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, 1997
[ ] 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 or organization) Identification Number)
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 No X
----- -----
As of September 30, 1997, 26,000,000 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, 1997
(unaudited) and March 31, 1997.............................. 3
Unaudited Consolidated Statements of Income and Retained
Earnings - For the three and six months ended September 30, 1997
and 1996.................................................... 4
Unaudited Consolidated Statements of Cash Flows- For the six
months ended September 30, 1997 and 1996.................... 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....................... 10
Signatures.................................................... 10
2
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in '000 United States Dollars)
(unaudited)
Sept. 30, March 31,
1997 1997
------------- ------------
ASSETS
Current Assets
Cash and deposits $ 32,588 $ 21,131
Accounts receivable, net, prepaid and deposits 6,245 13,475
Amount due from related companies 2,403 2,326
Short term investments 43,033 34,618
Total Current Assets 84,269 71,550
------------- ------------
Property and equipment 490 530
Investment in joint ventures 297 297
Other assets 905 905
------------- ------------
Total Assets $ 85,961 $ 73,282
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Payable and accruals 5,920 4,870
Bank import loans 1,185 1,043
Due to related companies 585 756
Income taxes payable 9,291 8,316
Amount due to directors 782 782
Total Current Liabilities 17,763 15,767
------------- ------------
Stockholders' Equity
Share capital 26 26
Contributed surplus 1,728 1,728
Retained earnings 66,444 55,761
------------- ------------
Total Stockholders' Equity 68,198 57,515
------------- ------------
Total Liabilities and Stockholders' Equity $ 85,961 $ 73,282
============= ============
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 Six Months Ended
---------------------------------------- ---------------------------------------
September 30, September 30,
1997 1996 1997 1996
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues
Sale of turnkey projects $ 9,250 $ 9,932 $ 18,766 $ 19,102
Sale of raw materials 635 455 1,266 931
----------------- ----------------- ---------------- -----------------
9,885 10,387 20,032 20,033
Cost of sales 3,893 4,892 7,880 9,464
----------------- ----------------- ---------------- -----------------
Gross Profit 5,992 5,495 12,152 10,569
Depreciation of fixed assets (20) (21) (40) (43)
Selling and administrative
expenses (174) (437) (346) (790)
Financial income (expenses)
net (54) (7) (108) (15)
Other income (expenses) net 0 5 0 17
Share of losses of associated
companies 0 (20) 0 (42)
----------------- ----------------- ---------------- -----------------
Income before income
taxes 5,744 5,015 11,658 9,696
Income taxes (480) (418) (975) (808)
----------------- ----------------- ---------------- -----------------
Net Income 5,264 4,597 10,683 8,888
Retained Earnings, Beginning of Period 61,180 51,164 55,761 46,873
----------------- ----------------- ---------------- -----------------
Retained Earnings - September 30 $ 66,444 $ 55,761 $ 66,444 $ 55,761
================= ================ ================ =================
Earnings per share $ 0.202 $ 0.176 $ 0.411 $ 0.342
================= ================= ================ =================
Weighted average common
and equivalent shares
outstanding 26,000,000 26,000,000 26,000,000 26,000,000
================= ================= ================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in '000 United States Dollars)
(unaudited)
Six Months Ended
------------------------
September 30,
1997 1996
----------- ----------
Cash Flows From Operating Activities:
Net Income $10,683 $8,888
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 40 43
Share of (Profit) Loss in Joint Venture 0 42
Changes in Non-Cash Working Capital 592 11,191
--------- -----------
Net Cash Provided by Operating Activities 11,315 20,164
--------- -----------
Cash Flow From Investing Activities:
Proceeds from Disposal of Investments 0 0
Payments Fro Acquisition of Equipment 0 0
Investments in Joint Ventures 0 0
--------- -----------
Net Cash Provided by (Used in) Investing
Activities 0 0
--------- -----------
Cash Flow From Financing Activities:
Repayment of bank overdraft 0 (87)
Net Borrowings Under Bank Import Loans 142 173
--------- -----------
Net Cash Provided by Financing Activities 142 86
--------- -----------
Net Increase in Cash 11,457 20,250
Cash, Beginning of Period 21,131 963
---------
Cash, End of Period 32,588 21,213
========= ===========
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 March 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 7.73 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 Operations
Comparison of the Three Months Ended September 30, 1997 to the Three Months
Ended September 30, 1996
Revenues
Revenues decreased by $502,000 or 5% to $9,885,000 for the three months
ended September 30, 1997 from $10,387,000 for the corresponding period of the
prior year. The decrease in revenue reflects a decline in revenues from turnkey
projects which was partially offset by an increase in sales of raw materials.
Cost of Sales
Cost of sales decreased by $999,000 or 20.4% to $3,893,000 for the three
months ended September 30, 1997 from $4,892,000 for the corresponding period of
the prior year. This decrease resulted from negotiating better purchase terms
with the suppliers and the devaluation of other Southeast Asian countries'
currencies.
Depreciation of Fixed Assets
Depreciation expenses decreased by $1,000 or 5% to $20,000 for the three
months ended September 30, 1997 from $21,000 for the corresponding period of the
prior year. This decrease resulted from a change in accounting policy whereby
buildings are depreciated over the remaining period of the 50-year lease as
opposed to the useful life of the building utilized in prior periods.
Selling and Administrative Expenses
Selling and administrative expenses decreased by $263,000 or 60.2% to
$174,000 for the three months ended September 30, 1997 from $437,000 for the
corresponding period of the prior year. This decrease resulted from a
streamlining of operational procedures and improved controls.
Financial Income / (Expense), net
Financial income (expense), net is interest owed on cash and cash
equivalents, less interest expense. Net financial expense increased by $47,000
or 671% to $54,000 for the three months ended September 30, 1997 from $7,000 for
the corresponding period of the prior year. This increase resulted from
increased short term borrowings by the Company.
7
<PAGE>
Income Taxes
Income taxes for the three months ended September 30, 1997 were $480,000 or
8.36% of pretax income. This compares with $418,000 or 8.33% of pretax income
for the corresponding period of the prior year.
Net Income
Net income increased by $667,000 or 14.5% to $5,264,000 for the three
months ended September 30, 1997 from $4,597,000 for the corresponding period of
the prior year. This increase resulted from both increased contract revenues and
lower costs which was partially offset by lower turnkey revenues.
Comparison of the Six Months Ended September 30, 1997 to the Six Months Ended
September 30, 1996
Revenues
Revenues decreased by $1,000 to $20,032,000 for the six months ended
September 30, 1997 from $20,033,000 for the corresponding period of the prior
year. Although sales of turnkey projects decreased by $336,000, it was offset by
an increase in sales of raw materials of $335,000.
Cost of Sales
Cost of sales decreased by $1,584,000 or 16.7% to $7,880,000 for the six
months ended September 30, 1997 from $9,464,000 for the corresponding period of
the prior year. This decrease resulted from negotiating better purchase terms
with suppliers and the devaluation of other Southeast Asian countries'
currencies.
Depreciation of Fixed Assets
Depreciation expenses decreased by $3,000 or 7% to $40,000 for the six
months ended September 30, 1997 from $43,000 for the corresponding period of the
prior year. This decrease resulted from a change in accounting policy whereby
buildings are depreciated over the remaining period of the 50-year lease as
opposed to the useful life of the building utilized in prior periods.
Selling and Administrative Expenses
Selling and administrative expenses decreased by $444,000 or 56.2% to
$346,000 for the six months ended September 30, 1997 from $790,000 for the
corresponding period of the prior year. This decrease resulted from a
streamlining of operational procedures and improved controls.
Financial Income / (Expense), net
Financial income (expense), net is interest owed on cash and cash
equivalents, less interest expense. Net financial expense increased by $93,000
or 620% to $108,000 for the six months ended September 30, 1997 from $15,000 for
the corresponding period of the prior year. This increase resulted from
increased short term borrowings by the Company.
8
<PAGE>
Income Taxes
Income taxes for the six months ended September 30, 1997 were $975,000 or
8.36% of pretax income. This compares with $808,000 or 8.33% of pretax income
for the corresponding period of the prior year.
Net Income
Net income increased by $1,795,000 or 20.2% to $10,683,000 for the six
months ended September 30, 1997 from $8,888,000 for the corresponding period of
the prior year. This increase resulted from lower overall costs.
Liquidity and Capital Resources
At September 30, 1997, the Company had working capital of $66,506,000
including a cash balance of $32,588,000. This compares to working capital of
$55,783,000 and a cash balance of $21,131,000 at March 31, 1997.
Net cash provided by operating activities decreased to $11,315,000 from
$20,164,000 for the corresponding period of the prior year. This decrease
resulted from changes in non-cash working capital which was partially offset by
increased earnings. For the six months ended September 30, 1997, the change in
non-cash working capital was $(592,000). This compares with $11,191,000 for the
six months ended September 30, 1996.
Net cash provided by financing activities was $142,000 for the six months
ended September 30, 1997, all of which came from bank import loans. This
compares to $86,000 provided by financing activities for the six months ended
September 30, 1996.
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, the Company's purchase of Wealthy Asia Limited
for US$52,000,000 and 40,000,000 shares has substantially depleted the Company's
cash reserves. Accordingly, the Company anticipates seeking additional debt or
equity financing during the next twelve months to cover its capital requirements
for its new agricultural genetics joint venture.
9
<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: May 20, 1998 /s/ Harry H.H. Ho
------------------------------------
Harry H.H. Ho
Chairman and Chief Executive Officer
Date: May 20, 1998 /s/ Eric Ng
------------------------------------
Eric Ng
Chief Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 32,588
<SECURITIES> 0
<RECEIVABLES> 6,245
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,269
<PP&E> 490
<DEPRECIATION> 0
<TOTAL-ASSETS> 85,961
<CURRENT-LIABILITIES> 17,763
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 68,172
<TOTAL-LIABILITY-AND-EQUITY> 85,961
<SALES> 20,032
<TOTAL-REVENUES> 20,032
<CGS> 7,880
<TOTAL-COSTS> 7,880
<OTHER-EXPENSES> 386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> 11,658
<INCOME-TAX> 975
<INCOME-CONTINUING> 10,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,683
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
