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 Year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
4010-12 Convention Plaza Office Tower, 1 Harbour Road, Wanchai Hong Kong.
(Address of principal executive offices) (Zip Code)
Registrant Telephone Number, Included Area Code : 011-852-2507-2211
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act::
None
----------------
(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 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 .
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form and will not be contained, to the best of
registrant knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-KSB.
[X]
The issuer revenues for its most recent fiscal year were US$38,873,984
<PAGE>
At of December 31, 1999, 99,000,000 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 $46,411,200
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.
Annual Small Business Disclosure Format: Yes No X
---- -----
<PAGE>
TABLE OF CONTENTS
PART I Page
-------
ITEM 1. DESCRIPTION OF BUSINESS.............................. 4
ITEM 2. DESCRIPTION OF PROPERTIES............................ 9
ITEM 3. LEGAL PROCEEDINGS.................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................. 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.......................... 10
ITEM 6. SELECTED FINANCIAL DATA.............................. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION............................................ 13
ITEM 7A QUANTITATIVE AND QUALIFICATION DISCLOSURE
ABOUT MARKET RISK.................................... 18
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA................................................. 18
ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................. 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.......................................... 18
ITEM 11. EXECUTIVE COMPENSATION.............................. 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT .............................. 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTION......................................... 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTINGS ON FORM 8-K.............................. 22
SIGNATURES.......................................... 23
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................................... F-1
3
<PAGE>
PART 1
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 20 of this Form 10-K.
The Company
China Continental, Inc. (the "Company" or "CHCL") designs, installs and
sells plastic production lines on a turn-key basis; sells machinery and
equipment for the manufacture of plastic products and imports, and resells raw
materials. The major portion of the Company's sales are to plastic manufacturers
in the People's Republic of China ("PRC" or "China"). The Company has completed
approximately 82 turn-key projects throughout the PRC, varying in size from
$300,000 to $5 million United States dollars. Eight turn-key projects had been
completed during the calendar year 1999 averaging US$4.5 million per contract.
Typically turn-key projects require four to eight months to complete, depending
on their size and complexity. The installation and maintenance of production
lines are handled jointly by the original equipment manufacturers and the
Company. To strengthen its revenue base and diversify its business activities,
the Company has contracted to purchase Dong Wu Bio Tech Farm in Northern
Mongolia. The Company became a US listed public company via a reverse merger in
February, 1995.
Market and Client Base
In the 1990's, the Company began to market fully automated production lines
to plastic product manufacturers in the PRC on a turn-key basis . Beginning in
2000, the Company will import semen and embryos of Australian livestock for
implantation into local recipients. The sheep from the first generation of
offspring will be selected and propagated at Dong Wu Bio Tech Farm which will
then be sold in Mainland China.
Business Segments
The Company has three principal business segments:
* Sale of turn-key plastic production lines;
* Importer and reseller of raw materials;
* Operation of a breeding center.
4
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Sale of Turn-key Plastic Production Lines
In the 1990's, the Group began marketing 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 approximately 82
turn-key projects throughout the PRC, varying in size from $300,000 to $5
million. The Company also imports and resells raw materials and machinery and
equipment to plastic manufacturers in the People's Republic of China.
A typical turn-key project takes four to eight months to complete depending
on its size and complexity. The design of a production line is based on job
specifications obtained from the customers, such as the particulars of the
plastic products, the packaging format, the intended maximum production capacity
and the layout of the factory premises. 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 that they meet specified
requirements. Turn-key projects usually have warranties ranging from six months
to one year during which repairs and maintenance are provided by the Company
free of charge.
Sale of Machinery and Equipment, Accessories, Spare Parts, Raw Materials and
Steel
Sale of machinery and equipment, accessories, spare parts, raw materials
and steel are conducted in conjunction with the sale of turn-key plastic
production lines.
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 December 31, 1999, the Company employed a sales and administrative
staff of 14 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 highly 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 no significant price competition in this market, but price
competition may become a factor in the future.
5
<PAGE>
Economic development in the People's Republic of China ("PRC" or "China")
Since 1953, the development of the PRC's economy has been characterized by
the adoption of the "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, economic
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
People's Conference.
In 1999, facing complicated political and economic circumstances at home
and aboard, China enacted policy measures to increase input and expand demand.
The net result of these initiatives was a 7.1% increase in the gross domestic
product.
Although the domestic political and economic situation in the PRC and Asia
is still complicated, it has improved to some degree over 1999. In the PRC
market consumption is steady. Since the 4th quarter of 1999, retail sales of
consumer goods have increased while deflation has moderated. As the
international economy improves and the Asian economies recover, China's import
and export business have also recovered. Since the second half of 1999 exports
are up substantially.
For 2000, the steps of reform in PRC state owned enterprises will be
further accelerated. With the adjustment of strategic distribution in the state
owned economy and the implementation of strategic reshuffling in state owned
enterprises, the economic efficiency of state owned enterprises will hopefully
be improved.
The economic re-development of Western China has also begun Construction of
infrastructure including acceleration of the construction of the main lines of
the national railroad and provincial trunk lines has begun as has the expansion
of facilities for transporting water to Western China. Both the jobs created by
the infrastructure development and those resulting from it should help economic
development in Western China and the PRC. China is targeting a 7.5% increase in
its gross domestic production for the current year.
6
<PAGE>
FUTURE PROSPECT OF THE COMPANY
During the 1990s, the Company began to market fully automated production
lines on a turnkey basis to plastic product manufacturers in the People's
Republic of China ("PRC" or "China"). These turnkey 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 also owns a minority interest in Weifang Great Dragon Chemical
Fiber Company Limited ("Weifang") which was purchased in April, 1997 for US$8
million in cash. The principal activity of Weifang is the production of
polyester tire cord fabrics and polyester/nylon canvasses. Polyester tire cord
fabrics are one of the main components in the manufacture of radial tires. The
Company intends to acquire additional shares in Weifang Great Dragon Chemical
Fiber Company Limited with the ultimate objective of having it listed on the
Stock Exchange of Singapore.
In approaching the next millennium, food production in China is still the
paramount question despite recent advances of scientific methods in agriculture
and animal husbandry. The global demand for food is expected to be critical for
continued growth, particularly in developing countries. The Company feels that
the challenge of providing food can only be met through agricultural genetic
engineering. Therefore the goal of the Company is to increase shareholders'
value and to be involved in selected emerging high-growth sectors, particularly
in the provision of technologies utilized in agricultural genetics and farming
in China.
Despite being the most populous nation and the largest livestock producer
in the world, China lacks high quality livestock and hybred seeds to sustain its
agricultural industry. Unless new emphasis is placed on optimizing the use of
land and livestock, economic self-sufficiency cannot be achieved.
The Company believes that it has identified a niche by initiating a
multi-phase program to enhance agricultural production in China through the
provision of agricultural genetics technology to support the Country's
increasing demand of food. The strong relationship that the Company enjoys with
both its Chinese and International partners will provide the Company with
strategic access to this development opportunity.
The Company has embarked on a livestock and genetic engineering joint
venture called Dong Wu Bio-Tech Farm. The farm is located in Northern Mongolia.
The emphasis of the Company is to lead, focus and manage a selected high growth
emerging business within a specific growing industry group, particularly in the
provisions of technologies in agricultural genetics and farming in China, and to
generate from these businesses the potential of significant returns. The Company
believes opportunities exist for its 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.
7
<PAGE>
The Company believes that there are a number of favorable factors that will
enable it to achieve its objectives, including, but not limited to the
following:
* The opportunity to lead the market in the agricultural genetics and
farming industry in China with the ability to make available the
latest techniques and know-how in genetics technology and farming;
* The presence of dedicated management and staff with necessary
expertise;
* The unique location and availability of a significant size of land;
and
* The strong support from its Chinese and international partners,
ensuring that it is a position to exploit existing and future
opportunities in agricultural genetics.
A highly qualified team of five genetic professors has been recruited by
the Company to establish and initially manage a feedlot breeding center for Boer
goats and crossbred Boer goats, improving the genetic makeup of the domestic
Chinese herd through advanced semen extraction, artificial insemination and
embryo transplant techniques. Research and development teams participation will
also introduce enhanced farm management practices and technology, including
nutritional expertise, animal husbandry techniques and western farming practices
proven to maximize efficiency in livestock production and herd management.
The objectives of this project are:
* Support the Chinese Government's Grain Conservancy Policy for the
development of pasture fed animals such as sheep, goats and cattle as,
unlike pigs so that they do not compete for grains with humans;
* Produce superior breeding livestock to improve China's livestock
population; and
* Provide red meat for a population of 1.4 billion people.
The proposed project will entail the marketing and sale of thoroughbred
Breeding livestock and superior breed semen & embryos to contract breeders and
growers. The contract breeders will be coordinated by municipal, provincial and
central governments. The Company intends to repurchase the offspring (the
Crossbreed) of the artificially bred livestock for feedloting and slaughter in
the Company's contracted abattoir.
The project also involves sub-contracting an abattoir that will meet USDA,
EU, Japan, China and Halal health requirements, and sub-contracting a meat
packing plant equipped with tanning, fabricating and rendering facilities and
with the capacity to process 500,000 head of sheep and goats and 40,000 head of
cattle yearly. High quality brand products will then be distributed both in
China and worldwide. The Company will be involved in the sale of feed, feed
additives, minerals, vitamins, veterinary drugs and other related items and the
production and sale of milk, skin, hide, wool and cashmere.
In summary, this proposed project will propagate breeding livestock and,
when practicable, the Company will consider, establishing a seed division. The
purpose of the seed division will be to improve China agricultural production
through quality genetics. The seed industry is a rapidly developing industry
undergoing decentralizing government control and regulation. According to recent
studies, China's seed industry is facing pressure to improve yields to feed its
increasing human and livestock populations. China imports vegetable seeds,
potato seeds, turf seeds, oilseed and fruit seeds for planting and exports rice
planting seeds, soybeans, forage seeds, sugar beets and vegetable seeds to over
20 countries. At present, China is not a major world exporter of planting seeds
due to a lack of facilities, a poor distribution system, inadequate testing
labs, technology and machinery.
8
<PAGE>
The Company believes that it has identified a niche by providing a program
to enhance agricultural production that will significantly improve the standard
of living in China, and by providing badly needed agricultural genetics to
support the increasing demand of food in China. With the strong relationship
with the Chinese and International partners, the Company will have access to
this development opportunity and is well positioned to take advantage of
existing and future opportunities.
The Company intends to maximise its substantial cashflow to enhance the
values of its venture businesses through effective management, operations and
development strategies. The Company believes opportunities exist for its growth
in the business of agriculture and farming in China and are confident of the
growth of the Company and its rewarding prospects.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company principal administrative is located in Hong Kong at 4010-12
Convention Plaza, Office Tower, 1 Harbour Road, Wanchai, the Company occupies
these facilities under a two year lease.
The marketing , technical facilities and supporting teams are located in
Hong Kong at 1801-1806, Hua Qin International Building, 340 Queen Road Central.
This premises are owned by the Company.
The farm for which the Company has contracted, Dong Wu Bio Tech Farm is
located in the People's Republic of China.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's common stock trades on the OTC Electronic Bulletin Board and
is quoted under the symbol "CHCL.OB", the following table sets forth the high
and low bid price per share for the Company's common stock for each quarterly
period.
1999 1998
----------------- --------------------
High Low High Low
First Quarter 0.75 0.328 1.03 0.50
Second Quarter 0.703 0.203 1.156 0.563
Third Quarter 0.563 0.188 0.984 0.516
Fourth Quarter 1.50 0.313 1.00 0.50
The quotation reflects the inter-dealer prices without retail markup,
markdown or commission and may not represent actual transactions.
Holders
At December 31, 1999 there were approximately 340 holders of record.
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.
ITEM 6. SELECTED FINANCIAL DATA
(In thousand United States dollars, except per share 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 audited consolidated
financial statements in the Index to Financial Statements on page F-1 of this
report.
10
<PAGE>
<TABLE>
Year Year Nine Year Year
Ended Ended Months Ended Ended
Ended
Dec 31 Dec 31 Dec 31 Dec 31 Dec 31
1999 1998 1997 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Automatic production lines 36,434 $32,806 $18,815 $31,957 $34,897
Raw materials 670 1,594 1,846 2,782 3,451
Breeding center 1,770 2,388 0 0 0
-------- -------- ------- ------- -------
Total sales 38,874 36,788 20,661 34,759 38,348
Cost of sale 14,674 14,284 8,335 14,290 15,228
-------- -------- ------- ------- -------
Gross profit 24,200 22,504 12,325 20,469 23,120
Depreciation of fixed assets (3,897) (4,841) (386) (80) (64)
Selling and administrative
expenses (1,205) (2,395) (510) (959) (1,249)
(Provision) Recovery for
doubtful accounts (675) (681) 0 289 (1,217)
Financial income (expenses), net (126) (165) (57) (55) (73)
Other income (expenses) net (9) 360 2,919 (595) (2,518)
Gain on disposal of Wealthy Asia
Limited 11,431
Share of income/(loss) of
associated companies 0 103 144 0 (235)
Income before income tax 29,719 14,885 14,435 19,069 17,764
Income taxes 3,114 2,890 1,290 2,635 2,742
-------- -------- ------- ------- -------
Income before minority interest 26,605 11,995 13,145 16,434 15,022
-------- -------- ------- ------- -------
Minority interest 1,631 2,114 0 0 0
-------- -------- ------- ------- -------
Income for the year 28,236 14,109 13,145 16,434 15,022
-------- -------- ------- ------- -------
Net income per share 0.37 0.23 0.50 0.63 0.58
-------- -------- ------- ------- -------
Weighted average shares
outstanding 75,904 62,306 26,000 26,000 26,000
-------- -------- ------- ------- -------
</TABLE>
11
<PAGE>
Year Year Nine Year Year
Ended Ended Months Ended Ended
Ended
Dec 31 Dec 31 Dec 31 Dec 31 Dec 31
1999 1998 1997 1997 1996
------- -------- -------- -------- --------
Balance Sheet Data at period end
Working capital (decifit) (14,678) 35,938 (26,392) 55,784 (8,048)
--------- --------- --------- -------- --------
Total Assets 188,941 253,269 218,447 73,282 53,773
--------- --------- --------- -------- --------
Long-term Liabilities 1,245 1,261 0 0 21
--------- --------- --------- -------- --------
Shareholders Equity 164,737 128,543 70,694 57,516 40,713
--------- --------- --------- -------- --------
The Company changed its financial year end date to December in 1997 and
accordingly 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 audited consolidated
financial statements in the Index to Financial Statements on page F-1 of this
report. See also Item 7, Management Discussion and Analysis of Financial
Condition and Results of Operation.
Year ended December 31
--------------------------------------
1999 1998 1997
audited audited unaudited
------- ------- ---------
Income Statement Data
Automatic production lines 36,434 $32,806 $21,759
Raw materials 670 1,594 2,364
Breeding Center 1,770 2,388 0
-------- --------- --------
Sales 38,874 36,788 24,123
Cost of sale 14,674 14,284 8,042
-------- --------- --------
Gross profit 24,200 22,504 16,081
Depreciation of fixed assets (3,897) (4,841) (402)
Selling and administrative expenses (1,205) (2,395) (556)
(Provision) Recovery for doubtful
accounts (675) (681) 289
Financial Income (Expenses) net (126) (165) (91)
Other Income (Expenses) net (9) 360 2,304
Gain on disposal of Wealthy Asia
Limited 11,431
Share of income /(losses) of
associated companies 0 103 201
Income before income tax 29,719 14,885 17,826
-------- --------- --------
Income taxes 3,114 2,890 2,683
-------- --------- --------
Income before minority interest 26,605 11,995 15,143
-------- --------- --------
Minority interest 1,632 2,114 0
-------- --------- --------
Net income 28,236 14,109 15,143
-------- --------- --------
Net income per share 0.37 0.23 0.60
-------- --------- --------
Weighted average shares outstanding 75,904 62,306 26,000
-------- --------- --------
12
<PAGE>
Year ended December 31
-------------------------
1999 1998 1997
audited audited audited
--------- --------- ---------
Balance Sheet Data (At Year End)
Working capital (14,678) 35,938 (26,392)
--------- --------- ---------
Total assets 188,941 253,269 218,447
--------- --------- ---------
Long term liabilities 1,245 1,261 0
--------- --------- ---------
Shareholders Equity 164,737 128,543 70,694
--------- --------- ---------
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Twelve months ended December 31,1999 versus Twelve months ended December 31,1998
- --------------------------------------------------------------------------------
Revenues
Revenues increased by US$2,086,000 or 5.60% to US$38,874,000 for the twelve
months ended December 31, 1999 from US$36,788,000 for the prior year. This
increase is principally attributable to an increase in the sale of turn-key
projects by US$3,628,000, which was partially offset by a decrease in the sale
of raw materials by US$924,000 and in breeding center income of 618,000.
Cost of revenues/sales
Cost of sales of turn-key projects includes cost of machinery purchased and
the salaries and wages paid to engineers and consultants. For the year ended
December 31, 1999, cost of sales as a percentage of revenue on turn-key projects
was 36.40%, representing a decrease of 2.40% from 38.80% for the prior year. The
decrease is mainly attributable to the decrease in the cost of materials..
13
<PAGE>
Depreciation of Fixed Assets
Depreciation expense decreased by US$944,000 or 19.5% to US$3,897,000 for
the year ended December 31, 1999 from US$4,841,000 for the prior year. The
decrease was attributable to the sale of the farm located in Chengde Dafeng in
October, 1999.
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$1,190,000 or
49.68% to US$1,205,000 for the year ended December 31, 1999 compared to
US$2,395,000 for the prior year. The decrease resulted because the Company spent
less on financial and other public relations during 1999.
Provision for doubtful accounts
The provision for doubtful accounts decreased by US$6,000 or 1% to
US$675,000 for the year ended December 31, 1999 from US$681,000 for the prior
year. Generally, uncollectible accounts as a percent of receivable remains
fairly constant.
Financial Income (Expense) Net
Financial income/ (expense) is interest earned on cash and cash
equivalents, less interest expense. Net financial expense decreased by US$39,000
or 23.36% to US$126,000 for the year ended December 31, 1999 from US$165,000 for
the prior year. This decrease is attributable to a decrease in bank borrowing.
Other Income
Other income increased by US$11,062,000 or 3,072% to US$11,422,000 for the
year ended December 31, 1999 from US$360,000,000. The increase can mainly be
accounted for by the gain on the disposal of the Company's subsidiary, Wealthy
Asia Limited of US$11,431,000. The major asset of Wealthy Asia Limited was a 51%
holding in Chengde Dafeng Agriculture and Animal Husbandry Co. Ltd., a
Sino-Singapore joint venture incorporated in the Peoples' Republic of China on
December 3, 1997.
Gain on disposal of Wealthy Asia Limited
The gain on disposal of Wealthy Asia Limited amounted to US$11,431,000. The
major asset of Wealthy Asia Limited was a 51% holding in Chengde Dafeng
Agriculture and Animal Huabandry Co. Ltd., a Sino-Singapore joint venture
incorporated in the People's Republic of China on December 3, 1997.
14
<PAGE>
Income taxes
Income taxes for the year ended December 31,1999 were US$3,114,000 or
16.65% of pre-tax income. This compares with US$2,890,000 or 18.89% of pre-tax
income for calendar year 1998. The tax rate was lower for 1999 because a portion
of the income was classified as capital gains which are not subject to tax.
Net Income
Net income increased by US$14,127,000 or 100% to US$28,236,000 from
US$14,109,000 for the year ended December 31, 1999. The increase is attributable
to an increase in sales of US$ 2,086,000 and the gain on the sale of the farm of
US$11,431,000. The increase of which is partially offset by the increase in
provision for bad and doubtful debts.
Twelve Months Ended December 31, 1998 versus Twelve Months Ended December 31,
1997
Revenues
Revenues increased by US$12,665,000 or 52.50% to US$36,788,000 for the
twelve months ended December 31, 1998 from US$24,123,000 for the prior year.
This increase is attributable to an increase in the sale of turn-key projects of
US$11,000,000 and the sale of the breeding center for US$2,388,000 which were
partially offset by a decrease in sale of raw materials.
Cost of revenues/sales
The 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 December 31, 1998, cost of sales as a percentage of revenue on
turn-key projects was 38.82%, representing a increase of 5.48% from 34.34% for
the prior year. The increase is attributable to an increase in the cost of
materials..
Depreciation of Fixed Assets
Depreciation expense increased by US$4,439,000 or 1,104% to US$4,841,000
for the year ended December 31, 1998 from US$402,000 for the prior year. The
increase in depreciation expense is attributable due to the acquisition of the
farm for US$175,292,130 which is being depreciated over a period of 40 years.
Selling and administrative expenses
Selling and administrative expenses include salaries, commissions and other
direct employment costs paid by the Company to sales representatives and other
professionals. Selling and administrative expenses increased by US$1,839,000 or
330.76% to US$2,395,000 for the year ended December 31, 1998 compared to
US$556,000 for the prior year. The increase is attributable to additional costs
incurred by the Company for financial public relations and related expenses and
the increases associated with higher revenues.
15
<PAGE>
Provision for doubtful accounts
The provision for doubtful accounts increased by US$970,000 or 235%
toUS$681,000 for the year ended December 31, 1998 against a recovery of bad
debts of US$289,000 for the prior year. The increase resulted from the Company
writing off all receivables which had been outstanding for one year or longer.
Financial Income (Expense) Net
Financial income/ (expense) is interest earned on cash and cash
equivalents, less interest expense. Net financial expense increased by US$74,000
or 81.32% to US$(165,000) for the year ended December 31, 1998 from US$(91,000)
for the prior year. This increase is attributable to increase in borrowing.
16
<PAGE>
Other income/(expenses)
Other income decreased by US$1,944,000 to US$360,000 for the year ended
December 31, 1998 from US$2,304,000 for the prior year. This decrease resulted
because of the gain on the sales of Gain Whole Limited and Megaway Development
Limited during the year ended December 31, 1997.
Share of income/(losses) of associated companies
Other than Weifang Great Dragon Chemical Fibre Company Limited, the
associated Companies of the Company are principally operated on an 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 an
additional loss 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 during the year ended March 31, 1997.
The share of profit of the associated companies represented merely the Company's
share of the profit of Weifang Great Dragon Chemical Fiber Company Limited for
the year ended December 31, 1998 which totaled US$102,000.
Income taxes
Income taxes for the year ended December 31,1998 were US$2,890,000 or
18.88% of pretax income. This compares with US$2,683,000 or 14.77% of pretax
income for the prior year. The increase in percentage is due to the fact that
there was a charge back of an income tax provision during the year ended
December 31, 1997. In addition, certain income derived during the year ended
December 31, 1997 was considered as a capital gain and was not subject to income
tax.
Net Income
Net income decreased by US$1,034,000 or 6.83% to US$14,109,000 from
US$15,143,000 for the year ended December 31, 1998. The decrease is attributable
to the increase in depreciation and selling expenses which were partially offset
by the increase in revenue.
Liquidity and capital resources
At December 31, 1999, the Company had working capital of (US$14,678,000),
including a cash balance of US$870,000. This compares to a working capital of
US$35,938,000 and a cash balance of US$35,668,000 at December 31, 1998.
Net cash provided by operating activities increased to US$25,355,000 from
US$18,751,000 for the prior year. The cash provided by operating activities
consisted principally of US$24,317,000 of net income, an increase in gain on
disposal of subsidiary, an increase amount due to director, and an increase in
income tax payable.
Net cash used in investing activities totaled US$60,070,000 for the year
ended December 31, 1999 compared to US$2,000 for the year ended December 31,
1998. In both years the Company had nominal purchase of fixed assets, in the
year ended December 31, 1997, the Company used US$159,600,000 as deposit for the
purchase of investment in land. This was partially offset by the proceeds on
disposal of the subsidiary.
Net cash used in financing activities totaled US$(83,000) for the year
ended December 31,1999. Net cash provided by financing activities consisted
principally of net repayments which were partially offset by advances of bank
overdrafts.
17
<PAGE>
The Company business has historically been capital intensive. In most years
internally generated funds were sufficient to fund the Company 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. Management anticipates that cash generated from operations
combined with current working capital and available credit lines will provide
sufficient liquidity other than for the purchase of the farm to meet ordinary
capital requirements for the foreseeable future.
Impact of inflation
To date, the Company has not experienced any significant effect from
inflation. The Company's major expenses have been the cost of purchase of
machinery, salaries and related costs incurred principally for the turn-key
projects. The Company generally has been able to meet increases in costs by
raising prices of its products.
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
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) Country Risk
Substantially all of the Company 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 method 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 possible
that a change in the PRC leadership could lead to changes in economic policy. In
addition, a substantial portion of the Company revenues is denominated in
Renminbi, which must be converted into other currencies before remittance
outside the PRC. Both the conversion of the Reminbi and other foreign currencies
and remittance of foreign currencies abroad require approval of the PRC
government.
ITEM 7A QUANTITATIVE AND QUALIFICATION DISCLOSURE ABOUT MARKET RISK
Not applicable.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are annexed to this Report as pages
F2 through F-24. An index to such materials appears on page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and ages of the executive officers
of the Company and the position held by each.
Name Age Title
- ------ ----- --------
Harry H.H. Ho 50 Chairman of the Board and Chief Executive
Officer
Jia Ji Shang 46 Vice-Chairman of the Board and Director
Ji Jun Wu 61 Director
Kim Yong Soh 50 Director
Tan Sri (Dr.) M. Ghazali Shafie 62 Senior Advisor
Dr. Li Yan 45 Director
Kwai Chiu Chan 42 Director
Eric Ng 40 Secretary/Treasurer/ Chief Financial
Officer and Director
Ian Macdonald 46 Advisor
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or to be paid for
services rendered during the last three fiscal years by the Company to its chief
executive officers and the one remaining most highly paid executive officer who
earn more than $100,000 for the three fiscal years ended December 31,1999.
Name of Individuals Year Salary Bonus Others
Chan Kwai Chiu 1997 155,870 12,990 129,366
Apr. 1,1997 to
Dec.31, 1997 116,900 9,742
1998 108,000 0
1999 108,000
Wong Yuen Ki 1997 138,000 11,500 155,819
Apr. 1,1997 to
Dec.31, 1997 103,500 8,625
1998 0 0
1999 0 0
19
<PAGE>
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company executive officers are as follows:
Mr. Harry H. H. Ho, is the Chairman and the Managing Director of the
Company. He holds a degree in business studies from the Nanyang University of
Singapore and a master 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 activities include food, shipping and financing services. In
the same year, he established Hua Tuo Guan in Singapore to offer franchise
services in Chinese medical 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. Jia Ji Shang is the Vice -Chairman and a Director of the Company. He
holds a degree in engineering from the Central Broadcast Television University
of the People's Republic of China. He has over 16 years of commercial experience
and is closely associated with the high ranking officials in the People's
Republic of China.
Mr. Ji Jun Wu, is a Director of the Company, is the President of China
operation of Megaway Group. He has over 40 years of commercial experience. Since
establishing the open economy in the PRC in 1980, he has been instrumental in
the establishment of more than 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 representative.
Because of his work and achievements, he was honored by the City of Houston,
Texas, USA as an honory citizen.
Mr. Kim Yong SOH is a non executive director of the Company. He holds an
honory degree in systems and engineering from Nanyang University of Singapore
and a master 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 in Singapore, a company engaging in property development, building
construction, tourism industry, and electronic components and general
investments.
20
<PAGE>
Tan Sri (Dr.) M. Ghazali SHAFIE is a former minister in the government of
Malaysia and is the Senior Advisor of the Company. He was the Chairman of
Rolls-Royce Southeast Asia Advisory Board from 1987-1990, a consultant to the
World Bank Economic Development Institute (EDI), and the Chairman of
Commonwealth Obaerver Group for Bangladesh Parliamentary Elections. At present,
he is a Senior Consultant to the United Nations Centre on Transnational
Cooperation (UNCTC).
Dr. Li Yan, graduated from Massachusetts Institute of Technology, majoring
in Biochemistry and is the Technical Director of the Company. She is responsible
for developing researching and supplying technologies in agricultural genetics.
She has over 10 years of experience in the research and development of
agricultural genetics and has received numerous honors for outstanding
achievements based on her research.
Mr. Chan Kwai Chiu is a director of the Company. Mr. Chan has over 16 years
experience in the plastic products industry, including more than 10 years
experience in the design, installation and management of plastic related
production lines. His high level relationships with government planning agencies
commissioned for free enterprise projects in China at the provincial level, and
with the authorities of the "city" level planning agencies, have contributed
significantly to the business of the Company.
Mr. Eric Ng joined the Company in 1992 as Chief Financial Officer and
Secretary is responsible for the financing strategy of the Company. Prior to
joining the Company he was a manager at KPMG Peat Marwick, Hong Kong, 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 experience in auditing, finance and
administration.
Mr. Ian Macdonald is the Technical Adviser of the Company. He is a
recognised international authority on goat, deer and sheep reproduction with
over 15 years of experience in the Advanced Animal Breeding and Genetics fields.
Through his company in New Zealand he is engaged in custom semen and embryo
collection services to augment a clients merchandising abilities both
domestically and internationally. In the early days of 1980's when goat semen
and embryo collection technology was in its infancy, Ian Macdonald was in charge
of training more than 300 Artificial Insemination (AJ) technicians specifically
for goat reproduction.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 30, 1999 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 more than five percent of
the Company Common Stock.
21
<PAGE>
Amount and Nature of
Beneficial Ownership Percentage
Name and Address (1) of Beneficial Owner Shares of Class
- ---------------------------------------- -------------------- ----------
Chan Kwai Chiu 9,100,000 9.19%
Charter Score Development Limited 1,000,000 1.00%
Land Cheer Investment Limited 2,600,000 2.62%
Allington International Inc. 48,090,000 48.57%
----------- --------
All officers and directors as a group (one) 60,790,000 61.38%
(1) Address for all persons and entities is 4010-12 Convention Plaza Office
Tower, 1 Harbour Road, Wanchai, Hong Kong and all shares are deemed
beneficially owned by Harry H.H. Ho.
ITEM.13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company 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:
<TABLE>
Year Ended Year Ended Year Ended
March 31, April 1, 1997 to December31, December 31,
1997 December 31,1997 1998 1999
----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to joint ventures:
Raw materials US$2,548,484 US$1,594,473 US$1,542,354 USD669,976
</TABLE>
The unrealized profits arising from these transactions were eliminated in the
consolidated financial statements to the extent of the Company interest in these
joint ventures.
During the year ended March 31, 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.
On April 2, 1997, the Group acquired a 30% ownership in Megaway Development
Limited. The principal asset of Megaway Development Limited is a 60% 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).
22
<PAGE>
On December 23, 1997, Sun's International Holdings Limited acquired a 56.5%
interest in Wealthy Asia Limited (WAL) for US$52,000,000 (HK$403,364,486) in
cash from Mr. Brian Ko. WAL had simultaneously acquired 100% of Megaway
Agriculture Co. Ltd. (Megaway) from Mr. Harry Ho for US$92,000,000
(HK$713,644,828) in cash of which US$9,200,000 was paid at closing, with the
remainder in the form of a verbal receivable which was subsequently settled
through payment of US$ 72,900,000 in cash on December 31, 1997 and receipt of
9,900,000 newly issued shares of China Continental, Inc. common stock on March
18, 1998.
On February 10, 1998 Sun's International acquired the remaining 43.5%
interest in WAL from Mr. Brian Ko via the issuance of an additional 40,000,000
shares of stock in China Continental, Inc. of which 9,900,000 shares were issued
directly to Megaway Resort Development Limited, a company owned by Mr. Harry Ho.
The principal asset of Megaway is a 51% interest in Changde Dafeng
Agriculture and Animal Husbandry Ltd. (Changde), a Sino-Singapore joint venture
incorporated in the People's Republic of China on December 3, 1997. Mr. Ho,
through his prior ownership of Megaway, was an original party to the joint
venture, with the remaining 49% interest being held by entities associated with
the Chinese government. Changde was established to operate a breeding center to
propagate Boer goats and other livestock breeds. Changde's principal asset is
20,000 hectares or 49,400 acres of grassland located approximately 250
kilometers north of Beijing, in the People's Republic of China. Based upon an
independent appraisal dated July 30, 1998 by American Appraisal Hong Kong
Limited, the value of 100% of Changde is US$181,000,000 (HK$1,402,750,000) as of
December 31, 1997, resulting in a minority interest of the Company of
HK$685,039,110 as of December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Report on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHINA CONTINENTAL, INC.
By:
------------------------------
Harry H.H. Ho
Chairman of the Board and Chief
Executive Officer
Dated: May 2000
----
23
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Titles Date
- ------------ -------- ------
- ----------------
Harry H.H. Ho Chairman of the Board and Chief
Executive Officer May 2000
- ----------------
Jia Ji Shang Vice- Chairman and Director May 2000
- ----------------
Ji Jun Wu Director May 2000
- ----------------
Kim Yong Soh Director May 2000
- ----------------
Dr. Li Yan Technical Director May 2000
- ----------------
Chan Kwai Chiu Director May 2000
- ----------------
Eric Ng Secretary/Treasurer/ Chief
Financial Officer and Director
May 2000
24
<PAGE>
Pages
------
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Income F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-28
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the Stockholders
China Continental, Inc.
We have audited the accompanying consolidated balance sheets of China
Continental, Inc. (the "Company") and subsidiaries (collectively the "Group") as
of December 31, 1998 and 1999, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the nine months ended
December 31, 1997 and the years ended December 31, 1998 and 1999. 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of China Continental,
Inc. and subsidiaries as of December 31, 1998 and December 31, 1999, and the
results of their operations and their cash flows for the nine months ended
December 31, 1997 and for the years ended December 31, 1998 and 1999, in
conformity with generally accepted accounting principles.
As described in Note 11, the Company entered into certain transactions during
1997-98, ultimately with its current and former chairmen. These transactions
have significantly impacted the Company's business plan, liquid assets and
common stockholder interests. In addition, the Company has entered into a
significant acquisition in 1999, for which government approvals are expected but
not yet obtained. Appropriate disclosures have been made and our opinion is not
qualified in this respect.
s\Blackman Kallick Bartelstein, LLP
Chicago, Illinois
May 23, 2000
F-2
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and December 31, 1999
ASSETS
<TABLE>
December 31, December 31,
1998 1999 1999
Notes HK$ HK$ US$
------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and bank balances 276,424,018 6,743,618 870,144
Trade receivables, net of provisions of
HK$0 at December 31, 1998
and 1999 7, 17 72,002,050 57,433,900 7,410,826
Prepayments, deposits and other
receivables 8 4,747,901 8,540 1,102
------------- --------------- --------------
TOTAL CURRENT ASSETS 353,173,969 64,186,058 8,282,072
DEPOSIT ON INVESTMENT IN LAND HOLDING
COMPANY 11 - 1,323,966,245 170,834,354
FIXED ASSETS 9 3,155,880 3,026,841 390,560
INTERESTS IN ASSOCIATED
COMPANIES, net of accumulated
amortization of HK$5,766,000 and
HK $8,984,000 at December 31, 1998 and 1999 10 60,852,081 57,956,574 7,478,268
LAND LEASE RIGHTS, net of
accumulated amortization of
HK$33,962,849 at December 31,
1998 11 1,324,551,151 - -
AMOUNTS DUE FROM DIRECTORS 18 40,604,397 - -
AMOUNTS DUE FROM RELATED 18,21
COMPANIES 10,000,845 10,164,655 1,311,569
OTHER ASSETS 19 5,000,000 5,000,000 645,161
------------- --------------- --------------
TOTAL ASSETS 1,797,338,323 1,464,300,373 188,941,984
============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1998 and December 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
December 31, December 31,
1998 1999 1999
Notes HK$ HK$ US$
------- ------------ ------------ --------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Bank overdrafts 12 3,886,228 3,955,635 510,405
Bank import loans 12 3,588,515 2,988,375 385,597
Secured bank loan 12 119,171 134,845 17,399
Income taxes payable 96,487,847 118,448,796 15,283,716
Amounts due to directors 18 10,677,359 25,969,348 3,350,884
Amounts due to related parties 18 4,992,059 4,508,262 581,711
Accounts payable and accrued liabilities 28,950,400 21,931,631 2,829,888
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 148,701,579 177,936,892 22,959,600
LONG-TERM LIABILITIES
Secured bank loan 12 9,776,037 9,647,634 1,244,855
------------- ------------- -------------
TOTAL LIABILITIES 158,477,616 187,584,526 24,204,455
------------- ------------- -------------
MINORITY INTEREST 11 668,650,418 - -
------------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value US$0.001 per share:
Authorized:
1,000,000,000 shares;
Issued and outstanding
69,000,000 and 99,000,000
as of December 31, 1998 and 1999,
respectively 535,190 767,690 99,057
Additional paid-in capital 350,868,297 438,310,094 56,556,141
Retained earnings 618,806,802 837,638,063 108,082,331
------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 970,210,289 1,276,715,847 164,737,529
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY 1,797,338,323 1,464,300,373 188,941,984
=============== ============== =============
</TABLE>
F-4
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended December 31, 1997, and the
Years Ended December 31, 1998 and 1999
<TABLE>
Nine Months
Ended Year Ended
December 31, December 31, Year Ended December 31,
1997 1998 1999 1999
Notes HK$ HK$ HK$ US$
------- ------------- -------------- --------------------------
<S> <C> <C> <C> <C> <C>
SALES
Related parties 18 12,357,168 11,953,242 5,192,312 669,976
Others 147,762,121 273,154,057 296,081,066 38,204,008
-------------- -------------- -------------- -------------
160,119,289 285,107,299 301,273,378 38,873,984
COST OF SALES (64,600,231) (110,702,213) (113,725,185) (14,674,217)
-------------- -------------- -------------- -------------
GROSS PROFIT 95,519,058 174,405,086 187,548,193 24,199,767
DEPRECIATION AND
AMORTIZATION (2,990,894) (37,514,686) (30,203,531) (3,897,230)
SELLING AND ADMINISTRATIVE
EXPENSES (3,958,938) (18,558,469) (9,341,156) (1,205,310)
PROVISION FOR DOUBTFUL DEBTS - (5,280,608) (5,231,361) (675,014)
FINANCIAL INCOME/(EXPENSES),
NET 4 (442,851) (1,275,217) (979,546) (126,393)
OTHER INCOME/(EXPENSES),
NET 5 22,625,018 2,789,505 (67,493) (8,709)
GAIN ON DISPOSAL OF WEATHY
ASIA LIMITED 11 - - 88,591,608 11,431,175
SHARE OF GAINS OF
ASSOCIATED COMPANIES 10 1,113,459 795,995 - -
-------------- -------------- -------------- -------------
INCOME BEFORE INCOME TAXES 111,864,852 115,361,606 230,316,714 29,718,286
INCOME TAXES 6 (10,000,694) (22,399,318) (24,128,390) (3,113,341)
-------------- -------------- -------------- -------------
INCOME BEFORE MINORITY
INTEREST 101,864,158 92,962,288 206,188,324 26,604,945
LOSS ALLOCATED TO
MINORITY INTEREST - 16,388,692 12,642,937 1,631,347
-------------- -------------- -------------- -------------
NET INCOME 101,864,158 109,350,980 218,831,261 28,236,292
============== ============== ============== =============
EARNINGS PER SHARE 3(j), 11 3.92 1.75 2.88 .37
============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended December 31, 1997 and the
Years Ended December 31, 1998 and 1999
<TABLE>
Additional
Share paid-in Retained
capital capital earnings Total
Notes HK$ HK$ HK$ HK$
------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 202,800 13,356,985 532,900,224 546,460,009
Issuance of 40,000,000 shares
on February 10, 1998 at
US$1.00 per share 11 309,200 309,326,204 - 309,635,404
Issuance of 1,400,000 shares
on August 12, 1998 at
US$.50 per share 22 10,822 5,400,178 - 5,411,000
Issuance of 1,600,000 shares
on September 30, 1998 at
US$.42 per share 22 12,368 5,250,737 - 5,263,105
Assumption of liabilities
on December 31, 1998 and
contribution to capital 22 - 17,534,193 - 17,534,193
Deemed dividend to
Mr. Chan Kwai Chui 21 - - (23,444,402) (23,444,402)
Net income - - 109,350,980 109,350,980
--------- ------------- -------------- --------------
Balance at December 31, 1998 535,190 350,868,297 618,806,802 970,210,289
Issuance of 30,000,000 shares on
October 9, 1999 at US$0.37 per
share 11 232,500 86,730,000 - 86,962,500
Assumption of liabilities on
December 31, 1999 and
contribution to capital 22 - 711,797 - 711,797
Net income - - 218,831,261 218,831,261
--------- ------------- -------------- --------------
Balance at December 31, 1999 767,690 438,310,094 837,638,063 1,276,715,847
========= ============= ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31, 1997 and the
Years Ended December 31, 1998 and 1999
<TABLE>
Nine Months
Ended Year Ended
December 31, December 31, Year Ended December 31,
1997 1998 1999 1999
HK$ HK$ HK$ US$
------------- ------------ --------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income 101,864,158 109,350,980 218,831,261 28,236,292
Adjustments to reconcile net income to
net cash provided by operating activities:
Gains on disposal of fixed assets (350,800) - - -
Depreciation and amortization 2,990,894 37,514,686 30,203,531 3,897,230
Provision for doubtful debts and
diminution in values of investments
and associated companies - 5,280,608 5,231,361 675,014
Share of gains of associated companies (1,113,459) (795,995) - -
Gains on disposal of short-term
investments (18,731,775) - - -
Gain on disposal of subsidiary - - (88,591,608) (11,431,175)
Loss allocated to minority interest - (16,388,692) (12,642,937) (1,631,347)
Stock issued for public relation services - 5,411,000 - -
(Increase)/decrease in assets:
Trade receivables and long-term receivable (674,702) (36,167,309) 12,972,409 1,673,859
Prepayments and deposits (1,635,998) (598,127) 580,238 74,869
Amounts due from related companies (6,143,407) (2,186,764) (454,342) (58,625)
Amounts due from associated companies (616,905) 262,249 (2,380,923) (307,216)
Amounts due from directors - (2,102,195) 1,079,397 139,277
Increase/(decrease) in liabilities:
Amounts due to directors 2,562,096 8,712,447 15,425,445 1,990,380
Amounts due to related parties - (724,021) (483,797) (62,425)
Accounts payable and accrued liabilities (2,621,277) 14,974,220 (6,421,135) (828,533)
Income taxes payable 9,428,109 22,780,444 23,155,052 2,987,749
------------- ------------ ------------ -----------
Net cash provided by operating activities 84,956,934 145,323,531 196,503,952 25,355,349
------------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended December 31, 1997 and the
Years Ended December 31, 1998 and 1999
<TABLE>
Nine Months
Ended Year Ended
December 31, December 31, Year Ended December 31,
1997 1998 1999 1999
HK$ HK$ HK$ US$
-------------- --------------- --------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
INVESTING ACTIVITIES
Deposit on investment in land - - (1,237,003,745) (159,613,387)
Purchase of land lease rights (403,364,486) - - -
Purchase of fixed assets (14,856) (2,736) - -
Proceeds from disposal of fixed assets 530,000 - - -
Proceeds from disposal of short-term
investments 286,331,775 - - -
Proceeds from disposal of subsidiary - - 771,462,855 99,543,595
--------------- ------------ ---------------- --------------
Net cash used in investing activities (116,517,567) (2,736) (465,540,890) (60,069,792)
--------------- ------------ ---------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowings (repayments) under
bank import loans 2,415,365 (6,890,020) (600,140) (77,438)
Net repayments of bank loans - (89,656) (112,729) (14,546)
Advances of bank overdrafts 3,814,245 71,983 69,407 8,956
--------------- ------------ ---------------- --------------
Net cash provided by /(used in)
financing activities 6,229,610 (6,907,693) (643,462) (83,028)
--------------- ------------ ---------------- --------------
NET (DECREASE)/INCREASE IN
CASH AND BANK BALANCES (25,331,023) 138,413,102 (269,680,400) (34,797,471)
Cash and bank balances, at beginning
of period 163,341,939 138,010,916 276,424,018 35,667,615
--------------- ------------ ---------------- --------------
Cash and bank balances, at end of period 138,010,916 276,424,018 6,743,618 870,144
=============== ============= ================ ==============
SUPPLEMENTARY CASH FLOWS
DISCLOSURES:
Interest paid 488,704 1,275,217 1,834,429 236,701
=============== ============= ================ ==============
Income taxes paid 572,585 256,629 973,338 125,592
=============== ============= ================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Continental, Inc. (the "Company") was incorporated in the state of
Utah, in the United States of America, and its principal activity is a 100%
investment in Sun's International Holdings Limited (Sun's International), a
holding company for investments in operating companies. Sun's International
was incorporated under the laws of the British Virgin Islands.
Subsequent to March 31, 1997, the Company elected to change its fiscal
year-end to December 31.
The consolidated financial statements include the accounts of the Company
and Sun's International and its wholly owned subsidiaries, Billion Pearl
Investments Limited, High Glad Industries Limited (struck off in 1998),
Prime Hill Investment Limited (dormant), Prime View Industrial Limited
(dormant), Danbury Inc., Winkler Holdings Inc. (struck off in 1998), Cathay
Mercantile (Overseas) Limited (Disposed of in December, 1997; See Note 11),
Gain Whole Limited (Disposed of in August, 1997; See Note 11), Megaway
Resort Development Limited and its majority owned subsidiary (Acquired and
disposed of in August, 1997, and December, 1997, respectively; See Note 11)
Wealthy Asia Limited (disposed of in October 1999; see Note 11)
(hereinafter collectively together with the Company referred to as the
"Group").
Danbury Inc. is primarily engaged in the sale of automatic production lines
on a turn-key basis and related consulting fees to various customers in the
People's Republic of China (the "PRC"). This company, along with certain
dormant companies, has also made investments in PRC enterprises through the
formation of associated companies with various PRC parties. Billion Pearl
Investments Limited is primarily an importer and reseller of raw materials
to an associated company. Wealthy Asia Limited, through a wholly owned
subsidiary, owned 51% of a joint venture known as Chengde Dafeng
Agriculture and Animal Husbandry Co., Ltd., which was established to run a
breeding center to propagate Boer goats and other livestock breeds. See
Note 11.
2. BASIS OF PRESENTATION
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 wholly and majority owned subsidiaries. All material
intercompany balances and transactions have been eliminated on
consolidation.
F-9
<PAGE>
7
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)
(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.
(c) 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 December 31, 1998 and 1999, cash and cash equivalents included foreign
currency deposits equivalent to HK$275,138,120 (US$35,501,693) and
HK$6,694,810 (US$863,846), respectively.
(d) Fixed assets and depreciation
-----------------------------
Fixed assets are stated at cost less accumulated depreciation. Depreciation
of fixed assets is calculated on the straight-line basis to write off the
cost less estimated residual value of each asset over its estimated useful
life. The principal annual rates used for this purpose are as follows:
Leasehold land and buildings 2.0%
Furniture and fixtures 20%
Office equipment 20%
Motor vehicles 20%
(e) Land lease rights and amortization
----------------------------------
Land lease rights in Mainland China were stated at cost less accumulated
amortization. Amortization of land lease rights was calculated on the
straight-line basis over the lesser of its estimated useful life or the
lease term. The principal annual rate used for this purpose was 2.5%.
(f) Income taxes
------------
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".
F-10
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)
(g) Foreign currency translation
----------------------------
Foreign currency transactions denominated in foreign currencies are
translated into Hong Kong dollars ("HK$") 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$") for the
convenience of the reader has been made at the single rate of exchange on
December 31, 1999 of US$ 1.00 : HK$7.75. No representation is made that the
HK$ amounts could have been, or could be, converted into US$ at that rate
on December 31, 1999 or at any other date.
The associated companies 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.
(h) Revenue recognition
-------------------
Revenue from the sale of machinery and equipment, livestock and raw
materials is recognized when the merchandise is 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 design, training and consultancy services is recognized when
the 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 the nine months ended
December 31, 1997 and the years ended December 31, 1998 and 1999, were
HK$47,504, HK$57,546 and HK$13,923, respectively.
F-11
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)
(j) Earnings per share
------------------
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share", which requires
the Company to change the method used to compute earnings per share ("EPS")
and to restate all prior periods presented. The presentation of primary and
fully diluted EPS has been replaced with basic and diluted EPS,
respectively. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. The
computation of diluted earnings per share would include the dilutive effect
of securities that could be exercised or converted into common stock. The
Company has not entered into any transactions that would have a dilutive
effect upon EPS.
The weighted average number of shares outstanding during the nine months
ended December 31, 1997 and the years ended December 31, 1998 and 1999 were
26,000,000, 62,568,767, and 75,904,110, respectively.
(k) Segment reporting
-----------------
In December 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". The adoption of this
standard requires that reportable segments are reported consistent with how
management assesses segment performance. This statement requires disclosure
of certain information by reportable segment, geographic area and major
customer. See Note 20, "Segment Information", for further information. As a
result, the Company will separately report information on the following
three operating segments : automatic production lines on a turn-key basis,
raw material importer and reseller and breeding center operations. In
determining the operating income of each segment, certain general and
corporate expenses are not allocated to operating segments.
(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.
(m) Reclassification
----------------
Certain balances in the prior years have been reclassified to conform to
the presentation used in the current year.
F-12
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCIAL INCOME/(EXPENSES), NET
Nine months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
HK$ HK$ HK$
------------ ------------ ------------
Interest income 114,219 157,629 890,625
Interest expense (488,704) (1,359,620) (1,834,429)
Bank charges (68,366) (73,226) (35,742)
----------- ----------- ------------
(442,851) (1,275,217) (979,546)
5. OTHER INCOME/(EXPENSES), NET
<TABLE>
Nine months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
HK$ HK$ HK$
------------ ------------ -------------
<S> <C> <C> <C>
Commission and miscellaneous income 3,736,733 3,615,700 4,630
Foreign exchange gains/(losses), net (194,290) (826,195) (72,123)
Gains on disposal of short-term investments
Cathay (Note 11) 10,434,579 - -
Gain/Megaway (Note 11) 7,688,000 - -
Other 609,196 - -
Gains on disposal of fixed assets 350,800 - -
------------ ----------- -----------
22,625,018 2,789,505 (67,493)
============ =========== ===========
</TABLE>
F-13
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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:
<TABLE>
Nine months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
HK$ HK$ HK$
------------- ------------- -------------
<S> <C> <C> <C>
Income/(loss) before income taxes:
Hong Kong 177,843 (6,332,226) (8,396,983)
PRC 111,687,009 121,693,832 238,713,697
------------- -------------- --------------
111,864,852 115,361,606 230,316,714
============= ============== ==============
Income tax provision:
Current:
Hong Kong (2,157,306) 102,270 9,698
PRC 12,158,000 22,297,048 24,118,692
------------- -------------- --------------
10,000,694 22,399,318 24,128,390
============= ============== ==============
</TABLE>
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 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 December 31, 1998 and December 31, 1999 income tax payables included
foreign currency payables equivalent to HK$96,487,847 (US$12,450,045) and
HK$118,448,796 (US$15,283,716), respectively.
F-14
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (continued)
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Hong Kong tax rates to the income before
income taxes is as follows:
<TABLE>
Nine months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
HK$ HK$ HK$
-------------- -------------- -------------
<S> <C> <C> <C>
Statutory Hong Kong tax rates 16.5% 16.5% 16.5%
Computed expected tax expense 18,457,701 19,034,665 38,002,257
(Decrease) increase resulting from PRC tax
at a different composite tax rate (7,699,316) 944,644 (14,732,455)
Adjustments for expense items which are not
deductible for profits tax purposes:
Share of (gain) loss in and provisions for
diminutions in values of associated companies (94,644) (63,680) -
Other provisions 2,574,726 2,483,689 530,971
Disposal of short-term investments (3,090,743) - -
Others (147,030) - 327,617
------------- ------------ -------------
10,000,694 22,399,318 24,128,390
============= ============ =============
</TABLE>
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
approximately HK$838,000,000 at December 31, 1999. 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 at December 31, 1999 was approximately
HK$293,000,000.
F-15
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. TRADE RECEIVABLES, NET
<TABLE>
As of As of
December 31, December 31,
1998 1999
HK$ HK$
------------ ------------
<S> <C> <C>
Trade receivables 72,002,050 57,433,900
Less: Provision for doubtful debts - -
------------- ------------
Trade receivables, net 72,002,050 57,433,900
============= ============
Movements in provision for doubtful debts:
Balance at beginning of year 8,602,321 -
Write-off against specifically reserved receivables* (8,602,321) -
------------- ------------
Balance at December 31 - -
============= ============
</TABLE>
* In 1998, management determined that it should expend no further effort
in the collection of certain fully reserved receivables. It has
therefore written off the allowance against these receivables.
8. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES, NET
<TABLE>
As of As of
December 31, December 31,
1998 1999
HK$ HK$
------------ -------------
<S> <C> <C>
Prepayments, deposits and other receivables 4,747,901 8,540
Less: Provision for doubtful debts - -
----------- ---------
Prepayments, deposits and other receivables, net 4,747,901 8,540
=========== =========
Movements in provision for doubtful debts:
Balance at beginning of year 4,898,213 -
Write-off against specifically reserved receivables* (4,898,213) -
----------- ---------
Balance at December 31 - -
=========== =========
</TABLE>
* In 1998, management determined that it should expend no further effort
in the collection of certain fully reserved receivables. It has
therefore written off the allowance against these receivables.
F-16
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. FIXED ASSETS
<TABLE>
As of As of
December 31, December 31,
1998 1999
HK$ HK$
------------ ------------
<S> <C> <C>
Cost:
Leasehold land and buildings, located in Hong Kong (1) 4,239,231 4,239,231
Furniture and fixtures 700,826 700,826
Office equipment 603,484 603,484
Motor vehicles 1,244,030 1,244,030
-------------- -------------
6,787,571 6,787,571
Less: accumulated depreciation (3,631,691) (3,760,730)
-------------- -------------
Net book value 3,155,880 3,026,841
============== =============
</TABLE>
(1) Pledged to the Company's banker to secure facilities (See Note 16).
10. INTERESTS IN ASSOCIATED COMPANIES
<TABLE>
As of As of
December 31, December 31,
1998 1999
HK$ HK$
-------------- -------------
<S> <C> <C>
Unlisted investments, at cost 73,145,120 73,145,120
Share of post-acquisition gains, net 1,909,454 1,909,454
Write off for diminutions in values (8,114,000) (8,114,000)
Accumulated amortization (5,766,000) (8,984,000)
-------------- -------------
61,174,574 57,956,574
Due to associated companies, net (322,493) -
-------------- -------------
60,852,081 57,956,574
============== =============
Movement in provisions for diminutions in values:
Balance at beginning of year 8,114,000 8,114,000
Provisions for diminutions in value - -
-------------- -------------
Balance at December 31 8,114,000 8,114,000
============== =============
</TABLE>
F-17
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INTERESTS IN ASSOCIATED COMPANIES (continued)
During the year ended March 31, 1997, the Company incurred additional
diminutions in value in the remaining interests in associated companies,
except for Megaway Development Limited, which reduced the carrying value to
zero. Therefore, no further share of post-acquisition losses has been
provided for during the nine months ended December 31, 1997 or the years
ended December 31, 1998 and 1999. The Group's share of the post-acquisition
gains of associated companies was HK$1,113,459, HK$795,995 and HK$0 for the
nine months ended December 31, 1997 and the years ended December 31, 1998
and 1999, respectively.
Details of the associated companies at December 31, 1999 were as follows:
<TABLE>
Country of
Registration Group's
and Effective
Name Operations Holding % Principal activities
---------- -------------- ---------- ---------------------
<S> <C> <C> <C>
Panyu Panyi Chemical Industry PRC 30 Manufacturing and sale
& Commerce Co., Ltd. of PU resin
Zhengzhou ZZZ Prime Hill PRC 20 Manufacturing and sale
Floppy Disk Co., Ltd. of computer floppy disks
Megaway Development
Limited (Acquired in April, 1997; Western Holding company for company
( See Note 11) Samoa 30 manufacturing polyester products
</TABLE>
(1) The excess of cost over the underlying net assets at the date of
acquisition in the amount of approximately HK$48,271,000 is being amortized
over fifteen years, using the straight-line method. The amortization
expense was HK$2,548,000, HK$3,218,000 and HK$3,218,000 for 1997, 1998 and
1999, respectively.
11. ACQUISITIONS AND DISPOSITIONS
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. There was no cash
movement involved in this transaction. Cathay was purchased 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.
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. 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. On December 23,
1997, Sun's International sold the 100% interest in Cathay for a
consideration of approximately HK$123,435,000.
F-18
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITIONS AND DISPOSITIONS (Continued)
On April 2, 1997, the Group acquired a 30% interest in Megaway Development
Limited, a company owned by Mr. Harry Ho. Mr. Ho has become the chairman
and chief executive officer of the Company. The principal asset of Megaway
Development Limited is a 60% 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
China (Fujian) Foreign Trade Centre Holdings Company ("CFFTC") in the
amount of HK$65,031,120.
On June 21, 1996, Sun's International obtained a 100% interest in Gain
Whole Limited for a consideration of US$20,000,000 (HK$154,600,000) as a
partial settlement for the same amount of the debt due from CFFTC, a major
customer of the Group. The principal asset of Gain Whole Limited was a
certificate of deposit for an amount of US$20,000,000 (HK$154,600,000) with
an authorized financial institution in the PRC. The certificate of deposit
was valued at cost, which approximated market and was classified as a
short-term investment in the accompanying consolidated balance sheet as of
March 31, 1997.
On August 28, 1997, Sun's International sold its 100% interest in Gain
Whole Limited for a consideration of a 100% interest in Megaway Resort
Development Limited, a company owned by Mr. Harry Ho and 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 PRC. On December 3, 1997, the
Group sold the 100% interest in Megaway Resort Development Limited for a
consideration of US$21,000,000 (HK$162,288,000).
On December 23, 1997, Sun's International acquired a 56.5% interest in
Wealthy Asia Limited (WAL) for US$52,000,000 (HK$403,364,486) in cash from
Mr. Brian Ko. WAL had simultaneously acquired 100% of Megaway Agriculture
Co. Ltd. (Megaway) from Mr. Harry Ho for US$92,000,000 (HK$713,644,828),
with a cash payment of US$72,800,000 which was settled on December 31, 1997
and a verbal agreement to remit the remainder at some future date. The
remainder was settled on March 18, 1998 through the receipt of 9,900,000
newly issued shares of China Continental, Inc. common stock.
The following amounts represent the initial recording of this transaction:
Asset (Liability) HK$
-----------------------
Land lease rights 1,358,514,000
Due from Harry Ho 39,525,000
Due to Brian Ko (309,635,404)
Minority Interest (685,039,110)
---------------
Cash Paid 403,364,486
===============
On February 10, 1998, Sun's International acquired the remaining 43.5%
interest in WAL from Mr. Brian Ko via the issuance of an additional
40,000,000 shares of stock in China Continental, Inc. of which 9,900,000
shares were issued directly to Megaway Resort Development Ltd., a company
owned by Mr. Harry Ho and incorporated in Western Samoa.
F-19
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITIONS AND DISPOSITIONS (continued)
The principal asset of Megaway is a 51% interest in Chengde Dafeng
Agriculture and Animal Husbandry Co., Ltd. (Chengde), a Sino-Singapore
joint venture incorporated in the PRC on December 3, 1997. Mr. Ho, through
his prior ownership of Megaway, was an original party to the joint venture,
with the remaining 49% interest being held by entities associated with the
Chinese government. Chengde has been established to run a breeding center
to propagate Boer goats and other livestock breeds. Chengde's principal
asset is 20,000 hectares or 49,400 acres of grassland located approximately
250 kilometers north of Beijing, in the PRC. Based upon an independent
appraisal dated July 30, 1998 by American Appraisal Hongkong Limited, the
value of 100% of Chengde is US$181,000,000 (HK$1,402,750,000) as of
December 31, 1997.
Had the 40,000,000 shares of common stock been outstanding throughout the
periods presented, earnings per share would have been HK$1.58 for the nine
months ended December 31, 1997.
On October 4, 1999, Sun's International sold its 100% interest in WAL to an
unrelated third party for a consideration of approximately HK$773,127,341
(US$100,000,000).
The following amounts represent the noncash portion of this transaction:
Cash disposed of with sale of subsidiary$ HK$ 1,664,486
Accounts receivable 1,338,318
Prepayments, deposits and other 1,214,953
Amounts due from directors 39,525,000
Land lease rights, net 613,158,926
Income taxes payable (627,103)
Accounts payable and accrued liabilities (267,099)
Minority interest (656,007,481)
---------------
HK$ -
===============
On October 9, 1999, the Company initiated the purchase of a 100% interest
in Battonic Co., Ltd. for a consideration of US$160,000,000 and 30,000,000
shares of stock in the Company. The shares were valued at US$11,250,000,
based upon the trading value of the shares on this date. The cash and stock
were both transferred to the seller, an unrelated individual, on that date.
Subsequently, that individual became an employee of the Company.
The principal asset of Battonic Co., Ltd. is a 100% interest in East
Wu-Zhu-Mu-Qin Banner Green Demonstration Farm (Banner). The principal asset
of Banner is a 100% interest in Dongwu Demonstration Farm (Dongwu). Dongwu
has been established to run a breeding center to propagate Boer goats and
other livestock breeds. Dongwu's principal asset is the right to use 156
square miles of land located in Inner Mongolia for 25 years from July 1,
1999 to July 1, 2024. Based upon an independent appraisal dated October 20,
1999 by Vigers Hong Kong Limited, the value of 100% of Dongwu is
US$361,772,645 (HK$2,803,738,000).
Had the 30,000,000 shares of common stock been outstanding throughout the
periods presented, earnings per share would have been HK$1.87 and HK$1.22
for the nine months ended December 31, 1997 and the year ended December 31,
1998, respectively.
F-20
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITIONS AND DISPOSITIONS (Continued)
In the PRC, an investment such as Dongwu is not legally transferable until
all of the appropriate levels of governmental authority have approved the
transaction. However, according to an outside legal opinion obtained by the
Company, governmental procedures for the official change have commenced and
such procedures are in accordance with the relevant PRC laws and the
transfer of title ownership is deemed to be achievable through the
commenced procedures. At December 31, 1999, this investment had not yet
been properly approved. The company is therefore appropriately carrying the
funds expended as a deposit on investment in land. The company is confident
that all necessary approvals will be obtained. In the unlikely event that
the transaction is not approved, the company would take steps to rescind
the shares issued and to recover the cash deposit.
12. BANK LOANS
The import loans with banks carry interest at 1% above the Hong Kong prime
lending rate (weighted average of 10.9% and 9.5% per annum as of December
31, 1998 and December 31, 1999, 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 13.9% and 12.5% per annum as of December 31, 1998
and December 31, 1999, respectively).
During October, 1997, the Company borrowed and in turn loaned HK$9,984,864
to a company owned by a director, Mr. Chan Kwai Chiu, in conjunction with
his purchase of a personal residence. The mortgage loan is secured by the
residence and other properties owned by Mr. Chan Kwai Chiu with a cost of
HK$17,800,000. The balance remaining as of December 31, 1999 is
HK$9,782,479 and is payable as follows:
HK$
-------
2000 134,845
2001 143,734
2002 157,607
2003 172,820
2004 189,502
2005 207,793
Remaining years 8,776,178
-----------
9,782,479
Less current portion (134,845)
-----------
9,647,634
===========
F-21
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 and to directors
and related companies.
(i) Cash deposits
The Group places its cash deposits with an international bank. See Note 17.
(ii) Amounts due from related companies (See Note 18)
At December 31, 1998, approximately 24%, 18% and 46% of the amounts due
from related companies were due from New Skyland Industrial Ltd., Billion
Pearl International Limited and New Skyland International Ltd.,
respectively.
At December 31, 1999, approximately 24%, 18% and 49% of the amounts due
from related companies were due from New Skyland Industrial Ltd., Billion
Pearl International Limited and New Skyland International Ltd.,
respectively. These amounts have been fully reserved for at December 31,
1999. See Note 10.
The Group does not have the policy of requiring collateral.
(iii) Amounts due from and to directors (See Notes 11 and 18)
(iv) Deposit on investment in land holding company (See Note 11)
14. 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 directors
and related companies
Trade receivables, other receivables and the amounts due from related
companies and directors 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 and directors
are stated at their book value which approximates their fair value.
F-22
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Group's operations are conducted in Hong Kong and the PRC. Accordingly,
the Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong
and the PRC, and by the general state of the Hong Kong and the PRC
economies.
Effective July 1, 1997, sovereignty over Hong Kong was transferred from the
United Kingdom to the PRC, and Hong Kong became a Special Administrative
Region of the PRC ("SAR"). As provided in the Basic Law of the Hong Kong
SAR of the PRC, the Hong Kong SAR will have full economic autonomy and its
own legislative, legal and judicial systems for 50 years. The Group"s
management does not believe that the transfer of sovereignty over Hong Kong
has had an adverse impact on the Company's financial and operating
environment. There can be no assurance, however, that changes in political
or other conditions will not result in such an adverse impact.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The Group's results may be adversely affected by changes in the political
and social conditions in the PRC, and by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other things.
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 20). 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.
16. BANKING FACILITIES
The Group had banking facilities of approximately HK$33,180,000 for
mortgages, overdrafts and trade finance. Unused facilities as of December
31, 1999 amounted to approximately HK$16,450,000.
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$3,027,000.
ii. lien on a subsidiary's fixed deposits totaling HK$2,000,000.
iii. personal guarantee by a director, Mr. Chan Kwai Chiu, up to
HK$21,000,000.
iv. Mortgages over properties held by a director, Chan Kwai Chiu, with
purchase cost of approximately $17,800,000.
F-23
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FOREIGN CURRENCY EXCHANGE
The Group has substantial transactions with customers and significant
investments in associated companies in the PRC. Both the customers and the
associated companies may settle their debts and distribute their dividends
outside the PRC. The remittances are subject to control because RMB is not
freely convertible into foreign currencies. The majority of the Company's
bank balances as of December 31, 1998 and 1999 were in RMB. The amount of
debts due from customers in the PRC subject to control amounted to
HK$71,309,250 and HK$57,433,900 at December 31, 1998 and 1999,
respectively.
On January 1, 1994, the PRC government introduced a single rate of exchange
as quoted daily by the People's Bank of China (the "Unified Exchange
Rate").
The quotation of the exchange rates does not imply free convertibility of
RMB into Hong Kong dollars or other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the People's Bank of China. Approval of foreign
currency payments by the Bank of China or other institutions requires
submitting a payment application form together with suppliers' invoices,
shipping documents and signed contracts.
18. ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS
The Group's amounts due from/(to) directors and related companies owned
and/or controlled by a director, Mr. Chan Kwai Chiu, are unsecured,
interest-free and are repayable on demand. See also Note 12.
In the normal course of business, some of the companies in the Group are
engaged in the set-up of automatic production lines on a turn-key basis for
its associated companies. Other than the above-mentioned transactions, the
companies also arrange for the sale of raw materials to these associated
companies. Amounts of revenues from the sales of raw materials to these
associated companies are summarized as follows:
Nine months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
HK$ HK$ HK$
------------- ----------- ------------
Sales to associated companies:
Raw materials 12,357,168 11,953,242 5,192,312
============ ============ ===========
Any unrealized profits arising from these transactions were eliminated in
the consolidated financial statements to the extent of the Group's
interests in these associated companies.
F-24
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. CONTINGENCIES AND COMMITMENTS
During 1998 the Company entered into an agreement with an unrelated entity
to provide public relations and promotional services for the Company. In
accordance with the agreement the entity was issued stock for all services
provided. A portion of the agreement is contingent upon the firm's ability
to raise capital and obtain a listing for the Company on certain stock
exchanges in the United States. Attainment of these goals could result in
the issuance of up to an additional 1.6 million shares of common stock to
the firm. See Note 21.
The Group had contracts with a related company controlled by Mr. Chan Kwai
Chiu in the PRC to purchase office premises to be developed by the related
company for HK$21,700,000. At December 31, 1999, HK$5,000,000, which was
grouped under other assets, had been paid as a deposit for the purchase
with the remainder being payable upon receipt of the title certificates for
the office premises.
20. SEGMENT INFORMATION
The Company performs in the three following operating segments : Automatic
production lines on a turn-key basis, raw materials and breeding center
operations. In determining the operating income of each segment, certain
other expenses such as income taxes, administrative, financial, other
(income) expense and shares of gains of associated companies are not
allocated to operating segments.
The following table reflects the results of the segments consistent with
the Company's management system.
<TABLE>
Nine months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
HK$ HK$ HK$
-------------- -------------- --------------
<S> <C> <C> <C>
Sales
Automatic production lines 145,436,500 254,247,430 282,361,440
Raw materials 14,682,789 12,353,242 5,192,312
Breeding center - 18,506,627 13,719,626
------------- -------------- -------------
Total sales 160,119,289 285,107,299 301,273,378
============= ============== =============
Operating Income (Loss)
Automatic income 91,605,000 160,358,850 179,668,390
Raw income 5,368,427 1,689,518 (5,088,072)
Breeding - (30,651,824) (19,249,017)
------------- -------------- -------------
Total operating income 96,973,427 131,396,544 155,331,301
Less : General corporate expenses 5,856,201 15,127,221 9,341,156
Financial expense 442,851 1,275,217 979,546
Other (income) expense (22,625,018) (2,789,505) (88,524,115)
Share of gains of associated
companies (1,113,459) (795,995) -
------------- -------------- -------------
Amortization of investment premium 2,548,000 3,218,000 3,218,000
Income before income taxes 111,864,852 115,361,6066 230,316,714
============= ============== =============
</TABLE>
F-25
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT INFORMATION (continued)
Operating Segment Data
<TABLE>
Identifiable Capital Depreciation
Assets Expenditures & Amortization
HK$ HK$ HK$
--------------- -------------- ---------------
<S> <C> <C> <C>
Nine months ended December 31, 1997:
Automatic production lines 170,354,856 - -
Raw materials 3,467,445 - -
Breeding center 1,358,514,000 403,364,486 -
Other - 14,856 442,894
--------------- ------------- ------------
1,532,336,301 403,379,342 442,894
--------------- ------------- ------------
Year ended December 31, 1998:
Automatic production lines 346,447,370 - -
Raw materials 728,610 - -
Breeding center 1,327,305,671 - 33,962,849
Other - 2,736 333,837
--------------- ------------- ------------
1,674,481,651 2,736 34,296,686
--------------- ------------- ------------
Year ended December 31, 1999:
Automatic production lines 64,128,710 - -
Raw materials 41,612 - -
Breeding center - - 26,856,493
Other - - 129,038
--------------- -------------- ------------
64,170,322 - 26,985,531
=============== ============== ============
</TABLE>
Reconciliation to Total Assets As Reported
<TABLE>
Nine months
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
HK$ HK$ HK$
------------- -------------- --------------
<S> <C> <C> <C>
ASSETS :
Total reportable segments - identifiable assets 1,532,336,301 1,674,481,651 64,170,322
Unallocated amounts:
Cash 13,896 8,096 7,196
Deposit on investment in land - - 1,323,966,245
Prepayments, deposits and other receivables 5,613,775 3,235,373 8,540
Due from related parties 73,636,911 50,605,247 10,164,655
Plant and other property and equipment 3,486,981 3,155,880 3,026,841
Interests in associated companies 69,053,638 60,852,081 57,956,574
Other 7,000,000 5,000,000 5,000,000
--------------- --------------- ---------------
Total Consolidated Assets 1,691,141,502 1,797,338,328 1,464,300,373
=============== =============== ===============
</TABLE>
F-26
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SEGMENT INFORMATION (continued)
Much 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. The sales to other customers consist of
sales relating to the raw materials and breeding center segments.
<TABLE>
Sales by Major Customers Sales
----------------------------------------------------
Nine months Accounts
Ended Year ended Year ended Receivable
December 31, December 31, December 31, December 31,
1997 1998 1999 1999
HK$ HK$ HK$ HK$
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Kin Heng Xin Investment &
Development Company Limited 85,870,000 83,414,430 81,396,900 -
Shenzhen San Gao Enterprises
Company Limited (Shenzhen) 59,566,500 88,276,600 118,253,540 57,433,900
Chit Tat Industrial Development
Limited - 82,556,400 82,711,000 -
Others 14,682,789 30,859,869 - -
------------- ------------- ------------- ------------
160,119,289 285,107,299 282,361,440 57,433,900
============= ============= ============= ============
</TABLE>
21. PRIOR PERIOD ADJUSTMENTS
Due to a change in control of the Company in February 1998 from the former
chairman, Mr. Chan Kwai Chui to the current chairman, Mr. Harry Ho (see
Note 11), certain amounts due from companies controlled by Mr. Chan Kwai
Chui ceased to be actively pursued for collection. Therefore, these
amounts, or HK$23,444,402, have been reclassified as a deemed dividend to
Mr. Chan Kwai Chui as of this date, and the 1998 financial statements have
been restated to reflect this adjustment. The effect of the adjustment was
to decrease retained earnings and total assets by this amount.
In 1999, the Company determined that the 1997 and 1998 financial statements
should have reflected amortization expense associated with the Company's
initial investment in an associated company, Megaway Development Limited.
Accordingly, the 1997 and 1998 consolidated statements of income have been
restated to reflect additional expense of HK$2,548,000 and HK$3,218,000,
respectively, with corresponding adjustments to decrease the Company's
investment in this entity. See Note 10.
F-27
<PAGE>
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. ADDITIONAL NON-CASH TRANSACTIONS
1997
----
During the year ended March 31, 1997, HK$17,935,678 of trade accounts
payable were paid directly by directors on behalf of the Company and
HK$21,625,232 of trade accounts receivable were received directly by
directors. The net activity of these transactions was posted to the amounts
due to directors in the accompanying consolidated balance sheets.
1998
----
On August 12, 1998, 1,400,000 shares of stock were issued in exchange for
public relation services. The stock was issued at US$.50 per share, which
approximates trading value at that date. Total public relation service
expense recorded in relation to this transaction was HK$5,411,000. See Note
19.
On September 30, 1998, 1,600,000 shares of stock were issued to two
directors of the Company to settle amounts due to them. The stock was
issued at US$.42 per share, which approximates trading value at that date.
The total reduction to due to directors in relation to this transaction was
HK$5,263,105.
Mr. Harry Ho, assumed on December 31, 1998, pursuant to a signed written
agreement with the Company, HK$17,534,193 of the Company's accrued
liabilities. Mr. Ho then contributed his assumption of those liabilities to
additional paid-in capital.
During 1998, High Glad Industries Limited filed for dissolution (strike
off) in Hong Kong. In order to file for strike off, all assets and
liabilities must be removed from the books. The following non-cash items
were transferred to a Company director, Mr. Chan Kwai Chiu.
HK$
-----
Other assets - deposit (2,000,000)
Amounts due to Mr. Chan Kwai Chiu 1,326,777
Accounts payable and accrued expenses 673,223
------------
Total -
============
1999
----
Mr. Chan Kwai Chui, stockholder and director of the Company, assumed on
December 31, 1999, pursuant to a signed written agreement with the Company,
HK$711,797 of the Company's accrued liabilities. Mr. Chan Kwai Chui then
contributed his assumption of those liabilities to additional paid-in
capital.
F-28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 870,144
<SECURITIES> 0
<RECEIVABLES> 7,410,826
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,282,072
<PP&E> 875,816
<DEPRECIATION> 485,256
<TOTAL-ASSETS> 188,941,984
<CURRENT-LIABILITIES> 22,959,600
<BONDS> 1,244,855
0
0
<COMMON> 99,059
<OTHER-SE> 164,638,472
<TOTAL-LIABILITY-AND-EQUITY> 188,941,984
<SALES> 38,873,984
<TOTAL-REVENUES> 38,873,984
<CGS> 14,674,217
<TOTAL-COSTS> 14,674,217
<OTHER-EXPENSES> 5,102,540
<LOSS-PROVISION> 675,014
<INTEREST-EXPENSE> 236,701
<INCOME-PRETAX> 29,718,286
<INCOME-TAX> 3,113,341
<INCOME-CONTINUING> 28,236,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,236,292
<EPS-BASIC> .37
<EPS-DILUTED> .37
</TABLE>
