SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] 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.
(Exact name of registrant as specified in its charter)
Utah 87-0431063
- --------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1801-1806 Hua Qin International Building, 340 Queen's Road Central, Hong Kong
------------------------------------------------------------------------------
(Address of principal executive offices)
(852) 2542-2612
----------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES NO X
As of September 30, 1999, 69,000,000 shares of Common Stock of the issuer
were outstanding.
<PAGE>
CHINA CONTINENTAL, INC.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1999 (unaudited)
and December 31, 1998 (audited) 3
Unaudited Consolidated Statements of Income - For the
three months and six months ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows- For the
six months ended June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II - OTHER INFORMATION
Signatures 10
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CHINA CONTINENTAL, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in '000 United States Dollars)
(unaudited)
June 30, Dec. 31,
1999 1998
----------- ------------
(unaudited) (audited)
ASSETS
Current Assets
Cash and deposits 45,430 35,668
Accounts receivable, net of provision 11,415 9,290
Prepayments, deposits and other receivable 618 613
Amount due from related companies 4,428 4,316
-------- --------
Total Current Assets 61,891 49,887
-------- --------
Fixed Assets 355 407
Land lease rightS 168,718 170,910
Investment in joint ventures 8,596 8,596
Amount due from directors 5,205 5,239
Other assets 645 645
-------- --------
Total Assets 245,410 235,684
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft 320 501
Payable and accruals 3,728 3,736
Bank import loans 478 463
Secured bank loan 15 15
Due to related companies 632 644
Income taxes payable 13,835 12,450
Amounts due to directors 2,447 1,378
-------- --------
Total current liabilities 21,455 19,187
-------- --------
Long-term liabilities 1,262 1,262
Total Liabilities 22,717 20,449
-------- --------
Minority interest 85,203 86,277
Stockholders' Equity
Share capital 69 69
Contributed surplus 45,273 45,273
Retained earnings 92,148 83,616
-------- --------
Total Stockholders' Equity 137,490 128,958
-------- --------
Total Liabilities and Stockholders' Equity 245,410 235,684
======== ========
The accompanying notes are an integral part of these financial statements.
3
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CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Stated in '000 United States Dollars)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues
Sales of turnkey projects 10,700 10,500 18,570 18,368
Sales of raw materials 375 872 755 2,010
------- -------- -------- --------
Total Sales 11,075 11,372 19,325 20,378
Cost of Sales (4,294) (4,898) (7,547) (8,824)
-------- -------- -------- --------
Gross Profit 6,781 6,474 11,778 11,554
Depreciation and amortization (1,122) (1,127) (2,244) (2,223)
Selling and administrative
expenses (350) (303) (652) (642)
Financial income (expenses), net (20) (25) (39) (48)
-------- -------- -------- --------
Income before income taxes 5,289 5,019 8,843 8,641
Income taxes (815) (463) (1,385) (999)
Loss allocated to minority interest
in operations of Consolidated
subsidiary 537 537 1,074 1,185
-------- -------- -------- --------
Net income 5,011 5,093 8,532 8,827
======== ======== ======== ========
Earnings per share 0.073 0.08 0.12 0.16
======== ======== ======== ========
Weighted average common
and equivalent shares
outstanding 69,000,000 66,000,000 69,000,000 56,939,227
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
4
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CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in '000 United States Dollars)
(Unaudited)
<TABLE>
Six Months Ended June, 30
-------------------------
1999 1998
------ ------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Income 8,532 8,827
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 2,244 2,223
Loss allocated to minority Interest (1,074) (1,185)
Changes in Non-Cash Working Capital 226 (4,400)
-------- --------
Net Cash Provided by Operating Activities 9,928 5,465
-------- --------
Financing Activities:
Repayment (Advances) of bank overdraft (181) 7
Repayment of bank loan 0 (4)
Net Borrowings (Repayment) Under Bank Import Loans 15 (626)
-------- --------
Net Cash Used in Financing Activities (166) (623)
-------- --------
Net Increase in Cash 9,762 4,842
Cash and bank balance, Beginning of Period 35,668 17,808
-------- --------
Cash and bank balance, End of Period 45,430 22,650
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The unaudited condensed consolidated financial statements of China Continental,
Inc. have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the requirements
for reporting on Form 10-Q. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
Results shown for interim periods are not necessarily indicative of the results
to be obtained for a full fiscal year. These interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company Form 10-K for the fiscal year ended December 31, 1998.
Note 2 -- Foreign Currency Conversion
The Company financial information is presented in US dollars. Hong Kong dollars
have been converted into US dollars at the exchange rate of 7.75 to 1.
6
<PAGE>
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Results of Operation
Comparison of the Three Months Ended June 30, 1999 to the Three Months Ended
June 30, 1998
Revenues
Revenues decreased by $297,000 or 2.61% to $11,075,000 for the three months
ended June 30, 1999 from $ 11,372,000 for the corresponding period of the prior
year. The decrease in revenue can mainly be accounted for by the decrease in
sale of raw materials. Management is shifting the emphasis from the sale of raw
materials to the sale of turnkey projects as it believes that resources of the
Company can best be utilized by concentrating on the marketing and sale of
turnkey projects, which historically has had a much higher profit margin.
Cost of Sales
Cost of sales of turnkey projects includes cost of machinery purchased and
salaries and wages paid to engineers and consultants. Cost of sales was 38.77%
for the three months ended June 30,1999 compared to 43.07% for the corresponding
period of prior year. The decrease in the cost of sales can mainly be accounted
for by a decrease, on a percentage basis, in the sales of raw materials, and an
increase in the sales of the turnkey projects, which have a higher profit
margin.
Depreciation and amortization
Depreciation and amortization expenses decreased by $5,000 to $ 1,122,000
for the three months ended June 30, 1999 from $1,127,000 for the corresponding
period of the prior year. Depreciation and amortization charge remained
relatively constant during each period.
Selling and Administrative Expenses
Selling and administrative expenses increased by $47,000 or 15.5% to $
350,000 for the three months ended June 30, 1999 from $ 303,000 for the
corresponding period of the prior year. This increase represents additional
expenses paid to consultants.
7
<PAGE>
Financial Income (Expense), net
Financial income (expense), net is primarily interest earned on cash and
cash equivalents, less interest expense. Net financial expense decreased by $
5,000, or 20% to $20,000 for the three months ended June 30, 1999 from $25,000
for the corresponding period of the prior year. This decrease resulted from a
decrease in bank borrowings.
Income Taxes
Income taxes for the three months ended June 30 1999 were $815,000 or 15.4%
of pretax income. This compares with $ 463,000 or 9.2% of pretax income for the
corresponding period of the prior year. The increase in percentage resulted
because there was an under provision of income tax of approximately $330,000 in
the corresponding period of the prior year.
Net Income
Net income decreased by $82,000 or 1.6% to $ 5,011,000 for the three months
ended June 30, 1999 from $5,093,000 for the corresponding period of the prior
year. This minor decrease in income resulted from the decrease in sales of raw
material in the more profitable turnkey projects and an increase in the
provision for income taxes.
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
30, 1998
Revenues
Revenues decreased by $1,053,000 or 5.16% to $19,325,000 for the six months
ended June 30, 1999 from $ 20,378,000 for the corresponding period of the prior
year. The decrease in revenue can mainly be accounted for by a decrease in the
sale of raw materials. Management is shifting the emphasis from the sale of raw
materials to the sale of turnkey projects as it believes that resources of the
Company can best be utilized by concentrating on the marketing and sale of
turnkey projects, which historically have had a much higher profit margin.
Cost of Sales
Cost of sales of turnkey projects includes cost of machinery purchased and
salaries and wages paid to engineers and consultants. Cost of sale of turnkey
projects as a percentage of turnkey revenues was 39.0% for the six months ended
June 30,1999 compared to 43.3% for the corresponding period of prior year. The
decrease in the cost of sales can mainly be accounted for by the decrease in the
sales of raw materials, which have a lower gross profit margin than the margin
on turnkey projects.
8
<PAGE>
Depreciation and amortization
Depreciation and amortization expenses increased by $ 21,000 to $ 2,244,000
for the six months ended June 30, 1999 from $2,223,000 for the corresponding
period of the prior year. Depreciation and amortization charge remained
relatively constant during each period.
Selling and Administrative Expenses
Selling and administrative expenses increased by $ 10,000 or 1.55% to $
652,000 for the six months ended June 30, 1999 from $ 642,000 for the
corresponding period of the prior year. This represented additional expenses
paid to consultants.
Financial Income (Expense), net
Financial income (expense), net is primarily interest earned on cash and
cash equivalents, less interest expense. Net financial expense decreased by $
9,000, or 18.75% to $39,000 for the six months ended June 30, 1999 from $48,000
for the corresponding period of the prior year. This decrease resulted from a
decrease in bank borrowings.
Income Taxes
Income taxes for the six months ended June 30 1999 were $1,385,000 or
13.96% of pretax income. This compares with $ 999,000 or 10.16% of pretax income
for the corresponding period of the prior year. The increase in percentage
resulted because of an under provision of income tax of approximately $330,000
for the corresponding period of the prior year.
Net Income
Net income decreased by $295,000 or 3.34% to $ 8,532,000 for the six months
ended June 30, 1999 from $8,827,000 for the corresponding period of the prior
year. This decrease resulted from a decrease in the sale of raw materials.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $45,641,000 including
a cash balance of $45,430,000 This compares to a working capital of $35,939,000
and a cash balance of $ 35,668,000 at December 31 1999.
Net cash provided by operating activities increased to $9,928,000 for the
six months ended June 30, 1999 from $5,465,000 for the corresponding period of
the prior year. This increase resulted from the decrease in the amount due to
from related companies and the decrease in the creditors and accruals.
9
<PAGE>
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
1.27.1 Financial Data Schedule
b) Reports on Form 8-K
None
Signature
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
CHINA CONTINENTAL, INC.
/s/ Harry H.H. Ho
------------------------------------
Harry H.H. Ho
Chairman and Chief Executive Officer
/s/ Eric Ng
------------------------------------
Eric Ng
Chief Financial Officer and Secretary
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 0
<RECEIVABLES> 11,415
<ALLOWANCES> 0
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<PP&E> 355
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0
0
<COMMON> 69
<OTHER-SE> 137,421
<TOTAL-LIABILITY-AND-EQUITY> 245,410
<SALES> 11,075
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<CGS> 4,294
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<OTHER-EXPENSES> 1,492
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<INCOME-PRETAX> 5,826
<INCOME-TAX> 815
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<DISCONTINUED> 0
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<NET-INCOME> 5,011
<EPS-BASIC> .07
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