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, 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.
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(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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: 011-852-2542-2612
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, 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-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were US$34,758,634.
As of March 31, 1997, 26,000,000 shares of common stock of the Registrant
were outstanding. As of such date, the aggregate market value of the common
stock held by non-affiliates, based on the closing bid price on the NASD
Bulletin Board, was approximately $17,062,500.
DOCUMENTS INCORPORATED BY REFERENCE
No annual reports to security holders, proxy or information statements, or
prospectuses filed pursuant to Rule 424(b) or (c) have been incorporated by
reference in this report.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.................................. 3
ITEM 2. DESCRIPTION OF PROPERTIES................................ 6
ITEM 3. LEGAL PROCEEDINGS........................................ 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS...................................... 6
PART II
ITEM 5. MARKET FOR 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 7A. QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT
MARKET RISK.............................................. 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............. 12
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..................................... 12
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 12
ITEM 11. EXECUTIVE COMPENSATION................................... 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................... 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION...... 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTING
ON FORM 8-K.............................................. 14
SIGNATURES............................................... 15
INDEX TO FINANCIAL STATEMENTS............................ F-1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 11 of this Form 10-K.
The Company
China Continental, Inc. (the "Company") 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 its sales are to plastic
manufacturers in the People's Republic of China ("PRC" or "China"). The Company
has completed over 60 turn-key projects throughout the PRC varying in size from
US$300,000 to $5 million. Seven turn-key projects were completed during the year
ended March 31, 1997 at an average cost of US$4.5 million. Typically turn-key
projects require four to eight months to complete, depending on both the 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 US listed public company via a reverse acquisition in February 1995.
Market and Client Base
During the 1990s, the Company began to market, on a turn-key basis, fully
automated production lines to plastic product manufacturers. The majority of
these turn-key projects were sold to companies in the PRC.
Business Segments
The Company has two principal business segments:
* Sale of turn-key plastic production lines
* Sale of machinery and equipment, accessories, spare parts, and raw
materials
Sale of Turn-Key Plastic Production Lines
During the 1990s the Company began to market, on a turn-key basis, fully
automated production lines to plastic product manufacturers in the PRC. 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 in excess of 60
turn-key projects throughout the PRC, varying in cost from US$300,000 to US$5
million.
A typical turn-key project requires four to eight months to complete,
depending on both its size and complexity. The design of a production line is
based on job specifications, such as the particulars of the plastic products,
the packaging format, the intended maximum production capacity and the layout of
the factory premises, all of which are obtained from the customers. 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 engineers of the Company to ensure quality and
the meeting of specified requirements. Turn-key projects generally have warranty
periods ranging from six months to one year during which all repairs and
maintenance are provided free of charge by the Company.
Sale of Machinery and Equipment, Accessories, Spare Parts, and Raw Materials
The sale of machinery and equipment, accessories, spare parts, and raw
materials are conducted in conjunction with the sales of turn-key plastic
production lines.
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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.; Mintop Development Limited; Wing Lee Hong; and K.S. Plastics, Inc.
Employees
As of March 31, 1997, the Company employed a sales and administrative staff
of 15 persons in Hong Kong and a technical staff of approximately 40 persons in
the PRC.
Competition
The market for turn-key automated production lines in the plastic
manufacturing industry is fragmented in the PRC. The Company believes that it is
a leading designer, installer and Marketer of automated turn-key plastic
production lines in the PRC and that it provides buyers with superior
post-installation technical, engineering and quality control support. To date,
there has been limited price competition in this market, but price competition
is becoming a factor.
Economic Development in the People's Republic of China ("PRC" or "China")
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 ninth Five Year Plan for national, economical
and social development for 1996-2000, along with a ten year program which
extends to 2010, was adopted in 1996, by the Standing Committee of the National
Peoples' Congress.
China's gross domestic product for the first quarter of 1997 grew at 9.4%
when compared with the same period of the previous year, while the second
quarter grew at 9.6%. The growth rate for all of 1997 will approximate 1996,
which had a growth rate of 9.5%. Although this growth rate is 1% lower than 1995
and 2.2% lower than 1994, it is one of the highest growth rate in the world. In
September 1997, at a conference in Kuala Lumpur held by a United Nations project
to link forecasting models, researchers announced their predictions for economic
growth in 1997 of 3.1% (2.9% for 1996), within which the developed countries
will grow at 2.4%, the developing countries at 6.0%, and Eastern Europe at 3.7%.
China, however, will have the highest growth rate at 9.5%.
The total amount of investment in 1997 will reach RMB2,595 billion (US$313
billion), a nominal growth rate of 13% representing a real growth rate of 10.6%,
and the rate of investment will be approximately 34%. The 1998 total investment
is expected to be RMB2,965 billion (US$357 billion) a nominal growth rate of 14%
or a real growth rate of 10.9% with the rate of investment remaining at 34%. On
the whole, the nominal growth rate will be lower than the average level of the
past several years. However, due to the fall in inflation, the real investment
growth rate will not fall significantly. The situation where the investment
growth rate is higher than the GDP growth rate is expected to remain unchanged.
On the whole, China is expected to maintain a favorable combination of a
high growth economy with low inflation in 1998.
FUTURE PROSPECT OF THE COMPANY
The Company has, for the past six years, been actively involved in the sale
of turn-key production lines and the sale of machinery and equipment,
accessories, spare parts, and raw materials. These businesses have been
rewarding to the Company because of their high profit margins. These high
margins have in turn attracted new competitors. The margin of profit compared to
previous years has narrowed. Efforts are therefore being made to develop other
markets and to implement tighter marketing controls.
4
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On April 2, 1997, the Company acquired a 30% interest in Megaway
Development Limited. The principle asset of Megaway Development Limited is a 51%
interest in Weifang Great Dragon Chemical Fibre Company Limited whose principal
activity is the manufacture of polyester tyre cord fabrics, and polyester/nylon
canvas. Megaway Development Limited was acquired in exchange for a trade
receivable from CFFTC in the amount of HK$65,031,120 (US$8,415,000).
The Company has further restructured its business in a manner that has the
potential to eventually produce significant income and growth. The recent
uphcavel of nearly all of the Asian economies has been a critical factor in the
Company's decision to re-examine its business policy and to formulate a
corporate discipline that will focus on long term growth and development. To
this end, the Company has entered into a livestock and biotechnology joint
venture (the "Joint Venture") with Feng Ning Manchuria Autonomous Region
Agriculture Company Limited and China Resources Development Bureau in a
livestock development project in the Feng Ning Manchuria Autonomous County of
Northern Hebei Province in the PRC. On December 23, 1997, Sun's International, a
wholly owned subsidiary of the Company, acquired a 56.5% interest in Wealthy
Asia Limited for consideration in cash of US$52,000,000. On February 10, 1998,
Sun's International acquired the remaining 43.5% interest in Wealthy Asia
Limited for consideration of 40,000,000 shares of stock in China Continental,
Inc. The principal asset of Wealthy Asia Limited is a 51% interest in Changde Da
Feng Agriculture Co. Limited, a Sino Singapore joint venture incorporated in the
People's Republic of China. Changde Da Feng's principal asset is 20,000 hectares
or 49,400 acres of land.
The Company's new emphasis is to lead, focus and manage a select group of
high growth emerging businesses within a specific industry, particularly in the
provision of technologies in agricultural genetics and farming in China, and to
generate from these businesses the potential for significant returns. The
Company intends to provide and promote such technologies to local breeders and
growers in China. The Company believes significant opportunities exist for
growth in the business of agricultural genetics and farming in China,
particularly in those areas that offer potential proprietary technology
development and potential market dominance.
The Company believes that a number of factors will enable it to achieve its
business objectives, including (i) the opportunity to lead the market in the
agricultural and farming industry in China with the ability to make available
the latest techniques and know-how in agrogenetic agriculture and farming; (ii)
the presence of dedicated management and staff with expertise and know-how in
agrogenetic agriculture and farming; and (iii) the unique location and
availability of a significant size of arable farm land. In addition, the Company
has technical support from its business relationship with its Chinese and
American partners that will ensure its ability to exploit existing and future
opportunities.
The Joint Venture entails the import of American livestock genetics,
through International Agriculture Genetics, Inc. ("IAG"), a company based in
Edmond, Oklahoma, in the form of dairy cattle, beef cattle, sheep and goat
embryos for implanting into local recipients.
Superior genetics from the US will be selected and collected for
propagation in this project. Once the imported genetics have matured, semen and
embryos will be collected from offspring for propagation and distribution.
Embryo transfer is considered the fastest and most economical way of propagating
superior genetics. Embryos can be sexed, split and injected with an exogenous
gene condom for successful incorporation in the production of beneficial
pharmaceutical and immunological products to combat diseases such hepatitis,
cancer, and tuberculosis.
The rationale for this project is (I) to support the Chinese Government's
Grain Conservancy Policy for the development of pasture-fed animals such as
sheep, goats and cattle so that they do not compete for grains with humans; and
(II) to supply the demand of red meat to a population of 1.4 billion people. The
total production of meat in China is expected to increase to 58 million metric
tons. Although China has the largest human population in the world and is the
largest livestock producer, it still lacks in the supply of superior livestock
genetics. This project will propagate breeding livestock for China's expanding
livestock population and increasing demand for red meat.
The project will also entail marketing and distributing American
agricultural genetics to contract breeders and municipal and provincial
governments under a vertical integrated plan that includes the repurchase of
offspring forfeeding and slaughter in the Company's contract abattoir. The
Company-trained technicians will serve these clientele in the provision of
insemination of semen and implantation of embryos to livestock. The technician
will also provide services in the sale of the Company's feed, feed additives,
minerals, vitamins, veterinary drugs and other supplementary products.
5
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In summary, this project will propagate breeding livestock and, when
practicable, planting of seed genetics for China's ever-expanding livestock
population and increasing demand for food. China, despite being the most
populated nation in the world and the largest livestock producer, is lacking in
the supply of superior livestock and planting of seed genetics to sustain its
agriculture industry. The Company believes that it has identified a niche market
by providing a program to enhance agricultural production that will
significantly improve the standard of living and provide badly needed
agricultural genetics to support the increasing demand for food in China. With
its strong support from its Chinese and American partners, the Company will have
access to this development opportunity and is well positioned to take advantage
of existing and future opportunities. The Company is confident in its growth and
prospects.
ITEM 2. DESCRIPTION OF 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. These premises are owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock trades on the OTC Electronic Bulletin Board and
is quoted under the symbol "CHCL". The following table sets forth the high and
low bid price per share for the Company's common stock for each quarterly
period.
1997 1996
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High Low High Low
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First Quarter $ 2.875 $ 0.625 $ 1.25 $ 1.00
Second Quarter 1.0625 0.5625 1.50 1.27
Third Quarter 2.59375 0.5625 2.50 1.50
Fourth Quarter 1.375 0.875 1.875 0.75
The quotation reflects the inter-dealer prices without retail markup,
markdown or commissions and may not represent actual transactions.
As of April 30, 1998, the bid price of the Common Stock was $0.96875.
Holders
As of April 30, 1998, there were approximately 348 record owners of the
Common Stock of the Company.
6
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Dividends
Since fiscal 1994, the Company has not declared or paid any cash dividends
on its Common Stock and does not expect to declare or pay any such dividend in
the foreseeable future.
Sales of Unregistered Securities
None
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and dates indicated,
selected consolidated financial and operating data for the Company. The
financial data was derived from the consolidated financial statements of the
Company and should be read in conjunction with the Company's audited
consolidated financial statements included in the Index to Financial Statements
on page F-1 of this report. See also Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
Year Ended March 31,
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1997 1996 1995* 1994 1993
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(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Sales $34,759 $38,348 $32,650 $26,623 $5,789
Cost of Sales 14,290 15,228 15,639 10,890 3,341
------- ------- -------- ------- -------
Gross Profit 20,469 23,120 17,011 15,733 2,448
Depreciation (80) (64) (65) (46) (45)
Selling & Administrative Expenses (959) (1,249) (1,325) (1,839) (1,050)
(Provision) Recovery for Doubtful
Accounts 289 (1,217) (942) (1,332) (141)
Financial Income (Expenses), net (55) (73) 2 58 (34)
Other Income (Expenses), net (595) (2,518) 523 (71) (9)
Share of Losses of Associated
Companies - (235) (347) (455) -
Reorganization Expenses - - (1,603) - -
------- ------- -------- ------- -------
Income Before Taxes 19,069 17,764 13,254 12,048 1,169
Income Taxes 2,635 2,742 1,549 1,421 287
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Net Income 16,434 15,022 11,705 10,627 882
------- ------- -------- ------- -------
Net Income Per Share 0 .63 0 .58 0.45 .41 .03
------- ------- -------- ------- -------
Dividends Per Share - - - 38 -
------- ------- -------- ------- -------
Weighted Average Shares 26,000 26,000 26,000 26,000 26,000
Outstanding ------- ------- -------- ------- -------
Balance Sheet Data (At Period End)
Working Capital (Deficit) $55,784 $(8,048) $19,910 $ 877 $(1,266)
Total Assets 73,282 53,773 33,343 17,529 6,086
Long-term Liabilities 0 21 209 240 256
Shareholders Equity 57,516 40,713 25,691 12,383 3,035
</TABLE>
* Fiscal 1995 results include a nonrecurring, noncash charge of $0.48 per
share ($12,500,000) related to the reorganization adjustments due to the
reverse merger in February 1995. The financial data is presented as if the
reverse acquisition had been completed prior to April 1, 1991.
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1997 Versus 1996
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Revenues
Revenues decreased by US$3,589,000 or 9.36% to US$34,759,000 for the year
ended March 31, 1997 from US$38,348,000 for the prior year. This decrease is
principally attributable to a 12.13% reduction in sales of turn-key projects.
Management intends to abandon the marketing and sale of small turn-key projects,
as this is a low margin business. Management believes that the resources of the
Company can best be utilized by concentrating on the marketing and sale of large
turn-key projects and obtaining economies of scale thereon. The decrease in
sales of turn- key projects was partially offset by a 25% increase in sales of
raw materials. The increase reflects the strong demand for raw materials from
associated companies, as such sales are considered a value-added service to the
customers of turn-key projects.
Cost of sales
Cost of sales of turn-key projects includes the cost of machinery purchased
and the salaries and wages paid to engineers and consultants. For the year ended
March 31, 1997, cost of sales as a percentage of revenue on turn-key projects
was 34.11%, as a percentage of revenue virtually unchanged from the 34.72% for
the prior year.
Cost of sales of raw materials increased by 26.5%, which corresponded with
the 25% increase in sale of raw materials to associated companies. However, in
total, the Company's cost of sales decreased by US$938,000 or 6.2% to
US$14,290,000 for the year ended March 31, 1997 from US$15,228,000 for the prior
year. This reduction is attributable to larger rebates granted by suppliers.
Depreciation of Fixed Assets
Depreciation expense increased by US$16,000 or 25% to US$80,000 for the
year ended March 31, 1997 from US$64,000 for the prior year. The increase in
depreciation expense is the result of a change in accounting policies 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 include salaries, commissions and other
direct employment costs paid to the Company's sales representatives and other
professionals. Selling and administrative expenses decreased by US$290,000 or
23.2% to US$959,000 for the year ended March 31, 1997 compared to US$1,249,000
for the prior year. This decrease was mainly due to management's streamlining
operational procedures and increase budgetary control. Moreover, the Company
minimized its commission expenses by reducing commissions to a major
representative, China Fujian Foreign Trade Holdings Limited. The Company has
also reduced its auditing expense by approximately US$100,000.
Provision for doubtful debts and diminution in value of investment
The provision for doubtful debts and diminution in value of investment
decreased by US$1,506,000 or 120% to a recovery of US$289,000 for the year ended
March 31, 1997 from a provision of US$1,217,000 for the prior year. This
decrease is attributable to a tightening of credit procedures and the recovery
of US$290,000, which had previously been reserved.
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Financial Income (Expense) Net
Financial income (expense) is interest earned on cash and cash equivalents,
less interest expense. Net financial expense decreased by US$18,000 or 24.7% to
US$(55,000) for the year ended March 31, 1997 from US$(73,000) for the prior
year. This decrease is attributable to tighter controls on cash and the
curtailing of bank loans.
Other income/(expenses)
Other expenses decreased by US$1,923,000 or 76.4% to US$595,000 for the
year ended March 31, 1997 from US$2,518,000 for the prior year. This decrease is
principally attributable to a decrease of US$1,228,000 in write-offs of short
term investments.
Share of losses of associated companies
The associated companies are primarily operated on a break-even basis. The
Company has no further obligation to support the associated companies and the
losses sustained by them. During 1997, the Company incurred additional
diminutions in value from the remaining interest in associated companies which
reduced their carrying value to zero. Therefore, no share of post-acquisition
losses was provided for the year ended March 31, 1997.
Income taxes
Income taxes for the year ended March 31, 1997 were US$2,635,000 or 13.8%
of pretax income. This compares with US$2,742,000 or 15.4% of pretax income for
the prior year. The decrease is attributable to the overaccrual of the tax on
Hong Kong profits tax for the prior period.
Net income
Net income increased by US$1,412,000 or 9.4% to US$16,434,000 for the year
ended March 31, 1997 from US$15,022,000 for the prior year. This increase
resulted from lower costs which were partially offset by lower revenues.
1996 versus 1995
- ----------------
Revenues
Revenues increased by US$5,698,000 or 17.45% to US$38,348,000 for the year
ended December 31, 1996 from US$32,650,000 for the prior year. This increase
resulted from strong demand for both the Company's products and services. Sale
of turn-key projects grew by 35.11%, reflecting an improving economic
environment in the People's Republic of China (the "PRC") and strong demand by
manufacturers in the PRC to modernize their production facilities.
Sale of raw materials decreased by 26.43% as management concentrated on the
sale of turn-key projects which produce higher margins. It is the Company's
objective to generate approximately 94% of its total revenue from the sale of
turn-key projects and the remaining 6% of revenues from the sale of raw
materials. As of March 31, 1996, the Company has ceased selling steel.
Cost of 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 was 34.72% as a percentage of revenue for the year ended March
31, 1996 or virtually unchanged from the 34.15% for the prior year.
Cost of sales (including raw materials sales) as a percentage of revenue
decreased approximately 8% principally due to the decrease in the cost of sales
of raw materials and steel.
9
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Depreciation of fixed assets
Depreciation expenses decreased by US$1,000 or 1.5% to US$64,000 for the
year ended March 31, 1996 from US$65,000 for the prior year.
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 decreased by US$76,000 or
6.1% to US$1,249,000 for the year ended March 31, 1996 from US$1,325,000 for the
prior year. This decrease resulted from the efforts of management in streamling
operational procedures and increasing budgetary control. In addition, the
Company reduced its commission expenses to a major representative, China Fujian
Foreign Trade Holdings Limited.
Provision for doubtful debts and diminution in value of investment
The provision for doubtful debts and diminution in value of investment
increased by US$275,000 or 29.2% to US$1,217,000 for the year ended March 31,
1996 from US$942,000 for the prior year. This increase resulted from the Company
writing off all receivables which had been outstanding for one year or longer,
and a lump sum provision of approximately US$2,200,000 to reduce the remaining
receivables to net realizable value.
Financial Income (Expense) net
Financial income (expense) is interest earned on cash and cash equivalents,
less interest expense. Net financial expense increased by US$75,000 to
(US$73,000) for the year ended March 31, 1996 from US$2,000 for the prior year.
This increased expense is attributable to a decrease in interest earned as the
Company's cash was expended to finance its increased sales.
Other income/(expenses)
Non-operating income for the year ended March 31, 1996 consisted of a gain
on the disposal of short term investments of approximately US$2,348,000 compared
to US$360,000 for the prior year.
Share of losses of associated companies
The share of losses of associated companies decreased by US$112,000 or
32.3% to US$235,000 for the year ended March 31, 1996 from US$347,000 for the
prior year. This decrease is principally the result of a redefinition of
investment strategy and the disposal of interests in most of the Company's
associated companies.
Reorganization Expense
For the year ended March 31, 1995, the Company booked a loss of
US$1,603,000 from its reverse merger representing the losses of the shell
company prior to the merger. There was no reorganization expense for the year
ended March 31, 1996.
Income taxes
Income taxes for the year ended March 31, 1996 were US$2,742,000 or 15.4%
of pre-tax income. This compares with US$1,549,000 or 11.7% of pre-tax income
for the prior year. This increase in percentage resulted because a larger
percentage of the Company's income was earned in Hong Kong which has a higher
effective tax rate than the PRC.
Net Income
Net income increased by US$3,317,000 or 28.3% to US$15,022,000 for the year
ended March 31, 1996 from US$11,705,000 for the prior year. This decrease
resulted from increased revenues and the fact that there was no reorganization
expense for the year ended December 31, 1996.
10
<PAGE>
Liquidity and Capital Resources
At March 31, 1997, the Company had working capital of US$55,784,000,
including a cash balance of US$21,131,000. This compares to a working capital
deficit of US$8,048,000 and a cash balance of US$963,000 at March 31, 1996.
Net cash provided by operating activities increased to US$20,131,000 from
US$414,000 used in operating activities for the prior year. The cash provided by
operating activities consisted principally of US$16,434,000 of net income, a
reduction in accounts due from directors, an increase in accounts payable and
accrued liabilities, and an increase in income tax payable. These were partially
offset by an increase in accounts receivable.
Net cash used in investing activities totaled US$2,000 for the year ended
March 31, 1997 compared to US$832,000 provided by investing activities for the
prior year. In both years the Company had nominal purchases of fixed assets, but
in the prior year the Company had a net reduction of fixed bank deposits.
Net cash provided by financing activities totaled US$30,220 for the year
ended March 31, 1997. Net cash provided by investing activities consisted
principally of net borrowings which were partially offset by repayment of bank
loans and repayment of bank overdrafts. For the prior year the Company had
nominal cash provided by financing activities as loan repayments approximated
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, 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.
Impact of Inflation
Inflation has not been a major factor in the Company's business since
inception. There can be no assurance that this trend will continue. However, it
is anticipated that any increase in costs to the Company can be passed on to its
customers in the form of higher prices.
Certain Factors Affecting Certain Future Operating Results
a. Revised Corporate Business
In the past, the Company has been actively involved in the sale of turn-key
production lines, machinery and equipment, accessories, spare parts and raw
materials. The Company is now moving away from this line of business into the
provision of technology in agricultural genetics and farming in China. Because
of the Company's inexperience with this industry, there is no guaranty that its
future results will equal those of the past or that the Company will be
profitable in this industry.
b. Dependence on Strategic Relationship
The Company plans to conduct its future operations in the PRC with Feng
Ning Manchuria Autonomous Region Agriculture Company Limited and China Resources
Development Bureau. Any deterioration of this strategic relationship could have
an adverse effect on the future operations and financial position of the
Company.
c. Country Risk
Substantially all of the Company's operations are conducted in the PRC and
accordingly, the Company is subject to special considerations and significant
risks not typically associated with companies operating in North America and
Western Europe. These include the risks associated with the political, economic
and legal environments and foreign currency exchange, among others. The
Company's results may be affected by, among other things, changes in the
political and social conditions in the PRC and changes in government policies
with respect to laws and regulations, anti-inflation measures, currency
conversion and remittance abroad and rates and methods of taxation. The PRC
government has implemented economic reform policies in recent years, and these
reforms may be refined or changed by the government at any time. It is also
possible that a change in the PRC leadership could lead to changes in economic
policy. In addition, a substantial portion of the Company's revenues is
denominated in renminbi, which must be converted into other currencies before
remittance outside the PRC. Both the conversion of the renminbi and other
foreign currencies and remittance of foreign currencies abroad require approval
of the PRC government.
11
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are annexed to this Report as pages
F-2 through F-25. An index to such materials appears on page F-1.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 22, 1997, the Company's board of directors selected Blackman
Kallick Bartelstein LLP of Chicago, Illinois, as its certified accountants for
the year ended March 31, 1997 replacing Ernst & Young of Hong Kong. During the
preceding two years and the subsequent interim periods preceding their
dismissal, the Company had no disagreements with the prior accountants on any
matter of accounting principles or practice, financial statement disclosure or
auditing scope or procedure nor were there any qualifications on their opinions.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the executive officers
of the Company and the position held by each.
Name Age Title
- -------------------- ------ -----------------------------------
Harry H.H. Ho 47 Chairman of the Board and Chief Executive Officer
Ji Jun Wu 59 Vice-Chairman of the Board
Jui Ping Ng 50 Director
Kim Young Soh 49 Director
Dr. Thian hor Teh 52 Vice-President and Director
Dr. Y Joseph Mo 50 Director
Lin Tao Ge 36 Director
Chan Kwai Chiu 39 Director
Eric Ng 37 Secretary/Treasurer Chief Financial Officer and
Director
12
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid or to be paid for services
rendered during the last three fiscal years by the Company to its chief
executive officer and the one remaining most highly paid executive officer who
earn more than $100,000 for the three fiscal years ended March 31, 1997.
Name of Individual Year Salary Bonus Other
- -------------------------- --------- ------------ ----------- ------------
Chan Kwai Chiu 1995 130,680 10,880
1996 143,000 11,900
1997 155,870 12,990 129,366
Wong Yuen Ki 1995 116,160 9,680
1996 127,000 10,600
1997 138,000 11,500 155,819
No cash compensation was paid or accrued by the Company in excess of
$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.
Mr. Harry H.H. Ho is the Chairman of the Board and Chief Executive Officer.
He holds a degree in business studies from Nanyang University of Singapore and a
masters degree in business administration from East Asia University of Macau. He
has over 10 years of commercial experience in international trade, particularly
in food products. In 1989 he established Megaway Group which markets food,
shipping and financing services. In the same year, he established Hua Tuo Guan
in Singapore to offer franchise services in Chinese and health foods. Since 1990
Mr. Ho has been involved in China Trade and in takeovers and restructuring of a
number of Chinese enterprises.
Mr. Ji Jun Wu is the Vice-Chairman of the Board and the President of the
China operations of Megaway Group. He has over 40 years of commercial
experience. Since the PRC's establishment of the open economy in the 1980's he
has been instrumental in the establishment of over ten foreign investments and
joint ventures in the PRC, including such international companies as Motorola,
NEC, IBM, AT&T, Samsung and Yamaha. In addition, he has served as an official
Chinese government representative.
Mr. Jui Ping Ng, Director, is currently the Executive Chairman of several
Singapore companies, namely, Pac Asia Holdings, August - Kennedy Consulting
Group Pte Limited, and Horizon Technologies International Pte Limited. He was
previously the Chief of Army of the Republic of Singapore from 1990-1991 and the
Chief of Defense from 1991-1995.
Mr. Kim Young Soh, Director, holds an honorary degree in systems and
engineering from Nanyang University of Singapore and a masters degree in systems
and engineering from the University of Singapore. He has over ten years of
commercial experience, working with international companies such as Siemens, SGS
Thomson, Deltron Automatics Systems and Texas Instruments National
Semiconductors. In 1992 he established Right Holdings Limited, a Singapore
company involved in property development, building construction, tourism,
electronic components, and general investments.
Dr. Thian hor Teh, Vice President and Director joined the Company in
January 1998 and will be responsible for developing, researching and supplying
technologies in agricultural genetics. He established International Agriculture
Genetics, Inc. in 1995 and serves as its president and chief executive officer.
He has more than 20 years of experience in the research and development of
agricultural genetics and has received several honors for outstanding
achievements for his research works.
Dr. Y Joseph Mo, Director, holds a doctorate in industrial and physical
pharmacy from Purdue University. Prior to joining the Company, he held senior
executive and directorship positions in various international companies such as
NexMed, Inc.; Greenwich Pharmaceuticals, Inc.; Johnson & Johnson, Rorer
Pharmaceuticals, Smith Kline Pharmaceuticals and Beechman Products.
13
<PAGE>
Mr. Lin Tao Ge, Director, is also the Managing Director of Xin Yi Tong, the
joint distributor of credit cards for the International Commercial Bank of
China, which has over five million members throughout the major cities of the
PRC. He is also involved with Shandong Universal Biohealth Limited, a company
with a diversified market in the PRC for the sale of biotech and agricultural
related products.
Mr. Chan Kwai Chiu, Director, has over 16 years of experience in the
plastic products industry, including 10 years of experience in the design,
installation and management of plastic related production lines. He has high-
level relationships with government planning agencies commissioned for free
enterprise projects in China at the provincial level and with the authorities of
"city" level planning agencies.
Mr. Eric Ng, Secretary/Treasurer, Chief Financial Officer and Director,
joined the Company in 1992 and is responsible for the financial strategy of the
Company. Prior to joining the Company he was a manager at KPMG Peat Marwick Hong
Kong and is 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 merger and
acquisitions of listed companies in Hong Kong. He has over 10 years of
experience in auditing, finance and administration.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 30, 1998 the number of shares of
the Company's Common Stock known to be held by the Executive Officers and
Directors, individually, and as a group, and by beneficial owners of more than
five percent of the Company's Common Stock.
<TABLE>
Amount and Nature of
---------------------------------------------------------
Beneficial Ownership
Name and Address (1) of Beneficial Owner Shares Percentage of Class
- ------------------------------------------- ------------------------- -----------------------
<S> <C> <C>
Chan Kwai Chiu 9,100,000 36.28%
Wong Yuen Ki 2,600,000 10.37%
Dynasty Asia Worldwide Limited (2) 2,600,000 10.37%
Nanking International Limited 2,600,000 10.37%
Land Cheer Investment Limited (2) 2,600,000 10.37%
All officers and directors as a group (one) 14,300,000 55.00%
========================== ========================
</TABLE>
(1) Address for all persons and entities is 1801-1806 Hua Qin International
Building, 340 Queen's Road, Central Hong Kong.
(2) Owned 100% by Chan Kwai Chiu.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION
The Company'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 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. Amounts of revenues from the
sales of raw materials to these joint ventures are summarized as follows:
Year Ended March 31,
----------------------------------------------------
1995 1996 1997
----------- ------------- ------------
Sales to joint ventures:
Raw materials US$2,884,888 US$2,038,214 US$2,548,484
The unrealized profits arising from these transactions were eliminated in the
consolidated financial statements to the extent of the Company's interests in
these joint ventures.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTING ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA CONTINENTAL, INC.
By:
----------------------------------
Harry H.H. Ho
Chairman of the Board and Chief
Executive Officer
Dated: May 14, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- ------------------ ---------- ----------
- ---------------------- Chairman of the Board and Chief
Harry H.H. Ho Executive Officer May 14, 1998
- ----------------------
Ji Jun Wu Vice-Chairman of the Board May 14, 1998
- ----------------------
Jui Ping Ng Director May 14, 1998
- ----------------------
Kim Young Soh Director May 14, 1998
- ----------------------
Dr. Thian hor Teh Vice-President and Director May 14, 1998
- ----------------------
Dr. Y Joseph Mo Director May 14, 1998
- ----------------------
Lin Tao Ge Director May 14, 1998
- ----------------------
Chan Kwai Chiu Director May 14, 1998
- ---------------------- Secretary/Treasurer Chief Financial May 14, 1998
Eric Ng Officer and Director
15
<PAGE>
Consolidated Financial Statements
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
March 31, 1996 and 1997 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-25
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the Stockholders
China Continental, Inc.
We have audited the accompanying consolidated balance sheet of China
Continental, Inc. (the "Company") and subsidiaries (collectively the "Group") as
of March 31, 1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the year then ended. 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 Company for the years ended March 31,
1996 and 1995, were audited by other auditors whose report, dated April 18,
1997, expressed an unqualified opinion on those financial statements.
We conducted our audit in accordance with generally accepted auditing standards
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 year ended March
31, 1997, referred to above, present fairly, in all material respects, the
consolidated financial position of China Continental, Inc. and subsidiaries as
of March 31, 1997, and the consolidated results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles in the United States of America.
Blackman Kallick Bartelstein LLP
Chicago, Illinois
April 2, 1998
F - 2
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31, 1995, 1996 and 1997
<TABLE>
Year ended March 31,
----------------------------------------------------------
Notes 1995 1996 1997 1997
HK$ HK$ HK$ US$
------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
SALES
Related parties 21 22,300,181 15,755,398 19,699,783 2,548,484
Others 232,367,091 283,360,453 248,984,457 32,210,150
------------- ------------- ------------- ------------
254,667,272 299,115,851 268,684,240 34,758,634
COST OF SALES (121,983,761) (118,777,918) (110,460,697) (14,289,870)
------------- -------------- ------------
- -----------------
GROSS PROFIT 132,683,511 180,337,933 158,223,543 20,468,764
DEPRECIATION OF FIXED ASSETS (506,690) (495,989) (620,313) (80,248)
SELLING AND ADMINISTRATIVE
EXPENSES (10,335,518) ( 9,744,449) (7,413,213) (959,019)
(PROVISION) RECOVERY FOR
DOUBTFUL DEBTS (7,346,635) (9,489,774) 2,238,844 289,631
FINANCIAL INCOME/(EXPENSES),
NET 4 15,249 (566,408) (425,759) (55,079)
OTHER INCOME/(EXPENSES),
NET 5 4,081,627 (19,642,756) (4,597,305) (594,735)
SHARE OF LOSSES OF ASSOCIATED
COMPANIES 12 (2,708,969) ( 1,835,000) - -
REORGANIZATION EXPENSES 6 (12,500,000) - - -
------------ ------------- ------------- ------------
INCOME BEFORE INCOME TAXES 103,382,575 138,563,557 147,405,797 19,069,314
INCOME TAXES 7 (12,080,000) (21,393,062) (20,372,118) (2,635,462)
------------ ------------- -------------- ------------
NET INCOME 91,302,575 117,170,495 127,033,679 16,433,852
------------ ------------- -------------- ------------
EARNINGS PER SHARE 3(j), 24 3.51 4.51 4.89 .63
------------ ------------- -------------- ------------
</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, 1995, 1996 and 1997
<TABLE>
Additional
Note Share paid-in Retained
capital capital earnings Total
HK$ HK$ HK$ HK$
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1994 202,800 856,985 95,529,317 96,589,102
Net income - - 91,302,575 91,302,575
Reorganization expenses 6 - 12,500,000 - 12,500,000
----------- ------------ ------------ ------------
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
Net income - - 127,033,679 127,033,679
----------- ------------ ------------ -------------
Balance at March 31, 1997 202,800 13,356,985 431,036,066 444,595,851
</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, 1996 and 1997
<TABLE>
Notes 1996 1997 1997
HK$ HK$ US$
----------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and bank balances 7,508,606 163,341,939 21,130,911
Trade receivables, net of provisions of
HK$13,145,891 in 1996 and HK $8,602,321
in 1997 8 10,478,028 100,777,180 13,037,151
Prepayments, deposits and other receivables,
net of provisions of HK$7,157,636 in 1996
and HK$4,898,213 in 1997 9 3,074,749 3,382,296 437,555
Short term investments, net of provisions of
0 in 1996 and $17,000,000 in 1997 10 - 267,600,000 34,618,370
Amounts due from directors 21 773,115 - -
Amounts due from related companies 21 17,095,831 17,983,640 2,326,473
------------ ------------- ------------
TOTAL CURRENT ASSETS 38,930,329 553,085,055 71,550,460
FIXED ASSETS 11 4,699,452 4,094,219 529,653
INTERESTS IN ASSOCIATED COMPANIES 12 5,825,859 2,292,154 296,527
FIXED BANK DEPOSIT - - -
LONG TERM RECEIVABLE 248,798,243 - -
OTHER RECEIVABLE, net of provisions of
HK$17,000,000 in 1996 and 0 in 1997 13 113,000,000 - -
OTHER ASSETS 8,177,240 7,000,000 905,563
------------ ------------- -----------
TOTAL ASSETS 419,431,123 566,471,428 73,282,203
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Bank overdrafts 14 676,889 - -
Bank import loans 14 5,673,880 8,063,170 1,043,101
Bank loans 14 1,478,799 - -
Income taxes payable 45,823,523 64,279,294 8,315,562
Amounts due to directors 21 516,956 6,042,857 781,741
Amounts due to related companies 21 5,647,887 5,847,659 756,489
Accounts payable and accrued liabilities 41,887,813 37,642,597 4,869,676
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 101,705,747 121,875,577 15,766,569
DEFERRED TAXATION 7 163,204 - -
------------- ------------ ------------
TOTAL LIABILITIES 101,868,951 121,875,577 15,766,569
CONTINGENCIES AND
COMMITMENTS 22
STOCKHOLDERS' EQUITY
Common stock, par value
US$0.001 per share: Authorized:
1,000,000,000 shares; Issued and
outstanding: 26,000,000 shares 15 202,800 202,800 26,236
Additional paid-in capital 15 13,356,985 13,356,985 1,727,941
Retained earnings 304,002,387 431,036,066 55,761,457
-------------- ------------- -------------
TOTAL STOCKHOLDERS'
EQUITY 317,562,172 444,595,851 57,515,634
-------------- ------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 419,431,123 566,471,428 73,282,203
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 5
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1995, 1996 and 1997
<TABLE>
Year ended March 31,
---------------------------------------------------------
1995 1996 1997 1997
HK$ HK$ HK$ US$
------- ------- ------ -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income 91,302,575 117,170,495 127,033,679 16,433,852
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 (321,958) - (163,204) (21,113)
Depreciation 506,690 495,989 620,313 80,248
Provision for doubtful debts and
diminutions in values of
investments and associated companies 7,346,635 30,414,857 869,710 112,511
Share of losses of associated companies 2,708,969 1,835,000 - -
Gains on disposal of short term
investments (2,785,120) (1,145,013) - -
Decrease/(increase) in assets:
Trade receivables and long term receivable (136,808,993) (196,043,403) (13,182,571) (1,705,379)
Prepayments and deposits (4,375,553) 5,682,771 (307,547) (39,786)
Amounts due from related companies (14,574,550) 926,388 (887,809) (114,852)
Amounts due from/to directors 8,292,681 1,473,073 9,988,570 1,292,182
Amounts due from associated companies 9,362,537 (1,250,592) (702,335) (90,858)
Increase/(decrease) in liabilities:
Amounts due from joint venture companies (3,686,067) (241,427) - -
Amounts due to related companies (386,607) (221,846) 199,772 25,844
Accounts payable and accrued liabilities 16,032,848 16,600,556 13,690,462 1,771,082
Income taxes payable 11,765,325 21,077,767 18,455,771 2,387,551
-------------- -------------- -------------- -------------
Net cash provided by/(used in)
operating activities (3,120,588) (3,225,385) 155,614,811 20,131,282
-------------- -------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F - 6
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the years ended March 31, 1995, 1996 and 1997
<TABLE>
Year ended March 31,
---------------------------------------------------------
1995 1996 1997 1997
HK$ HK$ HK$ US$
-------- ------- -------- -------
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY/(USED IN)
INVESTING ACTIVITIES
Purchase of fixed assets (1,309,038) (1,900) (15,080) (1,951)
Reduction/(addition) of fixed
bank deposit (6,494,181) 6,494,181 - -
Dividend income reinvested in
other assets (618,240) - - -
Purchase of other assets (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 7,723,794 6,492,281 (15,080) (1,951)
------------- ------------ ------------ ------------
CASH FLOWS PROVIDED BY/(USED IN)
FINANCING ACTIVITIES
Dividends paid (10,000,000) - - -
Net borrowings/(repayments) under
bank import loans 1,208,086 (94,137) 2,389,290 309,093
Repayments of bank loans (210,914) (222,403) (1,478,799) (191,306)
Advances (repayments) of bank overdrafts 357,437 319,452 (676,889) (87,567)
------------- ------------- -------------- ------------
Net cash provided by/(used in)
financing activities (8,645,391) 2,912 233,602 30,220
------------- ------------- -------------- ------------
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS (4,042,185) 3,269,808 155,833,333 20,159,551
Cash and cash equivalents, at beginning
of year 8,280,983 4,238,798 7,508,606 971,360
------------- ------------- -------------- ------------
Cash and cash equivalents, at end of year 4,238,798 7,508,606 163,341,939 21,130,911
SUPPLEMENTARY CASH FLOWS
DISCLOSURES:
Interest paid 374,115 930,130 469,392 60,723
Income taxes paid 314,675 882,259 2,079,551 269,023
</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 Reorganization 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 its 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.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Billion Pearl Investments Limited, High
Glad Industries Limited, Prime Hill Investment Limited, Prime View
Industrial Limited, Danbury Inc., Winkler Holdings Inc., Cathay Mercantile
(Overseas) Limited ("Cathay") and Gain Whole Limited (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. Cathay, through the formation of joint ventures,
has invested in property development. Gain Whole Limited's principal
activity is the holding of a certificate of deposit.
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
generally accepted accounting principles 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.
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 Reorganization 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, 1997
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, 1996 and 1997, cash and cash equivalents included foreign
currency deposits equivalent to HK$13,802 (US$1,769) and HK$160,757,415
(US$20,796,561), respectively.
(e) Fixed assets and depreciation
------------------------------
Fixed assets are stated at cost less accumulated depreciation. Depreciation
of fixed assets is calculated on the straight-line basis to write off the
cost less estimated residual value of each asset over its estimated useful
life. The principal annual rates used for this purpose are as follows:
Leasehold land and buildings 2.5%
Furniture and fixtures 20%
Office equipment 20%
Motor vehicles 20%
(f) Income taxes
-------------
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".
(g) Foreign currency translation
-----------------------------
Foreign currency transactions denominated in foreign currencies are
translated into Hong Kong dollars ("HK$") 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$") for the
convenience of the reader has been made at the single rate of exchange on
March 31, 1997 of US$ 1.00 : HK$7.73. No representation is made that the
HK$ amounts could have been, or could be, converted into US$ at that rate
on March 31, 1997 or at any other date.
The joint ventures maintain their books and accounting records in Renminbi
(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,
1995, 1996 and 1997 were HK$52,955, HK$26,306, and HK$32,375, 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
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(m) New Accounting Pronouncements
------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 simplifies the standards
for computing earnings per share and is effective for financial statements
for both interim and annual periods ending after December 15, 1997. The
amount reported as earnings per share for the year ended March 31, 1997,
would not be different than that which would have been reported for basic
and diluted earnings per share in accordance with SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
The Company is in the process of evaluating the specific reporting
requirements of SFAS No. 130; however, it believes the adoption of SFAS No.
130 would have had no impact on the Company's consolidated results of
operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. SFAS No. 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company is in the
process of evaluating the disclosure requirements of SFAS No. 131; however,
it believes that its adoption will have no material impact on its future
disclosure requirements.
F-12
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCIAL INCOME/(EXPENSES), NET
<TABLE>
Year ended March 31,
----------------------------------------
1995 1996 1997
HK$ HK$ HK$
------- -------- --------
<S> <C> <C> <C>
Interest income 512,148 435,828 149,011
Interest expenses (374,115) (930,130) (469,392)
Bank charges (122,784) (72,106) (105,378)
----------- ---------- -----------
15,249 (566,408) (425,759)
</TABLE>
5. OTHER INCOME/(EXPENSES), NET
<TABLE>
Year Ended March 31,
-----------------------------------------
1995 1996 1997
HK$ HK$ HK$
-------- -------- -------
<S> <C> <C> <C>
Commission and miscellaneous income 273,475 66,674 369,836
Foreign exchange gains/(losses), net 82,834 70,640 446,139
Dividend income 618,240 - -
Associated companies written off - (4,995,117) (4,236,040)
Short term investments written off - (10,671,560) (1,177,240)
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 321,958 - -
------------ ------------ -----------
4,081,627 (19,642,756) (4,597,305)
</TABLE>
6. REORGANIZATION EXPENSES
In conjunction with the Reverse Acquisition in 1995 (See Note 1),
reorganization expenses were incurred which reduced net income and
increased paid-in capital by HK$12,500,000. This amount represented the
fair value of 12.5% of Sun's International received by the existing common
stock shareholders of the Company, prior to the Reverse Acquisition.
F - 13
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
The companies in the Group operate in several jurisdictions and are subject
to taxes in those jurisdictions. Details of the related provision for
income taxes are as follows:
Year ended March 31,
-------------------------------------
1995 1996 1997
HK$ HK$ HK$
-------- -------- --------
Income/(loss) before income taxes:
Hong Kong (70,094) (22,438,260) 507,446
PRC 103,452,669 161,001,817 146,898,351
------------- ------------ ------------
103,382,575 138,563,557 147,405,797
Income tax provision:
Current:
Hong Kong 2,980,000 1,879,812 (169,634)
PRC 9,100,000 19,513,250 20,704,956
------------ ------------- -----------
12,080,000 21,393,062 20,535,322
Deferred - - (163,204)
------------ ------------ -----------
12,080,000 21,393,062 20,372,118
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 the 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% 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, 1996 and 1997, income tax payables included foreign currency
payables equivalent to HK$37,863,250 (US$4,854,263), and HK$61,325,206
(US$7,933,403), respectively.
F - 14
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (continued)
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Hong Kong tax rates to the income before
income taxes is as follows:
<TABLE>
Year ended March 31,
----------------------------------------
1995 1996 1997
HK$ HK$ HK$
--------- --------- --------
<S> <C> <C> <C>
Statutory Hong Kong tax rates 16.5% 16.5% 16.5%
Computed expected tax expense 17,058,125 22,862,987 24,321,957
Decrease resulting from PRC tax
at a lower composite tax rate (8,168,175) (7,052,050) (4,587,807)
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 446,980 1,126,969 326,135
Provisions for diminutions in values
of investments - 2,628,444 -
Other provisions 662,269 1,565,813 -
Disposal of short term investments - (188,927) -
Reorganization expenses 2,062,500 - -
Others 18,301 449,826 311,833
------------ ------------- -----------
12,080,000 21,393,062 20,372,118
</TABLE>
Deferred taxes mainly represent temporary differences on the allowance of
doubtful debts, elimination of unrealized profits and accelerated depreciation
allowance.
F - 15
<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$431,036,066 at March 31, 1997. 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, 1997 was approximately HK$147,000,000.
8. TRADE RECEIVABLES, NET
As of March 31,
------------------------------
1996 1997
HK$ HK$
---------- ----------
Trade receivables 23,623,919 109,379,501
Less: Provision for doubtful debts (13,145,891) (8,602,321)
------------- -------------
Trade receivables, net 10,478,028 100,777,180
Movements in provision for doubtful debts:
Balance as at beginning of year 6,813,753 13,145,891
Doubtful debt expense (recovery) 6,332,138 (4,543,570)
------------- -------------
Balance as at March 31 13,145,891 8,602,321
------------- -------------
9. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES, NET
As of March 31,
-----------------------------
1996 1997
HK$ HK$
---------- ----------
Prepayments, deposits and other receivables 10,232,385 8,280,509
Less: Provision for doubtful debts (7,157,636) (4,898,213)
------------ -------------
Prepayments, deposits and other receivables, net 3,074,749 3,382,296
Movements in provision for doubtful debts:
Balance as at beginning of year 2,800,000 7,157,636
Transfer from short term investments (Note 10) 1,200,000 -
Doubtful debt expense (recovery) 3,157,636 (2,259,423)
------------ -------------
Balance as at March 31 7,157,636 4,898,213
F- 16
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHORT TERM INVESTMENTS
Year ended March 31,
--------------------------
1996 1997
HK$ HK$
-------- --------
Unlisted investments at cost (Notes 13 and 24) - 284,600,000
Provisions for diminutions in values - (17,000,000)
Amounts due from joint venture companies, net - -
Provision for doubtful debts - -
------------ ------------
- 267,600,000
Movements in provisions for diminutions in values:
Balance at beginning of year 4,899,000 -
Transfer from other receivables (Note 13) - 17,000,000
Reversal of provision on disposal (4,899,000) -
------------- ------------
Balance at March 31 - 17,000,000
Movements in provision for doubtful debts:
Balance at beginning of year 1,200,000 -
Transfer to prepayments, deposits and other
receivables (Note 9) (1,200,000) -
-------------- ------------
Balance at March 31 - -
F-17
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. FIXED ASSETS
As of March 31,
----------------------
1996 1997
HK$ HK$
------- --------
Cost:
Leasehold land and buildings 4,485,631 4,485,631
Furniture and fixtures 700,826 700,826
Office equipment 570,813 585,893
Motor vehicles 1,244,030 1,244,030
------------ ------------
7,001,300 7,016,380
Less: accumulated depreciation (2,301,848) (2,922,161)
------------- ------------
Net book value 4,699,452 4,094,219
The land and buildings are located 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
As of March 31,
--------------------------
1996 1997
HK$ HK$
---------- ----------
Unlisted investments, at cost 14,335,440 14,335,440
Share of post-acquisition losses (6,928,886) (6,928,886)
Write off for diminutions in values (3,345,000) (6,793,565)
Elimination of unrealized profits (612,989) (612,989)
------------ ------------
3,448,565 -
Due from associated companies, net 2,377,294 2,292,154
------------ ------------
5,825,859 2,292,154
Movement in provisions for diminutions in values:
Balance at beginning of year 5,561,918 3,345,000
Reversal of provisions for diminutions in values
on disposal (2,216,918) -
Provisions for diminutions in value - 3,448,565
------------ ------------
Balance at March 31 3,345,000 6,793,565
F-18
<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$1,835,000. During 1997, the Company incurred
additional diminutions in value in the remaining interests in associated
companies which reduced the carrying value to zero. Therefore, no share of
post-acquisition losses was provided for the year ended March 31, 1997. The
amounts due from associated companies are deemed to be collectible as of March
31, 1997.
Details of the associated companies at March 31, 1997 and 1996 were as
follows:
Country of
registration Group's
and effective
Name operations holding Principal activities
- -------------- -------------- --------- --------------------
%
Panyu Panyi Chemical Industry PRC 30 Manufacturing and sale
& Commerce Co., Ltd. of PU resin
Shan Dong Linyi Modern PRC 35 Manufacturing and sale
Decorating Materials of PVC floor tiles
Co., Ltd.
Zhengzhou ZZZ Prime Hill PRC 20 Manufacturing and sale
Floppy Disk Co., Ltd. of computer floppy disks
13. OTHER RECEIVABLE
1996 1997
HK$ HK$
----------- ------------
Amounts due from a third party 130,000,000 -
Provision for doubtful debts (17,000,000) -
--------------- ------------
113,000,000 -
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 was investment holding and Cathay, through its
65.055% owned Hong Kong incorporated subsidiary, Fast Pulse Investment
Limited, held 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 was transferred
to the joint venture, performed by an independent professional valuer, a
provision in the amount of HK$17,000,000 was made to reduce the carrying
value of the other receivable to its estimated fair value of HK$113,000,000
as of March 31, 1996. On December 23, 1997, Sun's International sold the
100% interest in Cathay for a consideration of approximately
HK$123,435,000. As of March 31, 1997, the estimated fair value of the
interest in the property of HK$113,000,000 was reclassified to short-term
investments in the accompanying consolidated balance sheet.
F - 19
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. BANK LOANS
As of March 31,
---------------------------
1996 1997
HK$ HK$
--------- ---------
Long term bank mortgage loans,
denominated in HK$ 1,478,799 -
Less: current portion (1,478,799) -
------------ ----------
Long term portion - -
The import loans with banks carry interest at 1% above the Hong Kong prime
lending rate and the Hong Kong prime lending rate (weighted average of 9.5%
and 8.5% per annum as of March 31, 1996 and 1997, respectively). The import
loans are usually repaid in three to six months, which is in accordance
with the terms of the agreement.
The bank overdrafts carry interest at 3% above the Hong Kong prime lending
rate (weighted average of 11.5% per annum as of March 31, 1996 and 1997).
15. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL
On February 21, 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-20
<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, 1997 and 1996, approximately 71% and 95% respectively, of
the trade receivable and long term receivable balances were due from China
(Fujian) Foreign Trade Center Holdings Company, a Chinese Government
controlled company.
(iii) Amounts due from related companies
At March 31, 1997, approximately 37% and 31% 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 approximates their fair value.
F - 21
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 19 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 sale of
automatic production lines on a turn-key basis with companies in the PRC
(See Note 23). As such, those revenues are vulnerable to an increase in the
level of competition from overseas and domestic suppliers and a change in
the supply and demand relationship with those customers.
19. BANKING FACILITIES
The Group had banking facilities of approximately HK$12,000,000 for
mortgages, overdrafts and trade finance. Unused facilities as of March 31,
1997 amounted to approximately HK$3,937,000.
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$3,526,000.
ii. lien on a third party's bank deposits totaling HK$5,000,000.
iii. Personal guarantee by director, Chan Kwai Chiu, up to HK$20,000,000.
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$100,767,720 and HK$248,000,000 in 1997 and 1996, respectively.
On January 1, 1994, the PRC government introduced a single rate of exchange
as quoted daily by the People's Bank of China (the "Unified Exchange
Rate").
The quotation of the exchange rates does not imply free convertibility of
RMB into Hong Kong dollars or other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the People's Bank of China. Approval of foreign
currency payments by the Bank of China or other institutions requires
submitting a payment application form together with suppliers' invoices,
shipping documents and signed contracts.
F-22
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. RELATED PARTY BALANCES AND TRANSACTIONS
The Group's amounts due from/(to) directors and related companies owned
and/or controlled by a director, Chan Kwai Chiu, are unsecured,
interest-free and are repayable on demand.
In the normal course of business, some of the companies in the Group are
engaged in the set-up of automatic production lines on a turn-key basis for
its joint ventures. Other than the above-mentioned transactions, the
companies also arrange for the sale of raw materials to these joint
ventures. Amounts of revenues from the sales of raw materials to these
joint ventures are summarized as follows:
Year ended March 31,
-------------------------------------------
1995 1996 1997
HK$ HK$ HK$
--------- --------- ----------
Sales to joint ventures:
Raw materials 22,300,181 15,755,398 19,699,783
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, 1997, the Group has the following capital commitments and
contingencies:
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, 1997, HK$7,000,000, which was grouped under other assets,
had been paid as a deposit for the purchase with the remainder being
payable upon receipt of the title certificates for the office premises.
F-23
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. SEGMENTED FINANCIAL INFORMATION
Substantially all of the Group's activities consist of assembling and sales
of production lines on a turn-key basis. Substantially all the Group's
sales are made to customers in the PRC.
<TABLE>
Sales by major customers Accounts
Sales Receivable
------------------------------------------------------------
Year ended March 31
------------------------------------------------------------
1995 1996 1997 1997
HK$ HK$ HK$ HK$
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
China (Fujian) Foreign Trade
Centre Holdings Company ("CFFTC") 209,707,272 277,682,496 30,842,448 71,625,432
Kin Heng Xin Investment &
Development Company Limited - - 128,292,528 -
Shenzhen San Gao Enterprises
Company Limited - - 88,531,968 29,142,288
Others 44,960,000 21,433,355 21,017,296 9,460
-------------- --------------- -------------- -------------
254,667,272 299,115,851 268,684,240 100,777,180
</TABLE>
The outstanding balance receivable from CFFTC arising from the above sales
amounted to HK$248,798,243 as of March 31, 1996.
24. NON-CASH TRANSACTIONS
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.
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"). The certificate of deposit
is valued at cost, which approximates market and was classified as a
short-term investment in the accompanying consolidated balance sheet as of
March 31, 1997.
During 1997, HK$17,935,678 of trade accounts payable were paid directly by
directors on behalf of the Company and HK$21,625,232 of trade accounts
receivable were received directly by directors. The net activity of these
transactions was posted to the amounts due to directors in the accompanying
consolidated balance sheets.
F-24
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. SUBSEQUENT EVENTS
Subsequent to March 31, 1997 the following events took place:
(a) On April 2, 1997, the Group acquired a 30% interest in Megaway
Development Limited. The principle asset of Megaway Development Limited is
a 51% interest in Weifang Great Dragon Chemical Fibre Company Limited whose
principal activity is the manufacture of polyester tyre cord fabrics, and
polyester/nylon canvas. Megaway Development Limited was acquired in
exchange for a trade receivable from CFFTC in the amount of HK$65,031,120
(US$8,415,000).
(b) On August 28, 1997, Sun's International sold the 100% interest in Gain
Whole Limited (See Note 24), for a consideration of a 100% interest in
Megaway Resort Development Limited, a company incorporated in the British
Virgin Islands. The principal asset of Megaway Resort Development Limited
is a 75% interest in Da Yu Edible Oil Co. Ltd., a Sino Singapore joint
venture incorporated in the People's Republic of China. On December 3,
1997, Sun's International sold the 100% interest in Megaway's Resort
Development Limited for a consideration of US$21,000,000.
(c) On December 23, 1997, Sun's International acquired a 56.5% interest in
Wealthy Asia Limited for consideration in cash of US$52,000,000. On
February 10, 1998, Sun's International acquired the remaining 43.5%
interest in Wealthy Asia Limited for consideration of 40,000,000 shares of
stock in China Continental, Inc. The principal asset of Wealthy Asia
Limited is a 51% interest in Changde Da Feng Agriculture Co. Limited, a
Sino Singapore joint venture incorporated in the People's Republic of
China. Changde Da Feng's principal asset is 20,000 hectares or 49,400 acres
of land.
F-25
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
As independent accountants, we hereby consent to the use of our report dated
April 2, 1998, and to all references to our Firm including in or by
incorporation by reference made a part of the Annual Report on Form 10-K of
China Continental, Inc. for the year ended March 31, 1997.
BLACKMAN KALLICK BARTELSTEIN, LLP
Chicago, Illinois
May 12, 1998
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