10-Q 1 fm10q_93002.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) {X} QUARIERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ART OF 1934 For the quarterly period ended September 30, 2002 { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No. 33-3276-D CHINA CONTINENTAL, INC. -------------------------------------------------- (Exact name of registrant as specified in its charter) Utah 87-0431063 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1801-1802 Evening Newspaper Mansion, 358 Nanjing Road, Tianjin P.R.C. ----------------------------------------------------------------- (Address of principal executive offices) (86) 22-2750-1812 ------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO X As of September 30, 2002, 280,070,000 shares of Common Stock of the issuer were outstanding. CHINA CONTINENTAL, INC. INDEX Page Number ------- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets - September 30, 2002 and December 31, 2001..............................................3 Consolidated Statements of Income - For the three months and nine months ended September 30, 2002 and 2001.4 Consolidated Statements of cash Flows - For the nine months ended September 30, 2002 and 2001..........5 Notes to Consolidated Financial Statements.....................6 Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations............................7 PART II - OTHER INFORMATION Signatures....................................................11 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements CHINA CONTINENTAL, INC. CONSOLIDATED BALANCE SHEETS (Stated in '000 United States Dollars) September 30, December 31, 2002 2001 (unaudited) (audited) ----------- ------------ ASSETS Current assets Cash and deposits $ 7,617 $ 11,331 Accounts receivable, net of provision 2,024 4,568 Prepayments, deposits and other receivables 710 0 Prepaid expenses 3,727 10,048 Amount due from related company 0 1,716 ------------ ----------- Total Current Assets 14,078 27,663 ------------ ----------- Fixed Assets 2,198 2,532 Land use rights 150,577 155,766 Land improvement 11,061 0 Water sources 1 25,559 Deposit for improvement 0 1,349 ------------- ----------- Total Assets $ 177,914 $ 212,869 ============= =========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities Payable and accruals $ 273 $ 201 Due to related companies 533 509 Amount due to a related party 26 424 Amounts due to directors 229 229 ------------- ----------- Total current liabilities 1,061 1,363 ------------- ----------- Long-term liabilities 0 0 ------------- ----------- Total liabilities 1,061 1,363 ------------- ----------- Stockholders' Equity Share capital 335 312 Contributed surplus 70,063 69,603 Treasury stock (55) (55) Retained earnings 106,510 141,646 ------------- ----------- Total Stockholders' Equity 176,853 211,506 ------------- ----------- Total Liabilities & Stockholders' Equity $ 177,914 $ 212,869 ============= ===========

The accompanying notes are an integral part of these financial statements CHINA CONTINENTAL, INC. CONSOLIDATED STATEMENTS OF INCOME (Stated in '000 United States Dollars) Three Months Ended Sept. 30, Nine Months Ended Sept. 30, --------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues Sales of livestock $ 0 $ 0 $ 2,349 $ 9,495 Sales of forage grass 1,012 3,233 2,024 3,233 Cost of sales (38) (199) (680) (3,550) ----------- ----------- ----------- ----------- Gross Profit 974 3,034 3,693 9,178 Depreciation and amortization (1,929) (1,803) (5,661) (5,408) Land improvement costs (3,727) 0 (7,454) 0 Selling and administration expenses (33) (38) (156) (208) ----------- ----------- ----------- ----------- Income before income taxes (4,715) 1,193 (9,578) 3,562 Income taxes 0 0 0 0 ----------- ----------- ----------- ----------- (4,715) 1,193 (9,578) 3,562 Impairment loss on water sources 0 0 (25,558) 0 ----------- ----------- ----------- ----------- Net Income (loss) $ (4,715) $ 1,193 $ (35,136) $ 3,562 =========== =========== =========== =========== Earnings (loss) per share excluding Impairment loss (0.02) 0.01 (0.13) 0.02 =========== =========== =========== =========== Weighted average common and equivalent shares outstanding 267,947,000 230,000,000 260,782,000 230,000,000 =========== =========== =========== ===========

The accompanying notes are an integral part of these financial statements CHINA CONTINENTAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (States in '000 United States Dollars) Nine Months Ended Sept. 30, 2002 2001 ---------- ------------ Cash Flows From Operating Activities: Net Income/(loss) $ (35,136) $ 3,562 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 5,661 5,408 Impairment loss 25,558 0 Issue of shares for repayment of debt 484 0 (Increase)decrease in assets: Account receivable 2,544 (2,556) Inventories 0 3,350 Prepayments, deposits and other receivable (710) 0 Prepaid expense 6,321 0 Due from related company 1,716 (47) Increase (decrease) in liabilities: Payable and accruals 72 (23) Due to related companies 24 (267) Due to directors and related parties (398) 283 ---------- --------- Net Cash Provided by/(Used in) Operating Activities 6,136 9,710 Net cash provided by (used in) Investing Activities Land improvement (11,199) 0 Deposit for improvement 1,349 0 ---------- --------- (9,850) 0 Net increase/(decrease) in cash (3,714) 9,710 Cash, beginning of period 11,331 7,666 ---------- --------- Cash, end of period $ 7,617 $ 17,376 ========== =========

The accompanying notes are an integral part of these financial statements Note 1 -- Basis of Presentation The unaudited condensed consolidated financial statements of China Continental, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company Form 0-K for the fiscal year ended December 31, 2001. Note 2 -- Foreign Currency Conversation The Company financial information is presented in US dollars. Reminbi dollars have been converted into US dollars at the exchange rate of 8.3 to 1. Note 3 - Common Stock For the period ended September 30, 2002, the Company issued 22,870,000 shares of its common stock; 20,000,000 shares were issued for the payment of a related party payable for the approximate amount of $400,000 and 2,870,000 shares were issued for the payment of accrued legal fees of approximately $57,000. Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. Results of Operation Comparison of the Three Months Ended September 30, 2002 to the Three Months Ended September 30, 2001. Revenues Revenues decreased by $2,221,000 or 68.69% to $1,012,000 for the three months ended September 30, 2002 from $3,233,000 for the corresponding period of the prior year. The decrease occurred because the harvesting of forage grass was slightly delayed but will be completed in October. Because of the seasonality of the Company's business, the majority of the Company's revenue will be generated in the fourth quarter. Cost of Sales Cost of sales represents salaries, the cost of planting forage grass and the cost of livestock. Cost of sales decreased by $161,000 or 80.90% to $38,000 for the three months ended September 30, 2002 from $199,000 for the corresponding period of the prior year. The decrease in the cost of sales resulted because of the delay in the harvesting of forage grass and the absence of the sale of livestock. Depreciation and Amortization Depreciation and amortization increased by $126,000 or 6.98% to 1,929,000 for the three months ended September 30, 2002 from $1,803,000 for the corresponding period of the prior year. Depreciation and amortization expense represents amortization and depreciation of the land use right of East-Wu-Zhu-Mu-Qin Banner Green Demonstration Farm and improvements thereto. File land use rights are being amortized over a period of twenty-five years. The increase in depreciation and amortization for the third quarter resulted from the depreciation of the land improvement costs incurred of approximately $11,199,000 which is being depreciated over the remaining life of the lease. Land improvement costs The land improvement costs of approximately $3,727,000 represents the costs to survey, fertilize, perform chemical analysis and provide watering for cultivating 40,000 mu (approximately 2,667 hectares) for general agricultural use and to maintain its productive condition. The remaining $3,727,000 payable under the contract will be expensed over the balance of this calendar year. Selling and Administrative Expenses Selling and administrative expenses decreased by $5,000 or 13.15% to $33,000 for the three months ended September, 2002 from $38,000 for the corresponding period of the prior year. The decrease is attributable to the shutting of the administrative office in Hong Kong. Income Taxes No income tax have been provided as management believes that there is minimal income tax exposure under the applicable tax rules. Net Income Net income decreased by $5,908,000 or 495.22% to a loss of $4,715,000 for the three months ended September 30, 2002 from net income of $1,193,000 for the corresponding period of the prior year. The decrease is principally attributable to the discontinuation of the sale of native goats and cows and the increase in land improvement costs, and the delay in the harvesting and sale of forage grasses. Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended September 30, 2001 Revenues Revenues decreased by $8,355,000 or 65.64% to $4,373,000 for the nine months ended September 30, 2002 from $12,728,000 for the corresponding period of the prior year. The decrease occurred because 60,000 goats and 3,000 cows were sold during the first six months ended June 30, 2001 producing revenue of approximately $7,671,000. These goats and cows were acquired as part of the acquisition of East-Wu-Zhu-Mu-Qin Banner Green Demonstration Farm in 2000. Because the entire inventory of goats and cows was sold in 2001, there were no livestock sales for the nine months ended September 30, 2002. Revenue for nine months ended September 30, 2002 represent sales of forage grass and goats transplanted with embryos. However, because of the seasonality of the Company's business, management believes that the majority of the Company's revenues will be earned in the fourth quarter. Cost of Sales Cost of sales represents salaries, the cost of planting forage grass, the cost of livestock, the cost of goats and embryos and the direct costs of embryos transplanting. Cost of sales decreased by $2,870,000 or 80.84% to $680,000 for the nine months ended September 30, 2002 from $3,550,000 for the corresponding period of the prior year. The decrease in the cost of sales resulted because of the absence of livestock sales in the current year and the delay in the harvesting of forage grasses. Depreciation and Amortization Depreciation and amortization increased by $253,000 or 4.67% to 5,661,000 for the nine months ended September 30, 2002 from $5,408,000 for the corresponding period of the prior year. Depreciation and amortization represents amortization and depreciation of the land use right of East-Wu-Zhu-Mu-Qin Banner Green Demonstration Farm over a period of twenty-five years. The increase in depreciation and amortization resulted from the depreciation of the land improvement costs incurred in the last year of approximately $11,199,000 which is being depreciated over the remaining life of the lease. Land improvement costs The land improvement costs of approximately $7,454,000 represent the cost to survey, fertilize, perform chemical analysis and provide watering for cultivating 40,000 mu (approximately 2,667 hectares) for general agricultural use and to maintain its productive condition. The remaining $3,727,000 payable under the contract will be expensed over the balance of this calendar year. Selling and Administrative Expenses Selling and administrative expenses decreased by $52,000 or 25.00% to $156,000 for the nine months ended September, 2002 from $208,000 for the corresponding period of the prior year. The decrease is mainly attributable to the shutting down of the administrative office in Hong Kong. Income Taxes No income tax have been provided as management believes that there is minimal income tax exposure under the applicable tax rules. Impairment loss The impairment loss represents the diminution in value of the Company's water resources. Because this resource has not been developed, because of the cost to develop this resource, and because of the cost of transportation, this property has been written down. However, should an efficient form of transportation be developed, the Company will reassess this resource. Net Income Net income decreased by $38,698,000 or 1086.41% resulting in a loss of $35,136,000 for the nine months ended September 30, 2002 compared to income of $3,562,000 for the corresponding period of the prior year. The decrease is principally attributable to the impairment loss of water sources, the discontinuation of the sale of native goats and cows, the increase in land improvement costs and the delay in harvesting and marketing of forage grass. Liquidity and Capital Resources At September 30, 2002, the company had working capital of $13,017,000 and cash of $7,617,000. This compares with cash of $11,331,000 and a working capital of $26,300,000 at December 31, 2001. The decrease in working capital is primarily due to the decrease in prepayments made for the land improvements. Net cash provided by operating activities decreased to $6,136,000 for the nine months ended September 30, 2002 from $9,710,000 for the corresponding period of the prior year. This decrease is resulted from reduced earnings which was partially offset by an increase in non-cash charges, principally the impairment charge and net changes in the current accounts. Cash used in investing activities totaled $9,850,000 for the nine months ended September 30, 2002. There were no investing activities for the nine months ended September 30, 2001.The cash used in investing activities for the current period consisted of land improvements of $11,199,000 less the deposit of $1,349,000. For both the nine months ended September 30, 2002, and 2001 the Company had no financing activities. During the three months ended September 30, 2002, the Company issued 22,870,000 shares of its common stock, 20,000,000 shares were issued to a former employee of the Company for prior services rendered and funds advances, together totaling approximately $400,000, and 2,810,000 shares were issued for the payment of accrued legal fees of approximately $57,000. In most years, internally generated funds and available bank facilities were sufficient to fund the Company operations and financial its growth. While the Company has sufficient capital to execute its business plan for the next twelve months, there is no guaranty that the Company will not have to access the capital markets to fully develop its agricultural property. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits None b) Reports on Form 8-K None Signature Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. CHINA CONTINENTAL, INC. November 14, 2002 /s/ Jia Ji Shang --------------------------------------- Jia Ji Shang Chairman and Chief Executives Officer /s/ Jian Sheng Wei November 14, 2002, --------------------------------------- Jian Sheng Wei Chief Financial Officer and Secretary CERTIFICATIONS I, Jia Ji Shang, certify that: 1. I have reviewed this quarterly report on Form 10-Q of China Continental, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 By:/s/ Jia Ji Shang ---------------------- Jia Ji Shang Chief Executive Officer I, Jian Sheng Wei, certify that: 1. I have reviewed this quarterly report on Form 10-Q of China Continental, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 By: /s/ Jian Sheng Wei --------------------- Jian Sheng Wei Chief Financial Officer Item 4. Evaluation of Disclosure Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

CHINA CONTINENTAL INC /UT/ 10-Q