
merger in February 1995.

Market and Client Base
- ----------------------

In the 1990's, the Company began to market fully automated production
lines to plastic product manufacturers in the PRC on a turn-key basis. The
majority of turn-key projects were sold to state-owned companies in the PRC.

During the last two fiscal years of the Company, substantially all
(approximately 95%) of the revenues of the Company came from the assembly of
production lines on a turn-key basis with China (Fujian) Foreign Trade Center
Holdings Company, a state controlled entity ("CFTC"). The Company's relationship
with CFTC is vulnerable to an increase in the level of competition from overseas
and domestic suppliers as well as a change in the supply and demand relationship
with CFTC.

In addition, the Company's relationship with CFTC may be adversely
affected by significant political, economic and social uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies for the
past 18 years, no assurance can be given that the PRC government will continue
to pursue such policies or that such policies may not be significantly altered,
especially in the event of a change in leadership, social or political
disruption or unforeseen circumstances affecting the PRC's political, economic
and social conditions. There can be no assurance that the PRC government's
pursuit of economic reforms will be consistent or effective.

Business Segments
- -----------------

The Company has two principal business segments:

o Sale of turn-key plastic production lines; and

o Sale of machinery and equipment, accessories, spare parts, raw
materials and steel.

Sale of Turn-key Plastic Production Lines

<PAGE>

In the 1990's, the Group began to market fully automated production
lines to plastic product manufacturers in the PRC on a turn-key basis. These
turn-key projects require the provision of services from the design of the
engineering configuration of the production lines to the supply and installation
of the machinery and equipment. The Company has completed over 50 turn-key
projects throughout the PRC, varying in size from $300,000 to $5 million.

A typical turn-key project takes four to eight months to complete,
depending on its size and complexity. The design of a production line is based
on job specifications obtained from the customer, such as the particulars of the
plastic products, the packaging format, the intended maximum production capacity
and the layout of the factory premises. The installation and maintenance of
production lines are handled jointly by the original equipment manufacturers and
the Company. Test-runs of the turn-key production lines are conducted by the
engineers of the Company to ensure quality and to meet specified requirements.
Turn-key projects usually have warranty periods from six months to one year
during which repairs and maintenance are provided free of charge by the Company.

Sale of Machinery and Equipment, Accessories, Spare Parts, Raw Materials and
Steel

The sale of machinery and equipment, accessories, spare parts, raw
materials and steel are conducted in conjunction with the sales of turn-key
plastic production lines.

Raw Materials and Principal Suppliers
- -------------------------------------

The Company acquires its machinery and plastic materials from Nippon
Polyurethane Industry Co., Ltd., Nihon Unipolymer Co., Ltd., Tomen Corporation,
Janson Co., Ltd. Vicson Iron Works Co., Ltd., Cheer Young Machinery Works Co.,
Ltd., Handsome Plastics Co., Ltd. and K S Plastics Inc. All of the foregoing are
located outside of the PRC. Although the Company does not have any long-term
supply agreements with these suppliers, management believes that the termination
of any such relationships would not have an adverse material effect on the
Company since management believes there would be alternate suppliers of such
machinery and plastic materials at comparable prices.

Competition
- -----------

The market for turn-key automated production lines in the plastic
manufacturing industry is fragmented in the PRC. Over 95% of the sales were made
to Chinese Government controlled companies. The Company believes it is a leading
designer, installer and marketer of automated turn-key plastic production lines
in the PRC and it provides buyers with superior post installation technical,
engineering and quality control supports. To date, there has been no significant
price competition in this market, but price competition may become a factor in
the future.

Backlog
- -------

The backlog of the Company at March 31, 1996 and March 31, 1995 consisted
of the following:

-2-
<PAGE>

CFTC Other Customers
---- ---------------
March 31, 1996 HK $39,500,000 HK $7,000,000
March 31, 1995 HK $37,000,000 HK $5,000,000

All of the above orders are anticipated to be completed within one fiscal year
and have not been included in revenues for the prior fiscal year.

The People's Republic of China ("PRC" or "China")
- -------------------------------------------------

The PRC is the third largest country in the world in terms of land area. It
has a territory of approximately 9.6 million square kilometers (5.97 million
square miles). The PRC is the most populous country in the world with a
population at the end of 1993 of over 1.19 billion, representing about one-fifth
of the world's population. The country is becoming increasingly urbanized. In
1949, the PRC urban population accounted for only 11% of the total population.
At the end of 1992, about 27.6% of the population (more than 300 million people)
lived in the cities.

Political Overview

The structure of the PRC political system is organized on the basis of the
PRC Constitution. The structure consists of the National People's Congress
("NPC"), which is the highest legislative organ and law-making body under the
PRC Constitution, and the State Council, which is the highest executive organ of
the laws and decisions made by the NPC. All state organs derive official
authority from the PRC Constitution and other laws. The principal powers of the
NPC include amending and enacting the PRC Constitution, promulgating and
reviewing China's national laws and other regulations, appointing the Central
Military Commission, the President of the Supreme People's Court, the Procurator
General of the Supreme People's Procuratorate, and the President and
Vice-President of the PRC and approving national, social and economic plans. The
NPC represents the highest level of state power. Delegates to the NPC come from
the various provinces, regions, municipalities and armed forces units and hold
five year terms. The NPC meets annually with the Standing Committee of the NPC,
which exercises state power when the NPC is not in session.

While the NPC is the highest policy and law-making body, the State Council
is the highest executive organ of the state. The Premier of the State Council is
appointed by the NPC. The State Council is responsible for the supervision and
co-ordination of all ministries and commissions at the state level, as well as,
all administrative agencies at the local level. It prepares and supervises the
implementation of the State Plan and budget. There are 38 ministries and
commissions together with the People' Bank of China and the State Auditing
Administration, which are currently under the authority of the State Council.

The Chinese Communist Party ("CCP") plays a leading role in formulating
policy and selecting and providing personnel at all levels of the State
structure. Administratively, the PRC is divided into 23 provinces (which
includes Taiwan), three municipalities (Beijing, Shanghai and Tianjin) and five
autonomous regions. At the local level, administrative entities derive their
authority from, and are accountable to, the People's Congresses at the
provincial and municipal levels.

Economic Structure

-3-
<PAGE>

The PRC's economy currently comprises four major sectors: state-owned
enterprises, collectively-owned enterprises, individually-owned enterprises and
other enterprises, including enterprises with foreign capital. In 1993,
state-owned enterprises accounted for approximately 43% of the PRC's output
while enterprises owned by collectives and individuals accounted for
approximately 38.4% and 8.4%, respectively. The fastest growing sector of the
economy is other types of enterprises, including enterprises with foreign
capital, which accounted for 10.2% of the total industrial output in 1993,
representing an increase of approximately 43.7% over 1992 figures.

Economic Plans and Development

The development of the PRC's economy has been characterized by the
adoption, since 1953, of Five Year Plans. Implementation of the plans is carried
out under the supervision of the State Planning Commission, which reports
directly to the State Council. The eighth Five Year Plan for national, economic
and social development for 1991-1995, along with a ten-year program which
extends to 2000, was adopted on 28th March, 1991, by the Standing Committee of
the NPC.

One common objective for both of these plans is for the PRC to quadruple
its gross national output from Renminbi ("RMB") 710 billion in 1980 to RMB 2,800
billion by the end of this century. This objective requires the country's output
to grow at a compound annual rate of growth of about 6% in the 1990's. From 1980
to 1990, the PRC had an average annual GNP growth rate of approximately 9%,
which substantially exceeded both of the annual targeted rates of 4.0% and 7.5%
of the sixth Five Year Plan (1981-1985) and the seventh Five Year Plan
(1986-1990), respectively.

The plans call for the establishment of an economic structure consistent
with a socialist planned economy based on public ownership and market
regulation. Emphasis is placed on the further opening of the PRC to the outside
world by expanding economic and technological exchanges with other countries.
The plans also seek to relieve supply bottle-necks which have arisen from rapid
growth during the 1980's and to allocate resources to the priority areas of
agriculture, energy, transportation, telecommunications and basic materials
industries.

The PRC's target of 9% annual Gross National Product growth rate in the
current eighth Five Year Plan is somewhat higher than the average 7.5% per annum
achieved in the previous Five Year Plan from 1986 to 1990. GNP grew at a rate of
7.7% in 1991, 12.8% in 1992, and 13.2% in 1993. Due to the tightening of lending
by the state banks the GNP growth rate of 1994 slowed down to about 11.5%. The
estimated growth rate in 1995 is expected to be 9.6%. Foreign direct investment
in China has increased 23% from 1993 to about $34 billion in 1994.

-4-
<PAGE>

Future Prospects
- ----------------

The Company has been actively involved in the sale of turn-key production
lines as well as the sale of machinery and equipment, accessories, spare parts
and raw materials for the past six years. These particular businesses have
generated strong sales growth and high margins. The high margins have in turn
attracted new competitors. Profit margins compared to previous years remain
fairly constant. Efforts are being made by management to develop other markets
and to implement tighter marketing controls in order to enhance margins.

In order to sustain the long term growth of the Company, management is
seeking to diversify the Company's activities through investments which will
enhance the earnings and asset base of the Company. In this respect,
negotiations are being conducted to acquire an initial minority stake in Weifang
Great Dragon Chemical Fibre Company Limited ("Weifang"). The principal activity
of Weifang is the production of polyester tire cord fabrics and polyester/nylon
canvases. Polyester tire cord fabrics are one of the main components in the
manufacture of radial tires. At present, radial tires come as original equipment
on most passenger cars and light trucks in the PRC.

The tire cord fabric market is closely associated with the motor vehicle
market. Based on an existing base of 11 million motor vehicles on the road in
the PRC and a projected annual domestic motor vehicle production rate of 3
million units by the year 2001, the tire cord fabric business is anticipated to
experience tremendous growth. The Company believes that the PRC will be a
successful auto market during the next decade.

Employees
- ---------

As of March 31, 1996, the Company employed a sales and administrative staff
of 15 persons in Hong Kong and a technical staff of 38 persons in the PRC.

ITEM 2. PROPERTIES
----------

The Company's principal administrative, marketing and technical
facilities are located in Hong Kong at 1801-1806, Hua Qin International
Building, 340 Queen's Road Central, which was mortgaged to a bank to secure
general banking facilities at March 31, 1996. The mortgage has been released
subsequent to March 31, 1996.

ITEM 3. LEGAL PROCEEDINGS
-----------------

The Company is not currently subject to any material pending legal
proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.

-5-

<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------

The Company's Common Stock is traded on the OTC Electronic Bulletin Board
under the symbol CHCL. As of the date hereof, there is no established trading
market for the Common Stock.

The high and low bid prices (in U.S. Dollars) on the OTC Electronic
Bulletin Board for the Common Stock were as follows:

Fiscal High Low

1995

First Quarter (April 1, 1994 to June 30, 1994) $1.00 $1.00
Second Quarter (July 1, 1994 to September 30, 1994) $1.00 $1.00
Third Quarter (October 1, 1994 to December 31, 1994) $1.00 $1.00
Fourth Quarter (January 1, 1995 to March 31, 1995) $1.25 $1.00

1996 High Low

First Quarter (April 1, 1995 to June 30, 1995) $ 1.50 $ 1.27
Second Quarter (July 1, 1995 to September 30, 1995) $ 2.50 $ 1.50
Third Quarter (October 1, 1995 to December 31, 1995) $1.875 $ .75
Fourth Quarter (January 1, 1996 to March 31, 1996) $2.875 $ .625

Such quotations reflect inter-dealer prices, without retail mark-up, mark down
or commission and may not represent actual transactions.

The Company has not paid any cash dividends during the fiscal years ended
March 31, 1996 and March 31, 1995, and has no intention to pay any cash
dividends for the foreseeable future.

At March 31, 1996 there were approximately 316 holders of record of the
Common Stock.

-6-
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
-----------------------

(in thousands Hong Kong dollars, except per share data)
<TABLE>
<CAPTION>
At March 31 1996 1995 1994 1993 1992

<S> <C> <C> <C> <C> <C>
Operating revenues $299,116 $254,667 $207,658 $45,154 $22,530
Net income 117,170 91,303 81,893 6,874 (2,365)
Earnings per share 4.51 3.51 3.19 0.26 ---
Dividends declared per common share --- --- $0.38 --- ---

1996 1995 1994 1993 1992

Total assets 419,431 260,076 137,508 47,470 31,542
Long term obligations 163 1,627 1,856 2,075 2,742
Total shareholders' equity 317,562 200,392 96,589 23,669 16,795

</TABLE>

Notes: Fiscal 1995 results include a non-recurring, non-cash charge of HK $0.48
per share (HK $12,500,000) related to the reorganization adjustments due to the
reverse merger in February 1995.

The financial data were presented as if the reverse acquisition had
been completed prior to April 1, 1991.

Exchange Rate is U.S.$1 = HK $7.80.

-7-

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

RESULTS OF OPERATION

The following table presents, for the periods indicated, certain information
from the consolidated statements of income as a percentage of total revenues and
the percentage change of such items as compared to the prior year.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Percentage of Total Revenues
Percentage
Year ended March 31
Increase (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
versus versus
1996 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues

Sales of turn-key projects 94.73% 82.35% 97.50% 35.11% 5.18%

Sales of steel * 9.24% * * *

Sales of raw materials 5.27% 8.41% 2.50% (26.43%) 442.93%

- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 100.00% 100.00% 100.00% 17.45% 12.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and expenses

Cost of sales - turn-key 34.72% 34.15% 38.56% 19.41% 8.61%

Cost of sales - steel * 5.78% * * *

Cost of sales - raw materials 4.98% 7.96% 2.34% (26.52%) 35.00%

Depreciation of fixed assets 0.16% 0.20% 0.17% (6.03%) 44.27%

Selling and administrative expenses 3.25% 4.06% 6.91% (5.87%) (27.94%)

Other income (expenses) (6.29%) 1.61% (0.05%) (385.30%) *

Provision for doubtful debts and

diminution in value of investment 3.17% 2.88% 5.00% 28.28% (28.36%)

Share of losses of associated companies 0.61% 1.06% 1.71% (32.40%) (23.87%)

Reorganization expenses * 4.91% 0.00% * *
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 46.32% 40.61% 45.26% 34.02% 10.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes 7.15% 5.34% 5.34% 57.26% 22.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 39.17% 35.87% 39.92% 28.33% 10.14%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*not meaningful

<PAGE>

1996 versus 1995
- ----------------
Revenues

Total reported revenues increased by 17.45% from 1995 to 1996, reflecting
strong demand for the Company's products and services. Sale of turn-key projects
grew by 35.11% refleting an improving economic environment in the People's
Republic China (the "PRC") and the strong demand by manufacturers in the
People's Republic of China to modernize their production facilities.

Sale of raw materials has decreased by 26.43% as it is the intention of
management to concentrate on the sale of turn-key projects, which is considered
a higher margin business. The Company intends to generate approximately 94% of
total revenues from the sale of turn-key projects and the remaining 6% from the
sale of raw materials.

Cost of revenues/sales

Cost of sales of turn-key projects includes cost of machinery purchased and
the salaries and wages paid to engineers and consultants. Cost of sales of
turn-key projects has remained relatively constant, at 34.72% in 1996 and 34.15%
in 1995.

Cost of sales (including raw materials sales) as a percentage of revenue
has gone down approximately 8%, mainly due to the decrease in the cost of sales
of raw materials and steel. Selling raw material is a low margin business, which
the Company does as a value added service to the customers of turn-key projects
only.

Selling and administrative expenses

Selling and administrative expenses include salaries, commissions and other
direct employment costs paid to the Company's sales representatives and other
professionals. Selling and administrative expenses have decreased by
approximately 5.87% when compared with 1995 mainly due to management's
streamlining of operational procedures and increased efforts at budgetary
control. Moreover, the Company has successfully minimized its commission
expenses upon securing a very good relationship with its major customer, China
Fujian Foreign Trade Holdings Limited.

Other income/(expenses)

Other income /(expenses) consist primarily of interest income earned on
cash and cash equivalents less interest expenses. Non-operating income for 1996
consisted of a gain on the disposal of short term investments of approximately
HK$1,145,013 versus HK$2,785,120 in 1995.

Provision for doubtful debts and diminution in value of investment

The provision for doubtful debts and diminution in value of investment has
increased by 29.28% when compared with 1995 mainly due to the fact that the
Company has written off all receivables that had been

-9-
<PAGE>

overdue for one year. Moreover a lump sum provision of approximately U.S.
$2,199,700 was taken to reduce the Other Receivable shown on the balance sheet
to its net realizable value. It is the intention of management to write off all
the long term outstanding debts as of the current year in order to reduce the
receivable to its net realizable value.

Share of losses of associated companies

The share of losses of associated companies has decreased by 32.40% mainly
because the Company has redefined its investment strategy and disposed of its
interests in most of its associated companies.

The Other Receivable in the amount of HK $113,000,000 set forth in the
March 31, 1996 balance sheet represents the receivable due in connection with
disposal of the Company's interest in associated companies located in the PRC.
This item had been reflected in the item Short Term Investments on the March 31,
1995 balance sheet. Subsequent to March 31, 1996, this item had been settled in
exchange for the acquisition of all of the equity of Cathay Mercantile
(Overseas) Limited.

Long Term Receivable

The long term receivable of HK $248,798,243 represents the receivable due
from CFTC at March 31, 1996. The amount due from CFTC as of March 31, 1995 had
been reflected as a trade receivable in the March 31, 1995 balance sheet. The
amount due from CFTC was settled in exchange for a 100% interest in Gain Whole
Limited and the acquisition of a 15.3% interest in Weifang after March 31, 1996,
and the balance in cash was received after March 31, 1997.

Commitments

At March 31, 1996, the Company had outstanding letters of credit in the
amount of approximately HK $979,893. The Company also had contracts with a
related company in the PRC to purchase office premises to be developed by the
related company for HK $23,700,000. As of March 31, 1996, HK $7,000,000, which
was included under other assets, had been paid as a deposit for the purchase
with the remainder being payable upon receipt of the title certificates for the
office premises.

Subsequent to March 31, 1996, the Company settled its Other Receivable in
exchange for a 100% equity interest in Cathay Mercantile (Overseas) Limited,
which indirectly owns certain land use rights in the PRC. As of the date hereof,
it is not certain whether such land use rights could be successfully utilized,
and if not, losses could be incurred by the Company.

Income tax

The Company's effective tax rate has remained fairly constant at
approximately 15.44%.

Impact of inflation

To date, the Company has not experienced any significant effect from
inflation. The Company's major expenses have been the cost of the purchase of
machinery, salaries and related costs incurred principally for

-10-

<PAGE>

the turn-key projects. The Company generally has been able to meet increases in
costs by raising prices of its products.

Foreign currency exposure

During the fiscal year ended March 31, 1996, over seventy-four percent
(74%) of the Company's sales were settled in United States Dollars and the
remaining balance settled in Renminbi. Even though substantially all of the
sales of the Company are generated in the PRC, sales are invoiced in United
States Dollars. In view of the fact that Renminbi has remained fairly stable
during the fiscal year, management is of the opinion that the foreign exchange
risk is minimal.

Liquidity and capital resources

The Company's financial position remains strong. Cash and equivalents at
the end of 1996 were US$0.96 million, as compared with US$0.54 million at the
end of 1995. The cash provided by operations was largely used to fund the
Company's accounts receivable.

Although Renminbi can only be converted into other currency upon approval
from the PRC government, the Company believes that such approval will usually be
granted. Therefore, the Company does not anticipate any liquidity issues
regarding conversion of Renminbi into other currencies.

The Company's business is not capital intensive. The Company owns its
premises. Capital expenditures relate primarily to office equipment and
vehicles. As a consequence, the Company's requirement for capital expenditures
is not significant. Moreover, US$20,000,000 has been received from the Company's
major customer after the fiscal year end in the form of a certificate of deposit
with a maturity date of September 13, 1997.

Management anticipates that cash generated from operations combined with
current working capital and available credit lines will provide sufficient
liquidity to meet ordinary capital requirements for the foreseeable future. The
Company has a HK$14,800,000 bank credit line which bears interest at 1% above
the Hong Kong prime lending rate.

-11-
<PAGE>

1995 versus 1994
- ----------------
Revenues

Total reported revenues increased 22.64% from 1994 to 1995, reflecting
strong demand for the Company's products and services. Sale of turn-key projects
grew 5%, reflecting an improving economic environment in the People's Republic
China and the strong demand by manufacturers in the People's Republic of China
to modernize their production facilities.

Sale of raw materials and steel increased 443%. Recent percentages are in
line with the Company's target of generating 80% of revenues from turn-key
projects and 20% from the sale of raw materials and steel.

Cost of revenues/sales

Cost of sales-turn-key includes cost of machinery purchased and the
salaries and wages paid to engineers and consultants. Cost of sales-turn-key has
remained relatively constant, at 41% in 1995 and 38% in 1994.

Cost of sales (including raw materials sales) as a percentage of revenue
has grown at approximately 7%, mainly due to the increase in the cost of sales
of raw materials. Selling raw material is a low margin business, which the
Company does as a value added service to the customers of turn-key projects
only. The Company has maintained a margin of about 4% in 1994 and 14% in 1995
for the sale of raw materials.

Selling and administrative expenses

Other income/(expenses)

Other income (expenses) consists primarily of interest income earned on
cash and equivalents less interest expenses. Non-operating income for 1995
consisted of a gain on the disposal of short term investments of approximately
$357,000.

Provision for doubtful debts and diminution in value of investment

The provision for doubtful debts and diminution in value of investment has
decreased by 29% when compared with 1994 mainly due to the Company's effort in
tightening its credit control procedures.

Share of losses of associated companies

The share of losses of associated companies has decreased by 23% mainly
because the Company has redefined its investment strategy and decided to dispose
of its interest in certain of its existing associated companies.

-12-
<PAGE>

Reorganization expenses

Concurrent with the issuance to the shareholders of Sun's International
Holdings Limited of an aggregate of 22,750,000 shares of common stock in
exchange for all the issued and outstanding capital of Sun's International
Holdings Limited, non-cash reorganization expenses were incurred which reduced
net income by approximately HK$12,500,000, representing the fair value of 12.5%
of Sun's International attributable to the existing common stock shareholders of
the 3,250,000 shares of the Company prior to the reverse acquisition.

Income tax

The Company's effective tax rate has remained fairly constant at
approximately 11.68%.

Impact of inflation

To date, the Company has not experienced any significant effect from
inflation. The Company's major expenses have been the cost of purchase of
machinery, salaries and related costs incurred principally for the turn-key
projects. The Company generally has been able to meet increases in costs by
raising prices of its products.

Foreign currency exposure

Even though substantially all of the sales of the Company are generated in
the PRC, sales are invoiced in United States Dollars and paid in either United
States Dollars or in Renminbi. In view of the fact that the Renminbi has
remained fairly stable during the fiscal year, management is of the opinion that
the foreign exchange risk exposure is minimal.

Liquidity and capital resources

The Company's financial position remains strong. Cash and equivalents and
short term investments at the end of fiscal year 1995 were US$5.97 million, up
from US$2.8 million at the end of fiscal year 1994. The cash provided by
operations was largely used to fund the Company's accounts receivable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------

-13-
<PAGE>

The financial statements of the Company are annexed to this Report as pages
F-2 through F-24. An index to such materials appears on page F-1.

ITEM 9. CHANGE IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------------------------

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------

The Company's executive officers and Directors are as follows:

Mr. Chan Kwai Chiu, age 36, founded the Company and serves as Chief Executive
Officer, President, and Chairman of the Board. He is responsible for formulating
the overall policy making and development of the Company. Mr. Chan has over 16
years experience in the plastic products industry, including over 10 years
experience in the design, installation and management of plastic related
production lines. His high level relationships with government planning agencies
commissioned for free enterprise projects in China at the provincial level, and
with the authorities of the "city" level planning agencies, have contributed
significantly to the business of the Company.

Mr. Wong Yuen Ki, age 38, joined the Company in 1985 and is the Vice Chairman
of the Company responsible for the sales and marketing strategy of the Company,
and has been a Director of the Company since February 1995. He also oversees the
operations of the Company's joint ventures in China. Mr. Wong has approximately
10 years experience in the plastic products production industry.

Mr. Eric Ng, age 36, joined the Company in 1992 as Chief Financial Officer,
Treasurer, and Secretary of the Company, and is responsible for the financing
strategy of the Company. Mr. Ng has been a Director of the Company since
February 1995. Prior to joining the Company he was a manager at KPMG Peat
Marwick Hong Kong, a member of the Chartered Association of Certified
Accountants and a manager of Dynamic Holdings Limited (a listed company in Hong
Kong). During his tenure at KPMG Peat Marwick, he was responsible for various
mergers and acquisitions of listed companies in Hong Kong. He has over 10 years
experience in auditing, finance and administration.

Mr. Li Guang, age 55, is the Director of Technical Control of the Company and
has been a Director of the Company since February 1995. He graduated from the
University of Fujian with both mechanical and technology research engineering
degrees. Prior to joining the Company in 1989, he served in the senior
management of Fujian Fu Shing Industrial Import & Export Corporation. Mr. Li has
the title of senior engineer and has over 20 years of experience in mechanical
engineering technology research for the Chinese Military.

-14-
<PAGE>

Mr. Zhang Ji Shun, age 59, is Manager of Installation and Design and has been
a Director of the Company since February 1995. He is responsible for the
Installation and Design Department which provides machinery installation and
design services to its customers in China. He joined the Company in 1986 and
graduated from the Dailin Engineering Technical College with both chemical and
mechanical engineering degrees. Prior to joining the Company in 1986, he was the
chief engineer of the Islamic International Trust and Investment Corp of
Ningxia.

Mr. Chan Kwai Chun, age 53, cousin of Mr. Chan Kwai Chiu, is Manager of
Investment Planning and has been a Director of the Company since February 1995.
He has extensive experience in plastic manufacturing industries. He has worked
over 20 years in plastic manufacturing industries in the People's Republic of
China and has held management positions in state-owned entities before joining
the Company in 1985. He maintains very good relationships with government owned
and private plastic manufacturing entities.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth all compensation paid or to be paid for
services rendered during the last three fiscal years by the Company to its
executive officers who earn more than U.S. $100,000.

Name of Individual Year Salary Bonus

Chan Kwai Chiu 1994 $118,800 $ 9,900

1995 130,680 10,880

1996 143,000 11,900

Wong Yuen Ki 1994 105,600 8,800

1995 116,160 9,680

1996 127,000 10,600

No cash compensation was paid or accrued by the Company in excess of U.S.
$100,000 for any other executive officer. The Company does not provide
retirement, pension, profit sharing or similar benefit programs or plans to its
officers. The Company does not pay fees or other compensation to its Directors
for attending meetings or special assignments.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------

The following table sets forth, as of March 31, 1996, the beneficial
ownership of the Common Stock of each of the Company's Directors and executive
officers, the Company's Directors and executive officers

-15-
<PAGE>

as a group, and each stockholder known to the Company to be the beneficial owner
of more than five percent (5%) of the Common Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to communicate
property laws where applicable.

Name and Address Number of Shares
of Beneficial Owner Beneficially Owned(1) Percent of Class
- ------------------- --------------------- ----------------

Chan Kwai Chai 16,900,000(2) 65.0%
1801-1806 Hua Qin
International Building
340 Queen's Road Central
Hong Kong

Wong Yuen Ki 2,600,000 10.0%
1801-1806 Hua Qin
International Building
340 Queen's Road Central
Hong Kong

Dynasty Asia Worldwide Limited 2,600,000 10.0%
Skelton Building
Main Street
P.O. Box 3136
Road Town
Tortola, British Virginia Islands

China Asia International Limited 2,600,000 10.0%
Skelton Building
Main Street
P.O. Box 3136
Road Town
Tortola, British Virginia Islands

-16-

<PAGE>

Land Cheer Investment Limited 2,600,000 10.0%
Skelton Building
Main Street
P.O. Box 3136
Road Town
Tortola, British Virginia Islands

Perfect Fortune Limited 1,800,000 6.9%
Skelton Building
Main Street
P.O. Box 3136
Road Town
Tortola, British Virginia Islands

All Directors and Executive 19,500,000(3) 75.0%
Officers as a Group (6 persons)

- --------------

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. As of March 31, 1996, there were 26,000,000
shares of Common Stock issued and outstanding.

(2) Includes 9,100,000 shares owned by Mr. Chan Kwai Chiu individually as well
as 7,800,000 shares owned by Dynasty Asia Worldwide Limited, China Asia
International Limited, and Land Cheer Investment Limited of which he is the sole
owner.

(3) Includes the 16,900,000 shares beneficially owned by Mr. Chan Kwai Chiu as
well as the 2,600,000 shares beneficially owned by Mr. Wong Yuen Ki. Messrs. Ng,
Guang, Shun, and Chun do not beneficially own any shares of the Company's Common
Stock.

-17-
<PAGE>

ITEM.13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

See footnote 21 to the financial statements on page F-22.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------

(a) 1. Financial Statements.

The financial statements listed in the accompanying Index to
Financial Statements at page F-1 are filed as part of this Form 10-K.

2. Financial Statement Schedules.

None.

3. Exhibits (See (c) below).

(b) Reports on Form 8-K.

The Company did not file any reports on Form 8-K during the fiscal
year ended March 31, 1996.

The following is a list of exhibits filed as part of this annual report on
Form 10-K.

Exhibit
Number Description
- ------ -----------

23.1 Consent of Ernst & Young
27 Financial Data Schedule

-18-

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHINA CONTINENTAL, INC.

By: /s/ Eric Ng
----------------------
Eric Ng, Secretary and
Chief Financial Officer

Dated: July 25, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signatures Titles Date

<S> <C> <C>
/s/ Chan Kwai Chiu Chief Executive Officer and Chairman July 25, 1997
- ------------------ of the Board of Directors (Principal
Chan Kwai Chiu Executive Officer)

/s/ Eric Ng Chief Financial Officer, Secretary and Director July 25, 1997
- ------------------ (Principal Financial Officer)
Eric Ng

/s/ Wong Yuen Ki Vice Chairman and Director July 25, 1997
- ------------------
Wong Yuen Ki

Director of Technical July , 1997
- ------------------ Control and Director
Li Guang

Manager of Installation July , 1997
- ------------------ And Design and Director
Zhang Ji Shun

/s/ Chan Kwai Chun Manager of Investment July 25, 1997
- ------------------ Planning and Director
Chan Kwai Chun
</TABLE>

-19-
<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages

Report of independent auditors F-2

Consolidated statements of income F-3

Consolidated statements of changes in shareholders' equity F-4

Consolidated balance sheets F-5

Consolidated statements of cash flows F-6 to F-7

Notes to consolidated financial statements F-8 to F-24

F - 1

<PAGE>

ERNST & YOUNG Certified Public Accountants Phone: 852 2846 9888
15/F Hutchison House, 852 2526 5371
10 Harcourt Road Fax: 852 2868 4432
Central, Hong Kong 852 2845 9208

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and the Stockholders
China Continental, Inc.

We have audited the accompanying consolidated balance sheets of China
Continental, Inc. (the "Company") and subsidiaries (collectively the "Group") as
of March 31, 1995 and 1996 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the two years ended
March 31, 1996. 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 audit. The financial statements of the Group
for the year ended March 31, 1994 were audited by other auditors whose report,
dated March 18, 1995, expressed an unqualified opinion on those financial
statements.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements for the years ended March
31, 1995 and 1996 referred to above present fairly, in all material respects,
the consolidated financial position of China Continental, Inc. and subsidiaries
as of March 31, 1995 and 1996, and the consolidated results of their operations
and their cash flows for each of the two years ended March 31, 1996 in
conformity with accounting principles generally accepted in the United States of
America.

Hong Kong
April 18, 1997

F - 2

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended March 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Year ended March 31,
Notes 1994 1995 1996 1996
HK$ HK$ HK$ US$

SALES
<S> <C> <C> <C> <C> <C>
Related parties 21 13,521,495 22,300,181 15,755,398 2,019,923
Others 194,136,936 232,367,091 283,360,453 36,328,263
------------ ------------ ------------ -----------
207,658,431 254,667,272 299,115,851 38,348,186

COST OF SALES ( 84,940,808) (121,983,761) (118,777,918) (15,227,938)
------------ ------------ ------------ -----------
GROSS PROFIT 122,717,623 132,683,511 180,337,933 23,120,248

DEPRECIATION OF FIXED ASSETS ( 355,172) ( 506,690) ( 495,989) ( 63,588)

SELLING AND ADMINISTRATIVE
EXPENSES ( 14,345,445) ( 10,335,518) ( 9,744,449) ( 1,249,288)

PROVISION FOR DOUBTFUL DEBTS ( 10,390,918) ( 7,346,635) ( 9,489,774) ( 1,216,638)

FINANCIAL INCOME/(EXPENSES),
NET 4 452,454 15,249 ( 566,408) ( 72,616)

OTHER INCOME/(EXPENSES), NET 5 ( 553,276) 4,081,627 (19,642,756) ( 2,518,302)

SHARE OF LOSSES OF ASSOCIATED
COMPANIES ( 3,545,435) ( 2,708,969) ( 1,835,000) ( 235,257)

REORGANIZATION EXPENSES 6 -- ( 12,500,000) -- --
------------ ------------ ------------ -----------
INCOME BEFORE INCOME TAXES 93,979,831 103,382,575 138,563,557 17,764,559

INCOME TAXES 7 ( 11,086,629) ( 12,080,000) ( 21,393,062) ( 2,742,700)
------------ ------------ ------------ -----------

NET INCOME 82,893,202 91,302,575 117,170,495 15,021,859
============ ============ ============ ===========

EARNINGS PER SHARE 3(j) 3.19 3.51 4.51 0.58
============ ============ ============ ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F - 3

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'EQUITY

For the years ended March 31, 1994, 1995 and 1996

Note Additional
Share paid-in Retained
capital capital earnings Total
HK$ HK$ HK$ HK$

<S> <C> <C> <C> <C>
Balance at April 1, 1993 202,800 856,985 22,636,115 23,695,900
Net income - - 82,893,202 82,893,202
Dividends (HK$0.38 per share) - - (10,000,000) (10,000,000)
-------- ---------- ----------- -----------
Balance at March 31, 1994 202,800 856,985 95,529,317 96,589,102

Reorganization expenses 6 - 12,500,000 - 12,500,000
Net income - - 91,302,575 91,302,575
-------- ---------- ----------- -----------
Balance at March 31, 1995 202,800 13,356,985 186,831,892 200,391,677
Net income - - 117,170,495 117,170,495
-------- ---------- ----------- -----------
Balance at March 31, 1996 202,800 13,356,985 304,002,387 317,562,172
======== ========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-4

<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 1995 and 1996
<TABLE>
<CAPTION>
Notes 1995 1996 1996
HK$ HK$ US$
ASSETS

CURRENT ASSETS
<S> <C> <C> <C>
Cash and bank balances 4,238,798 7,508,606 962,642
Trade receivables, net of provisions of
HK$6,813,753 in 1995 and HK$13,145,891
in 1996 8 137,898,340 10,478,028 1,343,337
Prepayments, deposits and other receivables,
net of provisions of HK$2,800,000 in 1995 and
HK$7,157,636 in 1996 9 8,229,089 3,074,749 394,199
Short term investments, net of provisions of
HK$6,099,000 in 1995 and Nil in 1996 10 42,357,065 - -
Amounts due from directors 21 2,615,262 773,115 99,117
Amounts due from related companies 21 18,022,219 17,095,831 2,191,773
----------- ----------- -----------

TOTAL CURRENT ASSETS 213,360,773 38,930,329 4,991,068

FIXED ASSETS 11 5,193,541 4,699,452 602,494
INTERESTS IN ASSOCIATED COMPANIES 12 22,076,944 5,825,859 746,905
FIXED BANK DEPOSIT 6,494,181 - -
LONG TERM RECEIVABLE - 248,798,243 31,897,211
OTHER RECEIVABLE, net of provisions of
Nil in 1995 and HK$17,000,000 in 1996 13 - 113,000,000 14,487,179
OTHER ASSETS 12,950,848 8,177,240 1,048,364
----------- ----------- -----------

TOTAL ASSETS 260,076,287 419,431,123 53,773,221
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY

CURRENT LIABILITIES
Bank overdrafts 14 357,437 676,889 86,781
Bank import loans 14 5,768,017 5,673,880 727,420
Bank loans 14 237,710 1,478,799 189,590
Income taxes payable 24,745,756 45,823,523 5,874,811
Amounts due to directors 21 - 516,956 66,276
Amounts due to related companies 21 1,589,733 5,647,887 724,088
Accounts payable and accrued liabilities 25,359,261 41,887,813 5,370,232
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 58,057,914 101,705,747 13,039,198

LONG TERM BANK LOANS 14 1,463,492 - -
DEFERRED TAXATION 7 163,204 163,204 20,924
----------- ----------- -----------

TOTAL LIABILITIES 59,684,610 101,868,951 13,060,122

CONTINGENCIES AND COMMITMENTS 22

STOCKHOLDERS'EQUITY
Common stock, par value US$0.001 per share:
Authorized: 1,000,000,000 shares
Issued and outstanding: 26,000,000 shares 15 202,800 202,800 26,000
Additional paid-in capital 15 13,356,985 13,356,985 1,712,434
Retained earnings 186,831,892 304,002,387 38,974,665
----------- ----------- -----------
TOTAL SHAREHOLDERS'EQUITY 200,391,677 317,562,172 40,713,099
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 260,076,287 419,431,123 53,773,221
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 5

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended March 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>

Year ended March 31,
1994 1995 1996 1996
HK$ HK$ HK$ US$

CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income 82,893,202 91,302,575 117,170,495 15,021,858
Adjustments to reconcile net income to
net cash provided by/(used in) operating
activities:
Reorganization expenses - 12,500,000 - -
Gains on disposal of fixed assets ( 5,000) ( 321,958) - -
Depreciation 355,172 506,690 495,989 63,588
Provision for doubtful debts and
diminutions in values of
investments and associated companies 10,390,918 7,346,635 30,414,857 3,899,341
Share of losses of associated companies 3,545,435 2,708,969 1,835,000 235,256
Gains on disposal of short term
investments - ( 2,785,120) ( 1,145,013) ( 146,797)
Decrease/(increase) in assets:
Trade receivables and long term receivable ( 5,083,075) (136,808,993) (196,043,403) (25,133,769)
Prepayments and deposits ( 2,981,957) ( 4,375,553) 5,682,771 728,561
Amounts due from related companies ( 2,147,812) ( 14,574,550) 926,388 118,768
Amounts due from directors ( 3,843,013) 8,292,681 1,473,073 188,856
Amounts due from associated companies ( 6,862,656) 9,362,537 ( 1,250,592) ( 160,333)
Amounts due from joint venture companies - ( 3,686,067) ( 241,427) ( 30,952)
Increase/(decrease) in liabilities:
Amounts due to related companies 923,860 ( 386,607) ( 221,846) ( 28,442)
Accounts payable and accrued liabilities 574,546 16,032,848 16,600,556 2,128,277
Unearned revenue ( 7,962,630) - - -
Income taxes payable 9,806,596 11,765,325 21,077,767 2,702,278
------------ ----------- ----------- ----------
Net cash provided by/(used in)
operating activities 79,603,586 ( 3,120,588) ( 3,225,385) ( 413,510)
------------ ----------- ----------- ----------
</TABLE>

F - 6
<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the years ended March 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>

Year ended March 31,
1994 1995 1996 1996
HK$ HK$ HK$ US$
CASH FLOWS PROVIDED BY/(USED IN)
INVESTING ACTIVITIES
<S> <C> <C> <C> <C>
Purchase of fixed assets ( 226,051) ( 1,309,038) ( 1,900) ( 244)
Deposits paid ( 7,000,000) - - -
Reduction/(addition) of fixed
bank deposit - ( 6,494,181) 6,494,181 832,587
Purchase of investments in
associated companies (66,705,134) - - -
Dividend income reinvested in
other assets - ( 618,240) - -
Purchase of other assets ( 2,411,516) ( 254,744) - -
Proceeds from disposal of fixed assets - 399,997 - -
Proceeds from disposal of short term
investments - 16,000,000 - -
------------ ----------- ---------- -----------
Net cash provided by/(used in)
investing activities (76,342,701) 7,723,794 6,492,281 832,343
------------ ----------- ---------- -----------
CASH FLOWS PROVIDED BY/(USED IN)
FINANCING ACTIVITIES
Dividends paid - (10,000,000) - -
Net borrowings/(repayments) under
bank import loans 4,559,931 1,208,086 ( 94,137) ( 12,069)
Repayments of bank loans ( 784,606) ( 210,914) ( 222,403) ( 28,513)
Advances of bank overdrafts - 357,437 319,452 40,955
------------ ----------- ---------- -----------
Net cash provided by/(used in)
financing activities 3,775,325 ( 8,645,391) 2,912 373
------------ ----------- ---------- -----------
NET INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS 7,036,210 ( 4,042,185) 3,269,808 419,206

Cash and cash equivalents, at beginning
of year 1,244,773 8,280,983 4,238,798 543,436
------------ ----------- ---------- -----------
Cash and cash equivalents, at end of year 8,280,983 4,238,798 7,508,606 962,642
============ =========== ========== ===========

SUPPLEMENTARY CASH FLOWS
DISCLOSURES:
Interest paid 385,958 374,115 930,130 119,247
Income taxes paid 1,280,033 314,675 882,259 113,110
============ =========== ========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F - 7

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

China Continental, Inc. (the "Company") was incorporated under the laws
of Utah, the United States of America and its principal activity is
investment holding.

On February 21, 1995, the Company acquired all of the issued and
outstanding shares, pursuant to the Reorgarnization as defined
thereafter, of Sun's International Holdings Limited ("Sun's
International"), by the issue of an aggregate of 22,750,000 shares of
common stock, par value US$0.001 each, of the Company (the "Reverse
Acquisition"). Sun's International was incorporated under the laws of
the British Virgin Islands on January 19, 1994 and whose principal
activity is investment holding. This transaction has been treated as a
recapitalization of Sun's International as if Sun's International is
the acquirer. The historical financial statements prior to February 21,
1995 are those of Sun's International.

Concurrently, the Company changed its fiscal year end date to March 31.

On March 24, 1995, pursuant to a reorganization scheme (the
"Reorganization"), Sun's International issued a total of 1,422 shares,
credited as fully paid, to acquire the entire interests in Billion
Pearl Investments Limited, High Glad Industries Limited, Prime Hill
Investment Limited, Prime View Industrial Limited, Danbury Inc. and
Winkler Holdings Inc. (hereinafter collectively together with the
Company referred to as the "Group").

Billion Pearl Investments Limited, High Glad Industries Limited, Prime
Hill Investment Limited and Prime View Industrial Limited are primarily
engaged in the sale of automatic production lines on a turn-key basis
to various customers in the People's Republic of China (the "PRC").
These companies have also made investments in PRC enterprises through
the formation of joint ventures with various PRC parties. Danbury Inc.
and Winkler Holdings Inc. provide consulting and management services to
the customers as well as to other group companies.

In the opinion of the Company's management, the Reorganization
constitutes a reorganization under common control and subsequent to
which the ultimate control of the Company's subsidiaries remains
substantially the same as before the Reorganization.

F - 8

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. BASIS OF PRESENTATION

The consolidated financial statements of the Group have been prepared
based on the historical financial statements of the Company and its
subsidiaries for the years presented in these financial statements and
to give effect to the Reverse Acquisition and the Reorganization as set
out in note 1 to these consolidated financial statements as if the
Reverse Acquisition and the Reorganization had been completed on April
1, 1993.

The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the subsidiaries in Hong Kong which
are prepared in accordance with the accounting principles generally
accepted in Hong Kong.

The following material adjustments were made to present the consolidated
financial statements to conform with US GAAP:

- reversal of the revaluation surplus, and the related
depreciation, arising from the revaluation of leasehold land and
buildings; and

- write-off of pre-operating expenses in the year of occurrence.

3 . SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

(a) Basis of consolidation
----------------------
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries. The results of the
subsidiaries for the years are consolidated as if the
Reorganisation and the Reverse Acquisition had been completed on
April 1, 1993. All material intercompany balances and
transactions have been eliminated on consolidation.

(b) Associated companies
--------------------
An associated company is a company, not being a subsidiary, over
which the Group is in a position to exercise significant
influence.

The Group's share of the post-acquisition results of associated
companies is included in the consolidated statements of income
under the equity method of accounting. The Group's interests in
associated companies are stated in the consolidated balance
sheets at cost plus the Group's share of the associated
companies' post acquisition results and capital transactions,
less any provisions for other than temporary diminutions in
values.

F - 9

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 1996

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)

(c) Short term investments
----------------------
Short term investments are stated at the lower of cost and net
realizable value.

(d) Cash and cash equivalents
-------------------------
The Group considers cash and cash equivalents to include cash
on hand and demand deposits with banks with original term to
maturity of three months or less at the date of acquisition.

At March 31, 1995 and 1996, cash and cash equivalents included
foreign currency deposits equivalent to HK$860,595 (US$110,944)
and HK$13,802 (US$1,769), respectively.

(e) Fixed assets and depreciation
-----------------------------
Fixed assets are stated at cost less accumulated depreciation.

Depreciation of fixed assets is calculated on the straight-line
basis to write off the cost less estimated residual value of
each asset over its estimated useful life. The principal annual
rates used for this purpose are as follows:

Leasehold land and buildings 2.5%
Furniture and fixtures 20%
Office equipment 20%
Motor vehicles 20%

(f) Income taxes
------------
Income taxes are determined under the liability method as
required by Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes".

(g) Foreign currency translation
----------------------------
Foreign currency transactions denominated in foreign currencies
are translated into Hong Kong dollars ("HK$") at the respective
applicable rates of exchange. Monetary assets and liabilities
denominated in foreign currencies are translated into HK$ at
the applicable rate of exchange at the balance sheet date. The
resulting exchange gains or losses are credited or charged to
the statements of income.

Translation of amounts from HK$ into United States dollars
("US$") for the convenience of the reader has been made at the
single rate of exchange on March 31, 1996 of US$ 1.00 :
HK$7.80. No representation is made that the HK$ amounts could
have been, or could be, converted into US$ at that rate on
March 31, 1996 or at any other date.

The joint ventures maintain their books and accounting records
in Renminibi (the "RMB"). For the purpose of accounting for the
Group's attributable interests in the net assets and results of
the joint ventures, the RMB financial statements of the
associated companies were translated into HK$ using the current
rate method whereby all assets and liabilities are translated
into HK$ at the applicable rate of exchange prevailing at the
balance sheet date as quoted by the People's Bank of China,
income and expense items were translated at the average rates
as quoted by the People's Bank of China.

F - 10

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)

(g) Foreign currency translation (continued)
----------------------------
Gains and losses resulting from the changes in exchange rates
from year to year were reported separately as a component of
shareholders' equity.

(h) Revenue recognition
-------------------
Revenue from the sale of machinery and equipment is recognized
when the machinery and equipment are delivered to the customer.

Revenue from the sale of the production line on a turn-key basis,
which is normally completed within a period of eight to twelve
months, is recognized in full in the year when the installation
of the production line is completed. The installation of a
production line is considered complete when all the significant
costs have been incurred and all the machinery and equipment for
the production line have been delivered and installed.

Revenue for the provision of design, training and consultancy
services is recognized when service is rendered.

(i) Retirement benefits
-------------------
The Group participates in a defined contribution retirement plan
administered by an insurance company (the "Retirement Plan").
All staff (except for PRC staff and directors of the Company)
covered under the Retirement Plan are entitled to a monthly
pension, borne by the insurance company, upon their retirement
equal to a fixed proportion of their ending salary amount as at
their retirement. The Group is required to make contributions to
the Retirement Plan at a rate of 5% of the salaries of its
existing staff, and is not responsible for any payments beyond
the contributions to the Retirement Plan as noted above. The
retirement benefit contributions are charged to the statements of
income as services are provided.

Contributions made to the retirement plan during the years ended
March 31, 1994, 1995 and 1996 were HK$33,534, HK$52,955, and
HK$26,306, respectively.

(j) Earnings per share
------------------
Earnings per share is based on the number of 26,000,000 shares of
common stock outstanding as if the Reverse Acquisition had been
completed at April 1, 1993.

(k) Dividends per share
-------------------
Dividends per share is based on 26,000,000 shares of common stock
outstanding as if the Reverse Acquisition had been completed at
April 1, 1993.

(l) Use of estimates
----------------
The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could
differ from those estimates.

F - 11

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. FINANCIAL INCOME/(EXPENSES), NET
<TABLE>
<CAPTION>

Year ended March 31,
1994 1995 1996
HK$ HK$ HK$

<S> <C> <C> <C>
Interest income 838,412 512,148 435,828
Interest expenses ( 385,958) (374,115) (930,130)
Bank charges - (122,784) ( 72,106)
--------- -------- --------
452,454 15,249 (566,408)
========= ======== ========
</TABLE>

5. OTHER INCOME/(EXPENSES), NET
<TABLE>
<CAPTION>

Year ended March 31,
1994 1995 1996
HK$ HK$ HK$

<S> <C> <C> <C>
Commission and miscellaneous income 1,104,256 273,475 66,674
Foreign exchange gains/(losses), net (1,662,532) 82,834 70,640
Dividend income - 618,240 -
Associated companies written off - - ( 4,995,117)
Short term investments written off - - (10,671,560)
Other assets written off - - ( 5,258,406)
Gains on disposal of short term investments - 2,785,120 1,145,013
Gains on disposal of fixed assets 5,000 321,958 -
--------- -------- --------

( 553,276) 4,081,627 (19,642,756)
========= ======== ========
</TABLE>

6. REORGANIZATION EXPENSES

Concurrent with the issuance to the then shareholders of Sun's
International an aggregate of 22,750,000 shares of common stock in
exchange for all of the issued and outstanding capital stock of Sun's
International, reorganization expenses were incurred which reduced net
income by HK$12,500,000, representing the fair value of 12.5% of Sun's
International attributable to the existing common stock shareholders of
the 3,250,000 shares of the Company prior to the Reverse Acquisition.

F - 12

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INCOME TAXES

The companies in the Group operate in several jurisdictions and are
subject to taxes in those jurisdictions. Details of the related
provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1994 1995 1996
HK$ HK$ HK$
<S> <C> <C> <C>
Income/(loss) before income taxes:
Hong Kong (6,990,675) (70,094) (22,438,260)
PRC 100,970,506 103,452,669 161,001,817
----------- ----------- -----------
93,979,831 103,382,575 138,563,557
=========== =========== ===========
Income tax provision:
Current:
Hong Kong 2,366,629 2,980,000 1,879,812
PRC 8,720,000 9,100,000 19,513,250
----------- ----------- -----------
11,086,629 12,080,000 21,393,062

Deferred - - -
----------- ----------- -----------
11,086,629 12,080,000 21,393,062
=========== =========== ===========
</TABLE>

It is management's intention to reinvest all the income attributable to
the Company earned by its operations outside the United States.
Accordingly, no United States corporate income taxes have been provided
in these financial statements.

Under the current law of the British Virgin Islands, any dividends the
Group will distribute in future, and capital gains arising from the
Group's investments are not subject to income tax in the British Virgin
Islands.

Those companies carrying on business in Hong Kong are subject to Hong
Kong profits tax on their income arising in or derived from Hong Kong
after adjusting for income and expense items which are not assessable or
deductible for profits tax purposes. As such, current income taxes are
calculated at a statutory tax rate of 16.5% (1994: 17.5% and 1995:
16.5%) on their estimated taxable income for the year.

Companies with operations in the People's Republic of China (the "PRC")
are also subject to PRC income tax for income on services rendered
therein. The applicable effective tax rate for income derived from
services rendered in that jurisdiction is approximately 8.5%.

At March 31, 1995 and 1996, trade income tax payables included foreign
currency payables equivalent to HK$18,350,000(US$2,352,564) and
HK$37,863,250 (US$4,854,263), respectively.

F - 13

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INCOME TAXES (continued)

A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Hong Kong tax rates to the income
before income taxes is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1994 1995 1996
HK$ HK$ HK$

<S> <C> <C> <C>
Statutory Hong Kong tax rates 17.5% 16.5% 16.5%

Computed expected tax expense 16,446,470 17,058,125 22,862,987
Decrease resulting from PRC tax
at a lower composite tax rate (7,839,179) (8,168,175) (7,052,050)
Adjustments for expense items which are
not deductible for profits tax purposes:
Share of loss in and provisions for
diminutions in values of associated
companies 2,162,362 446,980 1,126,969
Provisions for diminutions in values
of investments -- -- 2,628,444
Other provisions 210,000 662,269 1,565,813
Disposal of short term investments -- -- ( 188,927)
Reorganization expenses -- 2,062,500 --
Others 106,976 18,301 449,826
---------- ---------- ----------
11,086,629 12,080,000 21,393,062
========== ========== ==========
</TABLE>

Deferred taxes mainly represent temporary differences on the allowance
of doubtful debts, elimination of unrealized profits and accelerated
depreciation allowance.

F - 14

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INCOME TAXES (continued)

Undistributed earnings of the Company's non U.S. subsidiaries amounted
to HK$304,002,387 at March 31, 1996. Because those earnings are
considered to be indefinitely invested, no provision for United States
corporate income taxes on those earnings has been provided. Upon
distribution of those earnings in the form of dividends or otherwise,
the Company would be subject to United States corporate income taxes.
Unrecognized deferred United States corporate income tax in respect of
these undistributed earnings as at December 31, 1996 was approximately
HK$105,000,000.

8. TRADE RECEIVABLES, NET
<TABLE>
<CAPTION>
March 31,
1995 1996
HK$ HK$
<S> <C> <C>
Trade receivables 144,712,093 23,623,919
Less: Provision for doubtful debts (6,813,753) (13,145,891)
----------- ----------

Trade receivables, net 137,898,340 10,478,028
=========== ==========
Movements in provision for doubtful debts:
Balance as at beginning of year 380,000 6,813,753
Doubtful debt expense 6,433,753 6,332,138
----------- ----------

Balance as at March 31 6,813,753 13,145,891
=========== ==========
</TABLE>

At March 31, 1995 and 1996, trade receivables included foreign currency
receivables equivalent to HK$121,396,694 (US$15,563,679) and HK$ Nil
(US$ Nil), respectively.

9. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES, NET

<TABLE>
<CAPTION>
March 31,
1995 1996
HK$ HK$
<S> <C> <C>
Prepayments, deposits and other receivables 11,029,089 10,232,385
Less: Provision for doubtful debts (2,800,000) (7,157,636)
----------- ----------
Prepayments, deposits and other receivables, net 8,229,089 3,074,749
=========== ==========

Movements in provision for doubtful debts:
Balance as at beginning of year -- 2,800,000
Transfer from short term investments (note IO) -- 1,200,000
Doubtful debt expense 2,800,000 3,157,636
----------- ----------

Balance as at March 31 2,800,000 7,157,636
=========== ==========
</TABLE>
F- 15

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SHORT TERM INVESTMENTS
<TABLE>
<CAPTION>
March 31,
1995 1996
HK$ HK$

<S> <C> <C>
Unlisted investments at cost 43,569,998 -
Provisions for diminutions in values (4,899,000) -
Amounts due from joint venture companies, net 4,886,067 -
Provision for doubtful debts (1,200,000) -
----------- -----------
42,357,065 -
=========== ===========
Movements in provisions for diminutions in values:
Balance at beginning of year - 4,899,000
Provisions for diminutions in values 4,899,000 -
Reversal of provision on disposal - (4,899,000)
----------- -----------
Balance at March 31 4,899,000 -
=========== ===========
Movements in provision for doubtful debts:
Balance at beginning of year - 1,200,000
Transfer from interests in associated companies (note 12) 1,200,000 -
Transfer to prepayments, deposits and other
receivables (note 9) - (1,200,000)
----------- -----------
Balance at March 31 1,200,000
=========== ===========
</TABLE>

F-16

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. FIXED ASSETS

March 31,
1995 1996
HK$ HK$
Cost:
<S> <C> <C>
Leasehold land and buildings 4,485,631 4,485,631
Furniture and fixtures 698,926 700,826
Office equipment 570,813 570,813
Motor vehicles 1,244,030 1,244,030
---------- ----------
6,999,400 7,001,300

Less: accumulated depreciation (1,805,859) (2,301,848)
---------- ----------
Net book value 5,193,541 4,699,452
========== ==========
</TABLE>

The land and buildings are situated in Hong Kong and are held on lease
terms over 50 years. The land and buildings are pledged to the Company's
banker to secure facilities (note 19).

12. INTERESTS IN ASSOCIATED COMPANIES

<TABLE>
<CAPTION>
March 31,
1995 1996
HK$ HK$
<S> <C> <C>
Unlisted investments, at cost 33,888,291 14,335,440
Share of post-acquisition losses (5,824,856) (6,928,886)
Write off for diminutions in values (5,561,918) (3,345,000)
Elimination of unrealized profits (1,279,824) (612,989)
---------- ----------
21,221,693 3,448,565

Due from associated companies, net 855,251 2,377,294
---------- ----------
22,076,944 5,825,859
========== ==========

Movement in provisions for diminutions in values:
Balance at beginning of year 11,010,918 5,561,918
Reversal of provisions for diminutions in values
on disposal - (2,216,918)
Transfer to other assets (550,000) -
Transfer to short term investments (4,899,000) -
---------- ----------
Balance at March 31 5,561,918 3,345,000
========== ==========
Movement in provision for doubtful debts:
Balance at beginning of year 1,200,000 -
Transfer to short term investments (note IO) (1,200,000) -
---------- ----------
Balance at March 31 - -
========== ==========
</TABLE>

F - 17
<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. INTERESTS IN ASSOCIATED COMPANIES (continued)

The Group's share of the post-acquisition losses of associated
companies for the year ended March 31, 1996 was HK$1,835,000 (1995:
HK$2,708,969).

Details of the associated companies as at March 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Country of
registration Group's
and effective
Name operations holding Principal activities
%
<S> <C> <C> <C>
Panyu Panyi Chemical Industry PRC 30 Manufacturing and sale
& Commerce Co., Ltd. of PU resin

Shan Dong Linyi Modern PRC 35 Manufacturing and sale
Decorating Materials of PVC floor tiles
Co., Ltd.

Zhengzhou ZZZ Prime Hill PRC 20 Manufacturing and sale
Floppy Disk Co., Ltd. of computer floppy disks
</TABLE>

13. OTHER RECEIVABLE
<TABLE>
<CAPTION>

1995 1996
HK$ HK$
<S> <C> <C>

Amounts due from a third party - 130,000,000
Provision for doubtful debts - (17,000,000)
----- ------------
- 113,000,000
===== ============
</TABLE>

Pursuant to a sales and purchase agreement dated December 20, 1996,
Sun's International, a wholly-owned subsidiary of the Group, acquired
from a third party a 100% equity interest in Cathay Mercantile
(Overseas) Limited ("Cathay") for a consideration of HK$130 million.
(Note 24)

Cathay's principal activity is investment holding and Cathay, through
its 65.055% owned Hong Kong incorporated subsidiary, Fast Pulse
Investment Limited, holds a 70% interest in a Sino-foreign cooperative
joint venture engaging in property development in Beijing, the PRC.

Based on a review of the fair value of the interest in Cathay,
primarily based on a valuation report on the land, the title of which
is to be transferred to the joint venture, performed by an independent
professional valuer, a provision in the amount of HK$17,000,000 has
been made to reduce the carrying value of the other receivable to its
estimated fair value.

F - 18

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. BANK LOANS
<TABLE>
<CAPTION>
March 31,
1995 1996
HK$ HK$

<S> <C> <C>
Long term bank mortgage loans, denominated in HK$ 1,701,202 1,478,799
Less: current portion (237,710) (1,478,799)
--------- ---------
Long term portion 1,463,492 -
========= =========
</TABLE>

The mortgage loans are repayable in 64 monthly installments to July,
2001, carry interest at 1% to 1.25% above the Hong Kong prime lending
rate (weighted average of 10.12% and 9.63% per annum as at March 31,
1995 and 1996, respectively), and are secured by the leasehold land and
buildings owned by the Group.

Subsequent to March 31, 1996, all the mortgage loans were repaid by the
Group and the mortgage loans were classified as current liabilities.

The import loans with banks carry interest at 1% above the Hong Kong
prime lending rate (weighted average of 10% and 9.5% per annum as at
March 31, 1995 and 1996, respectively).

The bank overdrafts carry interest at 3% above the Hong Kong prime
lending rate (weighted average of 12% and 11.5% per annum as at March
31, 1995 and 1996, respectively).

15. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL

On 21 February 1995, the Company acquired all of the issued and
outstanding shares of Sun's International by the issue of an aggregate
of 22,750,000 shares of common stock, US$0.001 par value each, of the
Company.

The additional paid-in capital account represents the reorganization
expenses (note 6) and the surplus arising from the differences between
the nominal value of the Company's shares exchanged under the Reverse
Acquisition and the paid up value of the shares of Sun's International.

The shares of the Company issued on March 24, 1995 pursuant to the
Reverse Acquisition were treated as if they had been in issue for all
periods presented.

F-19
<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. CONCENTRATION OF CREDIT RISKS

Financial instruments which potentially subject the Group to a
concentration of credit risk principally consist of cash deposits,
trade receivables, long term receivable and the amounts due from
related companies.

(i) Cash deposits

The Group places its cash deposits with an international
bank.

(ii) Trade receivables and long term receivable

As of March 31, 1996, approximately 95% (1995:77%) and 2%
(1995:12%) of the trade receivable and long term receivable
balances were due from China (Fujian) Foreign Trade Center
Holdings Company, a Chinese Government controlled company,
and Weihaiwei Market Stock Company Limited.

(iii) Amounts due from related companies

At March 31, 1996, approximately 50% and 32% of the amounts
due from related companies were due from New Skyland
Industrial Ltd. and Billion Pearl International Limited,
respectively.

The Group does not have the policy of requiring collateral.

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments are set out
as follows:

(i) Cash deposits

The cash deposits are stated at cost which approximates
market value.

(ii) Trade receivables, other receivables and amounts due from
related companies

Trade receivables, other receivables and the amounts due from
related companies are stated at their book value less
provision for doubtful debts, which approximates the fair
value.

(iii) Bank import loans

The carrying amount of short term bank loans approximates the
fair value because of the short maturity of these
instruments.

(iv) Accounts payable and amounts due to related companies

Accounts payable and amounts due to related companies are
stated at their book value which approximate their fair
value.

F - 20

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATFD FINANCIAL STATEMENTS

18. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

The Group's operating assets and primary source of income and cash
flow are located in the PRC, and may be adversely affected by
significant political, economic and social uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies
for the past 18 years, no assurance can be given that the PRC
government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change
in leadership, social or political disruption or unforeseen
circumstances affecting the PRC's political, economic and social
conditions. There is no guarantee that the PRC government's pursuit of
economic reforms will be consistent or effective.

Currently, a large proportion of the Group's revenue comes from the
assembling, and production lines on a turn-key basis with China
(Fujian) Foreign Trade Centre Holdings Company in the PRC, which is
vulnerable to an increase in the level of competition from overseas
and domestic suppliers and a change in the supply and demand
relationship with that substantial customer.

19. BANKING FACILITIES

The Group had banking facilities of approximately HK$14,800,000 for
mortgages, overdrafts and trade finance. Unused facilities as at March
31, 1996 amounted to approximately HK$6,065,000.

The banking facilities of the Group were secured by:

i. mortgages over the Group's leasehold land and buildings with a
net book value of approximately HK$3,819,000.

ii. corporate guarantees given by the Group totalling
HK$13,960,000 and

iii. lien on a third party's bank deposits totalling HK$5,000,000.

20. FOREIGN CURRENCY EXCHANGE

The Group has substantial transactions with customers and significant
investments in associated joint ventures in the PRC. Both of the
customers in the PRC may settle their debts and their associated
companies distribute their dividends outside the PRC. The remittances
are subject to control because RMB is not freely convertible into
foreign currencies. The amount of debts due from customers in the PRC
subject to control amounted to HK$248,798,000 (1995: HK$137,862,000).

On January 1, 1994, the PRC government introduced a single rate of
exchange as quoted daily by the People's Bank of China (the "Unified
Exchange Rate").

The quotation of the exchange rates does not imply free convertibility
of RMB into Hong Kong dollars or other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank
of China or other banks authorized to buy and sell foreign currencies
at the exchange rates quoted by the People's Bank of China. Approval
of foreign currency payments by the Bank of China or other
institutions requires submitting a payment application form together
with suppliers' invoices, shipping documents and signed contracts.

F-21

<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21. RELATED PARTY BALANCES AND TRANSACTIONS

The Group's amounts due from/(to) directors and related companies owned
and/or controlled by a director, Chan Kwai Chiu, are unsecured,
interest-free and are repayable on demand.

In the normal course of business, some of the companies in the Group are
engaged in the set-up of automatic production lines on a turn-key basis
for its joint ventures. Other than the above-mentioned transactions, the
companies also arrange for the sale of raw materials to these joint
ventures. In the opinion of the Company's management, all business with
these joint ventures was conducted on an arm's length basis. Amounts of
revenues from the sales of turn-key production lines and raw materials
to these joint ventures are summarized as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1994 1995 1996
HK$ HK$ HK$
<S> <C> <C> <C>
Sales to joint ventures:
Raw materials 5,291,715 22,300,181 15,755,398
Production lines 8,229,780 - -
---------- ---------- ----------
13,521,495 22,300,181 15,755,398
========== ========== ==========
</TABLE>
The unrealized profits arising from these transactions were eliminated
in the consolidated financial statements to the extent of the Group's
interests in these joint ventures.

22. CONTINGENCIES AND COMMITMENTS

As at March 31, 1996, the Group has the following capital commitments
and contingencies:

(i) The Group had outstanding letters of credit amounting to
approximately HK$979,893.

(ii) The Group had contracts with a related company in the PRC to
purchase office premises to be developed by the related company
for HK$23,700,000. As at March 31, 1996, HK$7,000,000, which
was grouped under other assets, had been paid as a deposit for
the purchase with the remainder being payable upon receipt of
the title certificates for the office premises.

(ill) The Group has acquired an interest of a property development
joint venture company, Cheng Zhong, details of which are set
out in note 13 to the financial statements. Cheng Zhong's
principal asset is a piece of land held for redevelopment in
Beijing, the PRC, the title of which is to be transferred to
Cheng Zhong. The land use rights is in the progress of being
transferred from the Chinese partner of the joint venture to
Cheng Zhong. It is not confirmed that such land use rights
could be successfully injected to Cheng Zhong. In case of
unsuccessful injection of the land use rights, the Group could
claim any resulted financial damages from the Chinese partner,
which is in accordance with the legal opinion from the Group's
lawyer in the PRC.

F-22

<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23. SEGMENTED FINANCIAL INFORMATION

Substantially all of the Group's activities consist of assembling and
sales of production lines on a turn-key basis. Substantially all the
Group's sales are made to customers in the PRC.

Sales by major customers

<TABLE>
<CAPTION>
Year ended March 31
1994 1995 1996
HK$ HK$ HK$
<S> <C> <C> <C>
Sales:
China (Fujian) Foreign Trade
Centre Holdings Company ("CFFTC") - 209,707,272 277,682,496
Others 207,658,431 44,960,000 21,433,355
----------- ----------- -----------

207,658,431 254,667,272 299,115,851
=========== =========== ===========
</TABLE>

The outstanding balance receivable from CFFTC arising from the above
sales amounted to HK$248,798,243 as at March 31, 1996 (1995:
HK$121,396,693).

24. NON-CASH TRANSACTION

As noted in note 13, Sun's International, a wholly-owned subsidiary of
the Group, acquired from a third party a 100% equity interest in Cathay
for a consideration of HK$130 million, which was satisfied by netting
off the other receivable, long term receivable, amount due from a
director and amount due from a related company of HK$56,572,640,
HK$68,333,334, HK$4,280,000 and HK$814,026, respectively. There was no
cash movement involved in this transaction.

25. SUBSEQUENT EVENTS

Subsequent to March 31, 1996 the following events took place:

(a) On June 21, 1996 the Group obtained a 100% interest in Gain
Whole Limited for a consideration of US$20 million (HK$154.6
million) as partial settlement for the same amount of the debt
due from China (Fujian) Foreign Trade Centre Holdings Company,
a major customer of the Group. The principal asset of Gain
Whole Limited is a certificate of deposit for an amount of
US$20 million (HK$154.6 million) with an authorized financial
institution in the People's Republic of China (the "PRC").

(b) On December 20, 1996, the Group obtained a 100% interest in
Cathay Mercantile (Overseas) Limited ("Cathay") for a
consideration of HK$130 million. The principal asset of Cathay
is a 65.055% interest in Fast Pulse Investment Limited ("Fast
Pulse"), a Hong Kong incorporated company holding a 70%
interest in Beijing Cheng Zhong Tower Real Estate Company
Limited ("Cheng Zhong"). Cheng Zhong's principal asset is a
piece of land held for redevelopment in Beijing, the PRC,
valued at HK$260 million by an independent professional valuer
on April 10, 1997.

F-23

<PAGE>

CHINA CONTINENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

25. SUBSEQUENT EVENTS (continued)

(c) On April 2, 1997 the Group acquired a 15.3% interest in Weifang
Great Dragon Chemical Fibre Company Limited ("Weifang") for a
cash consideration of US$8 million (HK$61.8 million). The
principal activity of Weifang is the manufacture of polyester
tyre cord fabrics, and polyester/nylon canvas.

F-24

<PAGE>

EXHIBIT INDEX
-------------

Exhibit Number Description
- -------------- -----------

23.1 Consent of Ernst & Young

27 Financial Data Schedule

<PAGE>

ERNST & YOUNG o Certified Public Accountants o Phone: 852-2846-9088
13/F Huschinson House 852-2526-5371
10 Hartcourt Road Fax: 852-2868-4432
Central, Hong Kong 852-2845-9208

The Board of Directors
China Continental, Inc.
Room 1801-1806
Hua Qin International Building
340 Queen's Road
Central
Hong Kong

Consent of Independent Auditors
-------------------------------

We consent to the incorporation by reference in the annual report
on Form 10-K of China Continental, Inc. for the year ended March 31, 1996 of our
report dated April 18, 1997 for the consolidated financial statements of China
Continental, Inc. and subsidiaries for the years ended March 31, 1995 and March
31, 1996.

/s/Ernst & Young
Certified Public Accountants

Hong Kong
July 25, 1997

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<NAME> CHINA CONTINENTAL, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS ('000)

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
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