SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] 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.
--------------------------------------------
(Name of small business issuer in its charter)
Utah 87-0431063
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation
Identification Number) or organization)
1801-1806 Hua Qin International Building, 340 Queen's Road Central, Hong Kong
------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
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 twelve (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 ninety (90)
days. Yes X No
--- ---
As of October 31, 1998, 66,000,000 shares of Common Stock of the issuer
were outstanding.
<PAGE>
CHINA CONTINENTAL, INC.
INDEX
Page
Number
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1998 ...........................................3
Consolidated Statements of Income and Retained Earnings -
For the three and nine months ended September 30, 1998
and 1997.........................................................4
Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1998 and 1997................................5
Notes to Unaudited 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...............................11
Signatures...............................................................11
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in '000 United States Dollars)
Sept. 30, Dec. 31,
1998 1997
---------------- -------------
(Unaudited)
ASSETS
Current Assets
Cash and deposits $25,436 17,808
Accounts receivable, net, of provision 13,593 4,699
Prepayments, deposits and other receivable 776 647
Amount due from directors 5,980 5,100
Amount due from related companies 2,854 4,402
------------
-------------
Total Current Assets 48,639 32,656
------------ -------------
Fixed assets 402 450
Land lease rights 172,005 175,292
Investments in joint ventures 8,910 8,910
Other assets 903 903
============ =============
Total Assets 230,859 218,211
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft 486 492
Payables and accruals 3,696 4,519
Bank import loans 774 1,352
Secured bank loan 1,282 1,288
Due to related companies 810 40,708
Income taxes payable 11,080 9,511
Amount due to directors 1,110 1,110
------------ -------------
Total Current Liabilities 19,238 58,980
------------ -------------
Minority Interest 86,672 88,392
------------ -------------
Stockholders' Equity
Share capital 66 26
Contributed surplus 41,683 1,723
Retained earnings 83,200 69,090
------------ -------------
Total Stockholders' Equity 124,949 70,839
------------ -------------
Total Liabilities and Stockholders' Equity 230,859 218,211
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Stated in '000 United States Dollars)
(unaudited)
<TABLE>
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
September 30, September 30,
1998 1997 1998 1997
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues
Sale of turnkey projects $ 10,971 $ 9,250 $29,339 $21,154
Sale of raw materials 654 635 2,664 2,340
Cost of sales (4,882) (3,893) (13,706) (9,387)
--------------- ---------------- ---------------- ----------------
Gross Profit 6,743 5,992 18,297 14,107
Depreciation and amortization of
fixed assets (1,112) (20) (3,335) (56)
Selling and administrative expenses (287) (174) (929) (649)
Provision for bad debt 0 0 289
Financial income (expenses) (28) (54) (76) (141)
........net
Other income (expenses) net 0 0 0 (614)
Share of income (losses) of 0 0 0 57
consolidated subsidiary
Minority interest in operations of 537 0 1,722 0
consolidated subsidiary --------------- ---------------- ---------------- ----------------
Income before income taxes 5,853 5,744 15,679 12,993
Income taxes (570) (480) (1,569) (1,129)
--------------- ---------------- ---------------- ----------------
Net Income 5,283 5,264 14,110 11,864
=============== ================ ================ ================
Earnings per share-basic and diluted $0.08 $0.20 $0.24 $0.45
=============== ================ ================ ================
Weighted Average common and
equivalent shares outstanding - basic
and diluted 66,000,000 26,000,000 59,959,484 26,000,000
=============== ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in '000 United States Dollars)
(unaudited)
<TABLE>
Nine Months Ended
-------------------------------
September 30,
1998 1997
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $14,110 $11,864
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 3,335 56
Minority interest (1,722) 0
Provision for doubtful debts and diminution in value of investments and 522
associated companies
Share of (Profit) Loss in Joint Venture 0 (57)
Changes in Non-Cash Working Capital (7,505) (392)
------------ --------------
Net Cash Provided by Operating Activities 8,218 11,993
============ ==============
Investment Activities:
Payment for Acquisition of Equipment 0 (8)
------------ --------------
Net cash Provided by (Used in) Investing Activities 0 (8)
============ ==============
Financing Activities:
Repayment of bank overdraft (6) 0
Repayment of secured loan (6) 0
Net borrowings (repayments) under bank import loans (578) 60
------------ --------------
Net Cash Provided by (Used in) Financing Activities (590) 60
============ ==============
Net Increase (decrease) in Cash 7,628 12,045
Cash, Beginning of Period 17,808 20,543
------------ --------------
Cash, End of Period 25,436 32,588
============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
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
This release contains forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company's actual results could differ
materially from those set forth on the forward looking statements as a result of
the risks set forth in a Company's filings with the Securities and Exchange
Commission in general economic conditions and changes in the assumptions used in
making such forward looking statements.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Results of Operations
Comparison of the Three Months Ended September 30, 1998 to the Three Months
Ended September 30, 1997
Revenues
Revenues increased by $1,740,000 or 17.6% to $11,625,000 for the three
months ended September 30, 1998 from $9,885,000 for the corresponding period of
the prior year. The increase in revenue reflects the continuous effort of
management in developing the market in the People's Republic of China.
Cost of Sales
Cost of sales as a percentage of revenue was 42% for the three months ended
September 30, 1998. This compares with 40% for the three months ended September
30, 1997. This increase in cost of sales as a percentage of revenue reflects
higher costs as a result of inflation.
Depreciation of Fixed Assets and Amortization of Land Lease Rights
Depreciation and amortization expenses increased by $1,092,000 or 5,460% to
$1,112,000 for the three months ended September 30, 1998 from $20,000 for the
corresponding period of the prior year. This increase resulted from the
acquisition of the land lease right 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 $113,000 or 65% to
$287,000 for the three months ended September 30, 1998 from $174,000 for the
corresponding period for the prior year. This increase represented additional
professional expenses incurred in bringing the Company's filings current and a
general increase in salaries.
Financial Income / (Expense), net
Financial income (expense), net is interest owed on cash and cash
equivalents, less interest expense. Net financial expense decreased by $26,000
or 48% to $28,000 for the three months ended September 30, 1998 from $54,000 for
the corresponding period of the prior year. This decrease resulted from a
reduction in bank import loans by the Company and a decrease in the effective
interest rate.
7
<PAGE>
Minority Interest in Operations of Consolidated Subsidiary
Minority interest in operations of consolidated subsidiary were $537,000
and $0 for the three months ended September 30, 1998 and 1997, respectively.
This increase from 1997 to 1998 is due to the amortization of the land lease
rights.
Income Taxes
Income taxes for the three months ended September 30, 1998 were $570,000 or
9.7% of pretax income. This compares with $480,000 or 8.3% of pretax income for
the corresponding period of the prior year.
Net Income
Net income increased by $19,000 or 0.3% to $5,283,000 for the three months
ended September 30, 1998 from $5,264,000 for the corresponding period of the
prior year. This increase reflects the increase in operating income which was
partially off-set by the increase in the amortization charge.
Comparison of the Nine Months Ended September 30, 1998 to the Nine Months Ended
September 30, 1997
Revenues
Revenues increased by $8,564,000 or 26.5% to $32,003,000 for the nine
months ended September 30, 1998 from $23,439,000 for the corresponding period of
the prior year. The increase in revenue reflects the continuous effort of
management in developing the market in the People's Republic of China.
Cost of Sales
Cost of sales as a percentage of revenue was 42.8% for the nine months
ended September 30, 1998. This compares with 40% for the three months ended
September 30, 1997. This increase in cost of sales as a percentage of revenue
reflects higher costs as a result of inflation.
Depreciation of Fixed Assets and Amortization of Land Lease Rights
Depreciation and amortization expenses increased by $3,297,000 or 5,755% to
$3,335,000 for the nine months ended September 30, 1998 from $56,000 for the
corresponding period of the prior year. This increase resulted from the
acquisition of the land lease right on property located north of Beijing which
is being amortized over the lease period of 40 years.
8
<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses increased by $280,000 or 43% to
$929,000 for the nine months ended September 30, 1998 from $649,000 for the
corresponding period for the prior year. This increase represented additional
professional expenses incurred in bringing the Company's filings current and a
general increase in salaries.
Financial Income / (Expense), net
Financial income (expense), net is interest owed on cash and cash
equivalents, less interest expense. Net financial expense decreased by $65,000
or 46% to $76,000 for the nine months ended September 30, 1998 from $141,000 for
the corresponding period of the prior year. This decrease resulted from a
reduction in bank import loans of the Company and a decrease in the effective
interest rate.
Minority Interest
Minority interest in operations of consolidated subsidiary were $1,722,000
and $0 for the nine months ended September 30, 1998 and 1997, respectively. This
increase from 1997 to 1998 is due to the amortization of the land lease rights.
Income Taxes
Income taxes for the nine months ended September 30, 1998 were $1,569,000
or 10% of pretax income. This compares with $1,129,000 or 8.7% of pretax income
for the corresponding period of the prior year.
Net Income
Net income increased by $2,246,000 or 18.9% to $14,110,000 for the nine
months ended September 30, 1998 from $11,864,000 for the corresponding period of
the prior year. This increase was due to an increase in sale which has been
partially offset by higher costs and amortization of the agricultural lease.
Liquidity and Capital Resources
At September 30, 1998, the Company had a working capital of $29,400,000,
including a cash balance of $25,436,000. 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 decreased to $8,218,000 from
$20,164,000 for the nine months ended September 30, 1998 from $11,993,000 for
the corresponding period of the prior year. This decrease resulted from changes
in non-cash working capital and minority interests which was partially offset by
increased earnings and depreciation/amortization. For the nine months ended
September 30, 1998, the change in non-cash working capital was $(7,505,000).
This compares with $(392,000) for the nine months ended September 30, 1997.
9
<PAGE>
Net cash provided by financing activities increased to $590 for the nine
months ended September 30, 1998 from $60 provided by financing activities for
the corresponding period for the prior year. The change resulted from repayment
of borrowings as opposed to an increase in borrowings.
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, because of startup of the agrogenetic
operation and the cash required to begin the operation, the Company may seek
additional equity or debt financing during the next twelve (12) months.
Year 2000 Disclosure
In the opinion of management, the Company does not believe that year 2000
issues will have a material impact on the Company's business results of
operations or financial condition.
10
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
1. 27.1 Financial Data Schedule
b) Reports on Form 8-K
None
Signatures
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 duly authorized.
CHINA CONTINENTAL, INC.
Date: November 3, 1998 /s/ Harry H.H. Ho
--------------------------------------
Harry H.H. Ho
Chairman and Chief Executive Officer
Date: November 3, 1998 /s/ Eric Ng
--------------------------------------
Eric Ng
Chief Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 25,436
<SECURITIES> 0
<RECEIVABLES> 13,593
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,639
<PP&E> 172,407
<DEPRECIATION> 0
<TOTAL-ASSETS> 230,859
<CURRENT-LIABILITIES> 19,238
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 124,883
<TOTAL-LIABILITY-AND-EQUITY> 230,859
<SALES> 11,625
<TOTAL-REVENUES> 11,625
<CGS> 4,882
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,853
<INCOME-TAX> 570
<INCOME-CONTINUING> 5,283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,283
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
