10-K 1 subfm10k_123100.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 33-3276-D CHINA CONTINENTAL, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Utah 87-0431063 -------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Room 2407, China Resources Building, No. 26 Harbour Road, Wanchai, Hong Kong. ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant Telephone Number, Included Area Code : 011-852-2802-8988 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None None Securities Registered Pursuant to Section 12(g) of the Act: None ---------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO X ------ ----- Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form and will not be contained, to the best of registrant knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-KSB. [X] The issuer revenues for its most recent fiscal year were US$14,344,706. At of December 31, 2000, 230,000,000 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 $17,963,000. DOCUMENTS INCORPORATED BY REFERENCE No annual reports to security holders, proxy or information statements, or prospectuses filed pursuant to Rule 424(b) or (c) have been incorporated by reference in this report. Annual Small Business Disclosure Format: Yes No X --- ----- TABLE OF CONTENTS PART I Page ------ ITEM 1. DESCRIPTION OF BUSINESS................................. 3 ITEM 2. DESCRIPTION OF PROPERTIES............................... 9 ITEM 3. LEGAL PROCEEDINGS....................................... 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 9 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ............................ 9 ITEM 6. SELECTED FINANCIAL DATA.................................10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION...............................................11 ITEM 7A QUANTITATIVE AND QUALIFICATION DISCLOSURE ABOUT MARKET RISK.......................................16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................16 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................................16 ITEM 11. EXECUTIVE COMPENSATION..................................17 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................18 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTION.............................................19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTINGS ON FORM 8-K.............................................20 SIGNATURES..............................................20 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 of this Form 10-K. The Company Historically, China Continental, Inc. (the "Company" or "CHCL") designed, installed and sold plastic production lines on a turn-key basis and sold machinery and equipment for the manufacture of plastic products. The major portion of the Company's sales were to plastic manufacturers in the People's Republic of China ("PRC" or "China"). The Company has completed approximately 84 turn-key projects throughout the PRC, varying in size from US$300,000 to US$5 million. Two turn-key projects were completed during calendar year 2000 averaging US$3.9 million per contract. However, because of an increase in price competition and a change in management, the Company has abandoned the sale of turn-key projects and refocused its business in agricultural genetics and water resources. To strengthen its revenue base and diversify its business activities, the Company purchased East Wu-Zhu Muo Qin Banner Green Demonstration Farm ("East Wu") in Inner Mongolia. The Company has further acquired two water resources in Inner Mongolia with a view of providing high quality mineral water. The Company became a US listed public company via a reverse merger in February, 1995. Market and Client Base During the 1990's, the Company began to market on a turn-key basis fully automated production lines to plastic product manufactures in the PRC. This business continued until the summer of 2000 when the Company refocused its activities to agrigenetics. In October 2000, the Company imported semen and embryos of Australian livestock for implantation into local recipients. The sheep from the first generation of offspring will be reared at East Wu and then be sold in Mainland China. During the fourth quarter of 2000, the Company's sole source of revenue approximating US$5.3 million was from the sale of natural forage grass. Sale of grass will continue in 2001. Livestock sales will also begin in 2001. Business Segments The Company operates the following principal business segments: 3 o Sale of breeding livestock, including the sale of semen and supplying genetic and agricultural services to contract breeders and growers in the animal husbandry industry o Planting, harvesting and sale of forage grass o The sale of potable water beginning in 2002 Sale of Breeding Livestock The Company has adopted a "Three Year Plan" to be implemented in Phases to achieve its objective of being both a fully functioning farm and one of the leaders in the agriculture and farming industry in China by leveraging the Company's ability to make available the latest agrogenetic techniques. Sale of forage grass This year the harvest for forage grass totaled approximately 65,000 tons, which was sold to Beijing Fengrun Fine Breed Husbandry. The market price for natural forage grass was approximately US$73 per ton. Better quality planted forage grass can be sold up to US$181 per ton. Sale of Potable Water The Company acquired water rights through the purchase of a 100% interest in Famous Goal International Ltd. Famous Goal's primary assets are 2.6 sq. km of land with two water resources located in Wulagai Development District in the northwest of Xi Lin Gol Meng. Total water flow is over 6,000 cubic meters/day with a daily extraction limit of 3,000 cubic meters. The water resources have been tested and meet the Chinese GB8537-95 Standard for "Potable Natural Mineral Water." Principal Suppliers The Company acquires all of its embryos from Castella Research Pty Ltd., based in Sydney, Australia. Employees As of December 31, 2000, the Company employed an administrative staff of 8 persons in Hong Kong and a technical and sale staff of approximately 40 persons in the PRC. 4 Competition The market for agricultural genetics and water resources is highly fragmented in the PRC. The Company believes that it is in a position to provide quality agricultural genetics to local customers along with superior technical support. Likewise, the Company believes that it will be able to produce high quality drinking water from its water sources. To date, there has been no significant price competition in either of these markets, but price competition may become a factor in the future. Economic Development in the People's Republic of China ("PRC" or "China") Since 1953, the development of the PRC's economy has been characterized by the adoption of the "Five Year Plans". Implementation of the plans are carried our under the supervision of the State Planning Commission, which reports directly to the State Council. The ninth Five Year Plan for national, economic 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 People's Conference. In 1999, facing complicated political and economic circumstances at home and aboard, China enacted a number of policy measures to increase output and expand demand. The net result of these initiatives was a 7.1% increase in the gross domestic product. Although the domestic political and economic situation in the PRC and Asia is still complicated, it has improved to some degree since 1999. In the PRC, market consumption is steady. Since the 4th quarter of 1999, retail sales of consumer goods have increased while deflation has moderated. During 2000, reform of PRC state owned enterprises was further accelerated. With the adjustment of strategic distribution in the state owned economy and the implementation of strategic reshuffling in state owned enterprises, the economic efficiency of state owned enterprises will,hopefully, be improved. The economic re-development of Western China has also begun. Construction of infrastructure, including acceleration of the construction of the main lines of the national railroad and provincial trunk lines has begun as has the expansion of facilities for transporting water to Western China. Both the jobs created by the infrastructure development, and those resulting from it, should help economic development in Western China and the PRC. China has averaged increases of 7% per year in its gross domestic production during for the Ninth Five Year Plan. During the opening address of the National People's Congress on March 5, 2001, Premier Zhu Ronji was optimistic that the economy would achieve an average seven percent growth in the coming five years and double in size in the next 10 years. 5 FUTURE PROSPECT OF THE COMPANY Overview Food production in China is still the paramount issue despite recent advances in scientific methods in agriculture and animal husbandry. The global demand for food is expected to be critical for continued growth, particularly in developing countries. The Company feels that the challenge of providing food can only be met through agricultural genetic engineering. Therefore the goal of the Company is to increase shareholders' value by its involvement in selected emerging high-growth sectors, particularly in the provision of technologies utilized in agricultural genetics and farming in China. Despite being the most populous nation and the largest livestock producer in the world, China lacks high quality livestock and hybred seeds to sustain its agricultural industry. Unless new emphasis is placed on optimizing the use of land and livestock, economic self-sufficiency will not be achieved. The Company believes that it has identified a niche market by initiating a multi-phase program to enhance agricultural production in China through the supplying of agricultural genetics technology to support the Country's increasing demand of food. The strong relationship that the Company enjoys with both its Chinese and international partners will provide the Company with strategic access to this development opportunity. The Company intends to maximize cashflow to enhance the values of its businesses through modern management, operations and development strategies. The Company believes opportunities exist for its growth in the agricultural industry as well as the bottled water industry in China. Breeding of Livestock The Company has embarked on a livestock and genetic engineering project at East Wu . The farm is located in Inner Mongolia. The emphasis of the Company is to lead and manage a selected high growth emerging business in providing technological services and products in agricultural genetics and farming in China. 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 there are a number of favorable factors that will enable it to achieve its objectives, including, but not limited to the following: - The opportunity to lead the market in the agricultural genetics and farming industry in China with the ability to make available modern techniques in genetics technology and farming; - The presence of dedicated management and staff with the necessary expertise; - The unique location and availability of a significant size of land; and - The strong support from its Chinese and international partners, ensuring that it is in a position to exploit existing and future opportunities in agricultural genetics. 6 A highly qualified team of five genetic professors has been recruited by the Company. This team will establish and initially manage a feedlot breeding center for Boer goats and crossbred Boer goats and to improve the genetic makeup of the domestic Chinese herd through advanced semen extraction, artificial insemination and embryo transplant techniques. The research and development team will also introduce enhanced farm management practices and technology, including nutritional expertise, animal husbandry techniques and western farming practices proven to maximize efficiency in livestock production and herd management. The objectives of this project are: - Produce superior breeding livestock to improve China's livestock population; and - Provide red meat for a population of 1.2 billion people. The Company has adopted a "Three Year Plan" to be implemented in three Phases to achieve its objective of being both a fully functioning farm and a leader in the agriculture and farming industry in China by leveraging the Company's ability to make available the latest agrogenetic techniques. Phase One - Important of Australian livestock genetics through Castella Research Pty Ltd., based in Sydney, Australia, in the form of goat embryos for implanting into local recipients. East Wu has purchased 2,000 embryos to produce approximately 1,000 Boer kids. It purchased approximately 2,400 native Chinese goats to serve as recipient goats. During 2001, the activities of the Company will primarily be to establish genetic and biotechnology services including introduction of embryo transfer and artificial insemination technology. CHCL plans to import 6,000 embryos from Australia and purchase 7,000 local recipients in 2001. Phase Two - After the first two years, the Company's commercial production of Boer goats should be in place. The Company plans to distribute and market genetics through semen, embryos and live breeding stocks to contact growers, and municipal and provincial governments. Company trained technicians will serve these clients by inseminating the semen, implanting the embryos and providing services in the sale of the Company's feed, feed additives, minerals, vitamins, veterinary drugs and other supplementary products. Phase Three - The Company expects to produce Boer goat crosses with 25%, 50%, 75% and 87% full blood Boer goats through embryo transfer within a three-year period. 7 Forage Grass With the increased meat consumption by China residents, there has been increased demand for China's forage grasses. This has resulted in the planting of specialized forage grass like alfalfa. Alfalfa is not only a fodder with a higher nutritional value for cows and sheep, but it also improves the soil. The consumption of milk and milk products by residents of China has been increasing, contributing to the increasing demand for forage grass. In view of this, China Continental is planning to leverage its technologies, scientific planting methods and modern management techniques to establish the largest area of grassland in China utilizing American advanced machinery and high quality imported seed. The initial focus of the plan is to enlarge the percentage of high quality forage grass to 36,500 hectares (or approximately 91,250 acres) within three years. By achieving this scale, the total yearly production of the high quality forage grass should be approximately 200,000 metric tons. Water Resources The Company acquired two water resources through the acquisition of a 100% equity stake in Famous Goal International Limited. The water resources are surrounded with a vast nature prairie producing a pure natural environment without industrial pollution. The Company plans to enter into a joint venture with a marketing and distribution company and to build a bottling plant. Construction of the plant is expected to begin late in 2001, with commercial production beginning in the fourth quarter of 2002. Water Source - The water source is surrounded with a vast natural prairie, a pure natural environment without industrial pollution. The mineral water exists in the pyroclastic rock crevice from the Jurassic Period. Rainfall seeps along the rock crevice into the soil, dissolves the microelements and micro-components in rocks through deep circulation, and then rises through crevices to the surface, thus forming natural mineral water. The high-grade natural mineral water meets the GB8537-95 Standard for "Potable Natural Mineral Water." It can be used to produce bottled or tubbed potable natural mineral water or mineral water drinks. Proposed Bottling Plant - The first phase of the proposed plant will include building a structure to house six production lines. The second phase calls for four additional production lines. Management expects that each production line will have a capacity of 100 million bottles at 600ml/bottle per year or 200 cubic meters per day of water. 8 ITEM 2. DESCRIPTION OF PROPERTIES The Company principal administrative office is located in Hong Kong at Room 2407 China Resources Building, 26 Harbour Road, Wanchai. The Company occupies these facilities under a two year lease. The marketing, technical facilities and supporting teams are located in Tianjin, People's Republic of China. The farm which the Company purchased, (East Wu) is located in Inner Mongolia in the People's Republic of China. ITEM 3. LEGAL PROCEEDINGS The Company is not currently subject to any material pending legal proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information The Company's common stock trades on the OTC Electronic Bulletin Board and is quoted under the symbol "CHCL.OB", the following table sets forth the high and low bid price per share for the Company's common stock for each quarterly period. 2000 1999 ------- ------ High Low High Low First Quarter 2.40 0.375 0.75 0.328 Second Quarter 1.25 0.375 0.703 0.203 Third Quarter 0.56 0.10 0.563 0.188 Fourth Quarter 0.16 0.055 1.50 0.313 These quotation reflects the inter-dealer prices without retail markup, markdown or commission and may not represent actual transactions. 9 Holders At December 31, 2000 there were approximately 350 holders of record. Dividends Since fiscal 1994, the Company has not declared or paid any cash dividends on its Common Stock and does not expect to declare or pay any such dividend in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA (In thousand United States dollars, except per share data) The following table sets forth, for the periods and dates indicated, selected consolidated financial and operating data for the Company. The financial data was derived from the consolidated financial statements of the Company and should be read in conjunction with the Company audited consolidated financial statements in the Index to Financial Statements on page F-1 of this report. Income Statement Data: (US$, 000) Year Year Year Nine Year Ended Ended Ended Months Ended Ended Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 2000 1999 1998 1997 1997 ---- ---- ---- ---- ---- Automatic production lines 0 36,434 32,806 18,815 31,957 Raw materials 0 670 1,594 1,846 2,782 Breeding center 0 1,770 2,388 0 0 Forage grass 5,873 0 0 0 0 ------ ------- ------ - - Total sales 5,873 38,874 36,788 20,661 34,759 Cost of sale 45 14,674 14,284 8,335 14,290 ------ ------- ------ ------ ------ Gross profit 45,828 24,200 22,504 12,325 20,469 Depreciation of fixed assets (2,405) (3,897) (4,841) (386) (80) Selling and administrative expenses (391) (1,205) (2,395) (510) (959) (Provision) Recovery for doubtful accounts (1) (675) (681) 0 289 Financial income (expenses), net 0 (126) (165) (57) (55) Other income (expenses) net 51 (9) 360 2,919 (595) Gain on disposal of Subsidiaries 17,608 11,431 0 0 0 Income from discontinued operations 5,505 Share of income/ (loss) of associated companies 0 0 103 144 0 ------ ------ ------ ------- ------ Income before income tax 26,195 29,719 14,885 14,435 19,069 Income taxes 0 3,114 2,890 1,290 2,635 ------ ------ ------ ------ ------ Income before minority interest 26,195 26,605 11,995 13,145 16,434 ------ Minority interest 0 1,631 2,114 0 0 ------ ------ ------ ------ ------ Income before extraordinary item 26,195 26,605 11,995 13,145 16,434 Extraordinary item 0 0 0 0 0 ------ ----- ----- ----- ------ Net income 26,195 28,236 14,109 13,145 16,434 ------- ------ ------ ------ ------ Net income per share 0.26 0.37 0.23 0.50 0.63 ======= ====== ====== ====== ====== Weighted average shares outstanding 102,230 75,904 62,306 26,000 26,000 ======= ====== ====== ====== ======

10 Balance Sheet Data at period end Year Year Year Nine Year Ended Ended Ended Months Ended Ended Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 2000 1999 1998 1997 1997 ---- ---- ---- ---- ------- Working Capital (deficit) 11,991 (14,678) 35,938 (26,392) 55,784 ------- ------- ------- ------- ------ Total Assets 204,384 188,941 253,269 218,447 73,282 ------- ------- ------- ------- ------ Long-term Liabilities 0 1,245 1,261 0 0 ------- ------- ------- ------- ------ Shareholders Equity 203,058 164,737 128,543 70,694 57,516 ------- ------- ------- ------- ------

ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Twelve months ended December 31, 2000 versus Twelve months ended December 31, 1999 Revenues Revenues from continuing operations decreased by US$33,001,000 or 84.89% to US$5,873,000 for the twelve months ended December 31, 2000 from US$38,874,000 for the prior year. This decrease is entirely attributable to the discontinuation of the plastics turnkey production business. Management believes that because of increasing price competition in the turnkey business, there is little room for further expansion at acceptable profit levels. With a view toward enhancing shareholder value, the Company had refocused its business to the field of agricultural genetics. Cost of Revenues/Sales Costs of Sales of approximately US$45,000 represent salaries and wages paid to workers for the harvesting and sale of forage grass. 11 Depreciation of Fixed Assets Depreciation expense decreased by US$1,492,000 or 38.28% to US$2,405,000 for the year ended December 31, 2000 from US$3,897,000 for the prior year. The decrease was attributable to the sale of the farm located on Chengde Dafeng in October 1999 resulting in no depreciation charge for this entity for the fourth quarter. The decrease in depreciation was partially offset by three months of depreciation of the East Wu facility located in Inner Mongolia. With an annual depreciation charge of US$7,200,000, management is now negotiating with the relevant governmental bodies to extend the lease term for another 25 years. Had the lease term been extended for another 25 years, the depreciation charge would have been reduced to US$3,600,000 per annum. Management expects approval for the extension of lease in 2001. Selling and Administrative Expenses Selling and administrative expenses include salaries of company personnel and general corporate overhead. Selling and administrative expense decreased by US$812,000 or 67.38% to US$393,000 for the year ended December 31, 2000 compared to US$1,205,000 for the prior year. The decrease resulted because the Company reduced its public relations expense together with discontinuing the turnkey business during 2000. Other Income Other income of US$51,000 represents gains on conversion of foreign currencies and miscellaneous income. Discontinued Operations Discontinued operations represent the net income less applicable income taxes of the turnkey business. Gain on Disposal of Associated Companies and Investment in Subsidiaries The gain on the disposal of associated companies and investment in subsidiaries increased by US$6,177,000 or 54.04% to US$17,608,000 for the year ended December 31, 2000 from US$11,431,000. The gain on disposal of investments of US$11,413,000 in 1999 represented gain on the disposal of Wealthy Asia Limited. The major asset of Wealthy Asia Limited was a 51% holding in Chengde Dafeng Agriculture and Animal Husbandry Co. Ltd., a Sino-Singapore joint venture incorporated in the People's Republic of China. With a view to streamlining the business of the Company during 2000, management disposed of three 100 percent owned subsidiaries, Billion Pearl Investments Limited, Prime Hill Investment Limited and Prime View Limited producing a gain of US$17,608,000. 12 Net Income Net income decreased by US$2,041,000 or 7.22% to US$26,195,000 from US$28,236,000 for the year ended December 31, 2000. The decrease is attributable to the discontinuation of the turnkey business which had been partially offset by the increase in sale of forage grass and the extraordinary item. Twelve Months Ended December 31, 1999 versus Twelve Months Ended December 31, 1998 Revenues Revenues increased by US$2,086,000 or 5.6% to US$38,874,000 for the twelve months ended December 31, 1999 from US$36,788,000 for the prior year. This increase is principally attributable to an increase in the sale of turn-key projects of US$3,628,000, which was partially offset by a decrease in the sale of raw-materials of US$924,000 and in breeding center income of US$618,000. Cost of Revenues/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 December 31, 1999, cost of sales as a percentage of revenue on turn-key projects was 36.40%, representing a decrease of 2.40% form 38.8% for the prior year. This decrease is principally attributable to an increase in the cost of materials. Depreciation of Fixed Assets Depreciation expense decreased by US$944,000 or 19.5% to US$3,897,000 for the year ended December 31, 1999 from US$4,841,000 for the prior year. The decrease is attributable to the sale of the farm located on Chengde Dafeng in October, 1999. 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 expense decreased by US$1,190,000 or 49.68% to US$1,205,000 for the year ended December 31, 1999 compared to US$2,395,000 for the prior year. The decrease resulted because the Company spent less on public relation during 1999. Provision for Doubtful Accounts The provision for doubtful accounts decreased by US$6,000 or 1% to US$675,000 for the year ended December 31, 1999 from US$681,000 for the prior year. Generally, uncollectible accounts as a percent of receivables remains fairly constant. 13 Financial Income (Expense) Net Financial income / (expense) is interest earned on cash and cash equivalents, less interest expense. Net financial expense decreased by US$39,000 or 23.6% to US$126,000 for the year ended December 31, 1999 from US$165,000 for the prior year. This decrease is attributable to a decrease in bank borrowing. Gain on Disposal of Wealthy Asia Limited The gain on disposal of Wealthy Asia Limited totaled US$11,431,000. The major asset of Wealthy Asia Limited is a 51% holding in Chengde Dafeng Agriculture and Animal Husbandry Co. Ltd., a Sino-Singapore joint venture incorporated in the People's Republic of China. Income Taxes Income taxes for the year ended December 31, 1999 were US$3,114,000 or 16.65% of pre-tax income. This compares with US$2,890,000 or 18.89% of pre-tax income for calendar year 1999. The tax rate was lower for 1999 because a portion of the income was classified as capital gains which are not subject to tax. Net Income Net income increased by US$14,127,000 or 100% to US$28,236,000 from US$14,109,000 for the year ended December 31, 1999. The increase is attributable to an increase in sales of US$2,086,000 and the gain on the sale of the farm of US$11,431,000, which was partially offset by the increase in provision for doubtful accounts. Liquidity and Capital Resources At December 31, 2000, the Company had working capital of US$11,991,000, including a cash balance of US$7,666,000. This compares to a working capital of US$(14,678,000) and a cash balance of US$870,000 at December 31, 1999. Net cash provided by operating activities decreased to US$24,984,000 from US$25,355,000 for the prior year. The cash provided by operating activities consisted principally of US$26,194,000 of net income, decrease in gain on disposal of subsidiary, a decrease in accounts receivable, and a decrease in income tax payable. Net cash used in investing activities totaled US$18,188,000 for the year ended December 31, 2000 compared to US$60,070,000 for the year ended December 31, 1999. In both years the Company had nominal purchases of fixed assets. During the year ended December 31, 1999, the Company used US$159,600,000 as a deposit for the purchase of the new farm. This was partially offset by the proceeds on disposal of subsidiaries and investment in subsidiaries. 14 The Company business has historically not been capital intensive. In most years internally generated funds were sufficient to fund the Company operations and financial its growth. While the cash generated from earnings and available lines of credit has historically provided sufficient liquidity to meet ordinary capital requirements, management anticipates that cash generated from the new operations combined with current working capital and available credit lines will provide sufficient liquidity (other than the purchase of the farm) to meet ordinary capital requirements for the foreseeable future. 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 purchasing of embryos, salaries and related costs incurred principally in the agricultural genetic projects. The Company generally has been able to meet increased costs by raising the prices of its products. Certain Risk Factors Affecting Future Operating Results a) Revised Corporate Business In the past, the Company has been actively involved in the sale of turnkey production lines, machinery and equipment, accessories, spare parts and raw materials. The Company has now exited this line of business and has moved into agricultural genetics and farming in China. Because of the Company's inexperience with this industry, there is no guaranty that its future results will equal those of the past or that the Company will be profitable in this industry. b) Country Risk Substantially all of the Company operations are conducted in the PRC and accordingly, the Company is subject to special considerations and significant risks not typically associated with companies operating in North America and Western Europe. These include risks associated with the political, economic and legal environments and with foreign currency exchange, among others. The Company's results may be affected by, among other things by 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, remittance abroad and rates and method of taxation. The PRC government has implemented economic reform policies in recent years, and these reforms may be refined or changed by the government at any time. It is possible that a change in the PRC leadership could lead to changes in economic policy. In addition, a substantial portion of the Company revenue is denominated in Renminbi, 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. 15 Agricultural Genetics Industry The Company is subject to the risks and uncertainties associated with the agricultural genetics business industry. The industry, can be negatively affected by a number of factors, including the following: the market price of livestock, outbreaks of diseases in humans or animals (such as BSE or "mad cow disease," or foot and mouth disease); weather conditions; government farm programs; government regulations; restrictive quota policies and trade policies and tariffs; and general economic conditions, either local, regional or global. Bottled Water Industry The Company is subject to the risks and uncertainties associated with the bottling industry. The business can be negatively affected by a number of factors, including the following: finding the appropriate joint venture partner, raising the necessary capital, general risks associated with building a bottling plant, competition, government regulations, and general economic conditions. ITEM 7A QUANTITATIVE AND QUALIFICATION DISCLOSURE ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company are annexed to this Report as pages F2 through F-26. An index to such materials appears on page F-1. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT The following table sets forth the name and ages of the executive officers of the Company and the position held by each. Name Age Title ---- ----- ------- Jia Ji Shang 47 Chairman of the Board and Chief Executive Officer Jian Sheng Wei 54 Chief Financial Officer/Secretary And Director Malcolm Roy Brandon 54 Technical Director Zhang Cheng Zhang 59 Director Shujing Li 38 Director 16 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all compensation paid or to be paid for services rendered during the last three fiscal years by the Company to its chief executive officers and the one remaining most highly paid executive officer who earn more than $100,000 for the three fiscal years ended December 31, 2000. Name of Individuals Year Salary Bonus -------------------- ------------ ---------- ----------- Chan Kwai Chiu 1998 108,000 0 1999 108,000 0 2000 0 0 Jai Ji Shang (1) 2000 0 0 (1) Was not employed by the Company prior to 2000. No cash compensation was paid or accrued by the Company in excess of $100,000 for any other executive officer. The Company does not provide retirement, pension, profit sharing or similar benefit program of plans to its officers. The Company does not pay fees or other compensation to its directors for attending meeting or special assignments. EXECUTIVE OFFICERS OF THE REGISTRANT The Company executive officers are as follows: Mr. Jia Ji Shang, age 47 is the Chairman and Chief Executive Officer of the Company. He holds a Master of Business Administration from Ukraine Institute of Wisconsin International University. He has in excess of 10 years of commercial experience in international trade, particularly in bioengineering, civil engineering, and biotechnology. Mr. Shang is the founder of Towering Technology Group Limited, which engages in civil and engineering construction in Mainland China and bioengineering and biotechnology throughout the Far East Region and in North America. Mr. Jian Sheng Wei, age 54 is the Business Director, Chief Financial Officer and Secretary of the Company. Mr. Wei holds a Bachelor in civil engineering and a Master in Business Administration. He has over 30 years experience in the operation, research and management of agriculture and husbandry. He has established breeding centers and large-scale slaughterhouses in Inner Mongolia and Hubei. Mr. Wei specializes in husbandry operation and is responsible in the promotion of business in the Far East Region, South Africa, Australia and North America. Dr. Malcolm Roy Brandon, age 54 is the Technical Director of the Company. Mr. Brandon is the Managing Director of Castella Research Pty Ltd., Honorary Professor of the University of Inner Mongolia, Principal Fellow of Centre for Animal Biotechnology, School of Veterinary Science at the University of Melbourne and Research Associate of the Austin Research Institute, Austin & Repatriation Hospital. Mr. Brandon received his Bachelor of Agricultural Science and PhD degree at the University of Sydney. He has over 26 years experience in basic research, development and production of biological products. He has been a visiting professor of Oxford University and Michigan State University. He is associated with 102 patents produced from his research. 17 Professional Zhong Cheng Zhang, age 59 is a Technical Director of the Company. He is a leader in animal biology and has contributed greatly in maintaining the Peoples' Republic of China's highly competitive research in his field. He has initiated eight research projects with the PRC government and has over 30 years experience in biotechnology. He has published more than 60 referred research papers, reviews and books and has received two honorary awards from China Agriculture and Husbandry for best thesis of the year. Mr. Shujing Li, age 38 is a Director of the Company. He received his Doctorate degree in Agriculture Science from China Agricultural University. He is primarily responsible for developing, researching and supplying technologies in agricultural genetics. He established state owned project "95", a project employing agricultural genetics to improve the equality of existing foodstuffs. He has authored more than 20 research papers, reviews and books. He holds positions in the Chinese Youth Association of Science and Technology, the Asian Society of Animal Biotechnology, the Chinese Society of Animal Reproduction and the College of Animal Science and Technology. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Under the security laws of the United States, the Company's directors, its executive officers and beneficial owners of more than ten percent of any class of the Company's securities are required to report their initial ownership of the Company's securities and any subsequent changes in that ownership to the Securities and Exchange Commission. However, none of these parties has yet filed the required forms with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of December 31, 2000 the number of shares of the Company's Common Stock known to be held by the Executive Officers and Directors, individually, and as a group, and by beneficial owners more than five percent of the Company Common Stock. Amount and Nature of Beneficial Ownership Percentage Name and Address (1) of Beneficial Owner Shares of Class ---------------------------------------- ---------- ----------- Shang Jia Ji 33,000,000 14.35% Jian Sheng Wei 0 0 Malcolm Roy Brandon 0 0 Zhang Cheng Zhang 0 0 Shuking Li 0 0 Clever Boy Limited 52,825,000 22.96% ---------- ------- All officers and directors as a group (five) 85,825,000 37.31% 18 Address for all persons and entities is Room. 2407 China Resources Building, 26 Harbour Road, Wanchai, Hong Kong and all shares are deemed beneficially owned by Shang Jia Ji. (1) Clever Boy Limited is beneficiarily owned by Shang Jia Ji. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company amounts due from / (to) directors and related companies owned and/ or controlled by a director, Jia Ji Shang, are unsecured, interest-free and are repayable on demand. In the normal course of business, some of the companies are engaged in the set-up of automatic production lines on a turn-key basis for its joint ventures. Other than the above-mentioned transactions, the companies also arrange for the sale of raw materials to these joint ventures. Amounts of revenue from the sales of raw materials to these joint ventures are summarized as follows: Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1999 2000 ------------ ------------- ------------ Sales to joint ventures: Raw materials US$1,542,354 US$669,976 US$0 The unrealized profits arising form these transactions were eliminated in the consolidated financial statements to the extent of the Company interest in these joint ventures. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits (b) Report on Form 8-K 1. Form 8-K dated November 16, 2000 reporting the resignation of Blackman Kallick Bartelstein LLP as the Company's certifying accountants. 2. Form 8-K dated December 23, 2000 reporting a change in control of the registrant and the acquisition of Famous Goal International Limited. 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/ Jia Ji Shang --------------------------------- Jia Ji Shang Chairman of the Board and Chief Executive Officer By: /s/ Jian Sheng Wei ---------------------------------- Jian Sheng Wei Chief Financial Officer Dated: April 13, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Titles Date ----------- -------- ------ /s/ Jia Ji Shang --------------------------- Jia Ji Shang Chairman of the Board and Chief Executive Officer April 13, 2001 /s/ Macolm Roy Brandon --------------------------- Macolm Roy Brandon Director April 13, 2001 /s/ Zhong Cheng Zhang --------------------------- Zhong Cheng Zhang Director April 13, 2001 /s/ Shujing Li --------------------------- Shujing Li Director April 13, 2001 /s/ Jian Sheng Wei --------------------------- Jian Sheng Wei Secretary / Treasurer / Chief Financial Officer and April 13, 2001 Director CONSOLIDATED FINANCIAL STATEMENTS CHINA CONTINENTAL, INC AND SUBSIDIARIES THE YEARS ENDED DECEMBER 31, 1999 AND 2000 CHINA CONTINENTAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Pages ------- Report of Independent Auditors F- 2 Consolidated Balance Sheets F-3 to F-4 Consolidated Statements of Income F-5 to F- 6 Consolidated Statements of Changes in Stockholders' Equity F-7 Consolidated Statements of Cash Flows F-8 to F-10 Notes to Consolidated Financial Statements F-11 to F-26 F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of China Continental, Inc. We have audited the accompanying consolidated balance sheet of China Continental, Inc. (the "Company") and subsidiaries (collectively the "Group") as of December 31, 2000, and the related statements of income, retained earnings, and cash flows for the year ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of China Continental, Inc. and subsidiaries as of December 31, 1998 and 1999, were audited by other auditors whose report dated May 23, 2000, expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the over-all financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Continental, Inc. and subsidiaries as of December 31, 2000, and the results of its operations and its cash flows for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Thomas Leger & Co., L.L.P. Houston, Texas March 26, 2001 CHINA CONTINENTAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and December 31, 2000 ASSETS December 31, ------------------------------------------------ 1999 2000 2000 HK$ HK$ US$ ----------- ----------- --------- CURRENT ASSETS Cash and bank balances 6,743,618 59,415,056 7,666,459 Trade receivables, net of provisions of HK$O at December 31, 1999 and 2000 57,433,900 17,830,189 2,300,670 Inventory - 25,966,037 3,350,456 Other receivable 8,540 - - ------------- --------------- -------------- TOTAL CURRENT ASSETS 64,186,058 103,211,282 13,317,585 DEPOSIT ON INVESTMENT IN LAND HOLDING COMPANY 1,323,966,245 - - FIXED ASSETS 3,026,841 21,886,792 2,824,102 INTEREST IN ASSOCIATED COMPANIES, net of accumulated amortization of HK$8,984, 000 57,956,574 - - LAND LEASE RIGHTS, net of accumulated amortization of HK$17,883,681 at December 31,2000 - 1,260,799,546 162,683,812 WATER RESOURSES - 198,081,376 25,558,887 AMOUNTS DUE FROM RELATED COMPANIES 10,164,655 - - OTHER ASSETS 5,000,000 - - ------------- --------------- -------------- TOTAL ASSETS 1,464,300,373 1,583,978,996 204,384,386 ============= =============== ==============

The accompanying notes are an integral part of these consolidated financial statements. F-3 CHINA CONTINENTAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) December 31, 1999 and December 31, 2000 LIABILITIES AND STOCKHOLDERS' EQUITY December 31, ---------------------------------------------- 1999 2000 2000 HK$ HK$ US$ -------- --------- -------- CURRENT LIABILITIES Bank overdrafts 3,955,635 - - Bank import loans 2,988,375 - - Secured bank loan 134,845 - - Income taxes payable 118,448,796 - - Amounts due to directors 25,969,348 74 12 Amounts due to related parties 4,508,262 8,876,268 1,145,323 Accounts payable and accrued liabilities 21,931,631 1,403,987 181,159 ----------- ----------- ---------- TOTAL CURRENT LIABILITIES 177,936,892 10,280,329 1,326,494 LONG-TERM LIABILITIES Secured bank loan - 9,647,634 - - ----------- ----------- ---------- TOTAL LIABILITIES 187,584,526 10,280,329 1,326,494 ----------- ----------- ---------- STOCKHOLDERS' EQUITY Common stock, par value US$0.001 per share: Authorized: 1,000,000,000 shares; Issued and outstanding 99,000,000 and 230,000,000 as of December 31, 1999 and 2000, respectively 767,690 1,789,425 230,894 Additional paid-in capital 438,310,094 531,262,285 68,549,972 Retained earnings 837,638,063 1,040,646,957 134,277,027 ------------- ------------- ------------ TOTAL STOCKHOLDERS' EQUITY 1,276,715,847 1,573,698,667 203,057,893 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,464,300,373 1,583,978,996 204,384,387 ============= ============= ============

The accompanying notes are an integral part of these consolidated financial statements. F-4 CHINA CONTINENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1998, 1999 and 2000 Year Ended December 31, ------------------------------------------------------------- 1998 1999 2000 2000 HK$ HK$ HK$ US$ ------- ------- --------- -------- SALES - - 45,518,868 5,873,403 COST OF SALES - - (353,774) (45,648) ------------- ------------- ------------- ----------- GROSS PROFIT - - 45,165,094 5,827,755 DEPRECIATION AND - - AMORTIZATION - - (18,638,398) (2,404,955) SELLING AND ADMINISTRATIVE - - EXPENSES - - (3,041,195) (392,413) OTHER INCOME - - 392,277 50,616 ------------- ------------- ------------- ----------- INCOME FROM CONTINUING OPERATIONS - - 23,877,778 3,081,004 DISCONTINUED OPERATIONS Income from operations of divested entities less applieable income taxes of HK$22,399,318 and HK$24,128,390 for 1998 and 1999 respectively 108,554,985 130,239,653 42,665,339 5,505,204 NET GAIN ON DISPOSAL OF ASSOCIATED COMPANIES AND INVESTMENTS IN SUBSIDIARIES 795,995 88,591,608 136,465,777 17,608,488 ------------- ------------- ------------- ----------- NET INCOME 109,350,980 218,831,261 203,008,894 26,194,696 ============= ============= ============= ===========

The accompanying notes are an integral part of these consolidated financial statements. F-5 CHINA CONTINENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1998, 1999 and 2000 Year Ended December 31, -------------------------------------------------------------- 1998 1999 2000 2000 HK$ HK$ HK$ US$ ---------- --------- ---------- ----------- INCOME PER COMMON SHARE BASIC Income from continuing operations - - 0.23 0.03 ncome from discontinued operations 1.73 1.72 0.42 0.06 Gain on disposals 0.02 1.16 1.34 0.17 ------------ ------------ ------------- ------------- 1.75 2.88 1.99 0.26 ============ ============ ============= ============= AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 62,568,767 75,904,110 102,230,137 102,230,137 ============ ============ ============= =============

The accompanying notes are an integral part of these consolidated financial statements. F-6 CHINA CONTINENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1998, 1999 and 2000 Additional Share paid-in Retained capital capital earnings Total HK$ HK$ HK$ HK$ --------- ------------ ------------ ------------ Balance at December 31, 1997 202,800 13,356,985 532,900,224 546,460,009 Issuance of 40,000,000 shares on February 10, 1998 at US$1.00 per share 309,200 309,326,204 - 309,635,404 Issuance of 1,400,000 shares on August 12, 1998 at US$.50 per share 10,822 5,400,178 - 5,411,000 Issuance of 1,600,000 shares on September 30, 1998 at US$.42 per share 12,368 5,250,737 - 5,263,105 Assumption of liabilities on December 31, 1998 and contribution to capital - 17,534,193 - 17,534,193 Deemed dividend to Mr. Chan Kwai Chui - - (23,444,402) (23,444,402) Net income - - 109,350,980 109,350,980 ---------- ------------- ------------- ------------- Balance at December 31, 1998 535,190 350,868,297 618,806,802 970,210,289 Issuance of 30,000,000 shares on October 9, 1999 at US$0.37 per share 232,500 86,730,000 - 86,962,500 Assumption of liabilities on December 31, 1999 and contribution to capital - 711,797 - 711,797 Net income - - 218,831,261 218,831,261 ---------- ------------- ------------- ------------- Balance at December 31, 1999 767,690 438,310,094 837,638,063 1,276,715,847 ---------- ------------- ------------- ------------- Issuance of 131,000,000 shares on December 23, 2000 at US$0.091975 -per share 1,021,735 92,952,191 - 93,973,926 Net income - - 203,008,894 203,008,894 ---------- ------------- ------------- ------------- Balance at December 31, 2000 1,789,425 531,262,285 1,040,646,957 1,573,698,667 ========== ============= ============== ==============

The accompanying notes are an integral part of these consolidated financial statements. F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1999 and 2000 Year Ended December 31, ------------------------------------------------------------- 1998 1999 2000 2000 HK$ HK$ HK$ US$ --------- -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 109,350,980 218,831,261 203,008,894 26,194,696 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,514,686 30,203,531 18,638,398 2,404,955 Provision for doubtful debts and diminution in values of investments and associated companies 5,280,608 5,231,361 - - Share of gains of associated companies (795,995) - - - Gain on disposal of subsidiaries - (88,591,608) (136,435,773) (17,604,615) (Income) loss allocated to minority interest (16,388,692) 12,642,937 - - Stock issued for public relation services 5,411,000 - - - (Increase)/decrease in assets: Inventories - - (3,324,528) (428,971) Trade receivables (36,167,309) (12,972,409) 39,603,711 5,110,156 Prepayments and deposits (598,127) 580,238 - - Amounts due from related companies (2,186,764) (454,342) - - Amounts due from associated companies 262,249 (2,380,923) - - Amounts due from directors (2,102,195) 1,079,397 - - Increase/(decrease) in liabilities: Amounts due to directors 8,712,447 15,425,445 (5,678,494) (732,709) Amounts due to related parties (724,021) (483,797) 4,368,006 563,614 Accounts payable and accrued liabilities 14,974,220 (6,421,135) (20,527,644) (2,648,728) Income taxes payable 22,780,444 23,155,052 - - --------------- ------------- ------------- ------------ Net cash provided by operating activities 145,323,531 196,503,952 99,652,570 12,858,398 --------------- ------------- ------------- ------------

The accompanying notes are an integral part of these consolidated financial statements. F-8 CHINA CONTINENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, 1998, 1999 and 2000 Year Ended December 31, --------------------------------------------------------------- 1998 1999 2000 2000 HK$ HK$ HK$ US$ ------- -------- --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Deposit on investment in land - (1,237,003,745) - - Purchase of water sources - - (46,981,132) (6,062,083) Purchase of fixed assets (2,736) - - - Proceeds from disposal of subsidiaries - 771,462,855 - - ------------- --------------- ------------- ------------ Net cash used in investing activities (2,736) (465,540,890) (46,981,132) (6,062,083) ------------- --------------- ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) under bank import loans (6,890,020) (600,140) - - Net repayements of bank loans (89,656) (112,729) - - Advances of bank overdrafts 71,983 69,407 - - ------------- --------------- ------------- ------------ Net cash provided by(used in) financing activities (6,907,693) (643,462) - - ------------- --------------- ------------- ------------ NET (DECREASE)INCREASE IN CASH AND BANK BALANCES 138,413,102 (269,680,400) 52,671,438 6,796,315 Cash and bank balances, at beginning of period 138,010,916 276,424,018 6,743,618 870,144 ------------- --------------- ------------- ------------ Cash and bank balances, at end of period 276,424,018 6,743,618 59,415,056 7,666,459 ============= =============== ============= ============ SUPPLEMENTARY CASH FLOWS DISCLOSURES: 1. Interest paid 1,275,217 1,834,429 - - ============= =============== ============= ============ Income taxes paid 256,629 973,338 - - ============= =============== ============= ============

2. The deposit on investment in land in 1999 has been reclassified in 2000 HK$ ------------ Land lease rights 1,278,683,227 Fixed assets 22,641,509 Inventories 22,641,509 1,323,966,245 The accompanying notes are an integral part of these consolidated financial statements. F-9 CHINA CONTINENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, 1998, 1999 and 2000 SUPPLEMENTARY CASH FLOWS DISCLOSURES: 3. During 2000 the Company disposed of Billion Pearl Investments Limited, Prime Hill Investment Limited, Prime View Industrial Limited; and ceased operations and liquidated Danbury, Inc. The following amounts represent the non-cash portion of these transactions: HK$ ----- Fixed assets 3,026,841 Interest in associated companies 830,256 Amount due from related companies 10,164,655 Other 5,008,540 Bank overfrafts (3,955,635) Bank import loans (2,988,375) Income taxes payable (118,448,796) Amounts due to directors (20,290,780) Secured bank loan (9,782,479) -------------- (136,435,773) ============== 4. The non-cash portion of the purchase of Famous Goal International Ltd is as follows: HK$ -------- 30% interest in Megaway Development Ltd 57,126,318 131,000,000 shares of China Continental Inc. 93,973,926 ------------- 151,100,244 The accompanying notes are an integral part of these consolidated financial statements. F-10 CHINA CONTINENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL ACTIVITIES China Continental, Inc. (the "Company") was incorporated in the state of Utah, in the United States of America, and its principal activity is a 100% investment in Sun's International Holdings Limited (Sun's International), a holding company for investments in operating companies. Sun 's International was incorporated under the laws of the British Virgin Islands. The consolidated financial statements include the accounts of the Company and Sun's International and its wholly owned subsidiaries, Billion Pearl Investments Limited (disposed of in 2000), High Glad Industries Limited (struck off in 1998), Prime Hill Investment Limited (disposed of in 2000), Prime View Industrial Limited (disposed of in 2000), Danbury Inc., Winkler Holdings Inc. (struck off in 1998), Wealthy Asia Limited (disposed of in October 1999), Battonic Company Limited and its operation East Wu-Zhu-Mu-Qin Banner Green Demonstration Farm (acquired in 1999); Famous Goal International Ltd and its holdings in water resources (acquired in 2000); (hereinafter collectively together with the Company referred to as the "Group"). Danbury Inc. was primarily engaged in the sale of automatic production lines on a turn-key basis and related consulting fees to various customers in the People's Republic of China (the "PRC"). This company, along with certain dormant companies, has also made investments in PRC enterprises through the formation of associated companies with various PRC parties. Danbury Inc., ceased operations in 2000. Billion Pearl Investments Limited was primarily an importer and reseller of raw materials to an associated company. Billion Pear Investments Limited was disposed of during 2000. Wealthy Asia Limited, through a wholly owned subsidiary, owned 51% of a joint venture known as Chengde Dafeng Agriculture and Animal Husbandry Co., Ltd., which was established to run a breeding center to propagate Boer goats and other livestock breeds. Battonic Company Limited, through its operation East Wu-Zhu-Mu-Qin Banner Green Demonstration Farm, is engaged in forage grass agriculture and a breeding center to propagate Boer goats and other livestock breeds. 2. BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This basis of accounting differs from that used in the statutory financial statements of the subsidiaries in 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 inter-company balances and transactions have been eliminated on consolidation. F-11 3. SUMMARY OF PRINCIPAL ACCOUTNTING POLICIES (Continued) (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. (c) 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 December 31, 1999 and 2000, cash and cash equivalents included foreign currency deposits equivalent to HK$6,694,810 (US$863,846), and HK$59,415,056 (US$7,666,459), respectively. (d) Inventory ---------- Inventories are measured at lower of cost and net realizable value using the first-in first-out ("FIFO") or weighted average cost formulas. (e) Fixed assets and depreciation ----------------------------- Fixed assets are stated at cost less accumulated depreciation. Depreciation of fixed assets is calculated on the straight-line basis to write off the cost less estimated residual value of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows: Leasehold land and buildings 2.0% -4% Furniture and fixtures 20% Office equipment 20% Motor vehicles 20% (f) Land lease rights and amortization ---------------------------------- Land lease rights in Mainland China were stated at cost less accumulated amortization. Amortization of land lease rights was calculated on the straight-line basis over the lesser of its estimated useful life or the lease term. The principal annual rate used for this purpose is 2.5% to 4.0% (g) Income taxes ------------ Income taxes are determined under the liability method as required by Statement of Financial Accounting Standard No.109, "Accounting for Income Taxes". F-12 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) (h) Foreign currency translation ---------------------------- Foreign currency transactions denominated in foreign currencies are translated into Hong Kong dollars ("HK$") 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, 2000 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, 2000 or at any other date. 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, livestock, forage grasses and raw materials is recognized when the merchandise is 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 year ended December 3l, 1998, 1999 and 2000, were HK$57,546, HK$l3,923 and HK$O, respectively. F-13 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued) (k) Earnings per share ------------------ Effective December 31, 1998, the Company adopted Statement of Financial Accounting Standard (" SFAS ") No . 128, "Earnings Per Share", which requires the Company to change the method used to compute earnings per share ("EPS") and to restate all prior periods presented. The presentation of primary and fully diluted EPS has been replaced with basic and diluted EPS, respectively. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share would include the dilutive effect of securities that could be exercised or converted into common stock. The Company has not entered into any transactions that would have a dilutive effect upon EPS. (l) Segment reporting ----------------- In December 1999, the Company adopted SFAS No. 131, " Disclosures About Segments of an Enterprise and Related Information". The adoption of this standard requires that reportable segments are reported consistent with how management assesses segment performance. This statement requires disclosure of certain information by reportable segment, geographic area and major customer. See "Segment Information", for further information. As a result, the Company will separately report information on the following three operating segments: automatic production lines on a turn-key basis, raw material importer and reseller and breeding center operations. In determining the operating income of each segment, certain general and corporate expenses are not allocated to operating segments. (m) 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. (n) Reclassification ---------------- Certain balances in the prior years have been reclassified to conform to the presentation used in the current year. F-14 CHINA CONTINENTAL, INC. AND SUBSIDIARIES NOTES TO CONSILIDATED FINANCIAL STATEMENTS 4. FINANCIAL INCOME/(EXPENSES), NET Year Ended Decmeber 31, ------------------------------ 1998 1999 HK$ HK$ ----------- ---------- Interest income 157,629 890,625 Interest expense (1,359,620) (1,834,429) Bank charges (73,226) 35,742 ------------ ------------ (1,275,217) (979,546) ============ ============ 5. OTHER INCOME(EXPENSES), NET Year Ended Decmeber 31, --------------------------- 1998 1999 2000 HK$ HK$ HK$ ------- -------- ------- Commission and miscellaneous income 3,615,700 4,630 - Foreign exchange gains/(losses), net (826,195) (72,123) 392,277 --------- -------- ------- 2,789,505 (67,493) 392,277 ========= ======== ======= 6. GAIN (LOSS) DISPOSAL OF INVESTMENT IN SUBSIDIARIES Year Ended Decmeber 31, ----------------------------- 1999 2000 HK$ HK$ ----------- ----------- Wealthy Asia Limited 88,591,608 - Billion Pearl Investments Limited - 27,217,513 Prime View Industrial Limited - (20,563,595) Prime Hill Investment Limited - 15,287,588 Danbury Inc. 118,478,800 ----------- ------------ 88,591,608 136,465,777 =========== ============ F-15 7. INCOME TAXES The companies in the Group operate in several jurisdictions and may be subject to taxes in those jurisdictions. Details of the related provision for income taxes are as follows: Year Ended December 31, ----------------------------------- 1998 1999 HK$ HK$ ------------ -------------- Income/(loss) before income taxes: Hong Kong (6,332,226) (8,396,983) PRC 121,693,832 238,713,697 -------------- --------------- 115,361,606 230,316,714 ============== =============== Income tax provision: Current: Hong Kong 102,270 9,698 PRC 22,297,048 24,118,692 -------------- --------------- 22,399,318 24,128,390 ============== =============== 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 operations in Hong Kong are subject to Hong Kong profits tax on their income arising in or derived from Hong Kong after adjusting for income and expense items which are not assessable or deductible for profits tax purposes. As such, current income taxes are calculated at a statutory tax rate of 16.5% on their estimated taxable income for the year. No companies are carrying on operations in Hong Kong at December 31, 2000 Companies with operations in the PRC may be subject to PRC income tax for income on services rendered therein. The applicable effective tax rate for income derived from services Tendered in that jurisdiction is approximately 8.5%. The Company is of the opinion there will be no taxes on the Battonic Co., Ltd, operations for the next five years. At December 31, 1999 income tax payables included foreign currency payables equivalent to HK$118,448,796 (US$15,283,716). F-16 7. INCOME TAXES (continued) A reconciliation between the actual income tax expense and income taxes computed by applying the statutory Hong Kong tax rates to the income before income taxes is as follows: December 31, ----------------------------------- 1998 1999 HK$ HK$ --------- --------- Statutory Hong Kong tax rates 16.5% 16.5% Computed expected tax expense 19,034,665 38,002,257 Increase (Decrease) resulting from PRC tax at a different composite tax rate 944,644 (14,732,455) 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 (63,680) - Other provisions 2,483,689 530,971 Others - 327,617 ------------ ------------ 22,399,318 24, 128,390 Undistributed earnings of the Company's non-U.S. subsidiaries amounted to approximately HK$1,040,646,957 at December 31, 2000. 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 at December 31, 2000 was approximately HK$350,000,000 (US$45,161,291). 8. FIXED ASSETS Year Ended December 31, 1999 2000 HK$ HK$ ------- -------- Cost: Leasehold land and buildings, located in Hong Kong (1) 4,239,231 - Machinery and equipment - 22,641,509 Furniture and fixtures 700,826 - Office equipment 603,484 - Motor vehicles 1,244,030 - ----------- ------------ 6,787,571 22,641,509 Less: accumulated depreciation (3,760,730) (754,717) ----------- ------------ Net book value 3,026,841 21,886,792 =========== ============ (1) Pledged. F-17 9. INTERESTS IN ASSOCIATED COMPANIES December 31, 1999 HK$ ------------------ Unlisted investments, at cost 73,145,120 Share of post-acquisition gains, net 1,909,454 Write off for diminutions in values (8,114,000) Accumulated amortization (8,984,000) 57,956,574 Due to associated companies, net - ------------ 57,956,574 Movement in provisions for diminutions in values: Balance at beginning of year 8,114,000 Provisions for diminutions in value - ------------ Balance at December 31,1999 8, 114,000 ============ During the year ended December 31, 2000, the company exchanged its interest in Megaway Development Limited, as part of the consideration to acquire a 100% interest in Famous Goal International Limited. The other interests in associated companies has been disposed of namely, Billion Pearl Investments Limited, Prime Hill Investment Limited and Prime View Industrial Limited. The Group's share of the post-acquisition gains of associated companies was HK$795,995 for the year ended December 3l, 1998. F-18 10. ACQUISITIONS AND DISPOSITIONS (Continued) 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$72,800,000 which was settled on December 31, 1997 and a verbal agreement to remit the remainder at some future date. The remainder was settled on March 18, 1999 through the receipt of 9,900,000 newly issued shares of China Continental, Inc. common stock. The following amounts represent the initial recording of this transaction: Asset (Liability) HK$ --------------------- 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. The principal asset of Megaway is a 51% interest in Chengde Dafeng Agriculture and Animal Husbandry Co., Ltd. (Chengde), a Sino-Singapore joint venture incorporated in the PRC 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. Chengde has been established to run a breeding center to propagate Boer goats and other livestock breeds. Chengde's principal asset is 20,000 hectares or 49,400 acres of grassland located approximately 250 kilometers north of Beijing, in the PRC. Based upon an independent appraisal dated July 30, 1999 by American Appraisal Hong Kong Limited, the value of 100% of Chengde is US$181,000,000 (HK$l,402,750,000) as of December 31, 1997. On October 4, 1999, Sun's International sold its 100% interest in WAL to an unrelated third party for a consideration of approximately HK$773,127,341 (US$l00,000,000) . The following amounts represent the non-cash portion of this transaction: Cash disposed of with sale of subsidiary HK$ 1,664,486 Accounts receivable 1,338,318 Prepayments, deposits and other 1,214,953 Amounts due from directors 39,525,000 Land lease rights, net 613,158,926 Income taxes payable (627, 103) Accounts payable and accrued liabilities (267,099) -------------- Net 656,007,481 ============== F-19 9. ACQUISITIONS AND DISPOSITIONS (continued) On October 9,1999, the Company initiated the purchase of a 100% interest in Battonic Co., Ltd. for a consideration of US$100,000,000 and 30,000,000 shares of stock in the Company. The shares were valued at US$11,250,000, based upon the trading value of the shares on this date. The cash and stock were both transferred to the seller, an unrelated individual, on that date. Subsequently, that individual became an employee of the Company. The principal asset of Battonic Co. Ltd. is a 100% interest in East Wu-Zhu-Mu-Qin Banner Green Demonstration Farm (Banner). The principal asset of Banner is a 100% interest in Dongwu Demonstration Farm (Dongwu). Dongwu has been established to run a breeding center to propagate Boer goats and other livestock breeds. Dongwu's principal asset is the right to use 156 square miles of land located in Inner Mongolia for 25 years from July 1, 1999 to July 1, 2024 and may be extended by the Company. Based upon an independent appraisal dated October 20, 1999 by Vigers Hong Kong Limited, the value of 100% of Dongwu is US$361,772,645 (HK$2,803,738,000). Had the 30,000,000 shares of common stock been outstanding throughout the periods presented, earnings per share would have been HK$1 .22 for the year ended December 31, 1998. In the PRC, an investment such as Dongwu is not legally transferable until all of the appropriate levels of governmental authority have approved the transaction. However, according to an outside legal opinion obtained by the Company, governmental procedures for the official change have commenced and such procedures are in accordance with the relevant PRC laws and the transfer of title ownership is deemed to be achievable through the commenced procedures. At December 31, 2000, this investment had not yet been properly approved. The Company has taken possession and commenced operation of the property. The company is confident that all necessary approvals will be obtained. In the unlikely event that the transaction is not approved, the company would take steps to rescind the shares issued and to recover the cash deposit. On December 23, 2000 the Company initiated the purchase of a 100% interest in Famous Goal International Limited for a consideration of US$6,000,000, exchange of the Company's Megaway interest (HK$57,126,318), and 131,000,000 shares of stock in the Company. The shares were valued at US$12,048,712 Had the 131,000,000 shares of common stock been outstanding through out the periods presented, earnings per share would have been HK$.48, HK$.95 and HK$.88, for 1998, 1999 and 2000 respectively. The principal assets of Famous Goal International Limited are 2.6 square kilometers of land with two water resources located in Wulagai Development District northwest of Xi Lin Gol Meng. It can be used to produce bottled natural mineral water. 10. BANK LOANS The import loans with banks carry interest at 1% above the Hong Kong prime-lending rate. (weighted average of 9.5% per annum as of December 31, 1999). 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. The Company borrowed and in turn loaned HK$9,984,864 to a company owned by a 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. The balance remaining as of December 31,1999 was HK$9,782,479. Upon disposal of Billion Pearl Investments Limited, all bank loans have been transferred to the vendor of the disposed subsidiary. F-20 11. CONCENTRATION OF CREDIT RISKS Financial instruments which potentially subject the Group to a concentration of credit risk principally consist of cash deposits, trade receivables, long-term receivable and the amounts due from and to directors and related companies. (i) Cash deposits The Group places it cash deposits with an international bank. (ii) Amounts due from related companies At December 31, 1999, approximately 24%, 18% and 49% of the amounts due from related companies were due from New Skyland Industrial Ltd., Billion Pearl International Limited and New Skyland International Ltd., respectively. These amounts have been fully reserved for at December 31, 1999. At December 31, 2000, there is no amount due from related company. The Group does not have the policy of requiring collateral. (iii) Amounts due from and to directors (See "Additional related party balances and transactions") (iv) Deposit on investment in landholding company (See "Acquisitions and dispositions") 12. 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 are stated at their book value which approximates their fair value. F-21 13. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS The Group's operations are conducted in Hong Kong and the PRC. Accordingly, the Group's business, financial condition and results of operations may be influenced by the political, economic and legal environments in Hong Kong and the PRC, and by the general state of the Hong Kong and the PRC economies. Effective July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the PRC ("SAR"). As provided in the Basic Law of the Hong Kong SAR of the PRC, the Hong Kong SAR wil1 have full economic autonomy and its own legislative, legal and judicial systems for 50 years. The Group's management does not believe that the transfer of sovereignty over Hong Kong has had an adverse impact on the Company's financial and operating environment. There can be no assurance, however, that changes in political or other conditions will not result in such an adverse impact. The Group's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Group's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. 14. 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 majority of the Company's bank balances as of December 31, 1999 and 2000 were in RMB. The amount of debts due from customers in the PRC subject to control amounted to HK$57,433,900 and HK$59,410,906 at December 31, 1999 and 2000, 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"). 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. 15. ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS The Group's amounts due from/(to) directors and related companies owned or controlled by a director are unsecured, interest-free and are repayable on demand. F-22 16. CONTINGENCIES AND COMMITMENTS During 1998, the Company entered into an agreement with an unrelated entity to provide public relations and promotional services for the Company. In accordance with the agreement the entity was issued stock for all services provided. A portion of the agreement is contingent upon the firm's ability to raise capital and obtain a listing for the Company on certain stock exchanges in the United States. Attainment of these goals could result in the issuance of up to an additional 1.6 million shares of common stock to the firm. 17. SEGMENT INFORMATION The Company performs in the four following operating segments: Automatic production lines on a turn-key basis, raw material, breeding center operations and forage grass agriculture. In determining the operating income of each segment, certain other expenses such as income taxes, administrative, financial, other (income) expense and shares of gains of associated companies are not allocated to operating segments. The following table reflects the results of the segments consistent with the Company's management system. Year Ended December 31 ---------------------------------- 1998 1999 2000 HK$ HK$ HK$ ------ ------ ------- Sales Automatic production lines 254,247,430 282,361,440 65,652,600 Raw materials 12,353,242 5,192,312 - Breeding center 18,506,627 13,719,626 - Forage grass agriculture - - 45,518,868 -------------- ------------- ---------- Total sales 285,107,299 301,273,378 111,171,468 Operating Income (Loss) Automatic Production lines 160,358,850 179,668,390 42,673,800 Raw materials 1,689,518 (5,088,072) - Breeding Center (30,651,824) (19,249,017) - Forage grass agriculture - - 26,490,737 --------------- ------------- ---------- Total operating income 131,396,544 155,331,301 69, 164,537 Less: General corporate expenses 15,127,221 9,341,156 3,013,696 Financial expense 1,275,217 979,546 - Other (income) expense (2,789,505) (88,524,115)(18,379,254) Share of gains of associated Companies (795,995) - - --------------- ------------- ---------- Amortization of investment premium 3,218,000 3,218,000 - --------------- ------------- ---------- Income before income taxes 115,361,606 230,316,714 84,530,095 =============== ============= ========== F-23 CHINA CONTINENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. SEGMENT INFORMATION (continued) Operating Segment Data Identifiable Capital Depreciation Assets Expenditures & Amortization HK$ HK$ HK$ ------------- ------------- --------------- Year ended December 31, 1998: Automatic production lines 346,447,370 - - Raw materials 728,610 - - Breeding center 1,327,305,671 - 33,962,849 --------------- ------------- ------------- Other - 2,736 333,837 --------------- ------------- ------------- 1,674,481,651 2,736 34,296,686 --------------- ------------- ------------- Year ended December 31, 1999: Automatic production lines 64,128,710 - - Raw materials 41,612 - - Breeding center - - 26,856,493 Other - - 129,038 --------------- ------------- ------------- 64,170,322 - 26,985,531 --------------- ------------- ------------- Year ended December 31, 2000: Automatic production lines 59,401,266 - - Raw materials - - - Breeding center - - - Forage gross agriculture 1,326,492,204 - 18,638,398 Other - 198,081,376 - --------------- ------------- ------------- 1,385,893,470 198,081,376 18,638,398 --------------- ------------- -------------

Reconciliation to Total Assets As Reported Year Ended December, 31 ------------------------------------------------- 1998 1999 2000 HK$ HK$ HK$ --------- ---------- --------- ASSETS: Total reportable segments - identifiable assets 1,674,481,651 64,170,322 1,385,893,470 Unallocated amounts: Cash 8,096 7,196 4,150 Water Sources - - 198,081,376 Deposit on investment in land - 1,323,966,245 - Prepayments, deposits and other receivables 3,235,373 8,540 - Due from related parties 50,605,247 10,164,655 - Plant and other property and equipment 3,155,880 3,026,841 - Interests in associated companies 60,852,081 57,956,574 - Other 5,000,000 5,000,000 - ------------- ------------- --------------- Total Consolidated Assets 1,797,338,328 1,464,300,373 1,583,978,996 ============= ============= ===============

F-24 17. SEGMENT INFORMATION (continued) Much of the Group's activities did 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 ---------------------------------------- Year Ended December 31, ---------------------------------------- 1998 1999 2000 HK$ HK$ HK$ ------- ------- ------ Kin Heng Xin Investment & Development Company Limited 83,414,430 81,396,900 - Shenzhen San Gao Enterprises Company Limited (Shenzhen) 88,276,600 118,253,540 65,652,600 Chit Tat Industrial Development Limited 82,556,400 82,711,000 - Others 30,859,869 - - ---------- ------------ ------------ 285,107,299 282,361,440 65,652,600 The sales from forage grass agriculture are also made to customer in the PRC. In 2000, all sales (HK$45,165,094) were made to Beijing Feng Ren Quality Livestock Company Limited. At December 31, 2000, the account receivable from Beijing Feng Ren is HK$17,830,038. F-25 18. ADDITIONAL NON-CASH TRANSACTIONS 1998 ---- On August 12, 1998, 1,400,000 shares of stock were issued in exchange for public relation services. The stock was issued at US$.50 per share, which approximates trading value at that date. Total public relation service expense recorded in relation to this transaction was HK$5,411,000. On September 30, 1998, 1,600,000 shares of stock were issued to two directors of the Company to settle amounts due to them. The stock was issued at US$.42 per share; which approximates trading value at that date. The total reduction to due to directors in relation to this transaction was HK$5,263,105. Mr. Harry Ho, assumed on December 31, 1998, pursuant to a signed written agreement with the Company, HK$17,534,193 of the Company's accrued liabilities. Mr. Ho then contributed his assumption of those liabilities to additional paid-in capital. During 1998, High Glad Industries Limited filed for dissolution (strike off) in Hong Kong. In order to file for strike off, all assets and liabilities must be removed from the books. The following non-cash items were transferred to a Company director, Mr. Chan Kwai Chiu. HK$ Other assets - deposit (2,000,000) Amounts due to Mr. Chan Kwai Chiu 1,326,777 Accounts payable and accrued expenses 673,223 ----------- Total - =========== 1999 ---- Mr. Chan Kwai Chiu, stockholder and director of the Company, assumed on December 31 , 1999, pursuant to a signed written agreement with the Company, HK$711,797 of the Company's accrued liabilities. Mr. Chan Kwai Chiu then contributed his assumption of those liabilities to additional paid-in capital. F-26

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