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 June 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.
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(Exact name of registrant as specified in its charter)
Utah 87-0431063
- -------------------------------- --------------------------------
(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
---- ------
As of September 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 - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income - For the three
months and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows- For the six months ended
June 30, 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 11
Signatures 11
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CHINA CONTINENTAL, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in '000 United States Dollars)
(unaudited)
June 30, Dec. 31,
1998 1997
---------- ----------
ASSETS
Current Assets
Cash and deposits $22,650 $17,808
Accounts receivable, net of provision 11,328 4,699
Prepayments, deposits and other receivable 735 647
Amount due from directors 6,035 5,100
Amount due from related companies 2,735 4,402
-------- --------
Total Current Assets 43,483 32,656
======== ========
Fixed Assets 418 450
Land lease rights 173,101 175,292
Investment in joint ventures 8,910 8,910
Other assets 903 903
-------- --------
Total Assets $226,815 $218,211
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft $499 $492
Payable and accruals 5,032 4,519
Bank import loans 726 1,352
Secured bank loan 1,284 1,288
Due to related companies 780 40,708
Income taxes payable 10,510 9,511
Amounts due to directors 1,110 1,110
-------- --------
Total current liabilities 19,941 58,980
-------- --------
Minority interest 87,208 88,392
-------- --------
Stockholders' Equity
Share capital 66 26
Contributed surplus 41,683 1,723
Retained earnings 77,917 69,090
-------- --------
Total Stockholders' Equity 119,666 70,839
-------- --------
Total Liabilities and Stockholders' Equity $226,815 $218,211
======== ========
The accompanying notes are an integral part of these consolidated
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 Six Months Ended
June 30 June 30
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Sales of turnkey projects $10,500 $9,516 $18,368 $11,904
Sales of raw materials 872 631 2,010 1,705
Cost of sales (4,898) (3,987) (8,824) (5,494)
-------- -------- -------- --------
Gross Profit 6,474 6,160 11,554 8,115
Depreciation and amortization of
fixed assets and land lease rights (1,127) (20) (2,223) (36)
Selling and administrative expenses (303) (172) (642) (475)
Provision for doubtful debts 0 0 0 289
Financial income (expenses), net (25) (54) (48) (87)
Other income (expenses), net 0 0 0 (614)
Share of income (losses) of
associated companies 0 0 0 57
Minority interest in operations of
consolidated subsidiary 537 0 1,185 0
-------- -------- -------- --------
Income before income taxes 5,556 5,914 9,826 7,249
Income taxes (463) (495) (999) (649)
-------- -------- -------- --------
Net Income $5,093 $5,419 $8,827 $6,600
-------- -------- -------- --------
Earnings per share-basic and diluted $0.08 $0.21 $0.16 $0.25
======== ======== ======== ========
Weighted average common and
equivalent shares outstanding -
basic and diluted 66,000,000 26,000,000 56,939,227 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)
<TABLE>
Six Months Ended June 30
------------------------
1998 1997
------ ------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $8,827 $6,600
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 2,223 36
Minority Interest (1,185) 0
Provision for doubtful debts and diminutions
in values of investments and associated companies 0 4,337
Share of (Profit) Loss in Joint Venture 0 (57)
Deferred Taxes 0 (20)
Changes in Non-Cash Working Capital (4,400) (8,348)
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Net Cash Provided by Operating Activities 5,465 2,548
======= =======
Cash Flows from Investing Activities:
Proceeds from issue of shares 0 0
Payments for Acquisition of Fixed assets 0 (8)
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Net Cash Provided by (Used in) Investing Activities 0 (8)
======= =======
Cash Flows from financing Activities:
Repayment of bank overdraft 7 0
Repayment of secured loan (4) 0
Net Borrowings Under Bank Import Loans (626) 8
------- -------
Net Cash (Used in) Provided by Financing Activities (623) 8
======= =======
Net Increase in Cash 4,842 2,548
======= =======
Cash, Beginning of Period 17,808 20,543
------- -------
Cash, End of Period $22,650 $23,091
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
NOTES TO UNAUDITED 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 June 30, 1998 to the Three Months Ended
June 30, 1997
Revenues
Revenues increased by $1,225,000 or 12% to $11,372,000 for the three months
ended June 30, 1998 from $10,147,000 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 43.1% for the three months
ended June 30, 1998. This compares with 39.3% for the three months ended June
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 $1,107,000 or 5,535% to
$1,127,000 for the three months ended June 30, 1998 from $20,000 for the
corresponding period of the prior year. This increase resulted from the
acquisition of the land lease rights on property located north of Beijing which
is amortized over the lease period of 40 years.
Selling and Administrative Expenses
Selling and administrative expenses increased by $131,000 or 76% to
$303,000 for the three months ended June 30, 1998 from $ 172,000 for the
corresponding period of 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 $ 29,000,
or 53.7% to $25,000 for the three months ended June 30, 1998 from $54,000 for
the corresponding period of the prior year. This decrease resulted from a
reduction in bank import loans of the Company.
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 June 30, 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 June 30 , 1998 were $463,000 or
8.3% of pretax income. This compares with $495,000 or 8.36% of pretax income for
the corresponding period of the prior year.
Net Income
Net income decreased by $326,000 or 6.0% to $ 5,093,000 for the three
months ended June 30, 1998 from $5,419,000 for the corresponding period of the
prior year. This decrease resulted from both higher cost of sales and the
amortization charge for the period.
Comparison of the Six Months Ended June 30, 1998 to the Six Months Ended June
30, 1997
Revenues
Revenues increased by $6,769,000 or 49.7% to $20,378,000 for the six months
ended June 30, 1998 from $ 13,609,000 for the corresponding period of the prior
year. The increase represents the delay in completion of two turnkey projects
originally scheduled for completion in 1997, but completed and booked in 1998
and 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 43.3% for the six months ended
June 30, 1998. This compares with 40.4% for the six months ended June 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 $ 2,187,000 or 6,075%
to $2,223,000 for the six months ended June 30, 1998 from $36,000 for the
corresponding period of the prior year. This increase resulted from the
acquisition of the land lease rights on property located north of Beijing which
is amortized over the lease period of 40 years.
8
<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses increased by $167,000 or 35% to
$642,000 for the six months ended June 30, 1998 from $475,000 for the
corresponding period of 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 $39,000,
or 44.8% to $48,000 for the six months ended June 30, 1998 from $87,000 for the
corresponding period of the prior year. This decrease resulted from a reduction
in bank import loans of the Company.
Minority Interest in Operations of Consolidated Subsidiary
Minority interest in operations of consolidated subsidiary were $1,185,000
and $0 for the six months ended June 30, 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 six months ended June 30 , 1998 were $999,000 or 10.2%
of pretax income. This compares with $ 649,000 or 9.0% of pretax income for the
corresponding period of the prior year.
Net Income
Net income increased by $2,227,000 or 33.74% to $8,827,000 for the six
months ended June 30, 1998 from $6,600,000 for the corresponding period of the
prior year. This increase resulted from a general increase in sales.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $23,542,000 including
a cash balance of $22,650,000. This compares to working capital of $17,851,000
and a cash balance of $17,808,000 at December 31, 1997.
Net cash provided by operating activities increased to $5,465,000 for the
six months ended June 30, 1998 from $2,542,000 for the corresponding period of
the prior year. This increase resulted from changes in non-cash working capital
which were partially offset by increased earnings. For the six months ended June
30, 1998, the change in non-cash working capital was $(4,400,000). This compares
with $(5,631,000) for the six months ended June 30, 1997.
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 the start up 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.
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 authorized.
CHINA CONTINENTAL, INC.
Date September 14, 1998 /s/ Harry H.H. Ho
-------------------------------------
Harry H.H. Ho
Chairman and Chief Executive Officer
Date September 14, 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> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,650
<SECURITIES> 0
<RECEIVABLES> 11,328
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,483
<PP&E> 173,519
<DEPRECIATION> 0
<TOTAL-ASSETS> 226,815
<CURRENT-LIABILITIES> 19,941
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 119,600
<TOTAL-LIABILITY-AND-EQUITY> 226,815
<SALES> 11,372
<TOTAL-REVENUES> 11,372
<CGS> 4,898
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 918
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,556
<INCOME-TAX> 463
<INCOME-CONTINUING> 5,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,093
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
