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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from April 1, 1997 to December 31, 1997
Commission File No. 33-3276-D
CHINA CONTINENTAL, INC.
------------------------------------------
(Name of small business issuer in its charter)
Utah 87-0431063
- --------------------------- -----------------------------
(State or other jurisdiction (I.R.S.Employer Identification
of incorporation or organization) Number)
1801-1806 Hua Qin International Building, 340 Queen's Road Central, Hong Kong
-----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: 011-852-2542-2612
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 twelve (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 ninety (90)
days. Yes No X
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were US$20,660,553.
As of December 31, 1997, 26,000,000 shares of common stock of the
Registrant were outstanding. As of such date, the aggregate market value of the
common stock held by non-affiliates, based on the closing bid price on the NASD
Bulletin Board, was approximately $23,562,500.
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.
Transitional Small Business Disclosure Format: Yes No X
--- ---
7
TABLE OF CONTENTS
Page
-------
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................... 3
ITEM 2. DESCRIPTION OF PROPERTIES............................. 6
ITEM 3. LEGAL PROCEEDINGS..................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................... 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................... 6
ITEM 6. SELECTED FINANCIAL DATA............................... 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 9
ITEM 7A. QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT
MARKET RISK........................................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 14
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................. 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.... 15
ITEM 11. EXECUTIVE COMPENSATION................................ 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................ 17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION... 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTINGS
ON FORM 8-K........................................... 18
SIGNATURES............................................ 19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............ F-1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference are discussed in the section entitled "Certain Factors Affecting
Future Operating Results" beginning on page 14 of this Form 10-K.
The Company
China Continental, Inc. (the "Company") designs, installs and sells plastic
production lines on a turn-key basis and sells machinery and equipment for the
manufacture of plastic products. The major portion of its sales are to plastic
manufacturers in the People's Republic of China ("PRC" or "China"). The Company
has completed over 67 turn-key projects throughout the PRC varying in size from
US$300,000 to $5 million. A typical turn-key project requires four to eight
months to complete, depending on both its size and complexity. The design of a
production line is based on job specifications, such as the particulars of the
plastic products, the packaging format, the intended maximum production capacity
and the layout of the factory premises, all of which are obtained from the
customers. The installation and maintenance of production lines are handled
jointly by the original equipment manufacturers and the Company. Test-runs of
the turn-key production lines are conducted by engineers of the Company to
ensure quality and the meeting of specified requirements. In addition, the
Company sells machinery and equipment, accessories, spare parts and raw
materials.
Market and Client Base
During the 1990s, the Company began to market, on a turn-key basis, fully
automated production lines to plastic product manufacturers. The majority of
these turn-key projects were sold to companies in the PRC.
Business Segments
The Company has two principal business segments:
* Sale of turn-key plastic production lines
* Sale of machinery and equipment, accessories, spare parts, and raw
materials
Sale of Turn-Key Plastic Production Lines
During the 1990s the Company began to market, on a turn-key basis, fully
automated production lines to plastic product manufacturers in the PRC. These
turn-key projects require the provision of services from the design of the
engineering configuration of the production lines to the supply and installation
of the machinery and equipment. The Company has completed in excess of 67
turn-key projects throughout the PRC, varying in cost from US$300,000 to US$5
million.
Typical turn-key project takes four to eight months to complete, depending
on its size and complexity. The design of a production line is based on job
specifications, such as the particulars of the plastic products, the packaging
format, the intended maximum production capacity and the layout of the factory
premises obtained from the customers. The installation and maintenance of
production lines are handled jointly by the original equipment manufacturers and
the Company. Test-runs of the turn-key production lines are conducted by the
engineers of the Company to ensure quality and the meeting of specified
requirements.
3
Sale of Machinery and Equipment, Accessories, Spare Parts, and Raw Materials
The sale of machinery and equipment, accessories, spare parts, and raw
materials are conducted in conjunction with the sales of turn-key plastic
production lines.
Principal Suppliers
The Company acquires its machinery and plastic materials from Nippon
Polyurethane Industry Co., Ltd.; Nihon Unipolymer Co., Ltd.; Tomen Corporation,
Janson Co., Ltd.; Vicson Iron Works, Co., Ltd.; Cheer Young Machinery Works Co.,
Ltd.; Mintop Development Limited; Wing Lee Hong; and K.S. Plastics, Inc.
Employees
As of December 31, 1997, the Company employed a sales and administrative
staff of 14 persons located in Hong Kong and a technical staff of approximately
35 persons located in the PRC.
Competition
The market for turn-key automated production lines in the plastic
manufacturing industry is fragmented in the PRC. The Company believes that it is
a leading designer, installer and marketer of automated turn-key plastic
production lines in the PRC and that it provides buyers with superior
post-installation technical, engineering and quality control support. To date,
there has been limited price competition in this market, but price competition
is becoming a factor.
Economic Development in the People's Republic of China ("PRC" or "China")
The development of the PRC's economy has been characterized by the
adoption, since 1953, of Five Year Plans. Implementation of the plans is carried
out under the supervision of the State Planning Commission, which reports
directly to the State Council. The ninth Five Year Plan for national, economical
and social development for 1996-2000, along with a ten year program which
extends to 2010, was adopted in 1996, by the Standing Committee of the National
Peoples' Congress.
China's gross domestic product for 1997 approximated 1996, which had a
growth rate of 9.5%. Although this growth rate is 1% lower than 1995 and 2.2%
lower than 1994, it is one of the highest growth rates in the world. In
September 1997, at a conference in Kuala Lumpur held by a United Nations project
to link forecasting models, researchers announced their predictions for economic
growth in 1997 of 3.1% (2.9% for 1996), within which the developed countries
will grow at 2.4%, the developing countries at 6.0%, and Eastern Europe at 3.7%.
China, however, had the highest growth rate at 9.5%.
The total amount of investment in 1997 will reach RMB2,595 billion (US$313
billion), a nominal growth rate of 13% representing a real growth rate of 10.6%,
and the rate of investment will be approximately 34%. The 1998 total investment
is expected to be RMB2,965 billion (US$357 billion) a nominal growth rate of 14%
or a real growth rate of 10.9% with the rate of investment remaining at 34%. On
the whole, the nominal growth rate will be lower than the average level of the
past several years. However, due to the fall in inflation, the real investment
growth rate will not fall significantly. The situation where the investment
growth rate is higher than the GDP growth rate is expected to remain unchanged.
Furthermore, the minister of the State Planning Commission, Mr. Zeng Peiyan
said on June 29, 1998 the Mainland could achieve its target of 8% economic
growth this year despite the fall of the yen.
Fixed assets investment growth this year would exceed 15%, up from 10.1 per
cent last year. In the first quarter, fixed asset investment rose 10.3 per cent
and in the first five months of 1998, 12.7%. The central government has approved
72 large and medium-sized projects with 1.24 trillion yuan in investment and
feasibility studies are being conducted for 308 others with investment of 4.46
trillion yuan.
4
On the whole China should be able to maintain a favorable combination of a
growing economy with relatively low inflation in 1998. However, because of
economic difficulties in other parts of Asia, the Chinese economy has slowed
significantly.
FUTURE PROSPECT OF THE COMPANY
The Company has been actively involved in the provisions of sale of
turn-key production lines, sale of machinery and equipment, accessories, spare
parts and raw materials for the past six years. These particular businesses have
been very rewarding due to their high margins. The high margin has in turn
attracted new competitors. Margin of profits compared to previous years are
getting smaller. Efforts are therefore being made to develop other areas of
market and to implement tighter marketing controls.
On April 2, 1997, the Company acquired a 30% interest in Megaway
Development Limited. The principle asset of Megaway Development Limited is a 60%
interest in Weifang Great Dragon Chemical Fibre Company Limited whose principal
activity is the manufacture of polyester tire cord fabrics, and polyester/nylon
canvas. Megaway Development Limited was acquired in exchange for a trade
receivable from CFFTC in the amount of HK$65,031,120 (US$8,415,000).
The Company has further restructured its business in a manner that has the
potential to eventually produce significant income and growth. The recent
upheaval of nearly the Asian economies has been a critical factor in the
Company's decision to re-examine its business policy and to formulate a
corporate discipline that will focus on a long term growth and development. To
this end, the Company has entered into a livestock and biotechnology joint
venture ( the "Joint Venture") with Feng Ning Manchuria Autonomous Region
Agriculture Company Limited and China Land Resources Development Bureau in a
livestock development project in Feng Ning Manchuria Autonomous County of
Northern Hebei Province in the PRC. On December 23, 1997, Sun's International, a
wholly-owned subsidiary of the Company, acquired a 56.5% interest in Wealthy
Asia Limited for consideration in cash of US$52,000,000. On February 10, 1998,
Sun's International acquired the remaining 43.5% interest in Wealthy Asia
Limited for consideration of 40,000,000 shares of stock in China Continental,
Inc. The principal asset of Wealthy Asia Limited is a 51% interest in Changde
DaFeng Agriculture and Animal Husbandry Limited, a Sino-Singapore joint venture
incorporated in the People's Republic of China. Changde DaFeng's principal asset
is 20,000 hectares or 49,400 acres of land.
The Company's emphasis now is to lead, focus and manage a selected high
growth emerging businesses within a specific growing industry group,
particularly in the provisions of technologies in agricultural genetics and
farming in China, and to generate from these businesses the potential of
significant returns. The Company intends to provide and promote such
technologies to the local breeder and growers in China. Also, the Company
intends to maximize its growth in cash available for distribution and to enhance
the value of its venture businesses through effective management, operation and
development strategies. The Company believes opportunities exist for its growth
in the business of agricultural genetics and farming in China, particularly in
those areas that offer potential proprietary technology development and
potential market dominance.
The Company believes that a number of factors will enable it to achieve its
business objectives, including (I) the opportunity to lead the market in the
agriculture and farming industry in China with the ability to make available the
latest techniques and know-how in agriculture genetics and farming, (ii) the
presence of dedicated management and staff with the expertise and know-how; and
(iii) the unique location and availability of a significant size of arable farm
land. In addition, the Company has good support from its business relationship
with the Chinese joint venture partners and the American technology partners
that ensures its position to exploit existing and future opportunities.
The joint venture entails the import of American livestock genetics,
through International Agriculture Genetics Inc., ("IAG"), a company based in
Edmond, Oklahoma, in the form of dairy cattle , beef cattle, sheep and goats
embryos for implanting into local recipients.
Superior genetics from the US will be selected and collected for
propagation in this project. Once the imported genetics have matured, semen and
embryos will be collected from offspring for propagation and distribution.
Embryo transfer is the fastest and most economical way of propagating superior
genetics from importing live animals. Embryos can be sexed, split and injected
with exogenous gene condom for successful incorporation for the production of
beneficial pharmaceutical and immunological products to combat diseases
including hepatitis, cancer and tuberculosis.
5
The rationale for this project is (I) to support the Chinese Government's
Grain Conservancy Policy for the development of pasture fed animals such as
sheep, goats and cattle so that they do not compete for grains with human
beings; and (II) to supply the ever increasing demand for red meat to a
population of 1.4 billion people. The total production of meat in China is
expected to increase to 58 million metric tons. China, as the largest human
population in the world and the largest livestock producer, still lacks in the
supply of superior livestock genetics. This project will propagate breeding
livestock for China's expanding livestock population and increasing demand for
red meat.
In addition, the project will entail marketing and distributing of American
agricultural genetics to contract breeders, municipal and provincial governments
under a vertical integrated scheme that includes the purchase of offspring back
for feeding and slaughter in the Company's contract abattoir. The Company
trained technicians will serve these clienteles in the provisions of
insemination of semen and implantation of embryos to livestock, and will provide
services in the sale of Company's feed , feed additives, minerals, vitamin and
veterinary drugs and other supplementary products.
In summary, this project will propagate breeding livestock and , when
practicable, planting seed genetics for China's ever expanding livestock
population and increasing demand for food. China, despite being the most
populous nation in the world and the largest livestock producer, lacks in the
supply of superior livestock and planting of seed genetics to sustain the
agriculture industry. The Company believes that it has identified a niche by
providing a program to enhance agricultural production that will significantly
improve the standard of living, and by providing badly needed agricultural
genetics to support the increasing demand of food in China. With the strong
relationship with the Chinese and American partners, the Company will have
access to this development opportunity and is well positioned to take advantage
of existing and future opportunities. The Company is confident of its growth and
its rewarding prospects.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal administrative, marketing and technical facilities
are located in Hong Kong at 1801- 1806, Hua Qin International Building, 340
Queen's Road Central. These premises are owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock trades on the OTC Electronic Bulletin Board and
is quoted under the symbol "CHCL". The following table sets forth the high and
low bid price per share for the Company's common stock for each quarterly
period.
1997 1996
--------------------------- ------------------------
High Low High Low
-------- -------- -------- ---------
First Quarter - 3/31 1.0 0.250 1.875 0.75
Second Quarter - 6/30 1.062 0.562 2.875 0.625
Third Quarter - 9/30 2.562 0.562 1.0625 0.5625
Fourth Quarter - 12/31 1.625 0.875 2.59375 0.5625
6
The quotation reflects the inter-dealer prices without retail markup,
markdown or commissions and may not represent actual transactions.
As of August 5, 1998, the bid price of the common stock was $0.625.
Holders
As of August 5, 1998, there were approximately 284 record owners of the
Common Stock of the Company.
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.
Sales of Unregistered Securities
None
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's audited
consolidated financial statements in the Index to Financial Statements on page
F-1 of this report.
Nine Year Year Year Year
Months Ended Ended Ended Ended
Ended March 31, March 31, March 31, March 31,
Dec. 31, 1997 1997 1996 1995 1994
------------- ----------- --------- --------- ---------
Income Statement Data:
Sales $20,661 $34,759 38,348 $32,650 $26,623
Cost of Sales (8,336) 14,290 15,228 15,639 10,890
-------- -------- -------- -------- --------
Gross Profit 12,325 20,469 23,120 17,011 15,733
Depreciation of fixed assets (57) (80) (64) (65) (46)
Selling and administrative expenses (511) (959) (1,249) (1,325) (1,839)
(Provision) Recovery for doubtful
accounts 0 289 (1,217) (942) (1,332)
Financial Income (Expenses), net (57) (55) (73) 2 58
Other Income (Expenses) net 2,919 (595) (2,518) 523 (71)
Share of gains (losses) of associated
companies 144 (235) (347) (455)
Reorganization expenses 0 0 0 (1,603) 0
-------- -------- -------- -------- --------
Income before income taxes 14,763 19,069 17,764 13,254 12,048
Income taxes 1,290 2,635 2,742 1,549 1,421
-------- -------- -------- -------- --------
Net income 13,473 16,434 15,022 11,705 10,627
======== ======== ======== ======== ========
Net income per share 0.52 0.63 0.58 0.45 .41
======== ======== ======== ======== ========
Dividend per share 0 0 0 0 .38
======== ======== ======== ======== ========
Weighted average shares outstanding 26,000 26,000 26,000 26,000 26,000
Balance Sheet Data (At Period End) ======== ======== ======== ======== ========
7
Working capital (deficit) (26,324) 55,784 (8,048) 19,910 877
Total Assets 88,435 73,282 53,773 33,343 17,529
Long-term Liabilities 0 0 21 209 240
Stockholders Equity 70,840 57,516 40,713 25,291 12,383
The Company has changed its financial year end date to December and
accordingly 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's audited
consolidated financial statements in the Index to Financial Statements on page
F-1 of this report. See also Item 7, Management Discussion and Analysis of
Financial Condition and Results of Operation.
Nine months ended December 31
1997 1996 1995
------ ------ ------
Income Statement Data
Sales $20,661 $31,296 $32,091
Cost of Sales (8,336) (14,583) (15,739)
Gross Profit 12,325 16,713 16,352
Depreciation of fixed assets (57) (64) (66)
Selling and administrative expenses (511) (1,689) (1,159)
Financial Income (Expenses), net (57) (22) 21
Other Income (Expenses) net 2,919 20 14
Share of gains (losses) of associated
companies 144 (57) (72)
Income before income taxes 14,763 14,901 15,090
Income taxes (1,290) (1,242) (1,248)
Net income 13,473 13,659 13,842
Net income per share 0.52 0.53 0.53
Dividend per share
Weighted average shares outstanding 26,000 26,000 26,000
Balance Sheet Data (At Period End)
Working capital (deficit) (26,324) 35,372 (10,240)
Total Assets 218,212 67,593 53,773
Long-term Liabilities 88,392 20 20
Stockholders Equity 70,840 54,372 40,713
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine months ended December 31,1997 versus Nine months ended December 31,1996
Revenues
Revenues decreased by US$10,635,000 or 34% to US$20,661,000 for the nine
months ended December 31, 1997 from US$31,296,000 for the prior period. This
decrease is principally attributable to an increase in sales of turn- key
projects and sales of raw materials. Management is shifting the emphasis from
small scale to large scale projects as it believes that the resources of the
Company can best be utilized by concentrating on the marketing and sale of large
turn-key projects and obtaining economies of scale thereon. The increase
reflects the strong demand for the Company's services and for raw materials from
associated companies, as such sales are considered a value added service to the
customers of turn-key projects.
Cost of sales
Cost of sales of turn-key projects includes cost of machinery purchased and
the salaries and wages paid to engineers and consultants. For the nine months
ended December 31, 1997, cost of sales as a percentage of revenue on turn-key
projects was 35.88%, as a percentage of revenue representing a decrease of 8.4%
from 44.28% for the prior year. The decrease can mainly be attributable to the
devaluation of most Asian currencies and a larger rebate obtained from
suppliers.
Cost of sales of raw materials increased by 8% which correspond with the
increase in the sale of raw materials to associated companies.
Depreciation of fixed assets
Depreciation expense decreased by US$7,000 or 10.9% to US$57,000 for the
period ended December 31, 1997 from US$64,000 for the prior period. The decrease
in depreciation expense is due to the fact that some of the fixed assets of the
Company had already been fully depreciated.
Selling and administrative expenses
Selling and administrative expenses include salaries, commissions and other
direct employment costs paid to the Company's sales representatives and other
professionals. Selling and administrative expenses decreased by US$1,179,000 or
69.8% to US$510,000 for the period ended December 31, 1997 compared to
US$1,689,000 for the prior period. This decrease was mainly due to management's
streamlining of operational procedures and increased budgetary control.
Moreover, the delay in the completion of two of the turn-key projects accounted
also for the decrease in the selling expenses.
Financial income (expense) net
Financial income (expense) is interest earned on cash and cash equivalents,
less interest expense. Net financial expense increased by US$35,000 or 159% to
US$(57,000) for the period ended December 31, 1997 from US$(22,000) for the
prior period. This increase is attributable to an increase on the interest rate
and an increase in borrowing.
Other income/(expenses)
Other income increased by US$2,899,000 to US$2,919,000 for the period ended
December 31, 1997 from US$20,000 for the prior period. This increase can mainly
be accounted for by the gain on disposals of Gain Whole Limited and Megaway
Development Limited.
9
Share of gains (losses) of associated companies
Other than Weifang Great Dragon Chemical Fibre Company Limited, the
associated Companies of the Company are principally operated on an break even
basis. The Company has no further obligation to support the associated companies
and the losses sustained by them. During the year ended March 31, 1997, the
Company incurred additional diminution in value from the remaining interest in
associated companies which reduced their carrying value to zero. The share of
profit of the associated companies represented the Company's share of the profit
of Weifang Great Dragon Chemical Fibre Company Limited for the nine months ended
December 31, 1997 which totalled US$144,000.
Income taxes
Income taxes for the nine months ended December 31, 1997 were US$1,290,000
or 8.7% of pretax income. This compares with US$1,242,000 or 8.3% of pretax
income for the prior period. The provision for income tax for the period ended
December 31, 1996 has been under accrued by US$1,248,000 and therefore the
adjusted amount should be US$2,490,000 representing 16.7% of the pre-tax income.
The decrease in income tax for the current period under review is due to the
fact that certain income is capital gain and is not subject to income tax.
Net income
Net income decreased by US$186,000 or 1.4% to US$13,473,000 from
US$13,659,000 for the nine months ended December 31, 1996. This decrease is
attributable to a decline in gross profit which was partially offset by lower
expenses.
Year ended March 31, 1997 versus 1996
- -------------------------------------
Revenues
Revenues decreased by US$3,589,000 or 9.36% to US$34,759,000 for the year
ended March 31, 1997 from US$38,348,000 for the prior year. This decrease is
principally attributable to a 12.13% reduction in sales of turn-key projects.
Management intends to abandon the marketing and sale of small turn-key projects,
as this is a low margin business. Management believes that the resources of the
Company can best be utilized by concentrating on the marketing and sale of large
turn-key projects and obtaining economies of scale thereon. The decrease in sale
of turnkey projects was partially offset by a 25% increase in sale of raw
materials. The increase reflects the strong demand for raw materials from
associated companies, as such sales are considered a value added service to the
customers of turn-key projects.
Cost of sales
Cost of sales of turn-key projects includes cost of machinery purchased and
the salaries and wages paid to engineers and consultants. For the year ended
March 31, 1997, cost of sales as a percentage of revenue on turn-key projects
was 34.11%, as a percentage of revenue virtually unchanged from 34.72% for the
prior year.
Cost of sales of raw materials increased by 26.5% which corresponded with
the 25% increase in the sale of raw materials to associated companies. However,
in total, the Company's cost of sale decreased by US$938,000 or 6.2% to
US$14,290,000 for the year ended March 31, 1997 from US$15,228,000 for the prior
year. This reduction is attributable to larger rebates granted to suppliers.
Depreciation of fixed assets
Depreciation expense increased by US$16,000 or 25% to US$80,000 for the
year ended March 31, 1997 from US$64,000 for the prior year. The increase in
depreciation expense is the result of a change in accounting policies whereby
buildings are depreciated over the remaining period of the 50 year lease as
opposed to the useful life of the building utilized in prior periods.
10
Selling and administrative expenses
Selling and administrative expenses include salaries, commissions and other
direct employment costs paid to the Company's sales representatives and other
professionals. Selling and administrative expenses decreased by US$290,000 or
23.2% to US$959,000 for the year ended March 31, 1997 compared to US$1,249,000
for the prior year. This decrease was mainly due to management's streamlining
operational procedures and increased budgetary control. Moreover, the Company
minimized its commission expenses by reducing commissions to a major customer,
China Fujian Foreign Trade Holdings Limited. The Company has also reduced its
auditing expense by approximately US$100,000.
Provision for doubtful debts and diminution in value of investment
The provision for doubtful debts and diminution in value of investment
decreased by US$1,506,000 or 120% to a recovery of US$289,000 for the year ended
March 31, 1997 from a provision of US$1,217,000 for the prior year. This
decrease is attributable to a tightening of credit procedure and the recovery of
US$290,000, which had previously been reserved.
Financial income (expense) net
Financial income (expense) is interest earned on cash and cash equivalents,
less interest expense. Net financial expense decreased by US$18,000 or 24.7% to
US$(55,000) for the year ended March 31, 1997 from US$(73,000) for the prior
year, This decrease is attributable to tighter controls on cash and the
curtailing of the bank loans.
Other income/(expenses)
Other expenses decreased by US$1,923,000 or 76.4% to US$595,000 for the
year ended March 31, 1997 from US$2,518,000 for the prior year. This decrease is
principally attributable to a decrease of US$1,228,000 in write-offs of short
term investments.
Share of losses of associated companies
The associated companies of the Company are principally operated on a
break-even basis. The Company has no further obligation to support the
associated companies and the losses sustained by them. During 1997, the Company
incurred additional diminution in value from the remaining interest in
associated companies which reduced their carrying value to zero. Therefore, no
share of post-acquisition losses was provided for the year ended March 31, 1997.
Income taxes
Income taxes for the year ended March 31, 1997 were US$2,635,000 or 13.8%
of pretax income. This compares with US$2,742,000 or 15.4% of pretax income for
the prior year. This decrease is attributable to the overaccrual of tax on Hong
Kong profits tax for the prior period.
Net income
Net income increased by US$1,412,000 or 9.4% to US$16,434,000 for the year
ended March 31, 1997 from US$15,022,000 for the prior year. This increase
resulted from lower costs which were partially offset by lower revenues.
Year ended March 31, 1996 versus 1995
- -------------------------------------
Revenues
Revenues increased by US$5,698,000 or 17.45% to US$38,348,000 for the year
ended March 31, 1996 from US$32,650,000 for the prior year. This increase
resulted from strong demand for both the Company's products and services. Sale
of turn-key projects grew by 35.11%, reflecting an improving economic
environment in the People's Republic of China (the "PRC") and strong demand by
manufacturers in the PRC to modernize their production facilities.
11
Sale of raw materials decreased by 26.43% as management concentrated on the
sale of turn-key projects which produce higher margins. It is the Company's
objective to generate approximately 94% of its total revenue from the sale of
turn-key projects and the remaining 6% of revenues from the sale of raw
materials. As of March 31, 1996, the Company has ceased selling steel.
Cost of sales
Cost of sales of turn-key projects includes cost of machinery purchased and
the salaries and wages paid to engineers and consultants. Cost of sales of
turn-key projects was 34.72% as a percentage of revenue for the year ended March
31, 1996 or virtually unchanged from the 34.15% for the prior year.
Cost of sales (including raw materials sales) as a percentage of revenue
decreased approximately 8% principally due to the decrease in the cost of sales
of raw materials and steel.
Depreciation of fixed assets
Depreciation expenses decreased by US$1,000 or 1.5% to US$64,000 for the
year ended March 31, 1996 from US$65,000 for the prior year.
Selling and administrative expenses
Selling and administrative expenses include salaries, commissions and other
direct employment costs paid to the Company's sales representatives and other
professionals. Selling and administrative expenses decreased by US$76,000 or
6.1% to US$1,249,000 for the year ended March 31, 1996 from US$1,325,000 for the
prior year. This decrease resulted from the efforts of management in streamling
operational procedures and increasing budgetary control. In addition, the
Company reduced its commission expenses to a major representative, China Fujian
Foreign Trade Holdings Limited.
Provision for doubtful debts and diminution in value of investment
The provision for doubtful debts and diminution in value of investment
increased by US$275,000 or 29.2% to US$1,217,000 for the year ended March 31,
1996 from US$942,000 for the prior year. This increase resulted from the Company
writing off all receivables which had been outstanding for one year or longer,
and a lump sum provision of approximately US$2,200,000 to reduce the remaining
receivables to net realizable value.
Financial income (expense) net
Financial income (expense) is interest earned on cash and cash equivalents,
less interest expense. Net financial expense increased by US$75,000 to
(US$73,000) for the year ended March 31, 1996 from US$2,000 for the prior year.
This increased expense is attributable to a decrease in interest earned as the
Company's cash was expended to finance its increased sales.
Other income/(expenses)
Non-operating income for the year ended March 31, 1996 consisted of a gain
on the disposal of short term investments of approximately US$2,348,000 compared
to US$360,000 for the prior year.
Share of losses of associated companies
The share of losses of associated companies decreased by US$112,000 or
32.3% to US$235,000 for the year ended March 31, 1996 from US$347,000 for the
prior year. This decrease is principally the result of a redefinition of
investment strategy and the disposal of interests in most of the Company's
associated companies.
12
Reorganization Expense
For the year ended March 31, 1995, the Company booked a loss of
US$1,603,000 from its reverse merger representing the losses of the shell
company prior to the merger. There was no reorganization expense for the year
ended March 31, 1996.
Income taxes
Income taxes for the year ended March 31, 1996 were US$2,742,000 or 15.4%
of pre-tax income. This compares with US$1,549,000 or 11.7% of pre-tax income
for the prior year. This increase in percentage resulted because a larger
percentage of the Company's income was earned in Hong Kong which has a higher
effective tax rate than the PRC.
Net income
Net income increased by US$3,317,000 or 28.3% to US$15,022,000 for the year
ended March 31, 1996 from US$11,705,000 for the prior year. This increase
resulted from increased revenues and the fact that there was no reorganization
expense for the year ended December 31, 1996.
Liquidity and capital resources
At December 31, 1997, the Company had a deficit in working capital of
US$26,323,549, including a cash balance of US$17,808,000. This compares to a
working capital of US$35,372,000 and a cash balance of US$21,096,379 at December
31, 1996.
Net cash provided by operating activities decreased to US$10,962,000 from
US$20,131,000 used in operating activities for the prior year. The cash provided
by operating activities consisted principally of US$13,473,000 of net income, a
reduction in accounts due from related parties and income taxes payable. These
were partially offset by gains from short term investments and interests in
related companies, an increase in receivables and prepayments and a decrease in
accounts payable.
Net cash used in investing activities totaled US$15,035,000 for the nine
months ended December 31, 1997 compared to US$1,951 used in investing activities
for the prior year. In the current period, the Company had substantial
expenditures for the agricultural property of US$52,000,000 which was partially
offset by proceeds from the sale of short term investments of US$36,946,000.
Net cash provided by financing activities totaled US$804,000 for the nine
months ended December 31, 1997. Net cash provided by financing activities
consisted principally of net borrowings which were partially offset by repayment
of bank loans and repayment of bank overdrafts. For the prior year the Company
had nominal cash provided by financing activities as loan repayments
approximated borrowings.
The Company's business has historically been capital intensive. In most
years internally generated funds were sufficient to fund the Company's
operations and finance its growth. While the cash generated from earnings and
available lines of credit has historically provided sufficient liquidity to meet
ordinary capital requirements, the Company's purchase of Wealthy Asia Limited
for US$52,000,000 and 40,000,000 shares has substantially depleted the Company's
cash reserves. Accordingly, the Company anticipates seeking additional debt or
equity financing during the next twelve months to cover its capital requirements
for its new agricultural genetics joint ventures.
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
machinery, salaries and related costs incurred principally for the turn-key
projects. The Company generally has been able to meet increases in costs by
raising prices of its products.
13
Certain Factors Affecting Certain Future Operating Results
a. Revised Corporate Business
In the past, the Company has been actively involved in the sale of turn-key
production lines, machinery and equipment, accessories, spare parts and raw
materials. The Company is now moving away from this line of business into the
provision of technology in agricultural genetics and farming in China. Because
of the Company's inexperience with this industry, there is no guaranty that its
future results will equal those of the past or that the Company will be
profitable in this industry.
b. Dependence on Strategic Relationship
The Company plans to conduct its future operations in the PRC with Feng
Ning Manchuria Autonomous Region Agriculture Company and China Resources
Development Bureau. Any deterioration of this strategic relationship could have
an adverse effect on the future operations and financial position of the
Company.
c. Country Risk
Substantially all of the Company's operations are conducted in the PRC and
accordingly, the Company is subject to special considerations and significant
risks not typically associated with the companies operating in North America and
Western Europe. These include the risks associated with the political, economic
and legal environments and foreign currency exchange, among others. The
Company's results may be affected by, among other things, changes in the
political and social conditions in the PRC and changes in government policies
with respect to laws and regulations, anti-inflation measures, currency
conversion and remittance abroad and rates and method of taxation. The PRC
government has implemented economic reform policies in recent years, and these
reforms may be refined or changed by the government at any time. It is possible
that a change in the PRC leadership could lead to changes in economic policy. In
addition, a substantial portion of the Company's revenues are denominated in
Reminbi, 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
F-2 through F-6. An index to such materials appear on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE 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
- ----------- ------- ----------------
Harry H.H. Ho 48 Chairman of the Board and Chief Executive Officer
Ji Jun Wu 60 Vice-Chairman of the Board
Kim Young Soh 50 Director
Dr. Thian Hor Teh 53 Vice-President and Director
Dr. Y. Joseph Mo 51 Director
Lin Tao Ge 37 Director
Chan Kwai Chiu 40 Director
Eric Ng 38 Secretary/Treasurer/ Chief Financial Officer and
Director
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or to be paid for
services rendered during the last three fiscal periods by the Company to its
chief executive officer and the one remaining most highly paid executive officer
who earn more than $100,000 for the three fiscal periods ended December 31,
1997.
Name of Individual Year Salary Bonus Others
-------------------- ------ -------- ------- --------
Chan Kwai Chiu 1996 143,000 11,900
1997 155,870 12,990 129,366
Apr. 1,1997 to
Dec.31, 1997 116,900 9,742
Wong Yuen Ki 1996 127,000 10,600
1997 138,000 11,500 155,819
Apr. 1,1997 to
Dec.31, 1997 103,500 8,625
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 meetings or special assignments.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
Mr. Harry H. H. Ho, is the Chairman and the Managing Director of the
Company. He holds a degree in business studies from the Nanyang University of
Singapore and a master degree in business administration from East Asia
University of Macau. He has over 10 years of commercial experience in
international trade, particularly in food products. In 1989 he set up Megaway
Group which activities include food, shipping and financing services. In the
same year, he established Hua Tuo Guan in Singapore to offer franchise services
in Chinese medical and health food. Since 1990's, Mr. Ho has been involved in
China Trade and has been involved in takeovers and restructuring of a number of
Chinese enterprises.
15
Mr. Ji Jun Wu, is the Vice- Managing Director of the Company and is the
President of China operation of Megaway Group. He has over 40 years of
commercial experience. Since the establishing of the open economy by the PRC in
1980's he has been instrumental in the establishment of over ten foreign
investments and joint ventures in the PRC, which include such international
companies as Motorola, NEC, IBM, AT&T, Samsung and Yamaha and he has served as
an official Chinese representative. Because of his work and achievements, he was
honored by the City of Houston, Texas, USA as its honorable citizen.
Mr. Kim Young SOH is a non executive director of the Company. He holds an
honor degree in system and engineering from Nanyang University of Singapore and
a master degree in system and engineering from the University of Singapore. He
has over ten years of commercial experience, working with international
companies such as Siemens, SGS Thomson, Deltron Automatics Systems and Texas
Instruments National Semiconductors. In 1992 he established Right Holdings
Limited in Singapore, engaging in property development, building construction,
tourism industry, and electronic components and general investments.
Dr. Thian hor TEH, is the technical director of the Company in January 1998
and will be responsible for developing, researching and supplying technologies
in agricultural genetics. He established International Agriculture Genetics
Inc., in 1995 and serves as its president and chief executive officer. He has
more than 20 years of experience in the research and development of agricultural
genetics and has received several honors of outstanding achievements for his
research works.
Dr. Y Joseph MO, is a non executive director of the Company. He holds a
doctorate in industrial and physical pharmacy from Purdue University in the US.
Prior to joining the Company, he held senior executive and directorship in
various international companies such as NexMed Inc., Greenwich Pharmaceuticals
Inc., Johnson & Johnson, Rorer Pharmaceuticals, Smith Kline Pharmaceuticals and
Beecham Products.
Mr. Lin Tao GE is a director of the Company. He is also the Managing
Director of Xin Yi Tong, which is the joint distributor of credit card with
International Commercial Bank of China with over five million memberships
covering the major cities in the PRC. He is also involved with Shandong
Universal Biohealth Limited, which has a diversified market in the PRC for the
sale of biotech and agricultural related products.
Mr. Chan Kwai Chiu, director of the Company Mr. Chan has over 16 years
experience in the plastic products industry, including over 10 years experience
in the design, installation and management of plastic related production lines.
His high level relationships with government planning agencies commissioned for
free enterprise projects in China at the provincial level, and with the
authorities of the "city" level planning agencies, have contributed
significantly to the business of the Company.
Mr. Eric Ng, joined the Company in 1992 as Chief Financial Officer and
Secretary of the Company and is responsible for the financing strategy of the
Company. Prior to joining the Company he was a manager at KPMG Peat Marwick Hong
Kong, a member of the Chartered Association of Certified Accountants and a
manager of Dynamic Holdings Limited (a listed company in Hong Kong). During his
tenure at KPMG Peat Marwick, he was responsible for various merger and
acquisitions of listed companies in Hong Kong. He has over 10 years experience
in auditing, finance and administration.
16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1997 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's Common Stock.
Amount and Nature of
Name and Address (1) Beneficial Ownership
of Beneficial Owner Shares Percentage of Class
- ------------------- ---------------------- -------------------
Chan Kwai Chiu 9,100,000 35%
Charter Score Development Limited 1,300,000 5%
Dynasty Asia Worldwide Limited (2) 2,600,000 10%
Land Cheer Investment Limited (2) 2,600,000 10%
--------- ----
All officers and directors
as a group (one) 14,300,000 55%
========== ====
(1) Address for all persons and entities is 1801-1806 Hua Qin International
Building, 340 Queen's Road Central, Hong Kong.
(2) Beneficially owned by Chan Kwai Chiu
ITEM.13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's amounts due from/(to) directors and related companies owned
and/or controlled by a director, Chan Kwai Chiu, are unsecured, interest-free
and are repayable on demand.
In the normal course of business, some of the companies are engaged in the
set-up of automatic production lines on a turn-key basis for its joint ventures.
Other than the above-mentioned transactions, the companies also arrange for the
sale of raw materials to these joint ventures. Amounts of revenues from the
sales of raw materials to these joint ventures are summarized as follows:
Year Ended March 31, April 1, 1997 to
1996 1997 December 31,1997
------ ------ ----------------
Sales to joint ventures:
Raw materials US$2,038,214 US$2,548,484 US$1,594,473
The unrealized profits arising from these transactions were eliminated in the
consolidated financial statements to the extent of the Company's interest in
these joint ventures.
Pursuant to a sales and purchase agreement dated December 20, 1996, Sun's
International, a wholly-owned subsidiary of the Group, acquired from a third
party a 100% equity interest in Cathay Mercantile (Overseas) Limited ("Cathay")
for a consideration of HK$130 million. There was no cash movement involved in
this transaction. Cathay was purchased by netting off the other receivable, long
term receivable, amount due from a director and amount due from a related
company of HK$56,572,640, HK$68,333,334, HK$4,280,000 and HK$814,026,
respectively.
Cathay's principal activity was investment holding and Cathay, through its
65.055% owned Hong Kong incorporated subsidiary, Fast Pulse Investment Limited,
held a 70% interest in a Sino-foreign cooperative joint venture engaging in
property development in Beijing, the PRC.
17
Based on a review of the fair market value of the interest in Cathay,
primarily based on a valuation report on the land, the title of which was
transferred to the joint venture, performed by an independent professional
valuer, a provision in the amount of HK$17,000,000 was made to reduce the
carrying value of the other receivable to its estimated fair value of
HK$113,000,000 as of March 31, 1996. On December 23, 1997, Sun's International
sold the 100% interest in Cathay for a consideration of approximately
HK$123,435,000. As of March 31, 1997, the estimated fair value of the interest
in the property of HK$113,000,000 was reclassified to short-term investments in
the accompanying consolidated balance sheet.
On April 2, 1997, the Group acquired a 30% interest in Megaway Development
Limited, a company owned by Mr. Harry Ho. Mr. Ho has become the chairman and
chief executive officer of the Company. The principal asset of Megaway
Development Limited is a 60% interest in Weifang Great Dragon Chemical Fibre
Company Limited whose principal activity is the manufacture of polyester tire
cord fabrics, and polyester/nylon canvas. Megaway Development Limited was
acquired in exchange for a trade receivable from China (Fujian) Foreign Trade
Centre Holdings Company ("CFFTC") in the amount of HK$65,031,120.
On June 21, 1996, Sun's International obtained a 100% interest in Gain
Whole Limited for a consideration of US$20,000,000 (HK$154,600,000) as a partial
settlement for the same amount of the debt due from CFFTC, a major customer of
the Group. The principal asset of Gain Whole Limited was a certificate of
deposit for an amount of US$20,000,000 (HK$154,600,000) with an authorized
financial institution in the People's Republic of China (the "PRC"). The
certificate of deposit was valued at cost, which approximated market and was
classified as a short-term investment in the accompanying consolidated balance
sheet as of March 31, 1997.
On August 28, 1997, Sun's International sold its 100% interest in Gain
Whole Limited for a consideration of a 100% interest in Megaway Resort
Development Limited, a company owned by Mr. Harry Ho and incorporated in the
British Virgin Islands. The principal asset of Megaway Resort Development
Limited is a 75% interest in Da Yu Edible Oil Co. Ltd., a Sino Singapore joint
venture incorporated in the People's Republic of China. On December 3, 1997, the
Group sold the 100% interest in Megaway Resort Development Limited for a
consideration of US$21,000,000 (HK$162,288,000).
On December 23, 1997, Sun's International acquired a 56.5% interest in
Wealthy Asia Limited (WAL) for US$52,000,000 (HK$403,364,486) in cash from Mr.
Brian Ko. WAL had simultaneously acquired 100% of Megaway Agriculture Co. Ltd.
(Megaway) from Mr. Harry Ho for US$92,000,000 (HK$713,644,828), with a cash
payment of US$72,800,000 which was settled on December 31, 1997 and a verbal
agreement to remit the remainder at some future date. The remainder was settled
on March 18, 1998 through the receipt of 9,900,000 newly issued shares of China
Continental, Inc. common stock.
On February 10, 1998, Sun's International acquired the remaining 43.5%
interest in WAL from Mr. Brian Ko via the issuance of an additional 40,000,000
shares of stock in China Continental, Inc. of which 9,900,000 shares were issued
directly to Megaway Resort Development Ltd., a company owned by Mr. Harry Ho and
incorporated in Western Samoa.
The principal asset of Megaway is a 51% interest in Changde Dafeng
Agriculture and Animal Husbandry Ltd. (Changde), a Sino-Singapore joint venture
incorporated in the People's Republic of China on December 3, 1997. Mr. Ho,
through his prior ownership of Megaway, was an original party to the joint
venture, with the remaining 49% interest being held by entities associated with
the Chinese government. Changde has been established to run a breeding center to
propagate Boer goats and other livestock breeds. Changde's principal asset is
20,000 hectares or 49,900 acres of grassland located approximately 250
kilometers north of Beijing, in the People's Republic of China. Based upon an
independent appraisal dated July 30, 1998 by American Appraisal Hongkong
Limited, the value of 100% of Changde is US$181,000,000 (HK$1,402,750,000) as of
December 31, 1997.
During October 1997, the company borrowed and in turn loaned HK$9,984,864
to a company owned by director, Mr. Chan Kwai Chiu, in conjunction with his
purchase of a personal residence. The mortgage loan is secured by the residence
and other properties owned by Mr. Chan Kwai Chiu with the cost of HK$17,800,000.
During the year ended March 31, 1997, HK$17,935,678 of trade accounts
payable were paid directly by directors on behalf of the Company and
HK$21,625,232 of trade accounts receivable were receivable directly by
directors. The net activity of these transactions was posted to the amounts due
to directors in the accompanying consolidated balance sheets.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Report on Form 8-K
None
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHINA CONTINENTAL, INC.
By: /s/ Harry H.H. Ho
---------------------------------
Harry H.H. Ho
Chairman of the Board and Chief
Executive Officer
Dated:August 7, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Titles Date
---------- ------ ------
/s/ Harry H.H. Ho Chairman of the Board and Chief August 7, 1998
- --------------------- Executive Officer
Harry H.H. Ho
/s/ Ji Jun Wu Vice-Chairman of the Board August 7, 1998
- ---------------------
Ji Jun Wu
/s/ Kim Young Soh Director August 7, 1998
- ---------------------
Kim Young Soh
/s/ Dr. Thian Hor Teh Vice-President and Director August 7, 1998
- ----------------------
Dr. Thian Hor Teh
/s/ Dr. Y. Joseph Mo Director August 7, 1998
- ----------------------
Dr. Y. Joseph Mo
/s/ Lin Tao Ge Director August 7, 1998
- ----------------------
Lin Tao Ge
/s/ Chan Kwai Chiu Director August 7, 1998
- ----------------------
Chan Kwai Chiu
/s/ Eric Ng Secretary/Treasurer/ August 7, 1998
- ---------------------- Chief Financial Officer
Eric Ng and Director
20
Consolidated Financial Statements
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
Years Ended March 31, 1996 and 1997 and the
Nine Months Ended December 31, 1997
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-------
Report of independent auditors F-2
Consolidated statements of income F-3
Consolidated statements of changes in stockholders' equity F-4
Consolidated balance sheets F-5
Consolidated statements of cash flows F-6 to F-7
Notes to consolidated financial statements F-8 to F-26
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and the Stockholders
China Continental, Inc.
We have audited the accompanying consolidated balance sheets of China
Continental, Inc. (the "Company") and subsidiaries (collectively the "Group") as
of March 31, 1997 and December 31, 1997, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the year and nine
months, respectively, then ended. 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. The financial
statements of the Company for the year ended March 31, 1996, were audited by
other auditors whose report, dated April 18, 1997, expressed an unqualified
opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing standards
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 overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements for the year ended March
31, 1997 and the nine months ended December 31, 1997, referred to above, present
fairly, in all material respects, the consolidated financial position of China
Continental, Inc. and subsidiaries as of March 31, 1997 and December 31, 1997,
and the consolidated results of their operations and their cash flows for the
year and nine months, respectively, then ended in conformity with generally
accepted accounting principles in the United States of America.
As described in Note 12, the Company entered into certain transactions during
1997 and 1998, ultimately with its current chairman and chief executive officer.
These transactions have significantly impacted the company's business plan,
liquid assets and common stockholder ownership interests. Appropriate
disclosures have been made and our opinion is not qualified in this respect.
Chicago, Illinois
May 29, 1998; except for the seventh through the tenth paragraphs of Note 12, as
to which the date is July 30, 1998
F-2
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31, 1996 and 1997
and for the nine months ended December 31, 1997
Year ended March 31, Nine months ended December 31,
Notes 1996 1997 1997 1997
HK$ HK$ HK$ US$
----------- ----------- ---------- ----------
SALES
Related parties 19 15,755,398 19,699,783 12,357,168 1,594,473
Others 283,360,453 248,984,457 147,762,121 19,066,080
------------- -------------- ------------- -----------
299,115,851 268,684,240 160,119,289 20,660,553
COST OF SALES (118,777,918) (110,460,697) (64,600,231) (8,335,513)
------------- --------------- ------------- -----------
GROSS PROFIT 180,337,933 158,223,543 95,519,058 12,325,040
DEPRECIATION OF FIXED ASSETS (495,989) (620,313) (442,894) (57,148)
SELLING AND ADMINISTRATIVE
EXPENSES ( 9,744,449) (7,413,213) (3,958,938) (510,831)
(PROVISION) RECOVERY FOR
DOUBTFUL DEBTS (9,489,774) 2,238,844 - -
FINANCIAL INCOME/(EXPENSES),
NET 4 (566,408) (425,759) (442,851) (57,142)
OTHER INCOME/(EXPENSES),
NET 5 (19,642,756) (4,597,305) 22,625,018 2,919,357
SHARE OF (LOSSES) GAINS OF
ASSOCIATED COMPANIES 11 ( 1,835,000) - 1,113,459 143,672
-------------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 138,563,557 147,405,797 114,412,852 14,762,948
INCOME TAXES 6 (21,393,062) (20,372,118) (10,000,694) (1,290,412)
-------------- ------------- ------------- ------------
NET INCOME 117,170,495 127,033,679 104,412,158 13,472,536
EARNINGS PER SHARE 3(j), 12 4.51 4.89 4.02 .52
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended March 31, 1996 and 1997
and for the nine months ended December 31, 1997
Additional
Share paid-in Retained
capital capital earnings Total
HK$ HK$ HK$ HK$
Balance at April 1, 1995 202,800 13,356,985 186,831,892 200,391,677
Net income - - 117,170,495 117,170,495
---------- ----------- ------------- -----------
- ----------------
Balance at March 31, 1996 202,800 13,356,985 304,002,387 317,562,172
Net income - - 127,033,679 127,033,679
---------- ----------- ------------- -----------
- ----------------
Balance at March 31, 1997 202,800 13,356,985 431,036,066 444,595,851
Net income - - 104,412,158 104,412,158
---------- ------------ ----------- -----------
Balance at December 31, 1997 202,800 13,356,985 535,448,224 549,008,009
---------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1997
March 31, December 31,
Notes 1997 1997 1997
HK$ HK$ US$
ASSETS
CURRENT ASSETS
Cash and bank balances 163,341,939 138,010,916 17,807,860
Trade receivables, net of provisions of
HK $8,602,321 at March 31, 1997
and December 31, 1997 7 100,777,180 36,420,762 4,699,453
Prepayments, deposits and other
receivables, net of provisions of
HK$4,898,213 at March 31, 1997
and December 31, 1997 8 3,382,296 5,018,294 647,522
Short term investments, net of
provisions of
$17,000,000 at March 31, 1997 9 267,600,000 - -
Amounts due from related companies 19 17,983,640 34,111,911 4,401,537
Amounts due from directors 19 - 39,525,000 5,100,000
------------ -------------- ------------
TOTAL CURRENT ASSETS 553,085,055 253,086,883 32,656,372
FIXED ASSETS 10 4,094,219 3,486,981 449,933
INTERESTS IN ASSOCIATED
COMPANIES 11 2,292,154 69,053,638 8,910,147
LAND LEASE RIGHTS 12 - 1,358,514,000 175,292,130
OTHER ASSETS 20 7,000,000 7,000,000 903,225
------------- -------------- ------------
TOTAL ASSETS 566,471,428 1,691,141,502 218,211,807
------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Bank overdrafts 13 - 3,814,245 492,161
Bank import loans 13 8,063,170 10,478,535 1,352,069
Secured bank loan 13 - 9,984,864 1,288,370
Income taxes payable 64,279,294 73,707,403 9,510,632
Amounts due to directors 19 6,042,857 8,604,953 1,110,317
Amounts due to related parties 19 5,847,659 315,483,063 40,707,492
Accounts payable and accrued liabilities 37,642,597 35,021,320 4,518,880
------------- -------------- -------------
TOTAL CURRENT LIABILITIES 121,875,577 457,094,383 58,979,921
MINORITY INTEREST 12 - 685,039,110 88,392,143
STOCKHOLDERS' EQUITY
Common stock, par value
US$0.001 per share: Authorized:
1,000,000,000 shares; Issued and
outstanding: 26,000,000 shares 202,800 202,800 26,168
Additional paid-in capital 13,356,985 13,356,985 1,723,48
Retained earnings 431,036,066 535,448,224 69,090,093
-------------- ------------- -------------
TOTAL STOCKHOLDERS'
EQUITY 444,595,851 549,008,009 70,839,743
--------------- -------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 566,471,428 1,691,141,502 218,211,807
--------------- ---------------- --------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1996 and 1997
and the nine months ended December 31, 1997
Year Nine months
ended March 31, ended December 31,
1996 1997 1997 1997
HK$ HK$ HK$ US$
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income 117,170,495 127,033,679 104,412,158 13,472,536
Adjustments to reconcile net income to
net cash (used in)/provided by operating
activities:
Gains on disposal of fixed assets - (163,204) (350,800) (45,265)
Depreciation 495,989 620,313 442,894 57,148
Provision for doubtful debts and
diminutions in values of
investments and associated companies 30,414,857 869,710 - -
Share of (losses) gains of associated
companies 1,835,000 - (1,113,459) (143,672)
Gains on disposal of short term
investments (1,145,013) - (18,731,775) (2,417,003)
(Increase)/decrease in assets:
Trade receivables and long term receivable (196,043,403) (13,182,571) (674,702) (87,058)
Prepayments and deposits 5,682,771 (307,547) (1,635,998) (211,096)
Amounts due from related companies 926,388 (887,809) (6,143,407) (792,698)
Amounts due from associated companies (1,250,592) (702,335) (616,905) (79,601)
(Decrease)/Increase in liabilities:
Amounts due from joint venture companies (241,427) - - -
Amounts due to directors 1,473,073 9,988,570 2,562,096 330,593
Amounts due to related parties (221,846) 199,772 - -
Accounts payable and accrued liabilities 16,600,556 13,690,462 (2,621,277) (338,229)
Income taxes payable 21,077,767 18,455,771 9,428,109 1,216,530
-------------- ------------- -------------- -------------
Net cash (used in)/ provided by
operating activities (3,225,385) 155,614,811 84,956,934 10,962,185
--------------- ------------- ------------- ------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the years ended March 31, 1996 and 1997
and the nine months ended December 31, 1997
Nine months
Year ended March 31, ended December 31,
1996 1997 1997 1997
HK$ HK$ HK$ US$
CASH FLOWS PROVIDED BY/(USED IN)
INVESTING ACTIVITIES
Purchase of land lease rights - - (403,364,486) 52,047,030
Purchase of fixed assets (1,900) (15,080) (14,856) (1,917)
Reduction/(addition) of fixed
bank deposit 6,494,181 - - -
Proceeds from disposal of fixed assets - - 530,000 68,387
Proceeds from disposal of short term
investments - - 286,331,775 36,946,035
----------- ------------- ------------- ------------
Net cash provided by/(used in)
investing activities 6,492,281 (15,080) (116,517,567) (15,034,525)
------------ ------------- ------------- ------------
CASH FLOWS PROVIDED BY/(USED IN)
FINANCING ACTIVITIES
Net (repayments)/borrowings under
bank import loans (94,137) 2,389,290 2,415,365 311,660
Net(repayments)/borrowings of bank loans (222,403) (1,478,799) 3,814,245 492,161
Advances (repayments) of bank overdrafts 319,452 (676,889) - -
------------- ------------- ------------- ------------
Net cash provided by
financing activities 2,912 233,602 6,229,610 803,821
------------- ------------- ------------- ------------
NET INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS 3,269,808 155,833,333 (25,331,023) (3,268,519)
Cash and cash equivalents, at beginning
of period 4,238,798 7,508,606 163,341,939 21,076,379
------------- -------------- ------------- -----------
Cash and cash equivalents, at end of period 7,508,606 163,341,939 138,010,916 17,807,860
------------ --------------- ------------- -----------
SUPPLEMENTARY CASH FLOWS
DISCLOSURES:
Interest paid 930,130 469,392 488,704 63,059
------------ --------------- -------------- --------------
Income taxes paid 882,259 2,079,551 572,585 73,882
------------ --------------- -------------- --------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Continental, Inc. (the "Company") was incorporated under the laws of
Utah, the United States of America, and its principal activity is a 100%
investment in Sun's International Holdings Limited (Suns's International),
a holding company for investments in operating companies. Sun's
International was incorporated under the laws of the British Virgin
Islands.
Subsequent to March 31, 1997, the Company elected to change its fiscal
year-end to December 31.
The consolidated financial statements include the accounts of the Company
and Sun's International and its wholly owned subsidiaries, Billion Pearl
Investments Limited, High Glad Industries Limited, Prime Hill Investment
Limited, Prime View Industrial Limited, Danbury Inc., Winkler Holdings
Inc., Cathay Mercantile (Overseas) Limited (Disposed of in December, 1997;
See Note 12), Gain Whole Limited (Disposed of in August, 1997; See Note
12), Megaway Resort Development Limited (Acquired and disposed of in
August, 1997, and December, 1997, respectively; See Note 12) and its
majority owned subsidiary, Wealthy Asia Limited (56.5% owned and which had
no operating activity for 1997) (hereinafter collectively together with the
Company referred to as the "Group").
Billion Pearl Investments Limited, High Glad Industries Limited, Prime Hill
Investment Limited and Prime View Industrial Limited are primarily engaged
in the sale of automatic production lines on a turn-key basis to various
customers in the People's Republic of China (the "PRC"). These companies
have also made investments in PRC enterprises through the formation of
associated companies with various PRC parties. Danbury Inc. and Winkler
Holdings Inc. provide consulting and management services to the customers
as well as to other group companies. Wealthy Asia Limited, through a
wholly-owned subsidiary, owns 51% of a joint venture, known as Changde
Dafeng Agriculture and Animal Husbandry Co., Ltd., which has been
established to run a breeding center to propagate Boer goats and other
livestock breeds. See Note 12.
F-8
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the subsidiaries in Hong Kong which are
prepared in accordance with the accounting principles generally accepted in
Hong Kong.
The following material adjustments were made to present the consolidated
financial statements to conform with US GAAP:
- reversal of the revaluation surplus, and the related depreciation,
arising from the revaluation of leasehold land and buildings.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
-----------------------
The consolidated financial statements of the Company include the accounts
of the Company and its wholly and majority owned subsidiaries. All material
intercompany balances and transactions have been eliminated on
consolidation.
(b) Associated companies
---------------------
An associated company is a company, not being a subsidiary, over which the
Group is in a position to exercise significant influence.
The Group's share of the post-acquisition results of associated companies
is included in the consolidated statements of income under the equity
method of accounting. The Group's interests in associated companies are
stated in the consolidated balance sheets at cost plus the Group's share of
the associated companies' post- acquisition results and capital
transactions, less any provisions for other than temporary diminutions in
values.
F-9
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(c) Short term investments
-----------------------
Short term investments are stated at the lower of cost and net realizable
value.
(d) Cash and cash equivalents
--------------------------
The Group considers cash and cash equivalents to include cash on hand and
demand deposits with banks with original term to maturity of three months
or less at the date of acquisition.
At March 31, 1997 and December 31, 1997, cash and cash equivalents included
foreign currency deposits equivalent to HK$160,757,415 (US$20,796,561), and
HK$135,755,488 (US$17,516,837), respectively.
(e) Fixed assets and depreciation
------------------------------
Fixed assets are stated at cost less accumulated depreciation. Depreciation
of fixed assets is calculated on the straight-line basis to write off the
cost less estimated residual value of each asset over its estimated useful
life. The principal annual rates used for this purpose are as follows:
Leasehold land and buildings 2.0%
Furniture and fixtures 20%
Office equipment 20%
Motor vehicles 20%
(f) Land lease rights
-----------------
Land lease rights in mainland China are stated at cost less accumulated
amortization. Amortization of land lease rights is calculated on the
straight-line basis over the lesser of its estimated useful life or the
lease term. The principal annual rate used for this purpose is 2.5%.
(g) Income taxes
------------
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".
(h) Foreign currency translation
----------------------------
Foreign currency transactions denominated in foreign currencies are
translated into Hong Kong dollars ("HK$") at the respective applicable
rates of exchange. Monetary assets and liabilities denominated in foreign
currencies are translated into HK$ at the applicable rate of exchange at
the balance sheet date. The resulting exchange gains or losses are credited
or charged to the statements of income.
Translation of amounts from HK$ into United States dollars ("US$") for the
convenience of the reader has been made at the single rate of exchange on
December 31, 1997 of US$ 1.00 : HK$7.75. No representation is made that the
HK$ amounts could have been, or could be, converted into US$ at that rate
on December 31, 1997 or at any other date.
F-10
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
The associated companies maintain their books and accounting records in
Renminbi (the "RMB"). For the purpose of accounting for the Group's
attributable interests in the net assets and results of the joint ventures,
the RMB financial statements of the associated companies were translated
into HK$ using the current rate method whereby all assets and liabilities
are translated into HK$ at the applicable rate of exchange prevailing at
the balance sheet date as quoted by the People's Bank of China. Income and
expense items were translated at the average rates as quoted by the
People's Bank of China.
(i) Revenue recognition
--------------------
Revenue from the sale of machinery and equipment is recognized when the
machinery and equipment are delivered to the customer.
Revenue from the sale of the production line on a turn-key basis, which is
normally completed within a period of eight to twelve months, is recognized
in full in the year when the installation of the production line is
completed. The installation of a production line is considered complete
when all the significant costs have been incurred and all the machinery and
equipment for the production line have been delivered and installed.
Revenue for design, training and consultancy services is recognized when
the service is rendered.
(j) Retirement benefits
--------------------
The Group participates in a defined contribution retirement plan
administered by an insurance company (the "Retirement Plan"). All staff
(except for PRC staff and directors of the Company) covered under the
Retirement Plan are entitled to a monthly pension, borne by the insurance
company, upon their retirement equal to a fixed proportion of their ending
salary amount as at their retirement. The Group is required to make
contributions to the Retirement Plan at a rate of 5% of the salaries of its
existing staff, and is not responsible for any payments beyond the
contributions to the Retirement Plan as noted above. The retirement benefit
contributions are charged to the statements of income as services are
provided.
Contributions made to the retirement plan during the years ended March 31,
1996 and 1997, and the nine months ended December 31, 1997, were HK$26,306,
HK$32,375, and HK$47,504, respectively.
(k) Earnings per share
------------------
Earnings per share is based on the 26,000,000 shares of common stock
outstanding during each year.
(l) 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.
F-11
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(m) New Accounting Pronouncements
-----------------------------
In 1997, the company adopted SFAS No. 128, "Earnings Per Share." All
earnings per share amounts for all periods have been presented to conform
to the SFAS No. 128 requirement.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for fiscal years beginning after
December 15, 1997. The Company is in the process of evaluating the
disclosure requirements of SFAS No. 131; and believes that the investment
in the joint venture known as Chang de Dafeng Agriculture and Animal
Husbandry Co., Ltd. during the current period will cause it to modify its
disclosure requirements.
F-12
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCIAL INCOME/(EXPENSES), NET
Year ended Nine months ended
March 31, December 31,
1996 1997 1997
HK$ HK$ HK$
Interest income 435,828 149,011 114,219
Interest expense (930,130) (469,392) (488,704)
Bank charges (72,106) (105,378) (68,366)
----------- ----------- ----------
(566,408) (425,759) (442,851)
5. OTHER INCOME/(EXPENSES), NET
Year ended Nine months ended
March 31, December 31,
1996 1997 1997
HK$ HK$ HK$
Commission and miscellaneous income 66,674 369,836 3,736,733
Foreign exchange gains/(losses), net 70,640 446,139 (194,290)
Associated companies written off (4,995,117) (4,236,040) -
Short term investments written off (10,671,560) (1,177,240) -
Other assets written off (5,258,406) - -
Gains on disposal of short
term investments
Cathay (Note 12) - - 10,434,579
Gain/Megaway (Note 12) - - 7,688,000
Other 1,145,013 - 609,196
Gains on disposal of fixed assets - - 350,800
----------- ------------- ----------
(19,642,756) (4,597,305) 22,625,018
----------- ------------- ----------
F-13
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The companies in the Group operate in several jurisdictions and are subject to
taxes in those jurisdictions. Details of the related provision for income taxes
are as follows:
Year ended Nine months ended
March 31, December 31,
1996 1997 1997
HK$ HK$ HK$
Income/(loss) before income taxes:
Hong Kong (22,438,260) 507,446 177,843
PRC 161,001,817 146,898,351 114,235,009
------------ ------------ -----------
138,563,557 147,405,797 114,412,852
Income tax provision:
Current:
Hong Kong 1,879,812 (169,634) (2,157,306)
PRC 19,513,250 20,704,956 12,158,000
------------ ------------ ------------
21,393,062 20,535,322 10,000,694
Deferred - (163,204) -
------------ ------------ ------------
21,393,062 20,372,118 10,000,694
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
Group will distribute in the future, and capital gains arising from the
Group's investments are not subject to income tax in the British Virgin
Islands.
Those companies carrying on business 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.
Companies with operations in the People's Republic of China (the "PRC") are
also subject to PRC income tax for income on services rendered therein. The
applicable effective tax rate for income derived from services rendered in
that jurisdiction is approximately 8.5%.
At March 31, 1997 and December 31, 1997, income tax payables included
foreign currency payables equivalent to HK$61,325,206 (US$7,933,403) and
HK$73,483,206 (US$9,481,704), respectively.
F-14
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (continued)
A reconciliation between the actual income tax expense and income taxes computed
by applying the statutory Hong Kong tax rates to the income before income taxes
is as follows:
Year ended Nine months ended
March 31, December 31,
1996 1997 1997
HK$ HK$ HK$
Statutory Hong Kong tax rates 16.5% 16.5% 16.5%
Computed expected tax expense 22,862,987 24,321,957 18,878,121
Decrease resulting from PRC tax
at a lower composite tax rate (7,052,050) (4,587,807) (7,699,316)
Adjustments for expense items which are not
deductible for profits tax purposes:
Share of (gain) loss in and provisions for diminutions
in values of associated companies 1,126,969 326,135 (94,644)
Provisions for diminutions in values
of investments 2,628,444 - -
Other provisions 1,565,813 - 2,154,306
Disposal of short term investments (188,927) - (3,090,743)
Others 449,826 311,833 (147,030)
----------- ------------ ------------
21,393,062 20,372,118 10,000,694
----------- ------------ ------------
F-15
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (continued)
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
HK$535,448,224 at December 31, 1997. Because those earnings are considered to be
indefinitely invested, no provision for United States corporate income taxes on
those earnings has 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 as at December 31, 1997 was
approximately HK$182,000,000.
7. TRADE RECEIVABLES, NET
As of March 31, As of December 31,
1997 1997
HK$ HK$
Trade receivables 109,379,50 45,023,083
Less: Provision for doubtful debts (8,602,321) (8,602,321)
-------------- --------------
Trade receivables, net 100,777,180 36,420,762
Movements in provision for doubtful debts:
Balance as at beginning of year 13,145,891 8,602,321
Doubtful debt recovery (4,543,570) -
--------------- ---------------
Balance as at March 31 and December 31 8,602,321 8,602,321
8. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES, NET
As of March 31, As of December 31,
1997 1997
HK$ HK$
Prepayments, deposits and other receivables 8,280,509 9,916,507
Less: Provision for doubtful debts (4,898,213) (4,898,213)
-------------- -------------
Prepayments, deposits and other receivables, net 3,382,296 5,018,294
Movements in provision for doubtful debts:
Balance as at beginning of year 7,157,636 4,898,213
Doubtful debt recovery (2,259,423) -
-------------- --------------
Balance as at March 31 and December 31 4,898,213 4,898,213
F-16
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT TERM INVESTMENTS
Year ended Nine months ended
March 31, December 31,
1997 1997
HK$ HK$
Unlisted investments at cost (Notes 12 and 22) 284,600,000 -
Provisions for diminutions in values (17,000,000) -
------------- --------------
267,600,000 -
Movements in provisions for diminutions in values:
Balance at beginning of year - 17,000,000
Transfer from other receivables (Note 12) 17,000,000 -
Reversal of provision on disposal - (17,000,000)
------------- ---------------
Balance at March 31 and December 31 17,000,000 -
------------- ---------------
F-17
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. FIXED ASSETS
As of March 31, As of December 31,
1997 1997
HK$ HK$
Leasehold land and buildings, located in Hong Kong (1) 4,485631 4,239,231
Furniture and fixtures 700,826 700,826
Office equipment 585,893 600,749
Motor vehicles 1,244,030 1,244,030
-------------- --------------
7,016,380 6,784,836
Less: accumulated depreciation (2,922,161) (3,297,855)
--------------- --------------
Net book value 4,094,219 3,486,981
(1) Pledged to the Company's banker to secure facilities (See Note 17).
11. INTERESTS IN ASSOCIATED COMPANIES
As of March 31, As of December 31,
1997 1997
HK$ HK$
Unlisted investments, at cost 14,335,440 79,366,560
Share of post-acquisition gains (losses)/net (6,928,886) (5,815,427)
Write off for diminutions in values (6,793,565) (7,406,554)
Elimination of unrealized profits (612,989) -
--------------- ---------------
- 66,144,579
Due from associated companies, net 2,292,154 2,909,059
---------------- ----------------
2,292,154 69,053,638
Movement in provisions for diminutions in values:
Balance at beginning of year 3,345,000 6,793,565
Provisions for diminutions in value 3,448,565 612,989
---------------- -------------
Balance at March 31 and December 31 6,793,565 7,406,554
F-18
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INTERESTS IN ASSOCIATED COMPANIES (continued)
During the year ended March 31, 1997, the Company incurred additional
diminutions in value in the remaining interests in associated companies
which reduced the carrying value to zero. Therefore, no further share of
post-acquisition losses has been provided for during the nine months ended
December 31, 1997. The Group's share of the post-acquisition gains of
associated companies for the nine months ended December 31, 1997 was
HK$1,113,459. The amounts due from associated companies are deemed to be
collectible as of December 31, 1997.
Details of the associated companies at December 31, 1997 were as follows:
Country of
registration Group's
and effective
Name operations holding Principal activities
%
Panyu Panyi Chemical Industry PRC 30 Manufacturing and sale of PU resin
& Commerce Co., Ltd.
Shan Dong Linyi Modern PRC 35 Manufacturing and sale
Decorating Materials Co., Ltd. of PVC floor tiles
Zhengzhou ZZZ Prime Hill PRC 20 Manufacturing and sale
Floppy Disk Co., Ltd. of computer floppy disks
Megaway Development
Limited (Acquired in April, 1997; Western Holding company for company
See Note 12) Samoa 30 manufacturing polyester products
12. ACQUISITIONS AND DISPOSITIONS
Pursuant to a sales and purchase agreement dated December 20, 1996, Sun's
International, a wholly-owned subsidiary of the Group, acquired from a
third party a 100% equity interest in Cathay Mercantile (Overseas) Limited
("Cathay") for a consideration of HK$130 million. There was no cash
movement involved in this transaction. Cathay was purchased by netting off
the other receivable, long term receivable, amount due from a director and
amount due from a related company of HK$56,572,640, HK$68,333,334,
HK$4,280,000 and HK$814,026, respectively.
Cathay's principal activity was investment holding and Cathay, through its
65.055%-owned Hong Kong incorporated subsidiary, Fast Pulse Investment
Limited, held a 70% interest in a Sino-foreign cooperative joint venture
engaging in property development in Beijing, the PRC.
Based on a review of the fair value of the interest in Cathay, primarily
based on a valuation report on the land, the title of which was transferred
to the joint venture, performed by an independent professional valuer, a
provision in the amount of HK$17,000,000 was made to reduce the carrying
value of the other receivable to its estimated fair value of HK$113,000,000
as of March 31, 1996. On December 23, 1997, Sun's International sold the
100% interest in Cathay for a consideration of approximately
HK$123,435,000. As of March 31, 1997, the estimated fair value of the
interest in the property of HK$113,000,000 was reclassified to short-term
investments in the accompanying consolidated balance sheet.
F-19
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. ACQUISITIONS AND DISPOSITIONS (continued)
On April 2, 1997, the Group acquired a 30% interest in Megaway Development
Limited, a company owned by Mr. Harry Ho. Mr. Ho has become the chairman
and chief executive officer of the Company. The principal asset of Megaway
Development Limited is a 60% interest in Weifang Great Dragon Chemical
Fibre Company Limited whose principal activity is the manufacture of
polyester tyre cord fabrics, and polyester/nylon canvas. Megaway
Development Limited was acquired in exchange for a trade receivable from
China (Fujian) Foreign Trade Centre Holdings Company ("CFFTC") in the
amount of HK$65,031,120.
On June 21, 1996, Sun's International obtained a 100% interest in Gain
Whole Limited for a consideration of US$20,000,000 (HK$154,600,000) as a
partial settlement for the same amount of the debt due from CFFTC, a major
customer of the Group. The principal asset of Gain Whole Limited was a
certificate of deposit for an amount of US$20,000,000 (HK$154,600,000) with
an authorized financial institution in the People's Republic of China (the
"PRC"). The certificate of deposit was valued at cost, which approximated
market and was classified as a short-term investment in the accompanying
consolidated balance sheet as of March 31, 1997.
On August 28, 1997, Sun's International sold its 100% interest in Gain
Whole Limited for a consideration of a 100% interest in Megaway Resort
Development Limited, a company owned by Mr. Harry Ho and incorporated in
the British Virgin Islands. The principal asset of Megaway Resort
Development Limited is a 75% interest in Da Yu Edible Oil Co. Ltd., a Sino
Singapore joint venture incorporated in the People's Republic of China. On
December 3, 1997, the Group sold the 100% interest in Megaway Resort
Development Limited for a consideration of US$21,000,000 (HK$162,288,000).
On December 23, 1997, Sun's International acquired a 56.5% interest in
Wealthy Asia Limited (WAL) for US$52,000,000 (HK$403,364,486) in cash from
Mr. Brian Ko. WAL had simultaneously acquired 100% of Megaway Agriculture
Co. Ltd. (Megaway) from Mr. Harry Ho for US$92,000,000 (HK$713,644,828),
with a cash payment of US$72,800,000 which was settled on December 31, 1997
and a verbal agreement to remit the remainder at some future date. The
remainder was settled on March 18, 1998 through the receipt of 9,900,000
newly issued shares of China Continental, Inc. common stock.
The following amounts represent the initial recording of this transaction:
Asset (Liability) HK$
---------------------
Land lease rights 1,358,514,000
Due from Harry Ho 39,525,000
Due to Brian Ko (309,635,404)
Minority Interest (685,039,110)
-------------
Cash Paid (403,364,486)
-------------
On February 10, 1998, Sun's International acquired the remaining 43.5%
interest in WAL from Mr. Brian Ko via the issuance of an additional
40,000,000 shares of stock in China Continental, Inc. of which 9,900,000
shares were issued directly to Megaway Resort Development Ltd., a company
owned by Mr. Harry Ho and incorporated in Western Samoa.
F-20
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. ACQUISITIONS AND DISPOSITIONS (continued)
The principal asset of Megaway is a 51% interest in Changde Dafeng
Agriculture and Animal Husbandry Ltd. (Changde), a Sino-Singapore joint
venture incorporated in the People's Republic of China on December 3, 1997.
Mr. Ho, through his prior ownership of Megaway, was an original party to
the joint venture, with the remaining 49% interest being held by entities
associated with the Chinese government. Changde has been established to run
a breeding center to propagate Boer goats and other livestock breeds.
Changde's principal asset is 20,000 hectares or 49,400 acres of grassland
located approximately 250 kilometers north of Beijing, in the People's
Republic of China. Based upon an independent appraisal dated July 30, 1998
by American Appraisal Hongkong Limited, the value of 100% of Changde is
US$181,000,000 (HK$1,402,750,000) as of December 31, 1997.
Had the 40,000,000 shares of common stock been outstanding throughout the
periods presented, earnings per share would have been HK$1.92 and HK$1.58
for the year ended March 31, 1997 and the nine months ended December 31,
1997, respectively.
13. BANK LOANS
The import loans with banks carry interest at 1% above the Hong Kong prime
lending rate (weighted average of 8.5% and 8.9% per annum as of March 31,
1997 and December 31, 1997, respectively). The import loans are usually
repaid in three to six months, which is in accordance with the terms of the
agreement.
The bank overdrafts carry interest at 3% above the Hong Kong prime lending
rate (weighted average of 11.5% and 11.9% per annum as of March 31, 1997
and December 31, 1997, respectively).
During October 1997, the company borrowed and in turn loaned HK$9,984,864
to a company owned by director, Mr. Chan Kwai Chiu, in conjunction with his
purchase of a personal residence. The mortgage loan is secured by the
residence and other properties owned by Mr. Chan Kwai Chiu with a cost of
HK$17,800,000.
F-21
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 its cash deposits with an international bank.
(ii) Trade receivables
As of March 31, 1997 and December 31, 1997, approximately 71% and 18%,
respectively, of the trade receivable balance was due from China (Fujian)
Foreign Trade Center Holdings Company, a Chinese Government controlled
company.
(iii) Amounts due from related companies (See Note 19)
At December 31, 1997, approximately 34%, 24% and 21% of the amounts due
from related companies were due from New Skyland Industrial Ltd., Billion
Pearl International Limited and New Skyland International Ltd.,
respectively.
At March 31, 1997, approximately 37% and 31% of the amounts due from
related companies were due from New Skyland Industrial Ltd. and Billion
Pearl International Limited, respectively.
The Group does not have the policy of requiring collateral.
(iv) Amounts due from and to directors (See Notes 12 and 19)
15. 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) Bank import loans
The carrying amount of short term bank loans approximates the fair value
because of the short maturity of these instruments.
(iv) Accounts payable and amounts due to related companies and directors
F-22
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
Accounts payable and amounts due to related companies and directors are
stated at their book value which approximates their fair value.
16. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Group's operating assets and primary source of income and cash flow are
located in the PRC, and may be adversely affected by significant political,
economic and social uncertainties in the PRC. Although the PRC government
has been pursuing economic reform policies for the past 20 years, no
assurance can be given that the PRC government will continue to pursue such
policies or that such policies may not be significantly altered, especially
in the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC's political, economic and social
conditions. There is no guarantee that the PRC government's pursuit of
economic reforms will be consistent or effective.
Currently, a large proportion of the Group's revenue comes from the sale of
automatic production lines on a turn-key basis with companies in the PRC
(See Note 21). As such, those revenues are vulnerable to an increase in the
level of competition from overseas and domestic suppliers and a change in
the supply and demand relationship with those customers.
17. BANKING FACILITIES
The Group had banking facilities of approximately HK$25,000,000 for
mortgages, overdrafts and trade finance. Unused facilities as of December
31, 1997 amounted to approximately HK$1,000,000.
The banking facilities of the Group were secured by:
i. mortgages over the Group's leasehold land and buildings with a net
book value of approximately HK$3,130,000.
ii. lien on a subsidiary's fixed deposits totaling HK$2,000,000.
iii. personal guarantee by director, Chan Kwai Chiu, up to HK$20,000,000.
iv. mortgages over properties held by director, Chan Kwai Chiu, with
purchase cost of approximately $17,800,000.
18. FOREIGN CURRENCY EXCHANGE
The Group has substantial transactions with customers and significant
investments in associated companies in the PRC. Both the customers and the
associated companies may settle their debts and distribute their dividends
outside the PRC. The remittances are subject to control because RMB is not
freely convertible into foreign currencies. The amount of debts due from
customers in the PRC subject to control amounted to HK$100,767,720 and
HK$35,191,812 at March 31, 1997 and December 31, 1997, respectively.
On January 1, 1994, the PRC government introduced a single rate of exchange
as quoted daily by the People's Bank of China (the "Unified Exchange
Rate").
F-23
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
The quotation of the exchange rates does not imply free convertibility of
RMB into Hong Kong dollars or other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the People's Bank of China. Approval of foreign
currency payments by the Bank of China or other institutions requires
submitting a payment application form together with suppliers' invoices,
shipping documents and signed contracts.
19. ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS
The Group's amounts due from/(to) directors and related companies owned
and/or controlled by a director, Chan Kwai Chiu, are unsecured,
interest-free and are repayable on demand. See also Note 13.
In the normal course of business, some of the companies in the Group are
engaged in the set-up of automatic production lines on a turn-key basis for
its associated companies. Other than the above-mentioned transactions, the
companies also arrange for the sale of raw materials to these associated
companies. Amounts of revenues from the sales of raw materials to these
associated companies are summarized as follows:
Nine months ended
Year ended March 31, December 31,
1996 1997 1997
HK$ HK$ HK$
Sales to associated companies:
Raw materials 15,755,398 19,699,783 12,357,168
Any unrealized profits arising from these transactions were eliminated in
the consolidated financial statements to the extent of the Group's
interests in these associated companies.
20. CONTINGENCIES AND COMMITMENTS
As at December 31, 1997, the Group has the following capital commitments
and contingencies:
The Group had contracts with a related company controlled by Mr. Chan Kwai
Chiu in the PRC to purchase office premises to be developed by the related
company for HK$21,700,000. At December 31, 1997, HK$7,000,000, which was
grouped under other assets, had been paid as a deposit for the purchase
with the remainder being payable upon receipt of the title certificates for
the office premises.
F-24
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
21. SEGMENTED FINANCIAL INFORMATION
Substantially all of the Group's activities consist of assembling and sales
of production lines on a turn-key basis. Substantially all the Group's
sales are made to customers in the PRC.
Sales by major customers Sales Accounts
Nine months ended Receivable
Year ended March 31, December 31, December 31,
1996 1997 1997 1997
HK$ HK$ HK$ HK$
China (Fujian) Foreign Trade
Centre Holdings Company ("CFFTC") 277,682,496 30,842,448 - 6,594,312
Kin Heng Xin Investment &
Development Company Limited - 128,292,528 85,870,000 -
Shenzhen San Gao Enterprises
Company Limited (Shenzhen) - 88,531,968 59,566,500 28,597,500
Others 21,433,355 21,017,296 14,682,789 1,228,950
--------------- --------------- ---------------- --------------
299,115,851 268,684,240 160,119,289 36,420,762
The outstanding balance receivable from CFFTC and Shenzhen arising from the
above sales amounted to HK$71,625,432 and HK$29,142,288, respectively, as
of March 31, 1997.
22. ADDITIONAL NON-CASH TRANSACTIONS
During the year ended March 31, 1997, HK$17,935,678 of trade accounts
payable were paid directly by directors on behalf of the Company and
HK$21,625,232 of trade accounts receivable were received directly by
directors. The net activity of these transactions was posted to the amounts
due to directors in the accompanying consolidated balance sheets.
F-2
CHINA CONTINENTAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT'D
23. SELECTED FINANCIAL DATA (unaudited)
A summary of selected information for 1997 and 1996 is as follows:
Nine months ended Nine months ended
December 31, 1996 December 31,1997
HK$ US$ HK$ US$
Sales 242,544,000 31,296,000 160,119,289 20,660,553
Cost of Sales (113,018,250) (14,583,000) (64,600,231) (8,335,514)
------------ ------------ ----------- -----------
Gross Profit 129,525,750 16,713,000 95,519,058 12,325,040
Depreciation of Fixed Assets (496,000) (64,000) (442,894) (57,148)
Selling and Administrative Expenses (13,089,750) (1,689,000) (3,958,938) (510,831)
Financial Income/(Expenses), Net (170,500) (22,000) (442,851) (57,142)
Other Income/(Expenses), Net 155,000 20,000 22,625,018 2,919,357
Shares of (Losses) Gains of Associated
Companies (441,750) (57,000) 1,113,459 143,672
---------- ----------- ----------- -----------
Income Before Income Taxes 115,482,750 14,901,000 113,299,393 14,762,948
Income Taxes (9,625,500) (1,242,000) (10,000,694) (1,290,412)
------------ ----------- ------------ -----------
Net Income 105,857,250 13,659,000 104,412,158 13,472,536
------------ ----------- ------------ -----------
Earnings Per Share 4.07 0.53 4.02 0.52
------------ ----------- ------------- -----------
F-26