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, 2002
[ ] 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)
Room 1801-02 Evening Newspaper Mansion, 358 Nanjing Road, Tianjin, P.R.C.
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant Telephone Number, Included Area Code: 011-86-22-2750-1802
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 X NO
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-K.
[X]
The issuer revenues for its most recent fiscal year were $16,518,072.
As of December 31, 2002, 280,070,000 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 OTC
Bulletin Board, was approximately $1,245,750
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
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. DESCRIPTION OF BUSINESS 4
ITEM 2. PROPERTIES 5
ITEM 3. LEGAL PROCEEDINGS 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 6
ITEM 6. SELECTED FINANCIAL DATA 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION 8
ITEM 7A QUANTITATIVE AND QUALIFICATION DISCLOSURE
ABOUT MARKET RISK 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA 12
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 12
ITEM 11. EXECUTIVE COMPENSATION 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
ITEM 14. CONTROLS AND PROCEDURES 15
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTINGS
ON FORM 8-K 16
SIGNATURES 16
ITEM 16. 16
CERTIFICATIONS 17
FORWARD LOOKING STATEMENTS
This annual report contains certain forward-looking statements within the
meaning of the federal securities laws. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "the Company believes," "management believes" and similar
language. The forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and assumptions, including those
set forth in the discussion under "Description of Business," including the "Risk
Factors" described in that section, and "Management's Discussion and Analysis or
Plan of Operation." Our actual results may differ materially from results
anticipated in these forward-looking statements. We base our forward-looking
statements on information currently available to us, and we assume no obligation
to update them.
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" of this Form 10-K.
The Company
China Continental, Inc. (the "Company" or "CCI") focuses on the planting,
harvesting and sale of forage grass.
The Company's operations are based at its East Wu Bio-Tech Farm. The farm
comprises approximately 406 square kilometers or slightly more than 251 square
miles. It is located in East Ujimqin Qi, in Inner Mongolia in the People's
Republic of China (PRC). East Ujimqi Qi is an agricultural based area where
livestock (beef, cattle, goats and sheep) and dairy are the primary agricultural
products. The Company became a US listed public company via a reverse merger in
February, 1995.
Business
The Company's primary focus has been on the planting, cultivating and sale
of forage grass.
Xilinguole Grassland, where the forage grass base is located, is one of the
best-preserved and most valued natural areas in The PRC. "Xilinguole Prairie
Nature Protection Zone" was accepted by UNESCO as a unit in "MAB" in 1987. In
1997, it was designated as The PRC's State Nature Protection Zone. The forage
grass base of CCI is located in the Wulagai Development Zone in the northeast
section of the Xilinguole Prairie (46(cent)X16i 46(cent)X40iN, 119(cent)X00i
119(cent)X21iE). It is free from pollution because of its remote location and
sparse population. The soil is still untilled, which makes it one of the few
green virgin grasslands in the world.
With the increased meat consumption by Chinese residents, there has been an
increased demand for China's forage grasses. It has been necessary to plant
specialized forage grass like alfalfa and green millet to address market
demands. These grass types are not only types of fodder favored by cows and
sheep, but improve the soil, which makes them preferable as a domestic forage
grass planting. The consumption of milk and milk products by residents of China
has also been increasing, contributing to an increasing demand for forage
grasses.
In 2002, the Company's harvested 78,750 tons of green naked oats which sold
for $96 per ton, 7,500 tons of green millet which sold for $96 per ton, 16,800
tons of alfalfa which sold for $180 per ton and 39,000 tons of natural grass
which sold for $72 per ton. The bulk of this year's harvest of grasses was sold
to Beijing Fengrun Fine Breed Husbandry
4
China Continental is planning to leverage its technologies, scientific
planting methods and modern management techniques to establish one of The PRC's
largest grassland areas and expects to utilize American machinery and high
quality imported seeds. The Company has spent approximately $11 million of a
non-recurring nature to improve the quality of the land and increasing the
productivity of high quality planted grasses. It is expected that the
productivity will continue to improve in the coming years.
The initial phase of the plan is to increase the acreage of high quality
forage grass to approximately 36,500 hectares by 2004. If this goal is achieved,
the total yearly production of high quality forage grasses should be
approximately 200,000 metric tons.
Employees
As of December 31, 2002, the Company employed an administrative staff of 8
people and a technical and sales staff of approximately 40 persons, all in the
PRC.
Competition
The market for forage grass is currently in imbalance, with demand
exceeding supply. This strong demand for forage grass is expected to continue
for the next several years. The market for forage grass is highly fragmented in
the PRC. To date, there has been no significant price competition in our
markets, but price competition may become a factor in the future.
ITEM 2. PROPERTIES
The Company principal administrative office, marketing, technical
facilities and supporting teams are located in 1801-02 Evening Newspaper
Mansion, 358 Nanjing Road, Tianjin, People's Republic of China which is on a
lease term of three years at a monthly rental of approximately US$2,400.
East Wu Bio-Tech Farm, is located in the People's Republic of China. The
total farm area is approximately 406 square kilometers or 251 square miles. It
is located in Dong Ujimqin Qi, which is in Inner Mongolia, the People's Republic
of China.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material pending legal
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5
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.
2003 2002
High Low High Low
First Quarter 0.19 0.06 0.13 0.06
Second Quarter 0.11 0.03 0.13 0.06
Third Quarter 0.05 0.01 0.09 0.06
Fourth Quarter 0.04 0.01 0.13 0.06
The quotation reflects the inter-dealer prices without retail markup,
markdown or commission and may not represent actual transactions.
Holders
At December 31, 2002 there were approximately 3,260 holders of record.
Dividends
Since fiscal 1994, the Company has not declared or paid any cash dividends
on its Common Stock and does not expect to declare or pay any such dividend in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(In thousand United States dollars, except per share data)
The following table sets forth, for the periods and dates indicated,
selected consolidated financial and operating data for the Company. The
financial data was derived from the consolidated financial statements of the
Company and should be read in conjunction with the Company audited consolidated
financial statements in the Index to Financial Statements on page F-1 of this
report.
6
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec 31 Dec 31 Dec 31 Dec 31 Dec 31
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Income Statement Data:
Automatic production lines 0 0 0 36,434 32,806
Raw materials 0 0 0 670 1,594
Breeding center 0 9,398 0 1,770 2,388
Forage grass 16,518 12,138 5,873 0 0
---------- --------- --------- --------- --------
Total sales 16,518 21,316 5,873 38,874 36,788
Cost of sale 14,034 5,323 45 14,674 14,284
---------- --------- --------- --------- --------
Gross profit 2,484 15,993 5,828 24,200 22,504
Impairment loss on water resources (25,559) 0 0 0 0
Depreciation of fixed assets (7,587) (7,210) (2,405) (3,897) (4,841)
Selling and administrative expenses (557) (414) (393) (1,205) (2,395)
(Provision) Recovery for
doubtful accounts 0 0 (1) (675) (681)
Financial income (expenses), net 0 0 0 (126) (165)
Other income (expenses) net 2 0 51 (9) 360
Consulting expenses 0 (1,000) 0 0 0
Gain on disposal of Subsidiaries 0 0 17,608 11,431 0
Income from discontinued operation 0 0 5,505 0 0
Share of income/ (loss) of
associated companies 0 0 0 0 103
--------- --------- --------- --------- --------
Income before income tax (31,217) 7,369 26,195 29,719 14,885
Income taxes 0 0 0 3,114 2,890
--------- --------- --------- --------- --------
Income before minority interest (31,217) 7,369 26,195 26,605 11,995
--------- --------- --------- --------- --------
Minority interest 0 0 0 1,631 2,114
--------- --------- --------- --------- --------
Net income (31,220) 7,369 26,195 28,236 14,109
--------- --------- --------- --------- --------
Net income per share (0.12) 0.03 0.26 0.38 0.23
========= ========= ========= ========= ========
Weighted average shares
outstanding (in millions) 265,581 232,289 102,230 75,904 62,306
========= ========= ========= ========= ========
7
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec 31 Dec 31 Dec 31 Dec 31 Dec 31
2002 2001 2000 1999 1998
-------- -------- -------- -------- ---------
Balance Sheet Data at period end
Working Capital (deficit) 18,930 26,301 11,991 (14,678) 35,938
--------- -------- -------- --------- --------
Total Assets 182,588 212,869 204,384 188,941 253,269
--------- -------- -------- --------- --------
Long-term Liabilities 0 0 0 1,245 1,261
--------- -------- -------- --------- --------
Shareholders Equity 180,839 211,506 203,058 164,737 128,543
--------- -------- -------- --------- --------
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This annual report contains certain forward-looking statements within the
meaning of the federal securities laws. These include statements about our
expectations, beliefs, intentions or strategies for the future, which we
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "the Company believes," "management believes" and similar
language. The forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and assumptions, including those
set forth in the discussion under "Description of Business," including the "Risk
Factors" described in that section, and "Management's Discussion and Analysis or
Plan of Operation." Our actual results may differ materially from results
anticipated in these forward-looking statements. We base our forward-looking
statements on information currently available to us, and we assume no obligation
to update them.
Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December
31, 2001
Revenues
Revenues decreased by $4,798,000 or 22.50% to $16,518,000 for the twelve
months ended December 31, 2002 from US $21,316,000 for the prior year. This
decrease is attributable to the discontinuation of sales of breeding stock which
generated $7,590,000 for the twelve months ended December 31, 2001.
Cost of Sales
Costs of Sales of represents the cost of seeds, salaries and wages paid to
workers for the harvesting and sale of forage grass, and land improvement costs
of a recurring nature. Cost of sales increased by $8,711,000 or 163.6% to
$14,034,000 from $5,323,000 for the year ended December 31, 2001. This increase
resulted from land improvement costs deemed of a recurring nature of
approximately $11,180,000 which were charged to the current period.
8
Impairment Loss On Water Resources
The impairment loss represents the diminution in value of the water
resources. Because the water source will not be commercialized in the near
future, its value as a business asset was impaired.
Depreciation and Amortization
Depreciation and amortization increased by $377,000 or 5.2% to $7,587,000
for the year ended December 31, 2002 from $7,210,000 for the prior year.
Depreciation and amortization is taken on the land use right of East
Wu-Zhu-Mu-Qin banner demonstration Farm and is charged rateably over a period of
twenty-five years. The increase in depreciation and amortization resulted from
the addition of permanent land improvements of approximately $11,199,000 made
during 2002 which are being depreciated over the remaining period of the lease.
Selling and Administrative Expenses
Selling and administrative expenses include salaries of company personnel
and general corporate overhead. Selling and administrative expense increased by
$143,000 or 34.54% to $557,000 for the year ended December 31, 2002 from
$414,000 for the prior year. The increase resulted because of increased
operations at the Company's facilities.
Consulting
The consulting expense of $1,000,000 was incurred for services rendered in
connection with corporate re-engineering and management consulting during the
year ended December 31, 2001. No such expenses were incurred for the year ended
December 31, 2002
Net Loss
As a result of the foregoing, the Company incurred a loss of $31,217,000
from continued operations for the year ended December 31, 2002 compared to a
profit of $7,369,000 for the prior year. The loss resulted from the impairment
of the water resources of $25,559,000 and the charge for the land improvement
costs of $11,180,000.
Twelve Months Ended December 31, 2001 compared to Twelve Months Ended December
31, 2000
Revenues
Revenues from continuing operations increased by US $15,443,000 or 262.95%
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 initial sale
of goats who received embryos, and from the first sales of forage grasses.
Cost of Sales
Costs of Sales represents the purchase price of embryos and recipients, 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 from US $45,000 for
the prior year. The increase in the cost of sales is attributable to the sale of
forage grass and because there was no purchase of embryos or recipients in 2000.
9
Amortization of Fixed Assets
Amortization expense increased by US $4,805,000 or 199.79% to US $7,210,000
for the year ended December 31, 2001 from US $2,405,000 for the prior year. The
increase is attributable to a full year of depreciation and amortization of the
East Wu facility compared only to a quarter 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 $ 22,000 or 5.6% to US $414,000 for the year ended December 31, 2001 compared
to US $392,000 for the prior year. The increase resulted from an increase in
business at the company's facilities.
Consulting
Consulting expenses totaled $1,000,000 for the year ended December 31, 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 for management consulting
Other income
The Company had no other income for the year ended December 31, 2001, but
had other income of $50,616 for the year ended December 31, 2000. In addition,
these were also other 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 operation of
divested entities totaling $5,509,077.
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, as all the
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's income from continuing
operations totaled $7,368,519 for the year ended December 31, 2001, an increase
of $4,287,516 or 139.20% from the $3,081,003 for the year ended December 31,
2000. Earnings per share remained at $0.03 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.
10
Liquidity and Capital Resources
At December 31, 2002, the Company had working capital of $18,588,000,
including a cash balance of US $13,883,000. This compares to a working capital
of $26,300,000 and a cash balance of $11,331,000 at December 31, 2001.
Net cash provided by operating activities increased to $11,938,000 from
$5,013,000 for the prior year. Although the Company's income decreased from a
profit of USD7,369,000 to a loss of USD31,217,000, this was more than offset but
a non-cash charge of USD25,559,000 for the impairment of the water resources, a
small increase in depreciation and amortization, and changes in the current
accounts.
The Company used $9,850,000 in investing activities for the year ended
December 31, 2002 compared to $1,349,000 for the year ended December 31, 2001.
The increase is entirely attributable to expenditures for land improvements in
the year ended December 31, 2002, USD(11,199,000) which was partially offset by
the refund of a deposit USD(1,349,000) made in the year ended December 31, 2001.
The Company had USD464,000 of cash provided from financing activities for
the year-ended December 31, 2002 compared to $0 for the year ended December 31,
2001. The cash provided for the year-ended December 31, 2002 came from the sale
of shares USD(400,000) and from a capital contribution of a shareholder
USD(64,000).
The Company's business has historically not been capital intensive. In most
years internally generated funds were sufficient to fund the Company operations
and financial its growth. 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 in the PRC for the
foreseeable future. However, the use of the Company's cash has been restricted
by the Company's Chief Executive Officer to uses in the PRC. Therefore, if the
Company is to pay its non-PRC expenses, it will have to raise additional funds
from the sale of its shares or from third party loans.
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
11
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 and the sale of breeding stock. The Company has now moved away from
this line of business into planting and sales of forage grass 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, and most
recently SARS. 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.
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-26. An index to such materials appears on page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND 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 50 Chairman of the Board and Chief
Executive Officer
Jian Sheng Wei 57 Chief Financial Officer/Secretary
And Director
Malcolm Roy Brandon 57 Technical Director
Zhang Cheng Zhang 62 Director
Shujing Li 41 Director
12
Each Director is serving a one-year term that expires after the next annual
meeting of the Company's shareholders, or until their successors are elected and
qualified Executive Officers of the Company are elected by and serve at the
discretion of the Board of Directors. As of the date of this report, none of the
officers or directors of the Company have filed the Forms specified by Section
16a of the Exchange Act.
Mr. Jia Ji Shang, is the Chairman and Chief Executive Officer of the
Company. He holds a Master of Business Administration from Ukraine Institute of
Wisconsin International University. He has more than 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 in 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's Degree in civil engineering
and a Master in Business Administration. He has over 30 years experience in the
operation, research and management of the agriculture and husbandry industry.
Mr. Wei has established breeding centers and large-scale slaughterhouses in
Inner Mongolia and Hubei Province. Mr. Wei specializes in animal husbandry
operation and is responsible in the development of business in the Far East
Region, South Africa, Australia and North America.
Mr. Malcolm Roy Brandon, is the Technical Director for 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 &
Repatriation Hospital. Mr. Brandon received his Bachelor of Agricultural Science
and PhD from the University of Sydney. He has more than 26 years of experience
in basic research, development and production of biological products. He has
been a visiting professor at Oxford University and Michigan State University and
he has 102 patents on his research.
Professional Zhong Cheng Zhang, is a Director of the Company. He is a
leader in animal biology and has contributed in maintaining the Peoples'
Republic of China's highly competitive research work in this field. He is
conducting eight research projects for the Government and has over 30 years
experience in biotechnology. He has published over 60 research papers, and
books. He has also received two honorary awards from China Agriculture and
Husbandry institute for best thesis of the year.
13
Mr. Shujing Li, is a Director of the Company. He received his Doctorate in
Agriculture Science from China Agricultural University. He is responsible for
developing, researching and supplying technologies in agricultural genetics. He
established state owned project "95", a project employing agricultural genetics
to improve the quality of existing foodstuff. He has published more than 20
research papers. 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid for services rendered
during the last three fiscal years by the Company to its chief executive
officers and the remaining most highly paid executive officer who earn more than
USD100,000 for the three fiscal years ended December 31, 2002
Names of individuals Year Salary Bonus
- -------------------- ------ -------- -------
Jai Ji Shang (1) 2000 0 0
2001 0 0
2002 0 0
No cash compensation was paid or accrued by the Company in excess of $100,000
for any other executive officer. The Company does not provide retirement,
pension, profit sharing or similar benefit programs or plans to its officers.
The Company does not pay fees or other compensation to its directors for
attending meeting or special assignments.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2002 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
Name and Address Beneficial Ownership Percentage
of Beneficial Owner Shares of Class
- -------------------- --------------------- -----------
Shang Jia Ji (1) 33,000,000 12.80%
Clever Boy Limited (1) 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 at Room. 1801-02 Evening Newspaper
Mansion, 358 Nanjing Road, Tianjin, PRC
14
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. As of December 31,2002 an amount of $586,877 was due to
Mr. Jia Ji Shang, a director of the Company. Moreover, an amount of US $424,034
was due to two former officers of the Company at December 31, 2001 had been
settled during the year ended December 31, 2002.
East Wu Farm acquired 3,000 and 2,000 goat embryos and services from
Eternal technology Group, Ltd. ("Eternal"), a related company, for $600,000 and
$425,000 in November, 2001 and December, 2000. East Wu Farm's 3,000 and 2,000
goats with implanted embryos were sold in March 2002 and march 2001
approximately $2,349,000 and $1,687,000 respectively. One of the Company's
officers, directors and major shareholder owns approximately 38% of Eternal.
East Wu Farm had sales of forage grass to Eternal for approximately
$1,735,000 during 2001. These sales were at the same price as to third parties.
ITEM 14. 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.
15
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
ITEM 16. PRINCIPAL ACCOUNTANT FEES
Year-Ended Year-Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Audit Fees $ 72,000 $ 60,000
Total Fees $ 72,000 $ 60,000
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA CONTINENTAL, INC.
/s/ JiaJi Shang
------------------------------------
Dated: May 15, 2003 JiaJi Shang, Chief Executive Officer
/s/ Jian Sheng Wei
---------------------------------------
Dated: May 15, 2003 Jian Sheng Wei, Chief Financial Officer
Name Title Date
- -------- ---------- ---------
/s/JiaJi Shang Chief Executive Officer May 15, 2003
- ------------------------ and Director
JiaJi Shang
/s/Jian Sheng Wei Chief Financial Officer May 15, 2003
- ------------------------
Jian Sheng Wei
/s/Malcolm Roy Brandon Director May 15, 2003
- ------------------------
Malcolm Roy Brandon
/s/Zhang Cheng Zhang Director May 15, 2003
- ------------------------
Zhang Cheng Zhang
/s/ Shujing Li Director May 15, 2003
- ------------------------
Shujing Li
16
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, JiaJi Shang, certify that:
1. I have reviewed this annual report on the Form 10-K of China Continental,
Inc.
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the 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 annual 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
annual 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
annual 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.
Date: /s/ JiaJi Shang
JIAJI SHANG
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
17
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Jiansheng Wei, certify that:
1. I have reviewed this annual report on the Form 10-K of China Continental
Inc.
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the 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 annual 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
annual 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
annual 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.
Date: /s/ Jiansheng Wei
JIANSHENG WEI
CHIEF FINANCIAL OFFICER
18
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3-4
Consolidated Statements of Income for the years ended December 31,
2002, 2001 and 2000 F-5
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2002, 2001, and 2000 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2002,2001 and 2000 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. (the "Company")
and subsidiaries (collectively China Continental,
Inc. the "Group")
We have audited the accompanying consolidated balance sheets of China
Continental, Inc. (the "Company") and subsidiaries (collectively China
Continental, Inc. the "Group") as of December 31, 2002 and 2001, and the related
consolidated statements of income, consolidated statements of changes in
stockholders' equity, and consolidated statements of cash flows for the years
ended December 31, 2002, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits
We conducted our audits in accordance with 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the 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, 2002 and 2001, and the results of its
operations and its cash flows for the years ended December 31, 2002, 2001 and
2000 in conformity with accounting principles generally accepted in the United
States of America.
Houston, Texas
May 12, 2003
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
December 31,
2002 2001
US$ US$
------- ------
CURRENT ASSETS
Cash and bank balances $ 13,883,246 $ 11,330,717
Trade receivables 6,796,200 -
Third parties - 4,568,675
Related company - 1,715,663
Deposit and prepays - 10,048,193
------------ ------------
TOTAL CURRENT ASSETS 20,679,446 27,663,248
FIXED ASSETS 2,239,805 2,531,954
LAND LEASE RIGHTS, net of
accumulated amortization of US$16,143,468 and
US$9,225,520 at December 31,2002 and 2001 148,847,916 155,765,864
LAND IMPROVEMENTS, net of
amortization of US$381,393 at December 31, 2002 10,821,308 -
WATER RESOURCES - 25,558,887
Deposit for improvements - 1,349,093
------------ ------------
TOTAL ASSETS $ 182,588,475 $ 212,869,046
============ ============
F-2
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, 2002 AND 2001
December 31,
2002 2001
US$ US$
----- -------
CURRENT LIABILITIES
Account payable to related company $ 542,485 $ 508,782
Amounts due to directors 589,308 229,210
Amounts due to related parties 25,806 424,034
Accounts payable and accrued liabilities 591,725 200,608
--------- ----------
TOTAL CURRENT LIABILITIES 1,749,324 1,362,634
--------- ----------
TOTAL LIABILITIES 1,749,324 1,362,634
--------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value US$0.001 per share:
1,000,000,000 shares authorized:
335,070,000 issued and outstanding as of
December 31, 2002, and 312,894,000 issued
and outstanding at December 31, 2001 312,894
Additional paid-in capital 70,130,305 69,602,972
Treasury stock (55,000) (55,000)
Retained earnings 110,428,082 141,645,546
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 180,839,151 211,506,412
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 182,588,475 $ 212,869,046
=========== ============
F-3
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
Year Ended December 31,
2002 2001 2000
US$ US$ US$
SALES $ 16,518,072 $ 21,315,658 $ 5,873,403
COST OF SALES 14,033,735 5,323,244 45,648
GROSS PROFIT 2,484,337 15,992,414 5,827,755
IMPAIRMENT LOSS ON WATER SOURCES 25,558,88 - -
DEPRECIATION AND AMORTIZATION 7,587,584 7,210,097 2,404,955
SELLING AND ADMINISTRATIVE EXPENSES 413,788 392,413
CONSULTING - 1,000,000 -
OTHER INCOME 1,875 - 50,616
INCOME (LOSS) FROM CONTINUING OPERATIONS (37,368,519) 3,081,003
DISCONTINUED OPERATIONS
Income from operations of divested entities 5,509,077
NET GAIN ON DISPOSAL OF ASSOCIATED
COMPANIES AND
INVESTMENTS IN SUBSIDIARIES - - 17,604,615
NET INCOME (LOSS) $ (31,217,464) $ 7,368,519 $ 26,194,695
============= =========== ===========
INCOME PER COMMON SHARE
BASIC AND DILUTED
Income (loss) from continuing operations (0.12) 0.03 0.03
Income from discontinued operations - - 0.05
Gain on disposals - - 0.18
$ (0.12) $ 0.03 $ 0.26
============= =========== ===========
AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted 265,581,123 (1) 232,288,521 (1) 102,230,137
============= =========== ===========
(1) Excludes 55,000,000 shares in treasury
F-4
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2001 AND 2000
Additional
Share paid-in Retained
capital capital Treasury earnings Total
US$ US$ Stock US$ US$
---------- ------------ --------- ----------- ---------
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
Issuance of 20,000,000 shares @0.02
for settlement of payable 20,000 380,000 - - 400,000
Issuance of 2,870,000 shares @0.03
for legal services 2,870 83,230 - - 86,100
Contribution from a shareholder - 64,103 - - 64,103
Net loss for the year - - - (31,219,858) (31,219,858)
--------- ------------ -------- ------------ -------------
Balance at December 31, 2002 335,764 $ 70,130,305 $ (55,000) $ 110,425,688 $ 180,836,757
========= ============ ======== ============ =============
F-5
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
US$ US$ US$
--------- -------- --------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (31,217,464.00) $ 7,368,519.00 $ 26,194,696.00
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,587,584 7,210,096 2,404,955
Impairment loss on water sources 25,558,887
Issuance of shares for services 86,100 1,080,00 -
Gain on disposal of subsidiaries - - (17,604,615)
(Increase) decrease in assets:
Inventories - 3,350,456 (428,971)
Trade receivables third parties (2,227,525) (2,268,005) (5,110,156)
Prepayments and deposits 10,048,193 (10,048,19) -
Trade receivables from related companies 1,715,663 (1,715,66) -
Increase (decrease) in liabilities:
Accounts payable to related company 33,703 (260,604) (769,386)
Amounts due to directors 360,098 229,200 (732,709)
Amounts due to related parties 65,875 48,096 (375,937)
Accounts payable and accrued liabilities 391,117 19,449 170,165
Income taxes payable - - (2,648,728)
-------------- ------------ -------------
Net cash provided by operating activities 12,402,231 5,013,351 12,858,398
-------------- ------------ -------------
F-6
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
Year Ended December 31,
2002 2001 2000
US$ US$ US$
------ -------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES
Land improvement (11,198,795) - -
Deposit 1,349,093 (1,349,093) -
Purchase of water sources - - (6,000,000)
Purchase of fixed assets - - (62,083)
------------- ------------ ------------
Net cash used in investing activities (9,849,702) (1,349,093) (6,062,083)
CASH FLOWS FROM
FINANCING ACTIVITIES
Insurance of shares 400,000 - -
Contribution of additional paid-in
capital from a shareholder 64,103 - -
Net cash provided by financing activities 464,103 - -
NET INCREASE IN
CASH AND BANK BALANCES 2,552,529 3,664,258 6,796,315
Cash and bank balances, at beginning
of period 11,330,717 7,666,459 870,144
------------ ------------ ------------
Cash and bank balances, at end of period $13,883,246 $11,330,717 $ 7,666,459
============ ============ ============
F-7
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 changed its domicile 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.
This basis of accounting differs from that used in the statutory financial
statements of the subsidiaries in the PRC. There were no material
adjustments. Certain balances in the prior year have been reclassified to
conform to the presentation used in the current year.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
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.
F-8
Economic and political risks
The Company faces a number of risks and challenges since its main
operations are in the PRC.
Cash and cash equivalents
The Company considers cash and cash equivalents to include cash on hand and
demand deposits with banks with an original maturity of three months or
less.
The Company maintains no accounts in the United States of America. All cash
and cash equivalents, approximately $13,883,246, was restricted by the
Company for operations in the PRC.
Accounts receivable
No allowance for doubtful accounts has been established, as management
believes all amounts are collectible.
Inventory
Inventories are measured at lower of cost and net realizable value using
the first-in first-out ("FIFO") or weighted average cost formulas.
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%
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%
Land improvements
Land improvements are being amortized over a 20 year period.
F-9
Income taxes
The company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the
financial statement and tax basis of assets and liabilities is determined
annually. Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the current enacted tax
laws and rates that apply to the periods in which they are expected to
affect taxable income. Valuation allowances are established, if necessary,
to reduce the deferred tax asset to the amount that will assure full
realization. Income tax expense is the current tax payable or refundable
for the period plus or minus the net change in the deferred tax assets and
liabilities.
Foreign currency translation
The Companies maintain their books and accounting records in Renminb:
("RMB") the PRC's currency. Translation of amounts from RMB into United
States dollars ("US$") has been made at the single rate of exchange of
US$1.00:RMB7.75. No representation is made that RMB amounts have been or
could be, converted into US$ 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
Revenue recognition
Revenue from the sale of livestock and forage grass is recognized when the
merchandise is delivered and title passes.
Research and development
Research and development costs are charged to operations as incurred.
Employees benefits
Mandatory contributions are made to the Government's health, retirement
benefit and unemployment schemes at the statutory rates in force during the
period, based on gross salary payments. The cost of these payments is
charged to the statement of income in the same period as the related salary
cost.
F-10
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.
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
received the shares back in 2002 and is nullifying the transaction.
Recent pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
costs Incurred in a Restructuring). SFAS 146 requires recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit
plan under EITF No. 94-3. SFAS 146 is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. The Company does
not believe that the adoption of SFAS 146 will have a material effect on
the Company's financial position, results of operations, or cash flows.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". The statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is
effective for the Company in fiscal 2003. The Company does not expect the
adoption of SFAS 143 to have a material impact on the Company's future
results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and the accounting and reporting provisions of
APB Opinion 30, "Reporting the Results of
F-11
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and infrequently Occurring Events and
Transactions", for the disposal of a segment of a business. The statement
is effective for the Company in fiscal 2002.
In April, 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 eliminates the requirement to classify gains and
losses from extinguishments of indebtedness as extraordinary, requires
certain lease modifications to be treated the same as a sale-leaseback
transaction, and makes other non-substantive technical corrections to
existing pronouncements. SFAS 145 is effective for fiscal years beginning
after May 15, 2002, with earlier adoption encouraged. The Company is
required to adopt SFAS 145 effective January 2003. The Company does not
believe that the adoption of SFAS 145 will have a material effect on the
Company's financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123
"Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS 148 is effective for fiscal
years beginning after December 15, 2002. The interim disclosure provisions
are effective for financial reports containing financial statements for
interim periods beginning after December 15, 2002. The Company does not
expect the adoption of SFAS 148 to have a material effect on our financial
position, results of operations, or cash flows.
4. FIXED ASSETS
Year Ended December 31,
2002 2001
US$ US$
Cost
Machinery and equipment $ 2,921,485 $ 2,921,485
Less : accumulated depreciation (681,680) (389,531)
Net book value $ 2,239,805 $2,531,954
F-12
5. WATER RESOURCES AND IMPAIRMENT LOSS
Year Ended December 31,
2002 2001
US$ US$
Cost $ 25,558,887 $ 25,558,887
Less : Impairment loss (25,558,887) -
----------- ------------
Net book value $ - $ 25,558,887
=========== ============
The impairment loss represents the diminution in value of the Company's
water resources.
6. ACQUISITIONS AND DISPOSITIONS
US$
Fixed assets $ 390,568
Interest in associated companies 107,130
Amount due from related companies 1,311,566
Other 646,263
Bank overdrafts (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)
---------------
$ (17,604,615)
===============
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. (See Note 5).
Had the 131,000,000 shares of common stock been outstanding through out the
periods presented, earnings per share would have been US$0.13 in 2000.
F-13
The following amounts represent the non-cash portion of this transaction:
Cash disposed of with sale of subsidiary US$ $214,772
Accounts receivable 172,686
Prepayments, deposited and other 156,768
Amounts due from directors 5,100,000
Land lease rights, net 79,117,281
Income taxes payable (80,917)
Accounts payable and accrued liabilities (34,464)
------------
Net $ 84,646,127
============
7. INCOME TAXES
The Companies operated in several jurisdictions prior to the year 2002 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 16.5% on their estimated taxable
income for the year. No companies are carrying on operations in Hong Kong
at December 31, 2002 and 2001.
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 two years because of a special exemption.
F-14
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
approximately $110,425,688 and $142,725,546 at December 31, 2002 and 2001.
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, 2002 and 2001 was
approximately $37,500,000 and $49,000,000, respectively.
8. 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")
9. 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.
F-15
10. 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.
11. 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 3,000 and 2,000 goat embryos and services from
Eternal, a related company, for US$600,000 and US$425,000 in November, 2001
and December, 2000. Dong Wu Farm's 3,000 and 2,000 goats with implanted
embryos were sold in March 2002 and March, 2001 for approximately
US$2,349,000 and US$1,687,000 respectively.
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.
12. 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$11,397,0000. As
of December 31, 2002 all commitments have been fulfilled.
F-16