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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, 2001
[ ] 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)
Nevada 87-0431063
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1801-02 Evening Newspaper Mansion, 358 Nanjaing Rd.
Tianjun, PRC
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant Telephone Number, Included Area Code : 011-852-2750-1802
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$21,538,000.
At of December 31, 2001, 257,894,000 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 $21,315,658.
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
--- ----
TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS.............................. 3
ITEM 2. DESCRIPTION OF PROPERTIES............................ 11
ITEM 3. LEGAL PROCEEDINGS.................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................. 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ......................... 11
ITEM 6. SELECTED FINANCIAL DATA.............................. 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION............................................ 14
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............................... 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................ 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTION.......................................... 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTINGS
ON FORM 8-K.......................................... 21
SIGNATURES........................................... 22
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS........................................... F-1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference are discussed in the section entitled "Certain Factors Affecting
Future Operating Results" beginning on page 17 of this Form 10-K.
The Company
The Company became a U.S. publicly listed company via a revenue merger in
February 1995.
Until calendar year 2000, China Continental, Inc. (the "Company" or "CHCL")
designed, installed and sold plastic production lines on a turn-key basis and
sold machinery and equipment for the manufacture of plastic products. The major
portion of the Company's sales were to plastic manufacturers in the People's
Republic of China ("PRC" or "China"). Two turn-key projects were completed
during calendar year 2000 averaging US$3.9 million per contract. However,
because of increased price competition and a change in management, the Company
terminated the sale of turn-key projects and refocused its business an
agricultural genetics and water resources. To strengthen its revenue base and
diversify its business activities, the Company purchased East Wu-Zhu Muo Qin
Banner Green Demonstration Farm ("East Wu") in Inner Mongolia. Subsequently, the
Company acquired two water sources in Inner Mongolia with a view to bottling
high quality mineral water.
Our objectives are to be the market leader in improving the agriculture and
farming industry in The People's Republic of China ("PRC"), to make available
the latest techniques and know-how in agricultural genetics ("agrogenetics") and
farming, and to leverage our pure water resources.
Our focus is on developing agricultural genetics and water resources to help
meet the increasing demand of the growing population in The PRC.
The Company's products and services are generally divided into three main
categories: (i) the sale of breeding livestock, semen and embryos, and services
to contract breeders and growers; (ii) the planting, harvesting and sale of
forage grass; and (iii) beginning in 2002, the sale of potable water.
The Company has a 25 year lease on its farmland in Inner Magnolia. The total
farm area of Dongwu Bio Tech Farm ("Dongwu") is approximately 252 square miles
or 110,000 square acres. It is located in Dong Ujimqin Qi, Inner Mongolia in the
PRC. Dong Ujimqin Qi is located in the far north region of China near the border
with Mongolia. Dong Ujimqi Qi is an agricultural based area where livestock
(beef, cattle, dairy, goats and sheep) are the primary agricultural products.
3
The farm is the major focal point for our agricultural genetics and water
resources. Agricultural genetics will be applied both to animal husbandry and in
the to growing of forage grasses.
The agricultural genetics portion of the farm includes administration offices,
barns, surgery rooms and laboratories, kid barns, breeding barns, feedlot areas,
fenced pastures, shelters and paddocks for grazing goats. Because of harsh
winter conditions, additional barns will be erected to house the livestock
during winter months.
As the government promotes its grain conservation policy, there will be a shift
from grain-fed livestock (pigs) to pasture-fed livestock (cattle and goats).
This policy is expected to positively impact our activities. Also positively
affecting our activities is the increasing demand for non-pork meat. It is
estimated that this year, the PRC will be experiencing a shortage of
approximately 200,000 metric tons of goat and sheep meat and 300,000 metric tons
of beef.
The farm will allocate approximately 50% of its land to the forage operations.
Guided by the principle of "popularizing agriculture and husbandry technologies
for green environmental protection," We have chosen American alfalfa and other
high quality forage grasses that will improve soil and protect the environment.
We plan to spend the next three years cultivating and improving our forage
grassland. In 2001 the Company had approximately 24,900 hectares (a hectares =
approximately 2.5 acres) or 62,250 acres under cultivation. In 2003, management
expects to have 36,500 hectares planted. Additional land will be leased nearby
to support these activities. Depending on the type of forage planted, one
hectare will typically generate from three to twelve metric tons of grass per
year.
By the year 2003, assuming that there is no change in the pattern of increasing
meat consumption within The PRC, the demand for goat and sheep meat will reach
approximately 4.26 million metric tons. Because embryo transfer is the fastest
and most economical way to propagate superior goats, Dongwu has a significant
advantage in the production of livestock and in providing embryo transfer and
artificial insemination technologies that will provide lower operational costs
for the farm, thereby adding value to both Dongwu and the Company's customers.
We intend to dramatically increase the breeding livestock of purebred and
crossbred Boer goats to meet the increasing demand for meat, and the
Government's new grain conservation policy which is expected to result in a
shift from livestock requiring grain-based feed, i.e. pigs, to pasture-fed
livestock such as cattle and goats. The benefits of raising goats include: low
maintenance costs, a rising demand for goat meat both domestically and
internationally, the ability to control undesirable shrubs and weeds, and an
increased awareness of the health benefits of consuming lower fat meat, such as
goat meat.
Boer goats are a genetically superior breed providing significant advantages
over domestic goats, namely adaptability, productivity, meat quality and a
higher meat-to-bone ratio. The Company has determined that its Boer goat embryo
program will be adaptable to the conditions and environment of its farm.
4
The present-day Boer goat, identified by its short white hair and red markings
on its head and neck, emerged in the early 20th century when ranchers began
breeding the goat for its meat, high growth rate and fertility. Boer goats have
been further improved through artificial insemination and embryo transfer in the
US, resulting in greater profit margins for the producer. The Boer goat is a
large framed animal with mature weights between 78 to 113 kg for males and 50 to
70 kg for females.
In recent years, Boer goats have received considerable attention worldwide and
have become the key factor in many goat farming improvement programs in less
developed and developed countries.
A small number, approximately 20 Boer goats, were exported from Germany to the
Provinces of Shanxi and Jiansu in 1996, and an additional 200 head of Boer goats
were recently imported by the National Animal Science and Veterinary Bureau from
New Zealand. However, the number of pure breed and crossbred Boer goats remains
small.
Benefits of Boer goats:
- - One of the hardiest of all livestock breeds:
o Boer goats produced from embryo transfer with domestic goats adapt
better than imported animals because they acquire immunities to local
diseases, and better tolerate the heat and humidity in the PRC
o Proven to adapt very well to a variety of ecosystems
o Purebred Boers have a high resistance to disease and adapt well to
various climates and terrain
- - Grow at a faster rate than other goat breeds:
o Known for their outstanding size and rate of growth
o Bucks can grow at an average of 15 lbs per month while does can
average 12 lbs per month
o Dressing percentage is between 50% to 60%
o Meat to bone ratio is over 7:1 compared to 4:1 for other types of
goats
- - Superior to domestic Chinese goats in fertility and prolificacy:
o High percentage of multiple births
o Extended breeding season and possibility of achieving three births
every two years
o Reach puberty early, usually at about six months of age for males and
eight months for first-mating females
- - Good "milkers", which enable them to successfully raise multiple offspring
with excellent weight gains and little pre-weaning mortality thus
demonstrating superior maternal capabilities:
- - Forage on a wide spectrum of plants:
o Prefer a dietary ratio of 82% brush and 16% grass
o Integrate successfully into a multi-species grazing scheme and
complement cattle in their grazing patterns with very little dietary
overlap
o Multi-species grazing offers many advantages in pasture and range,
land management and economic diversification
5
- - Produce excellent skin, which is superior to other breeds of goat skin
The Three-Year Plan
The Company has adopted a "Three Year Plan" to be implemented in three Phases to
achieve its objectives to be both a fully functioning farm and to be one of the
leaders in the agriculture and farming industry in the PRC by leveraging the
Company's ability to make available the latest agrogenetic techniques.
Phase One - Importation of Australian livestock genetics through Castella
Research Pty Ltd., of Sydney, Australia, in the form of goat embryos for
implanting into local recipients. Superior genetics from Australia will be
selected and collected for propagation. Dongwu purchased 2,000 embryos which
will produce approximately 1,000 Boer kids and purchased approximately 2,400
native Chinese goats as recipient goats. This purchase included a 20% provision
for recipients that did not respond to hormonal treatment or were not suitable
recipients because of poor ovarian response. The best recipients are those that
have previously carried one litter at two to three years of age. All purchases
of local livestock will be paid in (RMB) and all purchases of embryos will be
paid in US dollars. Domestic sales of products and services are paid in RMB.
International sales are paid in the currency of the paying party.
During 2001, the Company established genetic and biotechnology services
including the introduction of embryo transfer and artificial insemination
technology. The Company has approximately 1,000 Boer kids derived from embryo
transfer and will gradually build its stock.
Phase Two - After several years, the Company's production of Boer goats will
have been established, and Dongwu will have a sufficient stock of male and
female Boer goats to provide live animals to both its customers and to continue
its production.
The Company also plans to distribute and market its genetics through semen,
embryos and live breeding stock to contract growers and municipal and provincial
governments. The Company's trained technicians will assist these clients by
inseminating the semen, implanting the embryos and providing services in the
sale of the Company's feed, feed additives, minerals, vitamins, veterinary drugs
and other supplementary products.
The Company will also train selected local technicians in agricultural genetics
technologies, including training in insemination and implantation of embryos,
sexing and splitting of embryos. These services will be provided both in-house
and to contract farmers and breeders.
Phase Three - Within three years, we expect to produce 200,000 Boer goat hybreds
with 25%, 50%, 75% and 87% Boer blood lines through embryo transfer. Following
the useful life of goats for breeding purposes, the Company will begin
processing both its own animals and purchase the offspring of previously sold
embryos for slaughter. We expect to develop a joint venture abattoir with
tannery, fabricating and rendering facilities which will meet USDA, EU, The PRC
and Halal health requirements. The project will have a planned capacity to
process 500,000 goats annually. Quality, branded, chilled, and frozen meat
products will be distributed to institutions, hotels, restaurants, wholesales
and retailers. Boer goats also produce excellent skin, which is superior to
other goat's skin which will be used in a variety of leather products.
6
Although the local market will absorb most of the farm's production of Boer
goats, we believe that establishing export contacts now will provide profitable
expansion opportunities in the future.
In the past, The PRC has exported about 250,000 sheep and goats to Saudi Arabia,
Kuwait, Nepal and Hong Kong. However, due to the increasing demand its the
domestic market, the export market has not significantly grown. In Asia, most
countries are net importers of meat. Taiwan, Hong Kong, South Korea, Japan and
all ASEAN countries import meat. Singapore imports all of its livestock and
meat. Malaysia produces only about 11% of its domestic requirements for sheep
and goat meat and annually and imports about 30,000 live sheep and 4,000 metric
tons of mutton from Australia and New Zealand. Therefore, a significant export
market could also be developed.
The Embryo transfer process - Embryo transfer is the process of transferring
fertilized embryos to female recipients six to seven days after they have shown
signs of heat. Embryo transfer will produce 100% full blooded kids if full
blooded animals are used for breeding and collecting. When imported embryos
derived by embryo transfer have matured, they will be ovulated using fertility
drugs to maximize the number of embryos produced. One fresh embryo will be
transferred to each synchronized recipient doe. Embryo transfer is the best
method of establishing a large number of animals. After the full blooded
offspring mature, they can serve as donors.
The Advantages of Embryo Transfer
- - It is less expensive to transport and propagate genetics than to purchase
and transport live animals
- - There is better survivability and adaptability of the animals
- - Superior genetics can be propagated faster than by traditional breeding
- - The offspring acquire immunity from the local recipients against local
diseases
- - It prevents the transfer of exotic disease from exporting countries
- - A uniformity of genetics is produced
Artificial Insemination - Artificial Insemination ("AI") is achieved by taking
semen (sperm) from the male and depositing the semen in the cervix of the female
to produce an offspring. We will take semen from full blooded Boer goats by
using AI, and will produce 50% hybred Boer goats.
Crossbreeding of native goats with Boer goats - Crossbreeding has long been a
valuable tool of animal breeders for improving the quality of livestock. Most
Chinese goats are well adapted to their environment and local feedstuff and are
resistant to endemic diseases and parasites. However, they are slow to gain
weight, mature late and have poor milk production. Boer goats are both excellent
meat and milk producers. In several early tests, they adapted easily to the
Chinese environment as they have proven to do in South Africa. Nevertheless,
purebred exotic breeds may need improved management practices to combat disease,
parasites, cold, heat and occasional humidity stresses. The objective of
crossbreeding is to blend together the best qualities of the exotic and
indigenous breeds.
7
It has been observed that under intensive management and in relatively mild
equatorial environments, crossbred animals with 60-100% exotic genes produce the
best overall performance. Under less intensive management and in harsher
environments, crossbred animal with 25-50% exotic genes performed best. Without
any improvements in management and in very harsh environments, indigenous goats
or crossbred animals with less than 25% exotic genes perform best. In a
successful crossbreeding program to develop a dual-purpose goat for most Chinese
native goats in agricultural highlands and range area, a crossbred population
with 50% exotic dairy genes was judged to be the best. Therefore, we plan to
develop 50% and 75% Boer crossed with Hebei, Henan, Hubei, Fujian, Liaoning or
Shandong goats (domestic breeds) for distribution to local farmers. Based on a
program of two embryo collections and transfers prior to natural breeding, it is
estimated that over a three-year period the crossbreeding program can generate
approximately 200,000 kids.
Phase Three - Forage Grass
This year the harvest for nature forage grass produced on our farm totaled
113,000 tons, which was sold to Beijing Fengrun Fine-Breed Husbandry. The
current market price for natural forage grass is approximately US$73 per ton and
higher quality forage grass can be sold for up to US$181 per ton.
Inner Mongolia has rich soil. However, after years of overgrazing, much of the
grassland has deteriorated and the ecological environment has been impaired.
Specialists in environment protection and husbandry have been working to
rationalize resource utilization, increase animal husbandry and to improve
grassland recovery.
In the spring of 2000, Beijing and other large cities were struck by massive
sandstorms that originated in Inner Mongolia's Hunshandake Tibba region. Because
of this disaster, the Chinese Government, adopted a policy to "stop planting
grain crops, to grow more forage" and to "transfer livestock feeding from grain
fed animals (pigs) to pasture fed animals (goats, sheep and cattle). The
government is promoting these efforts through tax benefits.
Guided by the principle of "popularizing agriculture and husbandry technologies
for green environmental protection," we have chosen American alfalfa and other
fine forage grasses that can both improve soil and protect the ecological
environment. We plan to spend three years cultivating and improving our
grasslands and expanding them to approximately 36,500 hectares. When completed,
this will enable us to market approximately 200,000 metric tons of high quality
forage grass annually.
We are planning to leverage our technology, scientific planting methods and
modern management techniques along with American machinery and seeds to build
one of The PRC's largest areas of grassland.
8
Our initial focus will be to enlarge the amount of high quality forage grass to
36,500 hectares. By reaching this scale, the total yearly production of the high
quality forage grass will be approximately 200,000 metric tons.
Xilinguole Grassland, where the forage grass base is now located, is one of the
best-preserved natural areas with the most grassland varieties and the richest
forage grass. "Xilinguole Prairie Nature Protection Zone" was accepted by UNESCO
as a unit in "MAB" in 1987. In 1997, it was entitled as The PRC's State Nature
Protection Zone.
Our forage grass is located in Wulagai Development Zone in the northeast of
Xilinguole Prairie. It is free from pollution because of its remoteness and
sparse population. The soil is still under natural conditions, which makes it
one of the few green virgin lands in the world.
There are a number of factors which determine revenues generated from grassland:
- - The time of planting. The first harvest after seeding takes about 60 days
but subsequent growths can then be harvested every 30-35 days.
- - The type of forage grown. We will harvest several types of grass including
natural grass depending on the type of grass harvested, 3 to 12 metric tons
per hectare will be produced
- - Depending on the type of grass harvested, the revenue generated per metric
ton will range from US$73 to US$181.
Our plans for seeding are as follows:
In 2001: 24,900 hectares were seeded
In 2002: an additional 6,100 hectares
In 2003: an additional 5,500 hectares
Bottled Water
The availability of water for urban residents in The PRC is worsening daily.
Because of the continuing dry conditions in the northern part of The PRC, many
cities have restricted water consumption. Also because local water sources are
seriously polluted, the quality of water supplied in many of the larger cities
has been reduced. Unfortunately, up to ninety percent of The PRC's water sources
have been polluted to various degrees. These factors provide opportunities to
develop and market drinkable mineral water. Several areas of The PRC are rich in
mineral water resources with potential for development. However, bottling and
transporting water from these resources to the cities where it is needed is
often difficult. Presently, several large enterprises including Wahaha, the
largest mineral water manufacturer in the PRC, provide consumers with potable
water products.
Although, the PRC is rich in water resource reserves, totaling roughly 280
million cubic meters (Source: The Mineral Water Source Exploration & Surveying
Dept. of The Inner Mongolia Autonomous Region) and it ranks sixth in water
reserves behind only Brazil, the former Soviet Union, Canada, the USA and
Indonesia. However, on a per capita basis, the PRC ranks 109th in the world.
9
Based on internationally standards, 2,000 cubic meters of water per person is
considered the minimum before there is a serious water shortage. By 2030, it is
estimated that the PRC will be 1.6-1.7 billion. Based on that projected
population, there will be 1,700 cubic meters per person of available water.
There has been rapid development of bottled mineral water in the PRC beginning
in the mid 80s. With the gradual improvement of people's living standards and
with the implement of a "Potable Natural Mineral Water" National Standard,
mineral water production developed at an annual rate of 30-40%. In 1998, the
volume of bottled mineral water was approximately 2.5 million tons from more
than 1,000 bottlers. It is estimated that in 2001, output volume exceeded 3
million tons.
The Company's mineral water sources are located at Dongwu and surrounding areas
in Wulagai Development Zone in the northeast of Xilingol in Inner Mongolia,
which has a convenient road connection with Huhehot. These water sources are
surrounded by a vast natural prairie, a pure natural environment without
industrial pollution where it exists in the pyroclastic rock crevice from the
Jurassic Period. Rainfall seeps along the rock crevices into the soil, dissolves
the microelements and micro-components in rocks through deep circulation, and
then rises through crevices to the surface, thus forming natural mineral water.
This high-grade natural mineral water is rich in microelements and meets the
GB8537-95 Standard for "Potable Natural Mineral Water." It can be used to
produce bottled or tubbed potable natural mineral water or mineral water drinks.
Our bottling and distribution operation is expected to be in operation in 2002.
Principal Suppliers
The Company acquires the majority of its goat embryos from Castella Research Pty
Ltd., based in Austrailia. The balance of the Company's needs come from many
suppliers.
Employees
As of December 31, 2001, the Company employed an administrative staff of 8
persons and a technical and sales staff of approximately 40 persons all in the
PRC. To streamline the operations of the Company, the administrative office in
Hong Kong was closed during 2001.
Competition
The market for livestock and for meat products and water is currently
unbalanced, with demand exceeding supply. Strong demand for livestock meats and
water is expected to continue for the near future. Although the market for
agricultural genetics and water resources is highly fragmented in the PRC, the
Company believes that it is in a leading position in providing quality
agricultural genetics, water and superior technical support to its customers. To
date, there has been no significant price competition in these markets, but
price competition may become a factor in the future.
10
ITEM 2. DESCRIPTION OF PROPERTIES
The Company principal administrative office, marketing, technical
facilities and supporting teams are located 1801-02 Evening Newspaper Mansion,
358 Nanjung Road, Tianjin, PRC, Tianjin, PRC.
The farm which the Company purchased, Dong Wu Bio-Tech Farm is located in
the PRC and has in excess of 110,000 acres.
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
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 for the prior two years.
11
2001 2000
---- ----
High Low High Low
---- ---- ---- ----
First Quarter 0.13 0.06 2.40 0.375
Second Quarter 0.13 0.06 1.25 0.375
Third Quarter 0.09 0.06 0.56 0.10
Fourth Quarter 0.13 0.06 0.16 0.055
These quotation reflects the inter-dealer prices without retail markup,
markdown or commission and may not represent actual transactions.
Holders
At December 31, 2001 there were 3,260 holders of record.
Dividends
Since being listed in the United States in 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.
Income Statement Data:
(US$, 000) Year Year Year Year Nine
Ended Ended Ended Ended Months
Ended
Dec 31 Dec 31 Dec 31 Dec 31 Dec 31
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Automatic production lines 0 0 36,434 32,806 18,815
Raw materials 0 0 670 1,594 1,846
Breeding center 9,398 0 1,770 2,388 0
Forage grass 12,138 5,873 0 0 0
------ ------ ------ ------- -------
Total sales 21,316 5,873 38,874 36,788 20,661
Cost of sale 5,323 45 14,674 14,284 8,335
------ ------ ------ ------- -------
Gross profit 15,992 45,828 24,200 22,504 12,325
Depreciation of fixed assets (7,210) (2,405) (3,897) (4,841) (386)
Selling and administrative
expenses (414) (391) (1,205) (2,395) (510)
(Provision) Recovery for
doubtful accounts 0 (1) (675) (681) 0
Financial income (expenses), net 0 0 (126) (165) (57)
Other income (expenses) net 1,000 51 (9) 360 2,919
Gain on disposal of Subsidiaries 0 17,608 11,431 0 0
Income from discontinued operations 0 5,505 0 0 0
Share of income/ (loss) of
associated companies 0 0 0 103 144
------ ------ ------ ------- -------
Income before income tax 7,368 26,195 29,719 14,885 14,435
Income taxes 0 0 3,114 2,890 1,290
------ ------ ------ ------- -------
Income before minority interest 7,368 26,195 26,605 11,995 13,145
----- ------ ------ ------- -------
Minority interest 0 0 1,631 2,114 0
------ ------ ------ ------ ------
Net income 7,368 26,195 28,236 14,109 13,145
----- ------- ------ ------ ------
Net income per share 0.03 0.26 0.37 0.23 0.50
======= ======= ====== ====== ======
Weighted average shares
outstanding 232,289 102,230 75,904 62,306 26,000
======= ======= ====== ====== ======
12
Balance Sheet Data at period end
Year Year Year Nine Year
Ended Ended Ended Months Ended
Ended
Dec 31 Dec 31 Dec 31 Dec 31 Dec 31
2000 1999 1998 1997 1997
------ ------- ------- ------- ------
Working Capital (deficit) 26,301 11,991 (14,678) 35,938 (26,392)
Total Assets 212,869 204,384 188,941 253,269 218,447
Long-term Liabilities 0 0 1,245 1,261 0
------- ------- ------- ------- ------
Shareholders Equity 211,506 203,058 164,737 128,543 70,694
------- ------- ------- ------- ------
13
ITEM 7.MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Twelve months ended December 31, 2000 versus Twelve months ended December 31,
1999 Revenues Revenues from continuing operations increased by US $15,442,000 or
262.9% to US $21,316,000 for the twelve months ended December 31, 2001 from US
$5,873,000 for the prior year. This increase is attributable to the first sale
of goats that have received embryos and the increase in the sale of forage
grasses.
Cost of Revenues/Sales
Costs of Sales represent purchases of embryos and recipient goats and
salaries and wages paid to workers for the harvesting and sale of forage grass.
Cost of sales increased by US $5,278,000 to US $5,323,000 for the year ended
December 31, 2001 from US $45,000 for the year ended December 31, 2000. This
increase resulted from a larger sale of boer goats where the gross profit is
less than that from the sale of forage grasses and from an increase in forage
grass sales.
Depreciation and Amortization
Depreciation and amortization increased by US $4,805,000 to US $7,210,000
for the year ended December 31, 2001 from US $2,405,000 for the prior year. The
increase is primarily attributable to a full year of depreciation and
amortization of the East Wu facility compared to only a quarter year in 2000.
Selling and Administrative Expenses
Selling and administrative expenses include salaries of company personnel
and general corporate overhead. Selling and administrative expense increased by
US $21,000 or 5.4% to US $414,000 for the year ended December 31, 2001 compared
to US$392,000 for the prior year. The increase resulted because of increased
operations at the Company's facilities.
Consulting. Consulting expenses totaled $1,000,000 for the year ended 2001
compared with no consulting expense for the year ended December 31, 2000. The
consulting expense was incurred for services rendered in connection with
corporate re-engineering and management consulting.
Other income. The Company had no other income for the year ended December 31,
2001, but other income of $50,616 for the year ended December 31, 2000. Other
income consisted of
Income from operations of divested entities. The Company had no income from
divested entities for the year ended December 31, 2001, because all divestitures
were completed during the year ended December 31, 2000. For the year ended
December 31, 2000, the Company had income from operations of divested entities
totaling $5,509,077.
14
Gain on Disposal of Associated Companies and investments in subsidiaries. The
Company had no income from the disposal of associated companies and investments
in subsidiaries for the year ended December 31, 2001 because all associated
companies and subsidiaries were disposed of during the year ended December 31,
2000. For the year ended December 31, 2000, the Company had income from the
disposition of associated companies and investment in subsidiaries of
$17,604,615.
As a result of the foregoing, the Company had income from continued operations
of $7,368,519 for the year ended December 31, 2001, an increase of $4,287,516 or
139.2% from the $3,081,003 for the year ended December 31, 2000. Earnings per
share remained at $.03 for the year ended December 31, 2001, the same for the
year ended December 31, 2000. Although there was an increase in earnings, per
share income did not increase because of an increased number of shares issued
and outstanding.
Twelve Months Ended December 31, 2000 versus Twelve Months Ended December 31,
1999
Revenues
Revenues from continuing operations decreased by US $33,001,000 or 84.89%
to US $5,873,000 for the twelve months ended December 31, 2000 from US
$38,874,000 for the prior year. This decrease is entirely attributable to the
discontinuation of the plastics turnkey production business. Management believes
that because of increasing price competition in the turnkey-business, there was
little room for further expansion at acceptable profit levels. With a view
toward enhancing shareholder value, the Company had refocused its business to
the field of agricultural genetics services and products.
Cost of Revenues/Sales
Costs of Sales of approximately US $45,000 represent salaries and wages
paid to workers for the harvesting and sale of forage grass.
Depreciation of Fixed Assets
Depreciation expense decreased by US $1,492,000 or 38.28% to US $2,405,000
for the year ended December 31, 2000 from US $3,897,000 for the prior year. The
decrease was attributable to the sale of the farm located on Chengde Dafeng in
October 1999 resulting in no depreciation charge for this entity for the fourth
quarter. The decrease in depreciation was partially offset by three months of
depreciation of the Dong Wu farm located in Inner Mongolia. With an annual
depreciation charge of US $7,200,000, management is now negotiating with the
relevant governmental bodies to extend the lease term for another 25 years. Had
the lease term been extended for another 25 years, the depreciation charge would
have been reduced to US$3,600,000 per annum. Management expects approval for the
extension of lease in 2001.
Selling and Administrative Expenses
Selling and administrative expenses include salaries of Company personnel
and general corporate overhead. Selling and administrative expense decreased by
US $812,000 or 67.38% to US $393,000 for the year ended December 31, 2000
compared to US $1,205,000 for the prior year. The decrease resulted because the
Company reduced its public relations expense together with discontinuing the
turnkey business during 2000.
15
Other Income
Other income of US $51,000 represents gains on conversion of foreign
currencies and miscellaneous income.
Discontinued Operations
Discontinued operations represent the net income less applicable income
taxes of the turnkey business.
Gain on Disposal of Associated Companies and Investment in Subsidiaries
The gain on the disposal of associated companies and investment in
subsidiaries increased by US $6,177,000 or 54.04% to US $17,608,000 for the year
ended December 31, 2000 from US$11,431,000. The gain on disposal of investments
of US $11,413,000 in 1999 represented gain on the disposal of Wealthy Asia
Limited. 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 People's Republic of China. With a view to streamlining the
business of the Company during 2000, management disposed of three 100 percent
owned subsidiaries, Billion Pearl Investments Limited, Prime Hill Investment
Limited and Prime View Limited producing a gain of US $17,608,000.
Net Income
Net income decreased by US $2,041,000 or 7.22% to US $26,195,000 from US
$28,236,000 for the year ended December 31, 2000. The decrease is attributable
to the discontinuation of the turnkey business which had been partially offset
by the increase in sale of forage grass and the extraordinary item.
Liquidity and Capital Resources
At December 31, 2001, the Company had working capital of US $26,301,000,
including a cash balance of US $11,331,000. This compares to a working capital
of US$11,991,000 and a cash balance of US $7,666,000 at December 31, 2000.
Net cash provided by operating activities decreased to US $5,014,000 from
US $12,858,000 for the prior year. This decrease is principally attributable to
a decrease in total earnings and an increase in current assets which was
partially offset by increased depreciation and amortization and shares issued
for services.
Net cash used in investing activities decreased to $1,349,000 for the year
ended December 31, 2001 compared to $6,062,000 used in investing activities for
the year ended December 31, 2000. This decrease is attributable to a reduction
in property purchases which was partially offset by the tendering of a deposit.
16
The Company had no cash flows from financing activities in either the year
ended December 31, 2001 or December 31, 2000.
The Company's business has generally not been capital intensive. Cash
generated from earnings and available lines of credit have 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 to meet
ordinary capital requirements for the foreseeable future. However, it may also
seek to raise additional capital through the sale of stock.
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
embryo, salaries and related costs incurred principally for the agricultural
genetic projects. The Company generally has been able to meet increase 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 turnkey
production lines, machinery and equipment, accessories, spare parts and raw
materials. The Company has now moved 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 revenue is denominated in
Renminbi (RMB) 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.
17
c) Agricultural Genetics Industry
The Company is subject to the risks and uncertainties associated with the
agricultural genetics business industry. The industry, can be negatively
affected by a number of factors, including the following: the market price
of livestock, outbreaks of diseases in humans or animals (such as BSE or
"mad cow disease", or foot and mouth disease); weather conditions;
government farm programs; government regulations; restrictive quota
policies and trade policies and tariffs; and general economic conditions,
either local, regional or global.
d) Bottled Water Industry
The Company is subject to the risks and uncertainties associated with the
bottling industry. The business can be negatively affected by a number of
factors, including the following: finding the appropriate joint venture
partner, raising the necessary capital, general risks associated with
building a bottling plant, competition, government regulations, and general
economic conditions.
ITEM 7A QUANTITATIVE AND QUALIFICATION DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are annexed to this Report as
pages F2 through F-14. An index to such materials appears on page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVES 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
---- ----- -------
Jia Ji Shang 48 Chairman of the Board and Chief
Executive Officer
Jian Sheng Wei 55 Chief Financial Officer/Secretary
And Director
Malcolm Roy Brandon 55 Technical Director
Zhang Cheng Zhang 60 Director
Shujing Li 39 Director
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company executive officers are as follows:
Mr. Jia Ji Shang, is the Chairman and Chief Executive Officer of the Company. He
holds a Master of Business Adminstration from Ukrane Institute of Wisconsin
International University. He has over 10 years of commercial experience in
international trade, particularly in bioengineering, civil engineering and
biotechnology. Mr. Shang is the founder of Towering Technology Group Limited,
which engages itself in the civil and engineering construction in Mainland
China, bioengineering and biotechnology throughout the Far East Region and in
North America.
Mr. Jian Sheng Wei, is the Business Director, Chief Financial Officer and
Secretary of the Company. Mr. Wei holds a Bachelor in civil engineering and a
Master in Business Administration. He has over 30 years experience in the
operation, research and management of agricultural and husbandry. He has
established breeding centers and large-scale slaughterhouse in Inner Mongolia
and Huber. Mr. Wei specializes in husbandry operation and is responsible in the
promotion of business in the Far East Region, South Africa, Australia and North
America.
Mr. Malcolm Roy Brandon is the Technical Director of the Company. Mr. Brandon is
the Managing Director of Castella Research Pty. Ltd., Honorary Professor of the
University of Inner Mongolia, Principal Fellow of Centre for Animal
Biotechnology, School of Veterinary Science at the University of Melbourne and
Research Associate of the Austin Research Institute, Austin and Repatrishon
Hospital. Mr. Brandon received his Bachelor of Agricultural Science and PhD
degree at the University of Sydney. He has over 26 years experience in basic
research, development and production of biological products. He has been
visiting professor of Oxford Unversity and Michigan State University. He has
over 102 patents for his researches.
Professional Zhong Cheng Zhang is a Technical Director of the Company. He is a
leader of animal biology and has contributed greatly in maintaining the People's
Republic of China's highly competitive research field. He has established eight
research projects with the Government and has over 30 years experience in
biotechnology. He has over 60 referred research papers, review and book
chapters. He has received two honorary awards from China Agriculture and
Husbandry for best thesis of the year.
Mr. Shujing Li is a Director of the Company. He received his Doctorate degree in
Agricultural Science from China Agricultural University. He is primarily
responsible for developing, researching and supplying technologies in
agricultural genetics. He established state owned project "95", a project
employing agricultural genetics to improve the equality of existing foodstuff.
He has over 20 referred papers, reviews and book chapters. He holds positions in
the Chinese Youth Association of Science and Technology, the Asian Society of
Animal Biotechnology, the Chinese Society of Animal Reproduction and the College
of Animal Science and Technology.
19
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, 2001.
Name of Individuals Year Salary Bonus
------------------- ------ -------- -------
Chan Kwai Chiu 1999 108,000 0
2000 108,000 0
Jai Ji Shang (1) 2000 0 0
2001 0 0
(1) Was not employed by the Company prior to 2000.
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 program of plans to its officers. The
Company does not pay fees or other compensation to its directors for attending
meeting or special assignments.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2001 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.
Amount and Nature of
Beneficial Ownership
Percentage
Name and Address (1) of Beneficial Owner Shares of Class
- ---------------------------------------- ------ ----------
Shang Jia Ji 33,000,000 12.80%
Clever Boy Limited 52,825,000 20.48%
----------- -------
All officers and directors as a group (one) 85,825,000 33.28%
(1) Address for all persons and entities is Room. 1801-02 Evening Newspaper
Mansion, 358 Nanjung Rd., Tianjin, PRC and all shares are deemed
beneficially owned by Shang Jia Ji.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company amounts due from / (to) directors and related companies owned
and/ or controlled by a director, Jia Ji Shang, are unsecured, interest-free and
are repayable on demand.
20
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 revenue from the sales
of raw materials to these joint ventures are summarized as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 2000 2001
------------ ------------ ------------
Sales to joint ventures:
Raw materials US$669,976 US$0 US$0
The unrealized profits arising form these transactions were eliminated in the
consolidated financial statements to the extent of the Company interest in these
joint ventures.
The Company and Eternal Technologies, Inc. ("Eternal") have certain common
directors and shareownership. During the year ended December 31, 2001, the
Company purchased $424,000 of Boer goats from Eternal and sold $1,730,000 of
natural grass to Eternal. The Company believes that all sales and purchases were
at prevailing market prices.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
1. Form 8-K dated March 1, 2001 reporting the acquisition of the
water resources and the change in control.
2. Form 8-K dated March 19, 2001 reporting a change in certifying
accountants.
21
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: /s/ Jia Ji Shang
---------------------------
Jia Ji Shang
Chairman of the Board and
Chief Executive Officer
By: /s/ Jian Sheng Wei
---------------------------
Jian Sheng Wei
Chief Financial Officer
Dated: May 20, 2001
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
- ---------- -------- ------
/s/ Jia Ji Shang
- ----------------------
Jia Ji Shang Chairman of the Board and Chief
Executive Officer May 20, 2002
/s/ Macolm Roy Brandon
- ----------------------
Macolm Roy Brandon Director May 20, 2002
/s/ Zhong Cheng Zhang
- ----------------------
Zhong Cheng Zhang Director May 20, 2002
/s/ Shujing Li
- ----------------------
Shujing Li Director May 20, 2002
/s/ Jian Sheng Wei
- ----------------------
Jian Sheng Wei Secretary / Treasurer /
Chief Financial Officer and May 20, 2002
Director
CONSOLIDATED FINANCIAL STATEMENTS
CHINA CONTINENTAL, INC AND SUBSIDIARIES
THE YEARS ENDED DECEMBER 31, 2001 AND 2000
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3-4
Consolidated Statements of Income for the years ended December 31,
2001, 2000 and 1999 F-5
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2001, 2000, and 1999 F-6
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999 F-7-8
Notes to Financial Statements F-9-14
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of China Continental, Inc.
We have audited the accompanying consolidated balance sheet of China
Continental, Inc. (the "Company") and subsidiaries (collectively the "Group") as
of December 31, 2001 and 2000, and the related consolidated statements of
income, retained earnings, and cash flows for the year ended December 31, 2001
and 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements of China Continental, Inc. and subsidiaries as of December
31, 1999, were audited by other auditors whose report dated May 23, 2000,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the over-all 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, 2001 and 2000, and the results of its
operations and its cash flows for the year ended December 31, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
Thomas Leger & Co., L.L.P.
Houston, Texas
March 28, 2002
F-2
ASSETS
December 31,
2001 2000
US$ US$
------ ------
CURRENT ASSETS
Cash and bank balances 11,330,717 7,666,459
Trade receivables - 2,300,670
Third parties 4,568,675 -
Related company 1,715,663 -
Inventory - 3,350,456
Deposit and prepaids 10,048,193 -
----------- -----------
TOTAL CURRENT ASSETS 27,663,248 13,317,585
FIXED ASSETS 2,531,954 2,824,102
LAND LEASE RIGHTS, net of
accumulated amortization of US$9,225,520 and
US$2,307,572 at December 31,2001 and 2000 155,765,864 162,683,812
WATER RESOURCES 25,558,887 25,558,887
Deposit for improvements 1,349,093 -
------------ ------------
TOTAL ASSETS 212,869,046 204,384,386
============ ============
F-3
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2001 2000
US$ US$
------- --------
CURRENT LIABILITIES
Account payable to related company 508,782 769,386
Amounts due to directors 229,210 12
Amounts due to related parties 424,034 375,937
Accounts payable and accrued liabilities 200,608 181,159
----------- ----------
TOTAL CURRENT LIABILITIES 1,362,634 1,326,494
----------- ----------
TOTAL LIABILITIES 1,362,634 1,326,494
----------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value US$0.001 per share:
Authorized:
1,000,000,000 shares authorized:
312,894,000 issued; 257,894,000 outstanding
as of December 31, 2001; and 230,894,000 at
2000 312,894 230,894
Additional paid-in capital 69,602,972 68,549,972
Treasury stock (55,000) -
Retained earnings 141,645,546 134,277,027
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 211,506,412 203,057,893
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY 212,869,046 204,384,387
============= ============
F-4
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2001 2000 1999
US$ US$ US$
------- ------- --------
SALES 21,315,658 5,873,403 -
COST OF SALES 5,323,244 45,648 -
GROSS PROFIT 15,992,414 5,827,755 -
DEPRECIATION AND
AMORTIZATION 7,210,097 2,404,955 -
SELLING AND ADMINISTRATIVE
EXPENSES 413,798 392,413 -
CONSULTING 1,000,000 - -
OTHER INCOME - 50,616 -
INCOME FROM CONTINUING OPERATIONS 7,368,519 3,081,003 -
DISCONTINUED OPERATIONS
Income from operations
of divested entities less
applicable income taxes of
US$2,907,000 for 1999 - 5,509,077 16,805,117
NET GAIN ON DISPOSAL OF ASSOCIATED
COMPANIES AND
INVESTMENTS IN SUBSIDIARIES - 17,604,615 11,431,175
NET INCOME 7,368,519 26,194,695 28,236,292
=========== ============= ============
INCOME PER COMMON SHARE
BASIC AND DILUTED
Income from continuing operations 0.03 0.03 -
Income from discontinued operations - 0.05 0.23
Gain on disposals - 0.18 0.15
0.03 0.26 0.38
=========== ============= ============
AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted 232,288,521 (1) 102,230,137 75,904,100
============ ============= ============
(1) Excludes 55,000,000 shares in treasury
F-5
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
Additional
Share paid-in Retained
capital capital Treasury earnings Total
US$ US$ Stock US$ US$
---------- ------------ ----------- ---------- -------
Balance at December 31, 1998 69,894 45,393,172 79,846,039 125,309,105
Issuance of 30,000,000 shares
on October 9, 1999 at
US$0.37 per share 30,000 11,070,000 - 11,100,000
Assumption of liabilities
on December 31, 1999 and
contribution to capital - 91,800 - 91,800
Net income - - 28,236,292 28,236,292
--------- ------------- ------------- -------------
Balance at December 31, 1999 99,894 56,554,972 108,082,331 164,737,197
--------- ------------- ------------- -------------
Issuance of 131,000,000 shares on
December 23, 2000 at US$0.091975
per share 131,000 11,995,000 - 12,126,000
Net income - - 26,194,696 26,194,696
--------- ------------- ---------- ------------- -------------
Balance at December 31, 2000 230,894 68,549,972 134,277,027 203,057,893
Issuance of 55,000,000 shares
On November 19, 2001 at par 55,000 - (55,000) - -
Issuance of 2,000,000 shares
for services On November 19,
2001 at US$.04
per share 2,000 78,000 - - 80,000
Issuance of 25,000,000 shares
for services
On December 14, 2001 at
US$.04 per share 25,000 975,000 1,000,000
Net income - - - 7,368,519 7,368,519
--------- ------------- ---------- ------------- -------------
Balance at December 31, 2001 $ 312,894 $ 69,602,972 $ (55,000) $141,645,546 $ 211,506,412
========= ============= ========== ============= =============
F-6
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2001 2000 1999
US$ US$ US$
------- ------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income 7,368,519 26,194,696 28,236,292
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,210,096 2,404,955 3,897,230
Issuance of shares for services 1,080,000 - -
Provision for doubtful debts and
diminution in values of investments
and associated companies - - 675,014
Gain on disposal of subsidiaries - (17,604,615) (11,431,175)
(Income) loss allocated to minority interest - - (1,631,346)
(Increase) decrease in assets:
Inventories 3,350,456 (428,971) -
Trade receivables third parties (2,268,005) 5,110,156 1,673,859
Prepayments and deposits (10,048,193) - 74,869
Trade receivables from related companies (1,715,663) - (58,625)
Amounts due from associated companies - - (307,216)
Amounts due from directors - - 139,277
Increase/(decrease) in liabilities:
Accounts payable to related company (260,604) 769,386 -
Amounts due to directors 229,200 (732,709) 1,990,380
Amounts due to related parties 48,096 (375,937) (62,425)
Accounts payable and accrued liabilities 19,449 170,165 (828,533)
Income taxes payable - (2,648,728) 2,987,748
----------- ------------ ------------
Net cash provided by operating activities 5,013,351 12,858,398 25,355,349
=========== ============ ============
F-7
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended December 31,
2001 2000 1999
US$ US$ US$
------- ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES
Deposit (1,349,093) - (159,613,386)
Purchase of water sources - (6,000,000) -
Purchase of fixed assets - (62,083) -
Proceeds from disposal of subsidiaries - 99,543,594
------------ ------------ -------------
Net cash used in investing activities (1,349,093) (6,062,083) (60,069,792)
------------ ------------ -------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Repayment of bank loans - - (83,028)
------------ ------------ -------------
NET (DECREASE) INCREASE IN
CASH AND BANK BALANCES 3,664,258 6,796,315 (34,797,471)
Cash and bank balances, at beginning
of period 7,666,459 870,144 35,667,615
------------ ------------ -------------
Cash and bank balances, at end of period 11,330,717 7,666,459 870,144
=========== ============ =============
SUPPLEMENTARY CASH FLOWS
DISCLOSURES:
1. Interest paid - - 236,700
=========== ============ =============
Income taxes paid - - 125,600
=========== ============ =============
F-8
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. The Company redomiciled to the state
of Nevada in 2002. The Company's principal activity is a 100% investment in
Sun's International Holdings Limited (Sun's International), a holding
company for investments in various operating companies. Sun 's
International was incorporated under the laws of the British Virgin
Islands. All current operations are in the Peoples Republic of China
("PRC").
The consolidated financial statements include the accounts of the Company
and Sun's International and its wholly owned subsidiaries, Billion Pearl
Investments Limited (disposed of in 2000), Prime Hill Investment Limited
(disposed of in 2000), Prime View Industrial Limited (disposed of in 2000),
Danbury Inc., (disposed of in 2001), Wealthy Asia Limited (disposed of in
October 1999), Battonic Company Limited and its operation East
Wu-Zhu-Mu-Qin Banner Green Demonstration Farm ("Dong Wu Farm") (acquired in
1999); Famous Goal International Ltd and its holdings in water resources
(acquired in 2000).
Battonic Company Limited, the Company's only operating company, through its
operation East Wu-Zhu-Mu-Qin Banner Green Demonstration Farm, is engaged in
forage grass agriculture and a breeding center to propagate Boer goats and
other livestock breeds.
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 the PRC.
There were no material adjustments made to present the consolidated
financial statements to conform with US GAAP.
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 owned subsidiaries. All material inter-company balances
and transactions have been eliminated on consolidation.
(b) Cash and cash equivalents
-------------------------
The Company 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.
The Company currently has no bank accounts outside the PRC.
(c) Inventory
----------
Inventories are measured at lower of cost and net realizable value using the
first-in first-out ("FIFO") or weighted average cost formulas.
F-9
3. SUMMARY OF PRINCIPAL ACCOUTNTING POLICIES (Continued)
(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% -4%
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 is 2.5% to 4.0%
(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." The
Company's current operations are exempt from taxation.
(g) Foreign currency translation
----------------------------
The Companies maintain their books and accounting records in Renminb: ("RMB")
the PRC's currency. Translation of amounts from RMB in United States dollars
("US$") has been made at the single rate of exchange of US$1.00:RMB8.30. No
representation is made that RMB amounts have been or could be, converted into
US$ at that rate.
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 to
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 invoices, shipping
documents and signed contracts
(h) Revenue recognition
-------------------
Revenue from the sale of livestock and forage grass is recognized when the
merchandise is delivered and title passes.
(i) Retirement benefits
-------------------
The Companies participate 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
Company 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.
F-10
3. SUMMARY OF PRINCIPAL ACCOUTNTING POLICIES (Continued)
(j) 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.
(k) Earnings Per Share
------------------
The Company has adopted Statement of Financial Accounting Standards NO. 128
("SFAS 128"), "Earnings Per Share." Under SFAS 128, basic earnings per share is
computed by dividing income available to common shareholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive.
Average number of shares outstanding do not include 55,000,000 shares issued
November 19, 2001 which are included in the financial statement as treasury
stock. The Company has received the shares back in 2002 and is nullifying the
transaction.
Certain balances in the prior year have been reclassified to conform to the
presentation used in the current year.
4. INCOME TAXES
------------
The Companies operated in several jurisdictions prior to the year 2001 and may
be subject to taxes in those jurisdictions.
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 Company
will distribute in the future, and capital gains arising from the Company's
investments are not subject to income tax in the British Virgin Islands.
Those companies carrying on operations 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% on their estimated taxable income for the year. No companies are
carrying on operations in Hong Kong at December 31, 2001 and 2000.
Companies with operations in the PRC may be subject to PRC income tax for income
on services rendered therein. The applicable effective tax rate for income
derived from services tendered in that jurisdiction is approximately 8.5%. The
Company is of the opinion there will be no taxes on operations in the PRC for
the next four years because of a special exemption.
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
approximately $142,000,000 and $134,277,027 at December 31, 2001 and 2000.
Because those earnings are considered to be indefinitely invested, no provision
for United States corporate income taxes have 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, 2001 and 2000 was approximately $49,000,000 and $46,000,000,
respectively.
F-11
5. FIXED ASSETS
Year Ended December 31,
2001 2000
US$ US$
------ -------
Cost:
Machinery and equipment 2,921,485 2,921,485
Less: accumulated depreciation (389,531) (97,383)
---------- -----------
Net book value 2,531,954 2,824,102
========== ===========
6. ACQUISITIONS AND DISPOSITIONS
During 2000 the Company disposed of Billion Pearl Investments Limited, Prime
Hill Investment Limited, Prime View Industrial Limited; and ceased operations
and liquidated Danbury, Inc.
The following amounts represent the non-cash portion of these transactions:
US$
------
Fixed assets 390,560
Interest in associated companies 107,130
Amount due from related companies 1,311,566
Other 646,263
Bank Overdraft (510,409)
Bank import loans (385,597)
Income taxes payable (15,283,716)
Amounts due to directors (2,618,165)
Secured bank loan (1,262,255)
--------------
(17,604,623)
==============
On December 23, 2000 the Company initiated the purchase of a 100% interest in
Famous Goal International Limited for a consideration of US$6,000,000, exchange
of the Company's Megaway interest was valued at US$7,432,887 and 131,000,000
shares of stock in the Company. The shares were valued
6. ACQUISITIONS AND DISPOSITIONS
On December 23, 2000 the Company initiated the purchase of a 100% interest in
Famous Goal International Limited for a consideration of US$6,000,000, exchange
of the Company's Megaway interest was valued at US$7,432,887 and 131,000,000
shares of stock in the Company. The shares were valued at US$12,126,000. The
principal assets of Famous Goal International Limited are 2.6 square kilometers
of land with two water resources located in Wulagai Development District
northwest of Xi Lin Gol Meng. The water resources can be used to produce bottled
water.
Had the 131,000,000 shares of common stock been outstanding through out the
periods presented, earnings per share would have been US$0.13 and US$0.12, 2000
and 1999 respectively.
F-12
6. ACQUISITIONS AND DISPOSITIONS (Continued)
On October 4, 1999, Sun's International sold its 100% interest in Wealthy Asia
Limited to an unrelated third party for a consideration of approximately
US$l00,000,000.
The following amounts represent the non-cash portion of this transaction:
Cash disposed of with sale of subsidiary US$ 214,772
Accounts receivable 172,686
Prepayments, deposits and other 156,768
Amounts due from directors 5,100,000
Land lease rights, neta 79,117,281
Income taxes payable (80,917)
Accounts payable and accrued liabilities (34,464)
------------
84,646,127
============
On October 9,1999, the Company initiated the purchase of a 100% interest in
Battonic Co., Ltd. for a consideration of US$148,363,386 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 Dong Wu Farm. Dong Wu has been established to run a
breeding center to propagate Boer goats and other livestock breeds. Dong Wu'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 and may be extended by
the Company.
7. 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 it cash deposits with an international bank.
(ii) Amounts due from related companies
At December 31, 2001, there is US$1,715,663 due from a related company.
The Group does not have a policy of requiring collateral.
(iii)Amounts due from and to directors (See "Additional related party balances
and transactions")
F-13
8. 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) Accounts payable and amounts due to related companies
and directors are stated at their book value which
approximates their fair value.
9. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Group's operations are conducted in the PRC. Accordingly,
the Group's business, financial condition and results of
operations may be influenced by the political, economic and
legal environments in the PRC, and by the general state of the
PRC economy.
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.
10. ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS
The Group's amounts due from/(to) directors, related parties,
and related company are unsecured, interest-free and are
repayable on demand. Eternal Technology Group, Ltd.
("Eternal") is a related company. One of the Company's
officers, directors and major shareholder owns approximately
24% of Eternal.
Dong Wu Farm acquired 2,000 goat embryos and services from
Eternal, a related company, for US$425,000 in December, 2000.
Dong Wu Farm's 2,000 goats with implanted embryos were sold in
March, 2001 for approximately US$1,687,000.
Dong Wu Farm had sales of forage grass to Eternal for
approximately US$1,735,000 during 2001. These sales were at
the same price as to third parties.
11. CONTINGENCIES AND COMMITMENTS
During September, 2001 the Dong Wu Farms entered into three
contracts with Inner Mongolia Sai Ri Ji He Husbandry Co. Ltd.
The contracts are for the construction of fences, roads and
the preparation of fields for planting in the spring of 2002.
The roads and fences estimated cost are US$4,180,000. The cost
for preparation of the fields is approximately US$20,096,000.
The contracting company required a deposit of approximately
US$11,397,000 with the balance to be paid in 2002.
F-14