SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARIERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ART OF 1934
For the quarterly period ended September 30, 2002
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 33-3276-D
CHINA CONTINENTAL, INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0431063
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1801-1802 Evening Newspaper Mansion, 358 Nanjing Road, Tianjin P.R.C.
-----------------------------------------------------------------
(Address of principal executive offices)
(86) 22-2750-1812
-------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES NO X
As of September 30, 2002, 280,070,000 shares of Common Stock of the issuer
were outstanding.
CHINA CONTINENTAL, INC.
INDEX
Page
Number
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001..............................................3
Consolidated Statements of Income - For the
three months and nine months ended September 30, 2002 and 2001.4
Consolidated Statements of cash Flows -
For the nine months ended September 30, 2002 and 2001..........5
Notes to Consolidated Financial Statements.....................6
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations............................7
PART II - OTHER INFORMATION
Signatures....................................................11
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements CHINA
CONTINENTAL, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in '000 United States Dollars)
September 30, December 31,
2002 2001
(unaudited) (audited)
----------- ------------
ASSETS
Current assets
Cash and deposits $ 7,617 $ 11,331
Accounts receivable, net of provision 2,024 4,568
Prepayments, deposits and other receivables 710 0
Prepaid expenses 3,727 10,048
Amount due from related company 0 1,716
------------ -----------
Total Current Assets 14,078 27,663
------------ -----------
Fixed Assets 2,198 2,532
Land use rights 150,577 155,766
Land improvement 11,061 0
Water sources 1 25,559
Deposit for improvement 0 1,349
------------- -----------
Total Assets $ 177,914 $ 212,869
============= ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Payable and accruals $ 273 $ 201
Due to related companies 533 509
Amount due to a related party 26 424
Amounts due to directors 229 229
------------- -----------
Total current liabilities 1,061 1,363
------------- -----------
Long-term liabilities 0 0
------------- -----------
Total liabilities 1,061 1,363
------------- -----------
Stockholders' Equity
Share capital 335 312
Contributed surplus 70,063 69,603
Treasury stock (55) (55)
Retained earnings 106,510 141,646
------------- -----------
Total Stockholders' Equity 176,853 211,506
------------- -----------
Total Liabilities & Stockholders' Equity $ 177,914 $ 212,869
============= ===========
The accompanying notes are an integral part of these financial
statements
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Stated in '000 United States Dollars)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
--------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues
Sales of livestock $ 0 $ 0 $ 2,349 $ 9,495
Sales of forage grass 1,012 3,233 2,024 3,233
Cost of sales (38) (199) (680) (3,550)
----------- ----------- ----------- -----------
Gross Profit 974 3,034 3,693 9,178
Depreciation and amortization (1,929) (1,803) (5,661) (5,408)
Land improvement costs (3,727) 0 (7,454) 0
Selling and administration expenses (33) (38) (156) (208)
----------- ----------- ----------- -----------
Income before income taxes (4,715) 1,193 (9,578) 3,562
Income taxes 0 0 0 0
----------- ----------- ----------- -----------
(4,715) 1,193 (9,578) 3,562
Impairment loss on water sources 0 0 (25,558) 0
----------- ----------- ----------- -----------
Net Income (loss) $ (4,715) $ 1,193 $ (35,136) $ 3,562
=========== =========== =========== ===========
Earnings (loss) per share excluding
Impairment loss (0.02) 0.01 (0.13) 0.02
=========== =========== =========== ===========
Weighted average common and
equivalent shares outstanding 267,947,000 230,000,000 260,782,000 230,000,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(States in '000 United States Dollars)
Nine Months Ended Sept. 30,
2002 2001
---------- ------------
Cash Flows From Operating Activities:
Net Income/(loss) $ (35,136) $ 3,562
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 5,661 5,408
Impairment loss 25,558 0
Issue of shares for repayment of debt 484 0
(Increase)decrease in assets:
Account receivable 2,544 (2,556)
Inventories 0 3,350
Prepayments, deposits and other receivable (710) 0
Prepaid expense 6,321 0
Due from related company 1,716 (47)
Increase (decrease) in liabilities:
Payable and accruals 72 (23)
Due to related companies 24 (267)
Due to directors and related parties (398) 283
---------- ---------
Net Cash Provided by/(Used in) Operating Activities 6,136 9,710
Net cash provided by (used in) Investing Activities
Land improvement (11,199) 0
Deposit for improvement 1,349 0
---------- ---------
(9,850) 0
Net increase/(decrease) in cash (3,714) 9,710
Cash, beginning of period 11,331 7,666
---------- ---------
Cash, end of period $ 7,617 $ 17,376
========== =========
The accompanying notes are an integral part of these financial statements
Note 1 -- Basis of Presentation
The unaudited condensed consolidated financial statements of China Continental,
Inc. have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the requirements
for reporting on Form 10-Q. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
Results shown for interim periods are not necessarily indicative of the results
to be obtained for a full fiscal year. These interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company Form 0-K for the fiscal year ended December 31, 2001.
Note 2 -- Foreign Currency Conversation
The Company financial information is presented in US dollars. Reminbi dollars
have been converted into US dollars at the exchange rate of 8.3 to 1.
Note 3 - Common Stock
For the period ended September 30, 2002, the Company issued 22,870,000 shares of
its common stock; 20,000,000 shares were issued for the payment of a related
party payable for the approximate amount of $400,000 and 2,870,000 shares were
issued for the payment of accrued legal fees of approximately $57,000.
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. Results of Operation
Comparison of the Three Months Ended September 30, 2002 to the Three Months
Ended September 30, 2001.
Revenues
Revenues decreased by $2,221,000 or 68.69% to $1,012,000 for the three months
ended September 30, 2002 from $3,233,000 for the corresponding period of the
prior year. The decrease occurred because the harvesting of forage grass was
slightly delayed but will be completed in October. Because of the seasonality of
the Company's business, the majority of the Company's revenue will be generated
in the fourth quarter.
Cost of Sales
Cost of sales represents salaries, the cost of planting forage grass and
the cost of livestock. Cost of sales decreased by $161,000 or 80.90% to $38,000
for the three months ended September 30, 2002 from $199,000 for the
corresponding period of the prior year. The decrease in the cost of sales
resulted because of the delay in the harvesting of forage grass and the absence
of the sale of livestock.
Depreciation and Amortization
Depreciation and amortization increased by $126,000 or 6.98% to 1,929,000
for the three months ended September 30, 2002 from $1,803,000 for the
corresponding period of the prior year. Depreciation and amortization expense
represents amortization and depreciation of the land use right of
East-Wu-Zhu-Mu-Qin Banner Green Demonstration Farm and improvements thereto.
File land use rights are being amortized over a period of twenty-five years. The
increase in depreciation and amortization for the third quarter resulted from
the depreciation of the land improvement costs incurred of approximately
$11,199,000 which is being depreciated over the remaining life of the lease.
Land improvement costs
The land improvement costs of approximately $3,727,000 represents the costs
to survey, fertilize, perform chemical analysis and provide watering for
cultivating 40,000 mu (approximately 2,667 hectares) for general agricultural
use and to maintain its productive condition. The remaining $3,727,000 payable
under the contract will be expensed over the balance of this calendar year.
Selling and Administrative Expenses
Selling and administrative expenses decreased by $5,000 or 13.15% to
$33,000 for the three months ended September, 2002 from $38,000 for the
corresponding period of the prior year. The decrease is attributable to the
shutting of the administrative office in Hong Kong.
Income Taxes
No income tax have been provided as management believes that there is
minimal income tax exposure under the applicable tax rules.
Net Income
Net income decreased by $5,908,000 or 495.22% to a loss of $4,715,000 for
the three months ended September 30, 2002 from net income of $1,193,000 for the
corresponding period of the prior year. The decrease is principally attributable
to the discontinuation of the sale of native goats and cows and the increase in
land improvement costs, and the delay in the harvesting and sale of forage
grasses.
Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended
September 30, 2001
Revenues
Revenues decreased by $8,355,000 or 65.64% to $4,373,000 for the nine
months ended September 30, 2002 from $12,728,000 for the corresponding period of
the prior year. The decrease occurred because 60,000 goats and 3,000 cows were
sold during the first six months ended June 30, 2001 producing revenue of
approximately $7,671,000. These goats and cows were acquired as part of the
acquisition of East-Wu-Zhu-Mu-Qin Banner Green Demonstration Farm in 2000.
Because the entire inventory of goats and cows was sold in 2001, there were no
livestock sales for the nine months ended September 30, 2002. Revenue for nine
months ended September 30, 2002 represent sales of forage grass and goats
transplanted with embryos. However, because of the seasonality of the Company's
business, management believes that the majority of the Company's revenues will
be earned in the fourth quarter.
Cost of Sales
Cost of sales represents salaries, the cost of planting forage grass, the
cost of livestock, the cost of goats and embryos and the direct costs of embryos
transplanting. Cost of sales decreased by $2,870,000 or 80.84% to $680,000 for
the nine months ended September 30, 2002 from $3,550,000 for the corresponding
period of the prior year. The decrease in the cost of sales resulted because of
the absence of livestock sales in the current year and the delay in the
harvesting of forage grasses.
Depreciation and Amortization
Depreciation and amortization increased by $253,000 or 4.67% to 5,661,000
for the nine months ended September 30, 2002 from $5,408,000 for the
corresponding period of the prior year. Depreciation and amortization represents
amortization and depreciation of the land use right of East-Wu-Zhu-Mu-Qin Banner
Green Demonstration Farm over a period of twenty-five years. The increase in
depreciation and amortization resulted from the depreciation of the land
improvement costs incurred in the last year of approximately $11,199,000 which
is being depreciated over the remaining life of the lease.
Land improvement costs
The land improvement costs of approximately $7,454,000 represent the cost
to survey, fertilize, perform chemical analysis and provide watering for
cultivating 40,000 mu (approximately 2,667 hectares) for general agricultural
use and to maintain its productive condition. The remaining $3,727,000 payable
under the contract will be expensed over the balance of this calendar year.
Selling and Administrative Expenses
Selling and administrative expenses decreased by $52,000 or 25.00% to
$156,000 for the nine months ended September, 2002 from $208,000 for the
corresponding period of the prior year. The decrease is mainly attributable to
the shutting down of the administrative office in Hong Kong.
Income Taxes
No income tax have been provided as management believes that there is
minimal income tax exposure under the applicable tax rules.
Impairment loss
The impairment loss represents the diminution in value of the Company's
water resources. Because this resource has not been developed, because of the
cost to develop this resource, and because of the cost of transportation, this
property has been written down. However, should an efficient form of
transportation be developed, the Company will reassess this resource.
Net Income
Net income decreased by $38,698,000 or 1086.41% resulting in a loss of
$35,136,000 for the nine months ended September 30, 2002 compared to income of
$3,562,000 for the corresponding period of the prior year. The decrease is
principally attributable to the impairment loss of water sources, the
discontinuation of the sale of native goats and cows, the increase in land
improvement costs and the delay in harvesting and marketing of forage grass.
Liquidity and Capital Resources
At September 30, 2002, the company had working capital of $13,017,000 and
cash of $7,617,000. This compares with cash of $11,331,000 and a working capital
of $26,300,000 at December 31, 2001. The decrease in working capital is
primarily due to the decrease in prepayments made for the land improvements.
Net cash provided by operating activities decreased to $6,136,000 for the
nine months ended September 30, 2002 from $9,710,000 for the corresponding
period of the prior year. This decrease is resulted from reduced earnings which
was partially offset by an increase in non-cash charges, principally the
impairment charge and net changes in the current accounts.
Cash used in investing activities totaled $9,850,000 for the nine months
ended September 30, 2002. There were no investing activities for the nine months
ended September 30, 2001.The cash used in investing activities for the current
period consisted of land improvements of $11,199,000 less the deposit of
$1,349,000. For both the nine months ended September 30, 2002, and 2001 the
Company had no financing activities.
During the three months ended September 30, 2002, the Company issued
22,870,000 shares of its common stock, 20,000,000 shares were issued to a former
employee of the Company for prior services rendered and funds advances, together
totaling approximately $400,000, and 2,810,000 shares were issued for the
payment of accrued legal fees of approximately $57,000.
In most years, internally generated funds and available bank facilities
were sufficient to fund the Company operations and financial its growth. While
the Company has sufficient capital to execute its business plan for the next
twelve months, there is no guaranty that the Company will not have to access the
capital markets to fully develop its agricultural property.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
Signature
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
CHINA CONTINENTAL, INC.
November 14, 2002
/s/ Jia Ji Shang
---------------------------------------
Jia Ji Shang
Chairman and Chief Executives Officer
/s/ Jian Sheng Wei
November 14, 2002, ---------------------------------------
Jian Sheng Wei
Chief Financial Officer and Secretary
CERTIFICATIONS
I, Jia Ji Shang, certify that:
1. I have reviewed this quarterly report on Form 10-Q of China Continental,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
By:/s/ Jia Ji Shang
----------------------
Jia Ji Shang
Chief Executive Officer
I, Jian Sheng Wei, certify that:
1. I have reviewed this quarterly report on Form 10-Q of China Continental,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
By: /s/ Jian Sheng Wei
---------------------
Jian Sheng Wei
Chief Financial Officer
Item 4. Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our chief
executive officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a
date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in
our internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to the
Evaluation Date.