<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-16365
CHINA INDUSTRIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0974043
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
21st Floor, Central Plaza
18 Harbour Road
Wanchai, Hong Kong
(Address of principal executive offices)
011-852-2877-3857
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock -- 23,465,048
shares outstanding on September 30, 1995.
1
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I -- FINANCIAL INFORMATION
<C> <S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30,
1995 (unaudited) and December 31, 1994 3-4
Unaudited Consolidated Statements of Income -
Three and Nine Months ended September 30,
1995 and 1994 5
Unaudited Consolidated Statements of
Shareholders' Equity, Nine Months ended
September 30, 1995 6-7
Unaudited Consolidated Statements of Cash
Flows, Nine Months ended September 30, 1995 8
and 1994
Notes to Unaudited Consolidated Financial 9-13
Statements
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 14-19
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(STATED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
September 30, December 31
1995 1994
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,285,724 $ 6,009,700
Short-term investments 3,006,468 3,006,468
Accounts receivable 55,334,636 63,287,097
Inventories (Note 5) 25,353,827 21,838,540
Prepaid expenses 652,414 414,237
------------ ------------
Total current assets 86,633,069 94,556,042
------------ ------------
Property, plant and equipment:
Leasehold land and buildings 9,927,103 10,451,299
Plant and machinery 11,066,578 11,822,904
Furniture and fixtures 651,993 588,285
Motor vehicles 413,073 460,421
Construction in progress 653,477 83,403
------------ ------------
22,712,224 23,406,312
Less accumulated depreciation
and amortization (3,273,663) (2,524,150)
------------ ------------
19,438,561 20,882,162
------------ ------------
Other assets:
Pre-operating expenses 885,556
Investment 8,132,780 23,529
Long-Term receivable 3,000,000
------------ ------------
11,132,780 909,085
------------ ------------
$117,204,410 $116,347,289
============ ============
</TABLE>
3
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(STATED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 40,574 $ 40,574
Short-term bank borrowings 8,955,831 9,107,042
Accounts payable:
Trade 8,557,287 23,636,664
Related parties 366,811 366,811
Customer deposits and other 2,151,424 5,072,997
Accrued expenses 693,557 1,210,146
------------ ------------
Total current liabilities 20,765,484 39,434,234
------------ ------------
Long-term debt, net of current portion 12,244,946 10,382,252
------------ ------------
Minority interest 4,650,176 5,117,763
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' equity (Notes 7 and 8):
Preferred stock; authorized
10,000,000 shares:
Series A convertible; issued and
outstanding 24,375 shares 24,375 24,375
Series C convertible; issued and
outstanding 212 shares (1994) 0 5,900,000
Common stock par value $0.001;
authorized 100,000,000 shares;
issued and outstanding 23,465,048
shares (1995) and 19,931,252 shares (1994) 23,465 19,931
Capital in excess of par 15,161,460 9,264,994
Retained earnings 60,342,101 41,777,471
Cumulative foreign currency
translation adjustment 3,992,403 4,426,269
------------ ------------
79,543,804 61,413,040
------------ ------------
$117,204,410 $116,347,289
============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(STATED IN UNITED STATES DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
1995 1994 1995 1994
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues $77,596,553 $80,204,988 $228,047,229 $220,809,666
Cost of goods sold 65,973,569 68,084,198 193,438,388 187,007,537
----------- ----------- ------------ ------------
Gross profit 11,622,984 12,120,790 34,608,841 33,802,129
----------- ----------- ------------ ------------
Operating expenses:
General and administrative 4,150,776 3,127,239 11,543,922 9,778,920
Selling 593,575 585,877 1,760,715 1,577,836
----------- ----------- ------------ ------------
4,744,351 3,713,116 13,304,637 11,356,756
----------- ----------- ------------ ------------
Operating profit 6,878,633 8,407,674 21,304,204 22,445,373
----------- ----------- ------------ ------------
Interest - Related parties (28,898)
Interest - Others (595,993) (547,989) (1,730,626) (1,626,816)
Other income 558,102 18,339 558,102
Other expenses (Note 9) (154,498) -- (156,647) --
----------- ------------
(750,491) 10,113 (1,868,934) (1,097,612)
----------- ----------- ------------ ------------
Income before taxes and minority interests 6,128,142 8,417,787 19,435,270 21,347,761
Income tax expense 120,553 84,739 350,271 209,702
----------- ----------- ------------ ------------
Income before minority interest 6,007,589 8,333,048 19,084,999 21,138,059
Minority interests in earnings of subsidiaries 183,776 565,883 520,369 1,993,855
----------- ----------- ------------ ------------
Net income 5,823,813 7,767,165 18,564,630 19,144,204
=========== =========== ============ ============
Earnings per share (Note 4) $0.12 $0.17 $0.38 $0.44
=========== =========== ============ ============
Weighted average number of shares
outstanding 48,570,000 46,781,000 48,460,000 43,943,000
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(STATED IN UNITED STATES DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Series A Series C Capital
preferred preferred in excess Retained
stock stock Common stock of par earnings
----------------- --------------------- --------------------- ---------- -----------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 24,375 $24,375 295 $ 5,900,000 19,931,252 $19,931 $ 9,264,994 $41,777,471
Conversion of preferred stock
to common stock (295) (5,900,000) 3,533,796 3,534 5,896,466
Net Income 18,564,630
Translation adjustments
------ ------- ------ ----------- ---------- ------- ----------- -----------
Balances, September 30, 1995 24,375 $24,375 0 $ 0 23,465,048 $23,465 $15,161,460 $60,342,101
====== ======= ====== =========== ========== ======= =========== ===========
<CAPTION>
Cumulative
foreign
currency Total
translation shareholders'
adjustment equity
------------ --------------
<S> <C> <C>
Balances, January 1, 1995 $4,426,269 $61,413,040
Conversion of preferred stock
to common stock
Net Income 18,564,630
Translation adjustments (433,866) (433,866)
----------- -----------
Balances, September 30, 1995 $ 3,992,403 $79,543,804
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN UNITED STATES DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Net income $ 18,564,630 $ 19,144,204
------------ ------------
Adjustment to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 749,513 444,933
Gain on sale of securities
and other assets (558,102)
Minority interest (467,587) (2,002,024)
Translation adjustment (433,866) (1,003,461)
Decrease (increase) in assets:
Accounts receivable 7,952,461 (24,181,637)
Inventories (3,515,287) (5,061,340)
Prepaid expenses (238,177) (789,430)
Other assets 357,219
Increase (decrease) in accounts payable
and accrued expenses (18,517,539) 2,831,423
------------ ------------
Total adjustments (14,470,482) (29,962,419)
------------ ------------
Net cash provided by (used in)
operating activities 4,094,148 (10,818,215)
------------ ------------
Cash flows from investing activities
capital expenditures:
Proceeds from sale of securities and other assets 2,510,345
Proceeds from sale of property, plant and equipment 1,637,563
Purchases of securities and other assets (11,109,251)
Payments for securities and other assets (3,740,246)
Acquisition of property, plant and
equipment (943,475) (1,929,131)
Pre-operating costs $ 885,556 (388,724)
------------ ------------
Net cash used in
investing activities ($9,529,607) (3,547,756)
------------ ------------
</TABLE>
(Continued)
7
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(STATED IN UNITED STATES DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from financing activities
Net increased (decreased) in short-term
bank borrowings (151,211) 6,215,653
Proceeds from long-term loans 1,862,694 5,096,275
Repayment of long-term debt (2,741,202)
Repayment of shareholders' loans (1,926,532)
Proceeds from stock sales 10,864,091
Net cash provided by ----------- -----------
financing activities 1,711,483 17,508,285
----------- -----------
Net decrease in cash (3,723,976) 3,142,314
Cash, beginning 6,009,700 948,408
----------- -----------
Cash, ending $ 2,285,724 $ 4,090,722
=========== ===========
Cash paid for:
Interest 1,730,626 $ 1,626,816
=========== ===========
Noncash investing and financing
activities:
Conversion of 295 shares of Series C preferred
stock into 3,533,796 shares of common stock 5,900,000
===========
Conversion of debentures
to 1,120,426 shares of common stock $ 3,427,999
===========
</TABLE>
See notes to consolidated financial statements
8
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
1. Business and organization of the Company:
Business of the Company:
The Company's operations consist of distribution and
manufacturing activities performed by its operating subsidiaries.
Distribution activities primarily involve the purchase of wool products for
sale within the People's Republic of China (China) and the purchase of
chemicals and pharmaceuticals within China for export and sale outside of
China. Manufacturing activities primarily involve the manufacture and sale
of woolen products through the joint venture company in China. Due to
problems with the transportation system leading to the factory and revised
projections as to profitability, M.S. Enterprise Company Limited disposed
of its joint venture interest in M.S. (Ping Yuan) Industry Development
Company Limited to a company in China. M.S. Enterprise Company Limited, a
wholly owned subsidiary of the company, changed its name to Nimrod (H.K.)
Limited in August, 1995. The Company's subsidiaries at September 30, 1995
are:
<TABLE>
<CAPTION>
Name of Percent Place of Principal
Subsidiary Ownership Incorporation Activities
---------- --------- -------------- -------------
<S> <C> <C> <C>
Nova Industrial 100% British Virgin Holding
Holdings Limited Islands Company
Eyemouth 100% British Virgin Marketing and
Limited Islands distribution
Nimrod (H.K.) 100% Hong Kong Marketing and
Limited distribution
(formerly known as M.S.
Enterprise Co. Ltd)
Eastern Assets 100% British Virgin Holding
Management Limited Islands Company
Suzhou Nimrod 55% China Manufacturing
Woolen Textile Company by Eastern Assets
Limited (joint venture)
</TABLE>
9
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
Name of Percent Place of Principal
Subsidiary Ownership Incorporation Activities
---------- --------- -------------- -------------
<S> <C> <C> <C>
Harrington Worldwide 100% British Virgin Holding
Holdings Limited Islands Company
Ascot Holdings 100% British Virgin Holding
Group Limited Islands Company
</TABLE>
2. Interim consolidated financial statements:
The interim consolidated financial statements have been prepared
by the Company and, in the opinion of the management, reflect all material
adjustments which are necessary to a fair statement of results for the
interim periods presented. Certain information and footnote disclosure
made in the last annual report on Form 10-K have been condensed or omitted
for the interim consolidated statements. Certain costs are estimated for
the full year and allocated to interim period based on activity associated
with the interim period. Accordingly such costs are subject to year-end
adjustment. It is the Company's opinion that, when the interim
consolidated statements are read in conjunction with the December 31, 1994
annual report on Form 10-K, the disclosure is adequate to make the
information presented not misleading. The interim consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
3. Basis of accounting:
The financial statements are expressed in United States dollars
and are in conformity with United States generally accepted accounting
principles.
The United States dollar was adopted as the reporting currency
for the following reasons:
(i) the majority of the company's purchase and sales
transactions are quoted in United States dollars;
10
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
(ii) the majority of the expenses incurred by the Company are
denominated in Hong Kong dollars and the exchange rate between the Hong
Kong dollar and the United States dollar has been fixed at HK$7.8 to
US$1.00; as a result, exchange differences on translating from Hong Kong
dollars to United States dollars are minimal.
4. Earnings per share:
The computation of earnings per share in each year is based on
the weighted average number of common shares outstanding. When dilutive,
stock options and warrants are included as common equivalents using the
treasury stock method. The shares issued in connection the reverse
acquisition in 1994, including the common stock equivalents of the Series A
preferred stock, have been treated as being outstanding effective January
1, 1993. Shares issued in connection with the convertible debentures and
the Series C preferred stock have been included in weighted average shares
as if the conversions had occurred at the date the securities were issued.
Shares issuable under the conversion provision of the Series C preferred
stock have been considered common stock equivalents. Primary and fully
diluted earnings per share are the same for each period presented.
5. Inventories
The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30,
1995
-------------
<S> <C>
Raw materials $ 1,422,963
Work-in-process 989,772
Finished goods 22,941,092
-----------
$25,353,827
===========
</TABLE>
11
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
6. Commitments and contingencies:
Letter of credit:
At September 30, 1995, the Company had approximately $1,061,866
in letters of credit outstanding.
7. Shareholders' equity
Series A preferred stock:
The 24,375 shares of Series A preferred stock were issued in
connection with the reverse acquisition in 1994. Each share of Series A
preferred stock is convertible to 1,000 shares of common stock. All of the
Series A Preferred Stock was converted on November 3, 1995 into 24,375,000
shares of Common Stock.
Series C preferred stock:
During August 1994, the Company sold 465 shares of Series C
convertible preferred stock, and warrants to purchase 309,997 shares of
common stock at $5.50 per share for $9,300,000. The warrants are
exercisable through August 1996. No warrants have been exercised through
September 30, 1995.
During the year ended December 1994, 170 shares of Series C
convertible preferred stock were converted into 1,236,358 shares of common
stock.
During the nine months ended September 30, 1995, 295 shares of
Series C convertible preferred stock were converted into 3,533,796 shares
of common stock.
8. On June 2, 1995, the Company entered into a settlement
agreement with an entity that provided services to the Company related to
the reverse acquisition which occurred in January 1994. Under the terms of
the settlement, the Company agreed to issue 363,169 shares of common stock.
The issuance was valued at the market price of the Company's stock at the
date of the agreement and has been charged to shareholders' equity.
12
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
9. Other expenses:
During the nine months ended September 30, 1995, the Company
disposed of its joint venture interest in M.S. (Ping Yuan) Industry
Development Company Limited on September 20, 1995. The loss on disposal
was $154,498.
13
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW OF PRINCIPAL ACTIVITIES
China Industrial Group, Inc. (the Group) consists of Nova
Industrial Holdings Limited, a British Virgin Islands corporation, which is
a holding company for four operating entities. The operations of the Group
are divided into distribution and manufacturing.
The Group's distribution activities involve wool, industrial
chemicals and pharmaceutical products. The Group purchases wool from
unrelated persons mainly in New Zealand and Australia principally for US
dollars and, in turn, sells the wool through its sales representative
offices to its customers in the People's Republic of China (China).
The Group is responsible for all aspects of delivery of wool to
the factory, including customs clearance and transportation. To support
its distribution, the Group leases a number of bonded warehouses in China
which take delivery of the wool and arrange for shipment directly to the
factories.
The Group receives payment for the wool in Renminbi, the local
Chinese Currency (RMB). The Group then uses RMB to purchase industrial
chemicals and pharmaceutical products from manufacturers located in China.
The pharmaceutical products are principally generic products in powder
form, and are used by pharmaceutical manufacturers which convert the powder
into tablets or capsules. The chemical products are mainly industrial raw
materials used for various types of basic industries. Both the chemical
and pharmaceutical products are exported from China and sold to customers
located in India, Africa, Europe and Southeast Asia. Sales of these
products in turn generate U.S. dollars, which are then used to purchase
wool in Australia and New Zealand.
Although the Group bears the risk of non-payment from its
customers, the Group generally purchases products pursuant to outstanding
orders. Thus, the Group's exposure to currency risk and inventory problems
is minimized.
14
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
The Group is also engaged in the manufacture of woolen products
through its interest in two joint venture companies in China. These
facilities produce a variety of wool products ranging from scoured wool
(washed and comb wool), wool top (washed and comb wool that has been
processed into a spool of rope), yarn, rolls of wool fabric to woolen
sweaters mainly for Chinese consumer market. Due to problems with the
transportation system leading to the factory and revised projections as to
profitability, the Group disposed of its joint venture interest in M.S.
(Ping Yuan) Industry Development Limited. Suzhou Nimrod Woolen Textile
Company Limited replaced some of its plant and machinery to improve
productivity during this period.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED
------------------------------------------------------------------
SEPTEMBER 30, 1994
------------------
REVENUES. Revenues for the nine months ended September 30, 1995
--------
increased by $7.2 million or approximately 3% compared to the nine months
ended September 30, 1994. Revenues from distribution activities for the
nine months ended September 30, 1995 increased by $10.6 million or
approximately 5% compared to the nine months ended September 30, 1994.
This $10.6 million increase was primarily attributable to the increase in
sales of wool during the nine month period due to the natural growth of
market as a result of a change in consumers' behavior.
Revenues from manufacture of woolen products decreased by $3.15
million or approximately 17.1% from 1995 to 1994. This decrease was
primarily due to the government policy of `cooling down' the overheated
economy. In addition, the group has tightened its credit policy to its
domestic customers in China.
GROSS PROFIT. Gross profit increased by 2.4% or $0.8 million in
------------
the 1995 period as compared to the 1994 period. Gross profit as a percent
of revenues remains the same as compared to the 1994 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
-----------------------------------
expenses increased by $1.8 million or approximately 18.0% during the 1995
period compared to the 1994 period as a result of the increase in sales
activities and the expenses incurred in establishing the Group's New York
Office.
15
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
SELLING EXPENSES. During the 1995 period, revenues and marketing
----------------
expenses increased by $0.18 million compared to the 1994 period. The
primary reason for the increase was the increase in volume of sales.
INCOME FROM OPERATIONS. During the 1995 period, the Group
----------------------
generated income from operations of $21.3 million as compared to income
from operations of $22.4 million during the 1994 period. This decrease was
primarily due to the increase in sales activities. Income from operations
as a percent of revenue remained relatively constant at 9.3% for 1995 &
10.1% for 1994.
OTHER INCOME (EXPENSES). Interest expense during the 1995 period
-----------------------
was $1.73 million compared to $1.63 million for the same 1994 period. The
amount of short and long-term borrowings was approximately the same during
1995 and 1994. The disposal of the joint venture interests in M.S. (Ping
Yuan) Industry Development Company Limited resulted in a loss of $154,498
which was charged as other expenses in this period.
INCOME TAXES. Income taxes of $350,271 were incurred during the
------------
1995 and $209,702 during the 1994 period. The increase is primarily due to
income taxes provision for the Company's China operations and the increase
in earnings from the Company's Hong Kong distribution subsidiary.
NET INCOME. The net income during the 1995 period was $18.6
----------
million compared to a net income of $19.1 million for the prior period.
This represents an approximately 2.6% decrease in net income.
EARNINGS PER SHARE. Earnings per share for the nine months ended
------------------
September 30, 1995 was $0.38 compared with $0.44 for the same period in
1994. Even though net income was approximately the same in 1995 than in
1994, the difference in earnings per share was the result of an increase in
the weighted average number of shares outstanding.
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED
--------------------------------------------------------------------
SEPTEMBER 30, 1994
------------------
REVENUES. Revenues for the three months ended September 30, 1995
--------
decreased by 3% compared to the three months ended September 30, 1994.
This was
16
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
primarily due to a shortage of cotton supply in the third quarter of 1994
which resulted in a significant increase in the demand for wool. Revenue
for the three months ended September 30, 1995 reflected only the natural
growth of the market.
GROSS PROFIT. Gross profit decreased by 4.1% or $0.5 million in
------------
the three months ended September 30, 1995 compared to the three months
ended September 30, 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
-----------------------------------
expenses for the three month period ended September 30, 1995 increased by
$1.0 million or approximately 32% compared to the 1994 period as a result
of expenses incurred in establishing the Group's New York Office. General
and administrative expenses represent 5% of revenues for the period
compared to 4% of revenues for the three month period ended September 30,
1994.
SELLING EXPENSES. There was no significant change during the
----------------
three month period ended September 30, 1995 from the three month period
ended September 30, 1994.
INCOME FROM OPERATIONS. During the three month period ended
----------------------
September 30, 1995, the Group generated income from operations of $6.9
million as compared to income from operations of $8.4 million during the
1994 period.
OTHER INCOME (EXPENSES). Interest expense was $0.60 million and
-----------------------
$0.55 million for the three month periods ended September 30, 1995 and
1994, respectively. The disposal of the joint venture interests in M.S.
(Ping Yuan) Industry Development Company Limited resulted in a loss of
$154,498 which was charged as other expenses in this period.
INCOME TAXES. Income tax expense was $0.12 million and $0.08
------------
million for the three month periods ended September 30, 1995 and 1994,
respectively. The increase is primarily due to the income tax provision
for the Company's China operations and the increase in earnings from the
Company's Hong Kong distribution subsidiary.
NET INCOME. Net income was $5.8 million and $7.8 million for the
----------
three month periods ended September 30, 1995 and 1994, respectively.
17
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
EARNINGS PER SHARE. Earnings per share were $0.12 and $0.17 for
------------------
the three month period ended September 30, 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Group's principal source of liquidity during the nine months
ended September 30, 1995 was from operations.
As of September 30, 1995, the Group had a working capital excess
of approximately $66 million compared to $55 million as of December 31,
1994 primarily as a result of increase in revenues during this period.
Net cash generated from operating activities was $4.1 million and
$10.8 million was used in operating activities in the nine months ended
September 30, 1995 and 1994, respectively.
The Group believes the cash provided by operations will be
sufficient to meet its cash requirements for the next 12 months.
FOREIGN EXCHANGE
The financial statements of the Company's subsidiaries operating
in China are generally measured using the local currency, Renminbi (RMB),
as the functional currency. The exchange rates adopted in the translation
of RMB to the United States dollar are the applicable Bank of China
official rate which would be settled at by the Chinese Government. For the
company's other subsidiaries, the United States dollar is the functional
currency.
EFFECT OF INFLATION
Inflation has little impact on the operation of the Group. The
price of products the group distributes is determined by the open market.
Any increase in cost is generally reflected in the selling price. However,
the `cooling down' of China's overheated economy does have a negative
effect on the amount of sales for products manufactured in China. In
addition, inflation causes an increase in the general and administration
expenses.
18
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
COMMITMENTS FOR CAPITAL EXPENDITURE
The Group has no commitment for capital expenditures.
SEASONAL ASPECTS
Revenues from the Group's distribution of wool tends to increase
in fall and winter while revenues from sales of wool tends to steady by
late spring and summer.
19
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
20
<PAGE>
CHINA INDUSTRIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
SIGNATURES
Pursuant to the requirements 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 INDUSTRIAL GROUP, INC.
By: /s/ Benthony Ip
--------------------------------
Benthony Ip, Chief Financial
Officer (Chief financial officer
and accounting officer and duly
authorized officer)
Dated: November 17, 1995
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,285,724
<SECURITIES> 3,006,468
<RECEIVABLES> 55,334,636
<ALLOWANCES> 0
<INVENTORY> 25,353,827
<CURRENT-ASSETS> 86,633,069
<PP&E> 22,712,224
<DEPRECIATION> 3,273,663
<TOTAL-ASSETS> 117,204,410
<CURRENT-LIABILITIES> 20,765,484
<BONDS> 0
<COMMON> 23,465
0
24,375
<OTHER-SE> 79,543,804
<TOTAL-LIABILITY-AND-EQUITY> 117,204,410
<SALES> 228,047,229
<TOTAL-REVENUES> 228,047,229
<CGS> 193,438,388
<TOTAL-COSTS> 13,304,637
<OTHER-EXPENSES> 156,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,134,633
<INCOME-PRETAX> 19,435,270
<INCOME-TAX> 350,271
<INCOME-CONTINUING> 18,564,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,564,630
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
