SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
{ } 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)
Nevada 87-0431063
- ---------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1808-1802 Evening Newspaper Mansion, 358 Nanjing Road, Tianjin P.R.C.
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(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, 2003, 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, 2003 and
December 31, 2002 3
Unaudited Consolidated Statements of Income - For the three months
and nine months ended September 30, 2003 and 2002 4
Unaudited Consolidated Statements of Cash Flows-
For the nine months ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 4. Controls and Procedures 10
PART II - OTHER INFORMATION
Signatures 10
Certifications 11
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CHINA CONTINENTAL, INC.
CONSOLIDATED BALANCE SHEETS
Sept 30 Dec 31,
2003 2002
(unaudited) (audited)
----------- ----------
ASSETS
Current Assets
Cash and deposits 19,715,011 13,883,246
Accounts receivable, net of provision 994,326 6,796,200
Other asset 73,349 -
---------- ----------
Total Current Assets 20,782,686 20,679,446
---------- ----------
Fixed Assets 2,020,694 2,239,805
Land lease rights, net of
Accumulated amortization of $21,307,583
At September 30,2003
And $16,143,468 at December 31, 2002 143,683,801 148,847,916
Land Improvement, net of amortization of $783,226
At September 30, 2003 and $381,393 at
December 31, 2002 10,419,475 10,821,308
---------- ----------
Total Assets 176,906,656 182,588,475
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable to related company 542,629 542,485
Amounts due to directors 627,094 589,308
Amounts due to related parties 25,806 25,806
Accounts payable and accrued liabilities 671,746 591,725
---------- ---------
Total current liabilities 1,867,275 1,749,324
----------- ---------
Total Liabilities 1,867,275 1,749,324
----------- ---------
Stockholders' Equity
Common stock, par value $0.001 per share:
1,000,000,000 shares authorized:
335,070,000 issued, 280,070,000 outstanding
as of September 30, 2003
and December 31, 2002 335,764 335,764
Additional paid-in capital 70,130,305 70,130,305
Treasury stock (55,000) (55,000)
Retained earnings 104,628,312 110,428,082
---------- -----------
Total Stockholders' Equity 175,039,381 180,839,151
---------- -----------
Total Liabilities and Stockholders' Equity 176,906,656 182,588,475
=========== ===========
The accompanying notes are an integral part of
these financial statements.
3
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
2003 2002 2003 2002
(unaudited) (unaudited) (unaudited)(unaudited)
---------- ---------- --------- --------
SALES - 1,012,000 - 4,373,000
COST OF SALES - 38,000 - 680,000
---------- --------- ---------- ---------
GROSS PROFIT - 974,000 - 3,693,000
DEPRECIATION AND AMORTIZATION 1,928,353 1,929,000 5,785,059 5,661,000
SELLING AND ADMINISTRATIVE
EXPENSES 51,429 33,000 115,000 156,000
FINANCIAL INCOME (35,422) - (100,289) -
LAND IMPROVEMENT COST - 3,727,000 - 7,454,000
---------- --------- ---------- ---------
(1,944,360) (4,715,000) (5,799,770) (9,578,000)
IMPAIRMENT LOSS ON WATER
RESOURCES - - - (25,558,000)
---------- --------- ---------- ------------
NET INCOME (LOSS) (1,944,360) (4,715,000) (5,799,770)(35,136,000)
========= ========= ========= ===========
INCOME PER COMMON SHARE
BASIC AND DILUTED (0.007) (0.017) (0.02) (0.13)
EARNINGS/(LOSS) PER SHARE
EXCLUDING IMPAIRMENT LOSS (0.007) (0.017) (0.02) (0.034)
======= ======= ====== ======
WEIGHTED AVERAGE NUMBER OF
AND EQUILVANT SHARES
OTTSTANDING
BASIC AND DILUTED 280,070,000 280,070,000 280,070,000 280,070,000
=========== =========== =========== ===========
The accompanying notes are an integral part of
these financial statements.
4
CHINA CONTINENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Sept., 30
2003 2002
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) (5,799,770) (35,136,000)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 5,785,059 5,661,000
Impairment loss - 25,558,000
Issue of shares for repayment of debt - 484,000
(Increase) decrease in assets :
Accounts receivable 5,801,874 2,544,000
Prepayments, deposits and other receivable - (710,000)
Other assets (73,349) -
Prepaid expenses - 6,321,000
Due from related company - 1,716,000
Increase (decrease) in liabilities:
Payable and accruals 80,021 72,000
Due to related Companies 144 24,000
Due to directors and related parties 37,786 (398,000)
--------- --------
Net Cash Provided by (Used in) Operating Activities 5,831,765 6,136,000
Net Cash Provided by Investing Activities
Land improvement - (11,199,000)
Deposit for improvement - 1,349,000
---------- ----------
- (9,850,000)
Net Cash Provided by (Used in) Financing Activities
Net Increase/(decrease) in Cash 5,831,765 (3,714,000)
Cash, Beginning of Period 13,883,246 11,331,000
---------- ----------
Cash, End of Period 19,715,011 7,619,000
========== ==========
SUPPLEMENTARY CASH FLOWS DISCLOSURES
Interest and taxes
Interest paid - -
Taxes paid
None cash items - -
The accompanying notes are an integral part of
these financial statements.
5
CHINA CONTINENTAL, INC.
NOTES TO CONSOLIDATED 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) which 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 10-K for the fiscal year ended December 31, 2002.
Note 2 -- Foreign Currency Conversion
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 - Restriction On The Use Of Cash
The Company's cash is reserved for uses in the PRC
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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, 2003 to the Three Months
Ended September 30, 2002.
Revenues
The Company had no revenue for the three months ended September 30,
2003. For the three months ended September 30, 2002, the Company had revenue of
$1,012,000 from the sale of forage grass. Because of the seasonality of the
Company's business, management believes that the majority of the Company's
revenue will be earned in the fourth quarter of the calendar year.
Cost of Sales
Because there were no revenues for the three months ended September 30,
2003 there was no cost of good sold. For the three months ended September 30,
2002, the Company incurred cost of sale of $38,000 which represented certain
salaries and the cost of planting the forage grass.
Depreciation and Amortization
Depreciation and amortization expense decreased by $647 or 0.03% to
$1,928,353 for the three months ended September 30, 2003 from $1,929,000 for the
corresponding period of the prior year. Depreciation and amortization represents
amortization and depreciation of the land use right of the East-Wu-Zhu-Mu-Qin
Banner Green Demonstration Farm and improvements thereto over a period of
twenty-five years and was virtually unchanged from prior year.
Selling and Administrative Expenses
Selling and administrative expenses increased by $18,429 or 55.84% to
$51,429 for the three months ended September 30, 2003 from $33,000 for the
corresponding period of the prior year. The increase in selling and
administrative expenses is primarily attributable to the increase in legal and
professional fees incurred.
Financial Income
The Company earned $35,422 in interest income during the three months
ended September 30, 2003 from the investment of their excess cash. The Company
had no financial income for the three months ended September 30, 2002.
Land improvement costs
Land improvements costs of approximately $3,727,000 incurred during the
three months ended September 30, 2002 represent the costs to survey, fertilize,
conduct chemical analysis, watering and the cultivating of 40,000mu
(approximately 2,667 hectares or 6,667 acres) for general agricultural use to
maintain the soil's productive condition. There were no land improvements made
during the three months ended September 30, 2003
7
Income Taxes
No income taxes have been provided as management believes that there is
minimal income tax exposure under the applicable tax rules.
Net Income (Loss)
As a result of the foregoing, the net loss decreased by $2,770,640 or
58.75% to a loss of $1,944,360 for the three months ended September 30, 2003
from a net loss of $4,715,000 for the corresponding period of the prior year.
The decrease is principally attributable to the absence in the current year of
land improvement costs which were expensed.
Comparison of the Nine Months Ended September 30, 2003 to the Nine Months Ended
September 30, 2002.
Revenues
The Company had no revenue for the nine months ended September 30,
2003. For the nine months ended September 30, 2002, the Company had revenue of
$4,373,000 from the sale of forage grass. Because of the seasonality of the
Company's business, management believes that the majority of the Company's
revenue will be earned in the fourth quarter of the calendar year.
Cost of Sales
Because there were no revenues for the nine months ended September 30,
2003 there was no cost of good sold. For the nine months ended September 30,
2002, the Company incurred cost of sale of $680,000 represented certain salaries
and the cost of planting the forage grass.
Depreciation and Amortization
Depreciation and amortization expense increased by $124,059 or 2.19% to
$5,785,059 for the nine months ended September 30, 2003 from $5,661,000 for the
corresponding period of the prior year. Depreciation and amortization represents
amortization and depreciation of the land use right of the 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 land improvement costs
incurred during 2002 of approximately $11,187,000 which were capitalized and are
being depreciated over the remaining life of the lease.
Selling and Administrative Expenses
Selling and administrative expenses decreased by $41,000 or 26.28% to
$115,000 for the nine months ended September 30, 2003 from $156,000 for the
corresponding period of the prior year. The decrease in selling and
administrative expenses is primarily attributable to the decrease in sales.
Financial Income
The Company earned $100,289 in interest income during the nine months
ended September 30, 2003 from the investment of their excess cash. The Company
had no financial income for the nine months ended September 30, 2002.
8
Land improvement costs
Land improvements costs of approximately $7,454,000 incurred during
the nine months ended September 30, 2002 represents the costs to survey,
fertilize, conduct chemical analysis, watering and the cultivating of 40,000mu
(approximately 2,667 hectares or 6,667 acres) for general agricultural use to
maintain the soil's productive condition. There were no land improvements made
during the nine months ended September 30, 2003
Income Taxes
No income taxes have been provided as management believes that there is
minimal income tax exposure under the applicable tax rules.
Impairment loss
The impairment loss incurred during the nine months ended September 30,
2002 represents the diminution in value of the water resource. 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 transporting this water be developed, the
company will reassess this resource. There was no impairment loss for the nine
months ended September 30, 2003
Net Income (Loss)
As a result of the foregoing, the net loss decreased by $29,336,230 or
83.49% to a loss of $5,799,770 for the nine months ended September 30, 2003 from
a net loss of $35,136,000 for the corresponding period of the prior year. The
decrease is principally attributable to the absence in the current year of an
impairment loss, reduced land improvement costs which were expressed, and
reduced selling and administrative expenditure.
Liquidity and Capital Resources
At September 30, 2003, the Company had working capital of $18,915,411
including a cash balance of $19,715,011. This compares to working capital of
$18,930,122 and a cash balance of $13,883,246 at December 31, 2002.
Net cash provided by operating activities decreased to $5,831,765 for
the nine months ended September 30, 2003 from $6,136,000 for the corresponding
period of the prior year. This decrease resulted from a reduced net operating
loss which was partially offset by a decrease in non-cash charges, principally
the impairment charge, and net changes in the current accounts.
There was no cash used in investing activities during the nine months ended
September 30, 2003. Cash used in investing activities for the nine months ended
September 30, 2002 totaled $9,850,000 and consisted of land improvements of
$11,199,000 less the deposit of $1,349,000.
For both the nine months ended September 30, 2003 and 2002 the Company
had no financing activities.
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 and implement its
long term business plan. The Company is actively seeking additional business to
acquire to reduce the seasonality of the Company's business and enhance its
overall profitability.
9
Item 4. 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 Dare") 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.
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.
/s/ Jia Ji SHANG
-------------------------------------
November 24, 2003 Jia Ji SHANG
Chairman and Chief Executive Officer
November 24, 2003 /s/ Jian Sheng WEI
-------------------------------------
Jian Sheng WEI
Chief Financial Officer and Secretary
10
CERTIFICATIONS
I, Jia Ji Shang, certify that:
1. I have reviewed this Form 10-Q of China Continental, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)**
for the small business issuer and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with the generally accepted accounting principles;**
c) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter ( the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
small business issuer's auditors and the audit committee of the small business
issuer's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
11
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Dated: November 24, 2003
By:/s/ Jia Ji Shang
----------------------
Jia Ji Shang
Chief Executive Officer
CERTIFICATIONS
I, Jian Sheng Wei, certify that:
1. I have reviewed this Form 10-Q of China Continental, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)**
for the small business issuer and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with the generally accepted accounting principles;**
c) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter ( the small business issuer's
fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
12
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
small business issuer's auditors and the audit committee of the small business
issuer's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Dated: November 24, 2003
By:/s/ Jian Sheng wei
----------------------
Jian Sheng Wei
Chief Financial Officer and Secretary