SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File No. 33-3276-D
CHINA CONTINENTAL, INC.
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(Exact name of registrant as specified in its charter)
Utah 87-043106
- -------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1801-1806 Hua Qin International Building, 340 Queen's Road Central, Hong Kong
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(Address of principal executive offices)
(852) 2542-2612
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(Issuer's telephone number)
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
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As of August 1, 1998, 66,000,000 shares of Common Stock of the issuer were
outstanding.
<PAGE>
CHINA CONTINENTAL, INC.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 3
Consolidated Statements of Income -
For the three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows-
For the three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CHINA CONTINENTAL, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in '000 United States Dollars)
<TABLE>
March 31, December 31,
1998 1997
----------------- ----------------
<S> <C> <C>
(unaudited)
ASSETS
Current Assets
Cash and deposits $ 19,521 $ 17,808
Accounts receivable, net of provision 4,904 4,699
Prepayments, deposits and other receivable 703 647
Amount due from directors 5,100 5,100
Amount due from related companies 4,275 4,402
-------------------- -------------------
Total Current Assets 34,503 32,656
Fixed Assets 434 450
Investment in joint ventures 8,910 8,910
Land lease rights 174,212 175,292
Other assets 903 903
-------------------- -------------------
Total Assets $ 218,962 $ 218,211
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft $ 503 $ 492
Payable and accruals 2,950 4,519
Bank import loans 0 1,352
Secured bank loan 1,286 1,288
Due to related companies 749 40,708
Income taxes payable 10,047 9,511
Amounts due to directors 1,110 1,110
-------------------- -------------------
Total current liabilities 16,645 58,980
-------------------- -------------------
Minority interest 87,744 88,392
-------------------- -------------------
Stockholders' Equity
Share capital 66 26
Contributed surplus 41,683 1,723
Retained earnings 72,824 69,090
-------------------- -------------------
Total Stockholders' Equity 114,573 70,839
-------------------- -------------------
Total Liabilities and Stockholders' Equity $ 218,962 $ 218,211
==================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Stated in '000 United States Dollars
except shares and earnings per share)
(Unaudited)
<TABLE>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
------------------------- ------------------
Revenues
Sales of turnkey projects $ 7,868 $ 2,388
Sales of raw materials 1,138 1,074
Cost of sales (3,926) (1,507)
------------------------- ------------------
Gross Profit 5,080 1,955
Depreciation and amortization of fixed assets
and land lease rights (1,096) (16)
Selling and administrative expenses (339) (303)
Provision for doubtful debts 0 289
Financial income (expenses), net (23) (33)
Other income (expenses), net 0 (614)
Share of income of associated companies 0 57
Minority interest in operations of consolidated subsidiary 648 0
------------------------ -----------------
Incomes before income taxes 4,270 1,335
Income taxes (536) (154)
------------------------- ------------------
Net Income $ 3,734 $ 1,181
========================= ==================
Earnings per share - basic and diluted $ .08 $ .05
========================= ==================
Weighted average common and
equivalent shares outstanding - basic and diluted 47,777,777 26,000,000
========================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in '000 United States Dollars)
(Unaudited)
<TABLE>
Three Months Ended March, 31
1998 1997
---------------------- ---------------------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Income $ 3,734 $ 2,775
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 1,096 16
Share of (Profit) Loss in Joint Venture 0 (57)
Minority interest in operations of consolidated subsidiary (648) 0
Changes in Non-Cash Working Capital (1,126) (2,062)
---------------------- ---------------------
Net Cash Provided by Operating Activities 3,056 672
====================== =====================
Cash Flows from Investing Activities:
Proceeds from issue of shares 0 0
Payments for Acquisition of Fixed assets 0 (2)
----------------------
Net Cash Used in Investing Activities 0 (2)
====================== =====================
Financing Activities:
Repayment of bank overdraft 11 0
Repayment of secured loan (2) 0
Net Borrowings Under Bank Import Loans (1,352) (82)
---------------------- ---------------------
Net Cash Used in Financing Activities (1,343) (82)
====================== =====================
Net Increase in Cash 1,713 588
Cash, Beginning of Period 17,808 20,543
---------------------- ---------------------
Cash, End of Period $ 19,521 $ 21,131
====================== =====================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The unaudited condensed consolidated financial statements of China Continental,
Inc. have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the requirements
for reporting on Form 10-Q. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
Results shown for interim periods are not necessarily indicative of the results
to be obtained for a full fiscal year. These interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended December 31, 1997.
Note 2 -- Foreign Currency Conversion
The Company's financial information is presented in US dollars. Hong Kong
dollars have been converted into US dollars at the exchange rate of 7.75 to 1.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Results of Operation
Comparison of the Three Months Ended March 31, 1998 to the Three Months Ended
March 31, 1997
Revenues
Revenues increased by $5,544,000 or 232% to $9,006,000 for the three months
ended March 31, 1998 from $ 3,462,000 for the corresponding period of the prior
year. The increase in revenue reflects the delay of two turnkey projects
originally scheduled for completion in 1997, but completed and booked in the
first quarter of 1998 and also due to an overall increase in the demand for the
Company's products and services in the People's Republic of China.
Cost of Sales
Cost of sales as a percentage of revenue was 43.6% for the three months
ended March 31, 1998. This compares with 43.5% for the three months ended March
31, 1997.
Depreciation of Fixed Assets and Amortization of Land Lease Rights
Depreciation and amortization expenses increased by $1,080,000 or 6750% to
$ 1,056,000 for the three months ended March 31, 1998 from $16,000 for the
corresponding period of the prior year. This increase resulted from the
acquisition of the land rights on property located north of Beijing which is
being amortized over the lease period of 40 years.
Selling and Administrative Expenses
Selling and administrative expenses increased by $ 36,000 or 11.8% to $
339,000 for the three months ended March 31, 1998 from $ 303,000 for the
corresponding period of the prior year. This represented both a general
inflationary increase as well as the activity resulting from increased sales.
Financial Income / (Expense), net
Financial income (expense), net is interest earned on cash and cash
equivalents, less interest expense. Net financial expense decreased by $ 10,000,
or 30% to $23,000 for the three months ended March 31, 1998 from $33,000 for the
corresponding period of the prior year. This decrease resulted from a decrease
in bank import loans of the Company.
Minority Interest in Operations of Consolidated Subsidiary
Minority interests in operations of consolidated subsidiary were $648,000
and $0 for the three months ended March 31, 1998 and 1997, respectively. The
increase from 1997 to 1998 is due to the amortization of the land lease rights.
Income Taxes
Income taxes for the three months ended March 31, 1998 were $536,000 or
12.5% of pretax income. This compares with $ 154,000 or 11.5% of pretax income
for the corresponding period of the prior year.
7
<PAGE>
Net Income
Net income increased by $2,553,000 or 216.2% to $3,743,000 for the three
months ended March 31, 1998 from $1,181,000 for the corresponding period of the
prior year. This increase resulted from both higher revenues and lower costs.
Liquidity and Capital Resources
At March 31, 1998, the Company had working capital of $12,733,000 including
a cash balance of $19,521,000 This compares to a working capital deficit of
$(26,324,000) and a cash balance of $ 17,808,000 at December 31, 1997.
Net cash provided by operating activities increased to $3,056,000 for the
three months ended March 31, 1998 from $672,000 for the corresponding period of
the prior year. This increase resulted from changes in non-cash working capital
which was partially offset by increased earnings.
The Company's business has historically not been capital-intensive. In most
years internally generated funds were sufficient to fund the Company's
operations and finance its growth. While the cash generated from earnings and
available lines of credit has historically provided sufficient liquidity to meet
ordinary capital requirements. However, with the acquisition of the agricultural
property and the capital required to develop the agrogenetic business
operations, the Company anticipates selling additional debt or equity financing
during the next twelve months.
PART II. OTHER INFORMATION
(a) Exhibits
1. 27.1 Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K dated February 10, 1998 reporting the acquisition of a
43.5% interest in Wealthy Asian Limited for 40,000,000 shares of
Common Stock.
8
<PAGE>
Signature
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
CHINA CONTINENTAL, INC.
/s/ Harry H.H. Ho
------------------------------------
Harry H.H. Ho
Chairman and Chief Executive Officer
/s/ Eric Ng
------------------------------------
Eric Ng
Chief Financial Officer and Secretary
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,521
<SECURITIES> 0
<RECEIVABLES> 4,904
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,502
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 218,962
<CURRENT-LIABILITIES> 16,645
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 114,507
<TOTAL-LIABILITY-AND-EQUITY> 218,962
<SALES> 9,006
<TOTAL-REVENUES> 9,006
<CGS> (3,926)
<TOTAL-COSTS> (810)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,270
<INCOME-TAX> (536)
<INCOME-CONTINUING> 3,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,734
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
