<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] 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. 0-26232
CHINA PACIFIC, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0429945
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Rm. 2008 Sun Hung Kai Centre, 30 Harbour Road
WANCHAI, HONG KONG
(Address of principal executive offices)
(852) 2802 3068
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No
As of May 1, 1996, 30,498,507 shares of Common Stock of the issuer were
outstanding.
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CHINA PACIFIC, INC.
INDEX
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995.............................................. 1
Consolidated Statements of Operations - For the three months
ended March 31, 1996 and 1995.................................. 2
Consolidated Statements of Cash Flows - For the three months
ended March 31, 1996 and 1995.................................. 3
Notes to Consolidated Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
PART II - OTHER INFORMATION.............................................. 10
SIGNATURES............................................................... 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
(Amounts expressed in United States $'000)
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
ASSETS
Current assets:
Cash 14,331 14,691
Accounts receivable, net 21,161 17,153
Due from related companies 12 12
Prepayments and other current assets 4,304 3,651
Inventories, net 30,098 32,723
------- ------
Total current assets 69,906 68,230
Investment in associated company 6,293 6,011
Investments and notes receivable 4,176 3,810
Deferred value added tax recoverable 4,845 4,950
Property, plant and equipment, net 10,738 10,908
Construction in progress 3,703 -
Goodwill, net 2,097 2,104
------- ------
Total assets 101,758 96,013
------- ------
------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 8,981 12,481
Long-term debt, current portion 3,326 3,783
Accounts payable 14,867 17,779
Deposits from customers 11,634 11,265
Accrued liabilities 6,819 7,340
Value added tax payable 2,795 1,898
Due to related companies 651 1,634
------- ------
Total current liabilities 49,073 56,180
Long-term debt 9,160 10,979
------- ------
Total liabilities 58,233 67,159
------- ------
Minority interests 14,042 12,947
------- ------
Shareholders' equity:
Preferred stock, par value $0.001
Series A convertible - -
Series B convertible and redeemable - -
Common stock, par value $0.001 26 17
Additional paid-in capital 21,975 11,495
Dedicated capital 1,349 938
Retained earnings 5,550 2,872
Cumulative translation adjustments 583 585
------- ------
Total shareholders' equity 29,483 15,907
------- ------
Total liabilities and shareholders' equity 101,758 96,013
------- ------
------- ------
See accompanying notes to condensed consolidated financial statements
1
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(Amounts expressed in United States $'000)
1996 1995
---- ----
Net sales 28,228 -
Cost of goods sold 24,083 -
---------- ----------
Gross profit 4,145 -
Selling, general and administrative expenses 1,970 14
Interest income, net 67
Other income, net 1,942
---------- ----------
Income (loss) from continuing operations
before income taxes 4,184 (14)
Provision for income taxes
---------- ----------
Income (loss) from continuing operations 4,184 (14)
Discontinued operations:
Income (loss) from operations of the
discontinued Sun City Subsidiaries, net - (776)
---------- ----------
Income (loss) before minority interests 4,184 (790)
Minority interests (1,095) 334
---------- ----------
Net income (loss) 3,089 (456)
---------- ----------
---------- ----------
Earnings per common share:
Income (loss) from continuing operations 0.11 -
Income (loss) from discontinued operations - (0.03)
---------- ----------
Net income (loss) $0.11 $(0.03)
---------- ----------
---------- ----------
Weighted average number of shares outstanding 28,615,149 14,285,714
---------- ----------
---------- ----------
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
(Amounts expressed in United States $'000)
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 3,089 (59)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity gain on CPC (282) -
Amortization and depreciation 274 44
Loss on disposals of fixed assets 33 -
Minority interests 1,095 (26)
Effect of cumulative translation adjustment (2) 18
(Increase) Decrease in operating assets
Accounts receivable, net (4,008) -
Inventories, net 2,625 -
Deposits receivable - 1,781
Utility deposits (1) 138
Prepayments and other current assets (652) (133)
Other receivables
Increase (Decrease) in operating liabilities:
Accounts payable (2,912) -
Accrued liabilities (299) (809)
Deposit from customers 369 -
Taxation 1,002 -
------ ------
Net cash provided by (used in) operating activities 331 954
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investments and notes receivable (365) -
Acquisition of fixed assets (130) -
Acquisition of development properties, net - (2,213)
Acquisition of construction in progress (3,703) -
------ ------
Net cash provided by (used in) investing activities (4,198) (2,213)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term borrowings (3,500) -
(Decrease) increase in obligations under
lease purchase contracts (222) (11)
Other long-term liabilities (2,276) -
Loan from ultimate holding company - 1,055
Due from related companies and holding company - 108
Due to related companies and holding company (983) -
Proceeds from issuance of stock 10,489 -
------ ------
Net cash provided by (used in) financing activities 3,507 1,152
------ ------
Net increase (decrease) in cash (360) (107)
Cash at beginning of period 14,691 135
------ ------
Cash at end of period 14,331 28
------ ------
------ ------
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1996
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements
for reporting on Form 10-QSB. The December 31, 1995 balance sheet data
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The
interim financial statements and notes thereto should be read in
conjunction with the financial statements and notes included in the
Company's Form 10-KSB dated December 31, 1995. In the opinion of
management, the interim financial statements reflect all adjustments of a
normal recurring nature necessary for a fair statement of the results for
the interim periods presented.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in U.S. dollars. The
translation of the financial statements of foreign subsidiaries into
United States dollars is performed for balance sheet accounts using
closing exchange rates in effect at the balance sheet date and for revenue
and expense accounts using an average exchange rate during each reporting
period. The gains or losses resulting from translation are included in
shareholders' equity separately as cumulative translation adjustments.
3. BUSINESS AND ORGANIZATION
Effective July 1, 1995, the Company acquired a 60% interest in Chengdu
Chengkang Iron and Steel Limited ("CCISC"), a sino-foreign joint venture
engaged in the manufacturing of iron and steel products in the People's
Republic of China.
Effective December 29, 1995, the Company's 51% subsidiary, China Pacific
Construction (B.V.I.) Limited (formerly known as China Treasure
Construction (B.V.I.) Limited), disposed of its entire equity interest in
the Sun City development.
The interim financial statements included herein include only the Sun City
related operations during 1995 and include only the CCISC operations
during 1996. Pro forma information, giving affect to the CCISC
acquisition and Sun City disposition as if they had taken place at January
1, 1995 is as follows:
4
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CHINA PACIFIC, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 31, 1995
(AMOUNTS EXPRESSED IN UNITED STATES $'000)
CHINA PACIFIC CCISC PRO FORMA PRO FORMA
HISTORICAL PRO FORMA ADJUSTMENTS COMBINED
---------- --------- ----------- --------
Net sales - 26,383 26,383
Cost of goods sold - 22,561 22,561
---- ------ ------
Gross profit - 3,822 3,822
Selling, general and
administrative expense 14 1,824 14 (a) 1,852
Interest expense, net - - -
Other income, net - 46 46
---- ------ --- ------
Income (loss) from
continuing operations
before income taxes (14) 1,952 (14) 1,924
Provision for income taxes - - -
---- ------ --- ------
Income (loss) from
continuing operations (14) 1,952 (14) 1,924
Discontinued operations:
Income (loss) from
operations of the
discontinued Sun City
Subsidiaries, net (776) (776)
---- ------ --- ------
Income (loss) before
minority interests (790) 1,952 (14) 1,148
Minority interests 334 (781) (447)
---- ------ --- ------
Net income (loss) (456) 1,171 (14) 701
---- ------ --- ------
---- ------ --- ------
Earnings per common share:
Income (loss) from
continuing operations 0.08
Income (loss) from
discontinued operations (0.03)
------
Net income (loss) 0.05
------
Weighted average number of
shares outstanding 14,285,714
----------
----------
(a) To record amortization of goodwill over a 40 year period.
5
<PAGE>
4. SHAREHOLDERS' EQUITY
COMMON STOCK
During the period, 1,378,719 shares of common stock were issued for
$1,392,876, at an average price of $1.01 per share. Each of these shares
confers its holder rights to be allotted with additional shares of common
stock over a period between 41 days to 180 days after issuance based on
the reduction in market price of the common stock according to the average
closing market price of the Company's common stock for the three days
immediately preceding the date of exercising such rights over the closing
market price at the date of the subscription. In addition, holders of
798,660 shares of such common stock have exercised their rights which
entitle them to the issue of 679,970 additional shares of common stock.
SERIES A CONVERTIBLE PREFERRED STOCK
During the period, 2,250 shares of Series A preferred stock were converted
into 2,236,666 shares of common stock of the Company.
SERIES B CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
During the period, the Company sold 1,030 shares of Series B convertible
and redeemable preferred stock, par value $0.001 each, for $1,030,000.
The subscription value of Series B convertible and redeemable preferred
stock is convertible into common stock of the Company at a conversion
price equal to 65% of the average closing market price of the Company's
common stock for the five days immediately preceding the date of the
notice of conversion. The outstanding convertible and redeemable
preferred stock is redeemable at the option of the Company at any time
after January 1, 1997 by giving ten days notice at the original
subscription price. In addition, 1,330 shares of Series B preferred stock
previously issued were converted into 1,644,574 shares of common stock of
the Company.
SERIES C CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
During the period, the Company sold 9,105 shares of Series C 7%
convertible and redeemable preferred stock, par value of $0.001 each, for
$9,105,000. The subscription value of Series C convertible and redeemable
preferred stock is convertible into common stock of the Company at a
conversion price equal to 75% of the average closing market price of the
Company's stock for the five days immediately preceding the date of the
notice of conversion. The Series C 7% convertible and redeemable
preferred stock carries a 7% annual dividend payable upon conversion or
redemption. The outstanding convertible and redeemable preferred stock is
redeemable at the option of the Company at any time after January 1, 1998
with ten days notice at 133% of the original subscription price. In
addition, 2,103 shares of Series C convertible and redeemable preferred
stock have been submitted for conversion into 2,727,725 shares of common
stock of the Company.
10% CONVERTIBLE DEBENTURE
During the period, $300,000 of 10% convertible debentures were converted
into 302,449 shares of common stock of the Company.
6
<PAGE>
5. OTHER INCOME - MINIMUM PROFIT GUARANTEES
Pursuant to the terms governing the formation of Chengdu Steel and the
Company's acquisition of a 60% interest in Chengdu Steel, Chengdu Iron and
Steel Plant guaranteed a minimum after tax profit to Chengdu Steel of Rmb
150 million (approximately $18 million) during 1996. The Company
estimates annual after tax profits of Chengdu Steel periodically in order
to determine whether payments will be due to China Pacific Steel Limited,
the Company's wholly-owned subsidiary and 60% owner of Chengdu Steel,
pursuant to such profit guarantee. Based on earnings to date, the
estimated short-fall in after tax profits of Chengdu Steel during 1996
will result in a payment to China Pacific Steel Limited of $1,656,000
pursuant to the guarantee. The estimated payments pursuant to such
guarantee are recorded as other income for the period. Such estimated
guarantee payments will be adjusted periodically to reflect actual results
of Chengdu Steel.
6. SUBSEQUENT EVENTS
After March 31, 1996, the following subsequent events took place:
a. Holders of 315,593 shares of common stock exercise their rights
entitling them to the issue of 232,376 additional shares of common
stock.
b. 100 shares of Series B convertible and redeemable preferred stock were
converted into 149,184 shares of common stock.
c. 3,645 shares of Series C convertible and redeemable preferred stock
were converted into 4,643,404 shares of common stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MATERIAL CHANGES AND RESULTS OF OPERATIONS
Net sales during the three months ended March 31, 1996 totaled $28.2
million. The Company reported no sales during the three months ended March
31, 1995. The increase in net sales was attributable to the Company's
acquisition of a 60% interest in Chengdu Steel which was effective July 1,
1995. On a pro forma basis, net sales of Chengdu Steel for the three months
ended March 31, 1995 totaled $26.3 million. The increase in pro forma net
sales was attributable to variation in the product mix and an increase in
average selling prices.
Cost of goods sold during the three months ended March 31, 1996 totaled
$24.1 million. The Company had no cost of sales during the three months ended
March 31, 1995. The increase in cost of goods sold was attributable to the
Company's acquisition of a 60% interest in Chengdu Steel which was effective as
of July 1, 1995. On a pro forma basis, cost of goods sold for the three months
ended March 31, 1995 totaled $22.6 million. The increase in cost of goods sold
was attributable to the increase in iron and steel volumes and an increase in
raw material costs.
Pro forma gross profits increased by 8.4% from $3.8 million (14.5% of
net sales) during the period in 1995 to $4.1 million (14.7% of net sales)
during 1996. The increase in profit margin during the period was
attributable to the overall increase in sales, increased sales of products
which carry higher margins and the increase in average selling price.
Selling, general and administrative expenses ("SG&A") during the three
months ended March 31, 1996 totaled $1.97 million as compared to $14,000
during the three months ended March 31, 1995. The increase in SG&A was
attributable to an increased level of corporate activities, including the
acquisition and operation of Chengdu Steel. Additionally, 1995 reported SG&A
reflects the reclassification of substantial SG&A ($776,000) relating to Sun
City as discontinued operations.
On a pro forma basis, SG&A increased 6.4% to $1.97 million (7% of net
sales) for the three months ended March 31, 1996 as compared to $1.85 million
(7.0% of net sales) of pro forma SG&A reported by Chengdu Steel during the
period in 1995.
Other income, net, during the three months ended March 31, 1996 totaled
$1.9 million. The Company reported no other income, net, during the three
months ended March 31, 1995. Other income was attributable to (1) estimated
compensation of $1.656 million payable to the Company's subsidiary, China
Pacific Steel Limited, based on estimated 1996 earnings of Chengdu Steel,
pursuant to a letter of guarantee from Chengdu Iron and Steel Plant ("CISP")
to China Pacific Steel Limited whereby CISP guaranteed after tax profits of
Chengdu Steel of not less than Rmb 150 million (approximately $18 million)
during 1996, and (2) the Company's allocable share of profits of $286,000
from China Pacific Construction (B.V.I.) Limited following the sale of the
Company's interest in Sun City and the reduction in the Company's ownership
interest in China Pacific Construction to 50%.
On a pro forma basis, other income of Chengdu Steel totaled $46,000
during the period ended March 31, 1995. The increase in other income was
attributable to the Company's allocable share of profits from Sun City which
was partially offset by a decrease in management fee income of Chengdu Steel
from affiliated companies relating to services not assumed by Chengdu Steel
following the acquisition.
Minority interest represents the allocable share of income or loss
attributable to the 40% share of Chengdu Steel not owned by the Company
during the first quarter of 1996 and the 49% interest in China Pacific
Construction not owned by the Company during the first quarter of 1995.
Net income during the quarter ended March 31, 1996 totaled $1.5 million
as compared to a loss of $456,000 during the first quarter of 1995. Pro
forma net income for the three months ended March 31, 1995, including results
attributable to Chengdu Steel totaled $701,000.
8
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MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of $20.8 million and
cash balances of $14.3 million as compared to a working capital balance of
$12.1 million and a cash balance of $14.7 million at December 31, 1995. The
improvement in working capital was attributable to a combination of (i) cash
flows from profitable operations and (ii) the receipt of $10.4 million of net
proceeds from the sale of common stock, convertible debentures and
convertible preferred stock during the quarter.
At March 31, 1996, the primary obligations of the Company consisted of
$8.5 million which remained payable to an affiliate relative to the China
Steel Acquisition as well as long-term debt in the amount of $12.5 million,
including (i) a non-interest bearing unsecured current account with CISP in
the amount of $5.9 million, (ii) 10% convertible debentures in the amount of
$0.5 million, and (iii) various loans from unaffiliated third parties in the
amount of $6.1 million.
During the quarter, the Company issued common stock, convertible
debentures and convertible preferred stock raising approximately $10.3
million net of offering costs. At March 31, 1996, $500,000 of convertible
debentures remained outstanding and eligible for conversion into common
stock. Such debentures are convertible at a price equal to the lesser of
100% of the average closing market price of the Company's common stock for
the three days immediately preceding the issuance of the debentures ($4.68)
or 80% of the average closing market price of the common stock for the three
days preceding the conversion of the debentures. The debentures are due in
November of 1997 if not previously converted. At March 31, 1996, 350 shares
of Series B Preferred Stock and 3,645 shares of Series C Preferred Stock
remained outstanding. The Series B Preferred Shares are convertible into
common stock at a price equal to 65% of the average closing price of the
common stock for the five days immediately prior to the date of notice of
conversion. The Series B Preferred Shares are redeemable by the Company on
or after January 1, 1997 at $1,000 per share. The Series C 7% convertible
and redeemable preferred shares are convertible into common stock at a price
equal to 75% of the average closing price fo the common stock for the five
days immediately prior to the date of notice of conversion. The Series C
Preferred Shares carry a 7% annual dividend payable upon conversion or
redemption. The Series C Preferred Shares are redeemable at the option of
the Company at any time after January 1, 1998. A total of 2,250 shares of
Series A preferred stock (being all of the outstanding Series A Preferred
Shares), 300 shares of Series B Preferred Stock, 2103 shares of Series C
Preferred Stock and $300,000 of debentures were converted during the quarter
resulting in the issuance of an aggregate of 6,911,414 shares of common stock.
Subsequent to March 31, 1996, the Company issued approximately 5,000,000
shares of common stock pursuant to the conversion of outstanding debentures
and preferred stock and pursuant to the rights attaching to certain shares of
common stock.
Other than the foregoing, the Company has no sources of available
capital or commitments to provide additional capital. Management believes
that the Company has sufficient capital resources to fund its current
operations for the foreseeable future.
9
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PART II. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHINA PACIFIC, INC.
Date: May 14, 1996 /s/ Clement Mak
---------------------------------------------
Clement Mak Shiu Tong, President and
Chief Executive Officer
Date: May 14, 1995 /s/ Thomas Tong
---------------------------------------------
Thomas Tong, Treasurer and Chief
Financial Officer
11
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 14,331
<SECURITIES> 0
<RECEIVABLES> 21,311
<ALLOWANCES> 150
<INVENTORY> 30,098
<CURRENT-ASSETS> 69,906
<PP&E> 12,017
<DEPRECIATION> 1,279
<TOTAL-ASSETS> 101,758
<CURRENT-LIABILITIES> 49,073
<BONDS> 9,160
0
0
<COMMON> 26
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 101,758
<SALES> 28,228
<TOTAL-REVENUES> 30,237
<CGS> 24,083
<TOTAL-COSTS> 26,053
<OTHER-EXPENSES> 0
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