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 September 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)
4010-4012 Convention Plaza Office Tower, 1 Harbour Road, Wanchai, Hong Kong
---------------------------------------------------------------------------
(Address of principal executive offices)
(852) 2507-2211
---------------------------
(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 - September 30, 1999
(unaudited) and December 31, 1998 (audited) 3
Unaudited Consolidated Statements of Income - For
the three months and nine months ended September 30,
1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows- For
the nine months ended September 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)
Sept. 30, Dec. 31,
1999 1998
--------- ---------
(unaudited) (audited)
ASSETS
Current Assets
Cash and deposits 52,961 35,668
Accounts receivable, net of provision 10,987 9,290
Prepayments, deposits and other receivable 634 613
Amount due from related companies 4,315 4,316
-------- ---------
Total Current Assets 68,887 49,887
-------- ---------
Fixed Assets 342 407
Land lease right 167,622 170,910
Investment in joint ventures 8,596 8,596
Amount due from directors 5,350 5,239
Other assets 645 645
-------- ---------
Total Assets 251,452 235,684
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft 285 501
Payable and accruals 4,851 3,736
Bank import loans 580 463
Secured bank loan 15 15
Due to related companies 668 644
Income taxes payable 14,635 12,450
Amounts due to directors 2,030 1,378
-------- ---------
Total current liabilities 23,064 19,187
-------- ---------
Long-term liabilities 1,262 1,262
-------- ---------
Total Liabilities 24,326 20,449
-------- ---------
Minority interest 84,810 86,278
Stockholders' Equity
Share capital 69 69
Contributed surplus 45,273 45,273
Retained earnings 96,974 83,615
-------- ---------
Total Stockholders' Equity 142,316 128,957
-------- ---------
Total Liabilities and Stockholders' Equity 251,452 235,684
======== =========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Stated in '000 United States Dollars)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended,
Sept. 30, Sept. 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Sale of turnkey projects 10,530 10,971 29,100 29,339
Sale of raw materials 573 654 1,328 2,664
------- ------- ------- -------
Total Sales 11,103 11,625 30,428 32,003
Cost of Sales (4,415) (4,882) (11,962) (13,706)
------- ------- ------- -------
Gross Profit 6,688 6,743 18,466 18,297
Depreciation of fixed assets (1,109) (1,112) (3,353) (3,335)
Selling and administrative expenses (328) (287) (980) (929)
Financial income (expenses) net (18) (28) (57) (76)
Minority interest in operations of
Consolidated subsidiary 537 537 1,611 1,722
------- ------- ------- -------
Income before income taxes 5,770 5,853 15,687 15,679
Income taxes (800) (570) (2,185) (1,569)
------- ------- ------- -------
Net income 4,970 5,283 13,502 14,110
======= ======= ======= =======
Earnings per share 0.072 0.08 0.20 0.24
======= ======= ======= =======
Weighted average common and
equivalent shares outstanding 69,000,000 66,000,000 69,000,000 59,959,484
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in '000 United States Dollars)
(Unaudited)
<TABLE>
Nine Months Ended Sept, 30
----------------------------
1999 1998
------- --------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Income 13,502 14,110
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 3,353 3,335
Minority Interest (1,611) (1,722)
Changes in Non-Cash Working Capital 2,148 (7,505)
------- -------
Net Cash Provided by Operating Activities 17,392 8,218
======= =======
Cash Flows from Investing Activities:
Proceeds from issue of shares 0 0
Payments for Acquisition of Fixed assets 0 0
------- -------
Net Cash Provided by (Used in) Investing Activities 0 0
======= =======
Financing Activities:
Repayment of bank overdraft (216) (6)
Repayment of secured loan 0 (6)
Net Borrowings Under Bank Import Loans 117 (578)
------- -------
Net Cash Provided by (Used in) Financing Activities (99) (590)
======= =======
Net Increase (Decrease) in Cash 17,293 (7,628)
======= =======
Cash, Beginning of Period 35,668 17,808
------- -------
Cash, End of Period 52,961 25,436
======= =======
</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 September 30, 1999 to the Three Months
Ended September 30, 1998
Revenues
Revenues decreased by $522,000 or 4.49% to $11,103,000 for the three months
ended September 30, 1999 from $ 11,625,000 for the corresponding period of the
prior year. The decrease in revenues can partially be accounted for by the
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.
Cost of Sales
Cost of sales of turnkey projects includes the cost of machinery purchased
and salaries and wages paid to engineers and consultants. Cost of sales of
turnkey projects as a percent of sales was 39.76% for the three months ended
September 30,1999 compared to 41.99% for the corresponding period of prior year.
The decrease in the cost of sales is principally attributable to the decrease in
the sale of raw materials.
Depreciation of Fixed Assets
Depreciation expenses decreased by $3,000 to $ 1,109,000 for the three
months ended September 30, 199 from $1,112,000 for the corresponding period of
the prior year or virtually constant during both of the periods.
Selling and Administrative Expenses
Selling and administrative expenses increased by $41,000 or 14.28% to $
328,000 for the three months ended September 30, 1999 from $ 287,000 for the
corresponding period of the prior year. This increase resulted from additional
costs incurred in anticipation of the offerings in Singapore of shares of the
Company's subsidiaries.
Financial Income / (Expense), net
Financial income/ (expense) net, is interest earned on cash and cash
equivalents, less interest expense. Net financial expense decreased by $ 10,000,
or 35.71% to $18,000 for the three months ended September 30, 1999 from $28,000
for the corresponding period of the prior year. This decrease resulted from the
decrease in the bank overdraft.
7
<PAGE>
Income Taxes
Income taxes for the three months ended September 30 1999 were $800,000 or
13.86% of pretax income. This compares with $ 570,000 or 9.74% of pretax income
for the corresponding period of the prior year. There was an under provision of
income tax of approximately $285,000 in the corresponding period of the prior
year which artificially reduced income taxes as a percentage of pre-tax income.
Net Income
Net income decreased by $313,000 or 5.9% to $ 4,970,000 for the three
months ended September 30, 1999 from $5,283,000 for the corresponding period of
the prior year. This decrease resulted principally from a decrease in the sale
of raw materials and a higher provision for income taxes.
Comparison of the Nine Months Ended September 30, 1999 to the Nine Months Ended
September 30, 1998
Revenues
Revenues decreased by $1,575,000 or 4.92% to $30,428,000 for the nine
months ended September 30, 1999 from $ 32,003,000 for the corresponding period
of the prior year. The decrease in revenues is principally attributable to 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.
Cost of Sales
Cost of sales of turnkey projects includes the cost of machinery purchased
and salaries and wages paid to engineers and consultants. Cost of sale of
turnkey projects as a percentage of sales was 39.30% for the nine months ended
September 30,1999 compared to 42.80% for the corresponding period of prior year.
The decrease in the cost of sales is principally attributable to a decrease in
the sale of raw materials.
Depreciation of Fixed Assets
Depreciation expenses increased by $ 18,000 to $ 3,353,000 for the nine
months ended September 30, 1999 from $3,335,000 for the corresponding period of
the prior year or virtually constant for both of the periods.
8
<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses increased by $ 51,000 or 5.49% to $
980,000 for the nine months ended September 30, 1999 from $ 929,000 for the
corresponding period of the prior year. This increase resulted from additional
costs incurred in anticipation of the offering in Singapore of shares of the
Company's subsidiaries.
Financial Income / (Expense), net
Financial income/ (expense) net, is interest earned on cash and cash
equivalents, less interest expense. Net financial expense decreased by $ 19,000,
or 25% to $57,000 for the nine months ended September 30, 1999 from $76,000 for
the corresponding period of the prior year. This decrease resulted from a
decrease in bank borrowings.
Income Taxes
Income taxes for the nine months ended September 30 1999 were $2,185,000 or
13.92% of pretax income. This compares with $ 1,569,000 or 9.66% of pretax
income for the corresponding period of the prior year. There was an under
provision of income tax of approximately $610,000 for the corresponding period
of the prior year which artificially reduced the taxes as a percentage of
pre-tax income.
Net Income
Net income decreased by $608,000 or 4.31% to $ 13,502,000 for the nine
months ended September 30, 1999 from $14,110,000 for the corresponding period of
the prior year. This decrease principally resulted from a decrease in the sale
of raw materials and a higher provision for income taxes.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of $51,183,000
including a cash balance of $52,961,000. 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 $17,392,000 for the
nine months ended September 30, 1999 from $8,218,000 for the corresponding
period of the prior year. This increase resulted from a decrease in the amount
due to from related companies and a decrease in the creditor balances and
accruals.
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.
Year 2000 Issue
Many computers were not designed to handle any dates beyond the year 1999
and, therefore, computer hardware and software will need be modified prior to
the year 2000 in order to remain functional; this is the so called "Year 2000"
problem. The Company does not believe it has material exposure with respect to
Year 2000 issues. The Company currently utilizes commercially produced hardware
and software packages that were purchased to be Year 2000 complaint. The Company
does not rely on any one supplier or vendor for its goods and services, so the
failure of any supplier or vendor with the Year 2000 problems to convert its
systems on a timely basis should not have a material effect on the Company's
business, financial condition and result of operations. Software and hardware ,
such as telecommunication and office automation systems, that facilitates
operations of the Company's location and corporate headquarters comprise the
Company's primary non-IT systems and were likewise purchased or upgraded to be
Year 2000 complaint.
Net cash used in financing activities decreased to $99,000 for the nine
months ended September 30, 1999 from $590,000 for the corresponding period of
the prior year. This decrease resulted from an increase in borrowings under Bank
Import Loans which was partially offset by repayment of a bank draft.
9
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
1.27.1 Financial Data Schedule
b) Reports on Form 8-K
None
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 52,961
<SECURITIES> 0
<RECEIVABLES> 10,987
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,247
<PP&E> 342
<DEPRECIATION> 0
<TOTAL-ASSETS> 251,452
<CURRENT-LIABILITIES> 23,064
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 142,247
<TOTAL-LIABILITY-AND-EQUITY> 251,452
<SALES> 30,428
<TOTAL-REVENUES> 30,428
<CGS> 11,962
<TOTAL-COSTS> 2,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,687
<INCOME-TAX> 2,185
<INCOME-CONTINUING> 13,502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,502
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
