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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
(MARK ONE)
[/X/] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________.
Commission File No. 0-26232
CHINA PACIFIC, INC.
(Name of small business issuer in its charter)
NEVADA 87-0429945
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
RM. 2008 SUN HUNG KAI CENTRE, 30 HARBOUR ROAD
WANCHAI, HONG KONG
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (852) 2802 3068
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:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months
(or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past
ninety (90) days. Yes /X/ No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [/X/]
The issuer's revenues for its most recent fiscal year were $53,139,000.
As of March 15, 1996, 21,687,508 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 Nasdaq Small-Cap Market, was approximately $8,401,794.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual information statement to
be filed within 120 days of the Registrant's fiscal year ended December 31,
1995 are incorporated by reference into Part III.
Transitional Small Business Disclosure Format: Yes No /X/
--- ---
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS................................... 1
ITEM 2. DESCRIPTION OF PROPERTIES................................. 9
ITEM 3. LEGAL PROCEEDINGS......................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS....................................... 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS...................... 11
ITEM 7. FINANCIAL STATEMENTS...................................... 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT......................... 16
ITEM 10. EXECUTIVE COMPENSATION.................................... 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................... 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 19
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K.......................... 21
SIGNATURES................................................ 23
FINANCIAL STATEMENTS...................................... F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL AND DEVELOPMENT OF BUSINESS
China Pacific, Inc. (the "Company") is a holding company which, through
its subsidiaries, is engaged in iron and steel production in the People's
Republic of China ("PRC"). The Company also holds options to develop and
market land surrounding Sun City ("Sun City"), a multi-phase all-purpose
development project in the PRC.
The Company is a Nevada corporation which was incorporated in 1986 under
the name McMann Investments, Inc. McMann Investments, Inc. was organized as
a "blind pool blank check" company for the purpose of seeking and acquiring
business ventures. In March of 1988, McMann Investments, Inc. completed a
public offering of its common stock raising net offering proceeds of
approximately $233,000. In May of 1988, McMann Investments, Inc. entered
into an exchange agreement whereby it acquired all of the stock of Bulls on
the Run Productions, Inc., a movie production company, and changed its name
to Bulls on the Run Productions Corp. In 1992, the Company terminated the
operations of its subsidiary, Bulls on the Run Productions, Inc., and from
such date until May of 1994 the Company's activities were limited to the
search for business opportunities. On May 18, 1994, the Company acquired 51%
of the issued and outstanding stock of China Treasure Construction (B.V.I.)
Limited ("China Treasure Construction") from the existing shareholders of
China Treasure Construction in exchange for the issuance of shares of the
Company representing 93% of the issued and outstanding common stock of the
Company (the "China Treasure Exchange"). Thereafter, the Company terminated
its prior operations, the officers and directors of the Company resigned and
the officers and directors of China Treasure Construction were appointed in
their stead and the Company changed its name to China Treasure, Inc.
At the time of the Company's acquisition of China Treasure Construction,
until December 29, 1995, China Treasure Construction, through its
subsidiaries, was engaged in the development and marketing of the Regent on
the Park (a 500 unit master planned residential community), Star Place (a 5.5
million square foot all-weather shopping, entertainment and office complex)
and Sun Plaza (a 160,000 square foot office complex) phases of Sun City. Sun
City was conceived by the Huiyang City Government of Guangdong Province (the
"Huiyang City Government") as a comprehensive self-contained community, with
supporting infrastructure, to be developed with the goal of attracting
high-technology production companies and research and development
enterprises. Sun City is located approximately 62 miles north of Hong Kong.
On October 30, 1995, the Company acquired 100% of the outstanding stock
of China Pacific Steel, Inc. ("CPS"). CPS owns a sixty percent (60%)
interest in Chengdu Chengkang Iron and Steel Co. Limited ("Chengdu Steel"), a
PRC steel manufacturer.
The Company acquired its interest in CPS (the "Chengdu Steel
Acquisition") from China Pacific Capital Limited ("CPCL") for total
consideration of approximately $15.1 million which was payable $568,655 in
cash at closing with the balance being payable in the form of a non-interest
bearing demand promissory note secured by the stock of CPS. CPCL was a
wholly-owned subsidiary of China Treasure Holding (B.V.I.) Ltd. which was an
indirect controlling shareholder of the Company at the time of the
acquisition.
Chengdu Steel was created in October of 1994 when Chengdu Iron and Steel
Plant ("CSIP"), a state-owned PRC company controlled by the Department of
Metallurgy of the Chengdu Government, contributed its principal operating
assets to Chengdu Steel with substantially all remaining operating assets
being leased to Chengdu Steel in exchange for a 40% interest in Chengdu Steel
plus lease payments of approximately $1.8 million annually or 5% of after tax
net profits, whichever is less, up to March 31, 1996 and at various rates
thereafter as discussed in later sections of this report. CPS contributed
capital in the amount of $14 million and production and marketing expertise
in exchange for a 60% interest in Chengdu Steel.
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Following the Chengdu Steel Acquisition, management of the Company
determined that the Company would be best served by divesting its interests,
and the accompanying obligations, relating to the development of Sun City in
order to concentrate on its steel operations and the pursuit of other
infrastructure development opportunities within the PRC. To that end, on
December 29, 1995, the Company entered into an agreement with Open View
Properties Ltd. ("Open View Properties"), an entity controlled by the Huiyang
City Government pursuant to which China Treasure Construction sold its entire
interest in each of its subsidiaries (the "Project Subsidiaries") involved in
the development of Sun City (the "Sun City Sale"). As consideration for the
Company's interest in the Sun City development, Open View Properties
delivered to the China Treasure Construction a three year 8% promissory note
in the amount of $16.2 million (HK$125.4 million) representing a return of
China Treasure Construction's original capital contributions and loans to the
Project Subsidiaries plus a fee for services to be provided of $4.1 million
(HK$32 million).
In connection with the Sun City Sale, the Company was granted a ten year
option to develop and market 3 million square meters of land surrounding Sun
City at a price of RMB100 ($12) per square meter and a five year option to
repurchase the Company's interest in Sun City for HK$32,010,004 plus any
amounts injected into the Project Subsidiaries by Open View Properties and
10% interest per annum on all such amounts.
In conjunction with the Sun City Sale, Kiu Yin Investment and PCBC
formed China Pacific Investment Holdings Ltd. ("China Pacific Investment
Holdings"), China Pacific Investment Holdings acquired 100% of the stock of
China Treasure Investment from China Treasure Holding and changed the name of
China Treasure Investment to C.P. Investment (B.V.I.) Ltd. ("C.P.
Investment"). As a result of such transactions, Kiu Yin Investment and PCBC
became 51% and 49% shareholders of China Pacific Investment Holdings (the
ultimate parent of the Company), respectively, and the Huiyang City
Government's interest in the Company was terminated.
Also in conjunction with the Sun City Sale, The People's Government of
Huiyang City, through a wholly-owned subsidiary, acquired the 49% interest in
China Treasure Construction not held by the Company and contributed $240,000
to China Treasure Construction to increase its interest in China Treasure
Construction to 50% with the Company owning the remaining 50%. Following the
change in shareholdings in China Treasure Construction, the name of China
Treasure Construction was changed to China Pacific Construction (B.V.I.)
Limited and the only assets held by such company consisted, and consists, of
the notes payable delivered in connection with the Sun City Sale, the options
granted in connection with the Sun City and the cash contributed by The
Huiyang City Government.
In January of 1996, the Company changed its name from China Treasure,
Inc. to China Pacific, Inc.
STEEL MANUFACTURING - CHENGDU STEEL
BACKGROUND. Chengdu Iron and Steel Plant ("CISP") was established in
1958 as a state-owned enterprise in Chengdu, PRC under the Department of
Metallurgy of the Chengdu government. Operations of CISP began with the
construction of a small steel manufacturing plant in 1958 and continued until
1964. In 1965, the existing manufacturing facilities were demolished and
efforts began to construct a new and larger manufacturing facility. As a
result of the "Cultural Revolution" in the PRC, CISP was idle from 1966 to
1976. In 1977 steel manufacturing operations were reactivated by CISP and,
between 1977 and 1989, the facility was operated and various new production
facilities were installed. During 1990 and 1991, CISP undertook additional
expansion and modernization with the addition of a variety of major
production facilities, including a new sintering plant, blast furnace and
finished goods warehouse. Finally, an additional oxygen production plant was
completed during 1994 to support operations of CISP.
CISP's steel manufacturing plant (the "Plant") is located in
Qingbaijiang, approximately 32 kilometers from Chengdu. Chengdu is the
capital city of Sichuan Province and has a population in excess of 9 million.
Sichuan Province is the most densely populated province in the PRC with a
population of approximately 120 million. Based on government published
statistics, the Plant is the largest manufacturer of reinforced steel bars
and steel wire in Sichuan Province and, in 1993, the Plant was among the
twenty largest state-owned enterprises (based on revenues) in the province
and the 248th largest state-owned enterprise in the PRC.
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THE JOINT VENTURE AGREEMENT. In October of 1994, Team Steel, Inc.
("Team Steel"), a wholly-owned subsidiary of Team International Holdings,
Inc. ("Team Holdings"), entered into an agreement with CISP to form a joint
venture named Chengdu Chengkang Iron and Steel Co. Limited ("Chengdu Steel").
Pursuant to such agreement, CISP contributed certain principal operating
assets of the Plant, with an estimated value of RMB80 million, to Chengdu
Steel in exchange for a 40% interest in Chengdu Steel. Additionally, CISP
agreed to lease to Chengdu Steel substantially all remaining assets relating
to the operations of the Plant, valued at approximately RMB310 million, for
approximately RMB15.5 million annually or five percent (5%) of net after tax
profit of Chengdu Steel, whichever is less, through March 31, 1996; at an
annual rate of 6.5% based on the valuation of assets actually leased for the
period from April 1, 1996 to March 31, 1997; and, at an annual rental charge
to be mutually agreed by both CPS and CISP commencing April 1, 1997, based on
market rental rates, but not to exceed 8% based on the valuation of the
assets actually leased. Team Steel contributed RMB120 million (at an
exchange rate of US$100 = RMB 852.96) to Chengdu Steel in exchange for a 60%
interest in Chengdu Steel. In conjunction with the formation of Chengdu
Steel, CISP guaranteed Team Steel that Chengdu Steel's after tax profits
would be no less than $11.5 million in 1995 and $17.2 million in 1996 with
any shortages in Team Steel's allocable portion of such profits being
reallocated from CISP's share of profits. Additionally, CISP guaranteed that
Chengdu Steel, as a sino-foreign joint venture, would be granted a profits
tax concession exempting Chengdu Steel from PRC profits tax for the first two
years of profitable operations and allowing a 50% reduction in profits tax
for the following three years. In addition, CPS has been given an option to
participate in CCIS's future expansion in the form of additional capital or
loan injections.
On October 27, 1995, China Pacific Capital Limited ("CPCL") acquired
from Team Holdings 100% of the stock of Team Steel and assumed all of the
outstanding obligations and liabilities of Team Holdings for total
consideration of $15.1 million. Following its acquisition of Team Steel,
CPCL changed the name of Team Steel to China Pacific Steel Limited ("China
Pacific Steel") and, on October 30, 1995, sold its entire interest in China
Pacific Steel to the Company for total consideration of approximately $15.1
million. $568,655 of the purchase price of China Pacific Steel was paid in
cash by the Company at the time of acquisition and the balance is evidenced
by a non-interest bearing promissory note in the amount of $14.5 million and
secured by the stock of China Pacific Steel. CPCL is a wholly-owned
subsidiary of China Pacific Investment Holdings Ltd. which is the indirect
controlling shareholder of the Company. As a result of the foregoing, the
Company is presently a 60% shareholder of Chengdu Steel.
With the infusion of capital provided by the formation of the above
described joint venture, Chengdu Steel plans to expand its production
capacity and to modernize its facilities to facilitate future growth, meet
the growing demand for steel products to support infrastructure development
in the PRC and to increase profitability.
THE STEEL PLANT. Chendgu Steel's existing Plant is located in
Qingbaijiang, approximately 32 kilometers from Chengdu, the capital city of
Sichuan Province, PRC. The Plant is an integrated facility occupying gross
floor area of 217,406 square meters on a site area of approximately 1,000,000
square meters.
The Plant, in its current form, was built in 1965 and has been
periodically reconditioned, upgraded and expanded, with substantial portions
of the Plant being constructed between 1990 and 1994. The Plant currently
consists primarily of (a) a smelting factory utilizing four electric arc
furnaces each with a 10 ton capacity and having a total annual production
capacity of approximately 100,000 metric tons, (b) a 124 ton per hour output
sinter machine with sixteen mixture preparation/storage bins with capacities
ranging from 32 tons to 77 tons, (c) 100 cubic meter and 300 cubic meter
blast furnaces (a 335 cubic meter blast furnace is presently under
construction), (d) two 20 ton converter furnaces, (e) a cogging mill with
annual production capacity of approximately 380,000 tons, including a 60 ton
per hour reheating furnace, (f) a rolling mill producing steel wire rods in
sizes ranging up to 6 mm, (g) a rolling mill producing steel wire rods in
sizes over 6mm, (h) a rolling mill producing steel rebar, (i) an oxygen
production plant which provides the oxygen necessary to feed the furnaces,
with a capacity of 7,400m3/h, (j) a 53,150KV electricity transformer
substation, (k) a storage yard and finished goods warehouse, (l) various gas
storage units, (m) various administrative buildings, and (n) a system of
roads, rail, cranes and transportation belts.
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The Plant's operations and workforce are supported by substantial
infrastructure development. Among the infrastructure improvements supporting
the Plant and its workforce are an extensive transportation network including
private roads and railway connecting to all main railway lines; a television
station serving employee households; a hospital serving both employees and
the public; security service; a hotel with conference facilities; and,
secondary and primary schools.
MANUFACTURING. Manufacturing at the Plant is conducted in two separate
production lines. Line I utilizes blast furnaces and converter furnaces to
manufacturer steel products from iron ore. Ore of different shapes and sizes
is screened, separated and moved from the Plant's yard by means of conveyor
belts to a sintering plant. The sintering process begins with the ores being
prepared and mixed in storage bins. The raw sinter mix then enters sintering
machines which heat the raw materials to produce a coherent mass. Sintered
ore is placed in a blast furnace to produce liquid iron. The hot liquid iron
is then transferred by transfer cars to an oxygen steelmaking shop where the
liquid iron is transformed into ingot steel utilizing a converter furnace.
Line II of the Plant utilizes electric arc furnaces to smelt steel
scrap. Scrap is fed into the furnaces in the presence of oxygen which is
introduced to increase the temperature and accelerate the melting process.
The molten steel is then poured to produce ingot steel.
Steel ingots from Line I and Line II are rolled in a cogging mill to
produce 90 square mm steel billets. The billets are moved to a rolling mill
where they are reheated and fed through a series of rollers which reduces
their size and shapes them into the finished rebar, steel wire or rod. The
rebar emerges from the rolling mill and is allowed to cool uniformly on a
cooling bed and is then cut to standard lengths. In the case of steel wire,
the wire is cut and rolled while hot on coiling machines.
The Plant currently has raw material handling capacity of approximately
1 million metric tons annually. The annual steel production capacity of the
Plant is approximately 600,000 metric tons annually, consisting of a 450,000
metric ton capacity for Line I and a 150,000 metric ton capacity for Line II.
However, the iron production capacity of Line I is presently only 250,000
metric tons annually, thus limiting the effective production capacity of Line
I to 250,000 metric tons of steel annually and the total steel production
capacity of the Plant to 400,000 metric tons annually. Chengdu Steel is
presently undertaking efforts to increase the iron production capacity of
Line I to increase the effective total steel production capacity to 600,000
metric tons annually. In 1995, Chengdu Steel produced approximately 370,000
metric tons of steel or steel related finished products as compared to
356,000 metric tons produced in 1994.
PRODUCTS. CCISC's manufacturing currently focuses on the production of
reinforced steel bars and steel wires. CCISC's manufactured steel products
include reinforced bar, 6.5mm and 8.5 mm steel wire, 6.5 mm welding rod,
spring steel (billets) and other steel products used principally for
construction of buildings and infrastructure projects.
Rebar and the steel rods and wire produced by Chengdu Steel are embedded
in poured concrete and serve as structural reinforcements to increase the
strength of concrete. Reinforced concrete is used extensively in the PRC
(and throughout the world) as a principal construction material in highways,
bridges, sewage and water treatment plants, power plants, buildings of all
types, subways, tunnels, wharves, dams and other structures. During 1995,
rebar and steel wire comprised in excess of 83% of Chengdu Steel's output of
steel products.
RAW MATERIALS. The principal raw materials used by Chendu Steel to
produce rebar and steel wire are iron ore and coke. In addition to iron ore
and coke, scrap steel is utilized as raw material for production of steel
billets by Chengdu Steel's electric furnaces. In 1995, Chengdu Steel used
approximately 700,000 metric tons of iron ore and coke and 30,000 metric tons
of scrap steel. Raw materials have historically accounted for approximately
80% of Chengdu Steel's cost of production.
Iron ore and coke are purchased from various suppliers with
approximately 40% of such raw materials being supplied from within Sichuan
Province and 50% of such materials being supplied from neighboring provinces.
Scrap steel is purchased from numerous suppliers within Sichuan Province and
neighboring provinces.
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Because of the existing demand for steel products to support infrastructure
projects in the PRC, the market for raw materials is competitive and its
price is driven by market conditions. Shortages may occur periodically
resulting in increased prices and production costs. The Plant has a raw
material yard with a capacity of approximately 1 million tons of materials
allowing Chengdu Steel to maintain a supply of materials to partially
insulate itself against possible short-term price fluctuations or shortages.
Chengdu Steel typically maintains between 45 and 75 days' supply of raw
materials on hand.
Chengdu Steel is not dependent upon any one supplier of raw materials
and believes that adequate supplies of such materials are and will be
available from multiple suppliers to meet Chengdu Steel's foreseeable needs.
Purchases of raw materials have historically been made on a
cash-on-delivery basis. However, with tightened liquidity associated with
austerity measures implemented in the PRC beginning in 1993, Chengdu Steel
has obtained 90 day payment terms from approximately 40% of its suppliers
with the balance generally providing for payment over 90 days.
In addition to hard materials used in the manufacturing process, the
Plant consumes large amounts of electricity, natural gas, coal, water and
oxygen in the manufacturing process. Electricity is generally supplied by
government owned power plants in Chengdu. The Plant also has a power
sub-station to satisfy its electricity requirements in the event of shortages
in electricity supplied by government owned power plants. Sufficient
quantities are believed to be available to meet Chengdu Steel's current and
anticipated energy needs.
Supplies of natural gas are sufficient to meet current operating levels.
However, with the proposed expansion of operations, Chengdu Steel is
presently undertaking efforts to recover natural gas from blast furnaces and
converters to support future natural gas requirements.
Water and coal supplies are plentiful and Chengdu Steel has its own
oxygen plant which produces sufficient oxygen to support operations for the
foreseeable future.
EXPANSION PROGRAM. Chengdu Steel has developed a long term expansion
plan pursuant to which it plans to install and upgrade various machinery and
facilities to increase the effective production capacity of the Plant. The
primary objective of such expansion plan is to increase iron production
capacity of Line I of the Plant to match the steel production capacity of
Line I. As noted, current iron production capacity of Line I is 250,000
metric tons while steel production capacity of Line I is 450,000 metric tons.
Included in the expansion program are: (1) the construction of a 335m3
blast furnace which can increase the iron production of Line I from 250,000
metric tons to 450,000 metric tons, (2) the addition of a continuous casting
process for the converter furnace to improve efficiency of steel production,
and (3) construction of a natural gas recycling plant. The natural gas
recycling plant was completed in February of 1996. The addition of the 335m3
blast furnace and continuous casting process are expected to be completed by
mid-1996.
SALES AND MARKETING. Chengdu Steel sells its products primarily to two
markets; the building materials market and the industrial market. The vast
majority of Chengdu Steel's sales are of products for use as building
materials with the bulk of such products being used in infrastructure
projects.
All sales by Chengdu Steel are conducted from administrative offices
located at the Plant. Approximately 45% of products are sold to and
distributed through wholesalers with the balance being sold directly to
end-users. Approximately 40% of Chengdu Steel's sales have historically been
within Sichuan Province, with approximately 40% percent of sales being to
neighboring provinces and the balance to other parts of China.
Chengdu Steel has engaged in little marketing efforts by western
standards. For the most part, Chengdu Steel receives and fills orders from
its customers. Rebar manufactured to standard specifications and other
finished products are typically stored in warehouses located at the Plant.
Such finished products are shipped to customers by highway using a fleet of
trucks owned by Chengdu Steel or by rail from connections joining the Plant
to the major rail routes in the province and throughout the PRC. Customers
also pick up orders at the Plant or arrange for their own transportation of
the steel products they purchase.
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Chengdu Steel has over 100 regular customers, which are primarily
state-owned construction companies, with no single customer accounting for
more than 5% of total sales during 1995. Chengdu Steel's principal customers
are Chengdu Yuha Property Development Co., Ltd., Sichuan Province Material
Group Metal Trade Co., Sichuan Province Metallurgic Material Co., Zigong
Welding Rods Plant and Hubei Yichang Houwang Welding Material Co. Chengdu
Steel has no long-term contracts for the sale of its products and the
majority of its sales are on a cash basis. With growing competition, Chengdu
Steel has begun to grant 30 day payment terms to large wholesalers of good
standing. Such sales along with cash sales accounted for approximately 55%
of total sales during 1995 while 90 day credit sales accounted for
approximately 30% of 1995 sales with the balance of sales providing credit
terms of over 90 days. The remaining sales were to raw material suppliers of
Chengdu Steel in exchange for iron ore, coke and other materials. Chengdu
Steel has not experienced any material bad debts or collection problems to
date.
With the lifting of price controls by the PRC in 1991, Chengdu Steel is
free to sell its products at market prices. Chengdu Steel's sales and
marketing department monitors market prices, competitors' positions,
anticipated market demand and Chengdu Steel's position with a view to
maintaining competitive pricing of its products. Where market conditions
move materially, a pricing determination committee will review Chengdu
Steel's pricing strategy and make adjustments as appropriate.
MARKET. The steel products market within the PRC has experienced strong
growth in recent years and is expected to continue to experience strong
growth for the foreseeable future to support the development of
infrastructure projects within the PRC. According to estimates published by
the Ministry of Metallurgical Industry, consumption of steel is expected to
outstrip domestic steel production through the end of the decade with
production estimated to grow from 97 million metric tons in 1995 to 120
million metric tons by 2000 and consumption estimated to grow from 110
million metric tons in 1995 to 130 million metric tons by 2000.
With continual infrastructure development ongoing in Sichuan Province,
consumption of steel rebar and steel wire is expected to continue to grow and
to exceed production. Sichuan Province has announced no less than 39
infrastructure projects valued in excess of $9 billion which will require
steel rebar and steel wire before the end of the decade. Among the major
projects announced to date are the Er-tan Power Station, Bao-Cheng
Double-line Railway, Nei-Yi Highway, Shuangliu Airport and Wudu Water
Project, each of which is expected to be ongoing for various periods through
2000. Also expected to contribute to growth in demand for steel rebar and
steel wire is the pending construction of the Three Gorges Dam Project, a
major national project in a neighboring province which is expected to require
17 years to complete. While the project is not within Sechuan Province,
Chengdu Steel has entered an agreement with a contractor to supply steel
rebar and steel wire for such project. Further, the construction of such
project is expected to result in the displacement of significant populations
in the vicinity of such project which, in turn, is expected to result in
substantial new residential construction in surrounding areas, including
Sichuan Province, to accommodate such displaced population.
COMPETITION. There are many domestic competitors of Chengdu Steel in
its primary markets. Chengdu Steel is, however, the largest manufacturer of
steel wire and the second largest manufacturer of steel rebar in Sichuan
Province with an estimated one-third share of such combined market. Of
twelve known manufacturers of rebar and steel wire in Sichuan Province, five,
including Chengdu Steel, are classified by the Department of Metallurgy of
Sichuan Province as major manufacturers. Chengdu Steel is well-known within
the domestic steel industry, has received numerous national and provincial
awards and has consistently been ranked high in quality control by the
Ministry of Metallurgical Industry. Recently, the Sichuan government
conveyed to Chengdu Steel the grand prize designation for brand name rebar
products.
Chengdu Steel is also affected by foreign-produced steel that is
imported to the PRC. During certain periods when domestic steel prices
materially exceeded international steel prices, more foreign steel products
were imported into the PRC, legally or illegally, which caused a decline in
domestic steel product prices and an increase in stockpiled inventory at
domestic steel mills. In 1994, more than 30 million tons of steel products
were imported into the PRC. Such imports typically adversely affects domestic
steel producers.
To protect domestic steel producers, the PRC government implement
measures to restrict the levels of foreign imports and enhance enforcement
against illegal steel importation.
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The admission of the PRC as a member of the World Trade Organization
("WTO"), which on January 1, 1995 succeeded GATT as the international arbiter
of trade relations among GATT signatories, could lead to increased foreign
competition for Chengdu Steel. If the PRC becomes a member of the WTO, the
PRC government will likely be required to reduce import restrictions and
tariffs on steel and steel products. Moreover, such tariff-reduction
measures may be implemented by the PRC government in anticipation of becoming
a WTO member or in satisfaction of a condition to WTO membership. In January
of 1995, the PRC reduced tariffs on 246 products, including certain steel
products, in an action which may have been related to the PRC's application
to become a member of the WTO. Additional reductions by the PRC of the
barriers to imports of foreign steel, either in anticipation of or upon
becoming a member of the WTO, would likely lead to increased competition in
Chengdu Steel's markets.
While the prospects of increased foreign competition may ultimately have
a significant adverse impact on the domestic steel industry within the PRC,
the impact of such increased competition, should such arise, is expected to
be partially mitigated for Chengdu Steel and other producers within Sichuan
Province as a result of certain logistical problems associated with marketing
and delivering steel to Sichuan Province. Sichuan Province is an inland
province characterized by difficult mountainous terrain. The lack of ocean
ports serving the province and the prevailing terrain within the province
significantly increase the cost of transporting steel products into the
province. Those factors are expected to reduce the viability of competition
from overseas suppliers as well as steel suppliers in distant provinces.
Management believes that Chengdu Steel's relative size, its long history
of operations within the PRC, its affiliation with key PRC governmental
entities and the strong demand for steel products to support infrastructure
projects within the PRC will allow Chengdu Steel to compete successfully
within the steel market. While Chengdu Steel believes it is favorably
positioned to compete within the PRC steel market and to market all of its
production on favorable terms, there are a number of steel producers,
including government controlled steel producers, marketing their products
within the PRC, or which may begin marketing their products within the PRC
which have greater resources, financially and otherwise than Chengdu Steel.
RESEARCH AND DEVELOPMENT. While Chengdu Steel undertakes continual
efforts to upgrade and expand its production plant, minimal expenses have
been incurred directly related to research and development activities.
Feasibility studies for the expansion and modernization of the Plant have
historically been sponsored and assisted by the Metallurgical Department of
the State or Provincial government for a nominal charge.
ENVIRONMENTAL MATTERS. Chengdu Steel's Plant is subject to
comprehensive laws and regulations for environmental protection as will be
construction activity associated with its proposed expansion. These include
principally the Environmental Protection Law of the People's Republic of
China, the Law on Prevention of Water Pollution, the Law on Prevention of
Atmospheric Pollution, the Law of Noise Pollution and the Regulations
Regarding Environmental Protection Involving Construction Projects.
Chengdu Steel closely monitors its compliance with environmental
regulations and has implemented certain measures and installed certain
facilities, including a 50,000 m3 collection tower to collect, purify and
recycle various gases produced in the steel manufacturing process, to assure
such compliance. Chengdu Steel believes that its manufacturing and other
operations are in compliance in all material respects with existing
applicable environmental laws.
PROPERTY DEVELOPMENT - SUN CITY
As noted above, until December of 1995, the Company was engaged in
property development activities consisting of the preparation of the master
plan for Sun City and the development and marketing of the Regent on the
Park, Star Place and Sun Plaza phases of the Sun City development. With
the Sun City Sale, the Company no longer has a direct interest nor an active
involvement in the Sun City development but has retained an option with
respect to the development and marketing of land surrounding Sun City as well
as receiving an option to reacquire its interest in Sun City.
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OVERVIEW. Following the Sun City sale, Sun City is being developed by
various governmental bodies in Huiyang City, Guangdong Province, PRC.
Sun City is located in Huiyang City in the southern part of Guangdong
Province. Sun City lies in the Pearl River Delta approximately 19 miles from
the neighboring city of Huizhou, a city of approximately 2.4 million persons,
and 11.2 miles from the port city of Aotou on China's east coast and is
approximately 90 minutes from Hong Kong by hydrofoil, and one hour by car.
The site of Sun City lies on approximately 2,400 acres of flat land in a
valley which is bisected by the Danshui River. A comprehensive master site
plan was developed with land being zoned 30% for high-tech non-polluting
industries, 30% for residential development, 30% for commercial/retail space
and 10% open "green" space. A comprehensive road system was also laid out to
provide for ease of access and high mobility while maintaining the privacy of
residential areas. Finally, support services and infrastructure improvements
such as water sewage and electrical service necessary to support such a
community have been planned and are presently under construction.
Development of Sun City is being carried out in various phases as
necessary support services and infrastructure improvements are completed to
support each phase. The primary developments within Sun City will be Regent
on the Park, a luxury residential development, and Star Place, a multi-phase
5.5 million square foot all-weather shopping center containing office
complexes, high-end retail outlets and a variety of restaurants and
entertainment facilities. In addition to Regent on the Park and Star Place,
Sun City will include approximately 2,200 acres of industrial sites, science
and research areas, additional residential areas and recreational areas.
The ultimate objective of Sun City is to provide a comprehensive
integrated environment in which executives can work and reside without
sacrificing the quality of either their work or living environments. Sun
City is expected to eventually attract approximately 50 high-tech industries
to the city and to support a population of 100,000 persons. Progress in the
development of the Sun City project has been slowed as a result of
unfavorable weather conditions in the summer of 1995 and a depressed real
estate market in the Gunagdong Province of the PRC.
SALE OF COMPANY'S INTEREST IN SUN CITY. With the Company's
determination to pursue recurring infrastructure development opportunities in
the PRC, the Company's management determined to pursue the divestiture of its
interest in Sun City during the fourth quarter of 1995. As a result of such
efforts, the Company entered into an agreement effective December 29, 1995
pursuant to which the Company agreed to transfer substantially all of its
interests in Sun City (the "Sun City Sale") to Open View Properties Ltd., an
entity controlled by the Huiyang City Government. Under the terms of the Sun
City Sale, China Treasure Construction transferred its entire interest in
each of its subsidiaries involved in the Sun City development (the "Project
Subsidiaries") to Open View Properties. In exchange for the transfer of such
interest, Open View Properties delivered to the Company a series of three
year 8% promissory note in the amount of $16.2 million (HK$125.4 million)
representing a return of China Treasure Construction's original capital
contributions and loans to the Project Subsidiaries plus a fee for services
to be provided of $4.1 million (HK$32 million).
COMPANY'S CONTINUING INTEREST IN SUN CITY. Following the Sun City Sale,
the Company has no involvement or responsibility of any nature relating to
the future development or marketing of Sun City. However, in connection with
the Sun City Sale, the Company was granted a ten year option to develop and
market approximately 3 million square meters of land surrounding Sun City at
a price of RMB100 ($12) per square meter. Additionally, the Company was
granted a five year option to repurchase the Company's interest in Sun City
for a price equal to HK$32,010,004 plus any amounts injected into the Project
Subsidiaries by Open View Properties and 10% interest per annum on all such
amounts.
The Company's present operating plans are limited to pursuing
infrastructure development within the PRC and the Company has no present
interest to exercise either of its options to participate in the future
development of Sun City. However, the Company will evaluate the feasibility
of pursuing either or both of such
8
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options from time to time and, if the exercise of such options and renewed
involvement in the development of Sun City is deemed to provide sufficient
profit potential, may exercise either or both of such options and resume its
involvement in the development of Sun City.
COMPETITION. If the Company should elect to exercise either or both of
its options to renew its involvement in the development of Sun City, the
Company can expect to face intense competition from other developers,
including governmental entities and entities operating with government
support, to attract industry. While the nature of the Sun City development
and the Huiyang City Government support of such project are such that it is
not expected that Sun City will face direct competition, other developments
within southeast Asia may be undertaken which may be more attractive in terms
of location, governmental subsidies and other benefits offered to industry.
However, the Company has no obligation to renew its involvement in the Sun
City project and will only renew such involvement if it deems the opportunity
to offer satisfactory profit potential.
EMPLOYEES
At March 15, 1996, the Company had approximately 7,000 employees,
including 15 executive officers, 184 employees engaged in administration and
6,801 employees engaged in steel manufacturing operations. The Company and
its subsidiaries are not parties to any traditional labor contracts. The
Company has not suffered any labor stoppages and believes that it has good
relations with its employees. In connection with the planned expansion and
modernization of Chengdu Steel's manufacturing operations, the Company plans
to increase production without adding to the existing workforce at Chengdu
Steel.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company, at December 31, 1995, had interests in properties in the
PRC and in Hong Kong.
Within the PRC, virtually all land is state-owned and the right to use
most land is allocated without charge to users. However, in recent years,
the government, through the State Bureau of Land Administration and its
subordinate departments, has permitted grants of land use rights for value.
The Chengdu Steel Plant, described above, is located in Qingbaijiang,
approximately 32 kilometers from Chengdu in Sichuan Province. See "Item 1.
Description of Business. Steel Manufacturing - Chengdu Steel - The Steel
Plant." Chengdu Steel has the right, granted by the municipal government of
Qingbaijiang county, to use the land on which the Plant is located without
time limit and at no charge. Pursuant to the terms of the joint venture
agreement by which Chengdu Steel was formed, Chengdu Steel owns the principal
manufacturing facilities which constitute the Plant. Additional facilities
supporting the operation of the Plant are leased from CISP for approximately
RMB15.5 million annually or five percent (5%) of net after tax profit of
Chengdu Steel, whichever is less, for the period up to March 31, 1996, and at
various rates after such date as discussed above. See "Item 1. Description
of Business. Steel Manufacturing - Chengdu Steel - The Joint Venture
Agreement."
In addition to its interest in the Chengdu Steel Plant, the Company's
properties in the PRC include options relating to the development and
marketing of approximately 3 million square meters of land surrounding Sun
City. See "Item 1. Description of Business. Property Development - Sun City
- - Company's Continuing Interest in Sun City."
The Company's properties in Hong Kong consist of its executive offices
which are located in 3,400 square feet of space at Room 2008, Sun Hung Kai
Centre, 30 Harbour Road, Wanchai, Hong Kong. Such offices are held pursuant
to leases from third parties which provide for aggregate monthly rents of
approximately $18,500 and expiring July of 1998.
The Company believes that its properties are adequate to support its
current operations.
9
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ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any proceedings which are pending or
threatened to which the Company or its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
through the solicitation of proxies, or otherwise, during the fourth quarter
of the Company's fiscal year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is currently traded in the over-the-counter
market and is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the
symbol "CHNA". The Company's common stock commenced quotation on Nasdaq in
June of 1995. Prior to such date, the Company's common stock was quoted in
the over-the-counter market on the NASD Bulletin Board under the symbol
"CHTI". Prior to the commencement of quotations on Nasdaq, the trading
market in the Company's common stock was sporadic. The following table sets
forth the high and low bid price per share for the Company's common stock for
each quarterly period during the last two fiscal years:
High Low
---- ----
1994 - First Quarter 1.50 2.50
Second Quarter 2.50 3.00
Third Quarter 2.50 3.50
Fourth Quarter 2.25 2.75
1995 - First Quarter 2.38 1.25
Second Quarter 5.63 2.00
Third Quarter 6.53 4.63
Fourth Quarter 6.19 1.50
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
At March 15, 1996, the bid price of the Common Stock was $1.00.
As of March 15, 1996, there were approximately 306 holders of record of
the Common Stock of the Company.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the
foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
China Pacific, Inc.'s (the "Company") operations during 1995 consisted
of (i) participation in the development and marketing of various phases of
Sun City and (ii) manufacturing and marketing of steel in the PRC.
Development and marketing activities relating to Sun City began with the
Company's acquisition of a 51% interest in China Treasure Construction in
1994. Through the end of 1994, China Treasure Construction was engaged in
development and pre-sale of residential and commercial properties within Sun
City. Under the percentage of completion method of accounting, the Company
did not begin to recognize revenues from activities at Sun City until the
second quarter of 1995. Accordingly, with the exception of certain general
and administrative expenses, substantially all expenditures of the Company
relating to Sun City were capitalized as development costs during 1994.
In December of 1995, China Treasure Construction sold its entire
interest in the Project Subsidiaries involved in the development of Sun City,
including its interest in various loans to the Project Subsidiaries. As
consideration for the Company's interest in the Sun City development, Open
View Properties delivered to the China Treasure Construction a three year 8%
promissory note in the amount of $16.2 million (HK$125.4 million)
representing a return of China Treasure Construction's original capital
contributions and loans to the Project Subsidiaries plus a fee for services
to be provided of $4.1 million (HK$32 million).
In connection with the Sun City Sale, the Company was granted a five
year option to develop and market 3 million square meters of land surrounding
Sun City at a price of RMB100 ($12) per square meter and a five year option
to repurchase the Company's interest in Sun City for HK$32,010,004 plus any
amounts injected into the Project Subsidiaries by Open View Properties and
10% interest per annum on all such amounts. See "Description of Business --
General and Development of Business."
As a result of the Sun City Sale, the operating results of the Project
Subsidiaries have been accounted for as discontinued operations and prior
years financial results have been restated accordingly.
In October of 1995, the Company acquired 100% of the outstanding stock
of China Pacific Steel Limited ("CPS"). CPS owns a sixty percent (60%)
interest in Chengdu Chengkang Iron and Steel Co. Limited ("Chengdu Steel"),
a PRC steel manufacturer.
The Company acquired its interest in CPS (the "Chengdu Steel
Acquisition") from China Pacific Capital Limited ("CPCL") for total
consideration of approximately $15.1 million which was payable $568,655 in
cash at closing with the balance being payable in the form of a non-interest
bearing demand promissory note secured by the stock of CPS. CPCL at the time
of the acquisition was a wholly-owned subsidiary of China Treasure Holding
(B.V.I.) Ltd. which, following the "Sun City Sale" described above, was an
indirect controlling shareholder of the Company.
Chengdu Steel was created in October of 1994 when Chengdu Iron and Steel
Plant ("CISP"), a state-owned PRC company controlled by the Department of
Metallurgy of the Chengdu Government, contributed its principal operating
assets to Chengdu Steel with substantially all remaining assets being leased
to Chengdu Steel in exchange for a 40% interest in Chengdu Steel plus lease
payments of RMB15.5 million annually or five percent (5%) of net after tax
profit of Chengdu Steel, whichever is less, through March 31, 1996; at an
annual rate of 6.5% based on the valuation of assets actually leased for the
period from April 1, 1996 to March 31, 1997; and, at an annual rental charge
to be mutually agreed by both CPS and CISP commencing April 1, 1997, based on
market rental rates, but not to exceed 8% based on the valuation of the
assets actually leased. CPS contributed capital in the amount of $14 million
and production and marketing expertise in exchange for a 60% interest in
Chengdu Steel.
As a result of the China Steel Acquisition, the Company's operating
results reflect its share of the steel operations of Chengdu Steel from the
effective date of the acquisition, July 1, 1995, to the end of the year.
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The combined effect of the Sun City Sale and China Steel Acquisition is
reflected in the operating results of the Company with 1995 results
reflecting (i) Sun City related results, including the Sun City Sale, as
discontinued operations from January 1, 1995 to December 29, 1995, and (ii)
the Company's 60% interest in Chengdu Steel results from July 1, 1995 to
December 31, 1995. Operating results for 1994 consist primarily of Sun City
related results reported as discontinued operations.
RESULTS OF OPERATIONS -- FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
As a result of the Sun City Sale, operating results discussed below have
been restated to reflect substantially all of the expenditures associated
with the Sun City project as discontinued operations. Further, actual
results reported during 1995 relate primarily to the operations of Chengdu
Steel for the six month period from July 1, 1995 to December 31, 1995.
Certain pro forma information is provided to reflect the pro forma results of
Chengdu Steel for the full year ended December 31, 1995 as if the various
transactions relating to the formation of Chengdu Steel had taken place at
the beginning of such period.
NET SALES. Net sales during 1995 totaled $53.1 million. The Company
reported no sales during 1994. The increase in net sales 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, net sales of Chengdu
Steel for the full year ended December 31, 1995 totaled $108.9 million as
compared to $108.8 million during 1994. Sales of steel products during 1995
totaled approximately 364,020 tons as compared to 320,769 tons sold during
1994.
COST OF GOODS SOLD AND GROSS PROFIT. Cost of goods sold during 1995
totaled $41 million. The Company had no cost of sales during 1994. 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 full year ended December 31,
1995 totaled $89.2 million as compared to $90.6 million during 1994. The
decrease in cost of goods sold was attributable to strengthened cost control
measures implemented during 1995.
As a result of the decrease in cost of goods sold, pro forma gross
profits increased by 7.1% from $18.3 million (16.8% of net sales) to $19.7
million (18.1%). Reported gross profits, reflecting results for the period
from July 1, 1995 to December 31, 1995, totaled $12.1 million (22.8% of net
sales). The improvement in profit margin during the second half of 1995 was
attributable to improved product mix, strengthened cost control measures and
the disposal of scrap steel inventories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses ("SG&A") during 1995 totaled $3.8 million as
compared to $247,000 during 1994. The increase in SG&A was attributable to
an increased level of corporate activities, including the acquisition and
operation of Chengdu Steel, during 1995. Additionally, 1994 reported SG&A
reflects the reclassification of substantial SG&A ($1.6 million) relating to
Sun City as discontinued operations.
On a pro forma basis, SG&A increased 20.3% to $6.7 million (6.1% of net
sales) for the full year ended 1995 as compared to $5.9 million (5.5% of net
sales) of pro forma SG&A reported by Chengdu Steel during 1994. The increase
in SG&A, on a pro forma basis, was attributable to an increase in managerial
staff and, to a lesser degree, the affects of inflation.
INTEREST EXPENSE, NET. Net interest expense during 1995 totaled
$167,000. The Company reported no interest expense during 1994. The increase
in interest expense was attributable to borrowings incurred by Chengdu Steel
in connection with its ongoing operations.
On a pro forma basis, net interest expense of Chengdu Steel decreased
from $1.3 million during 1994 to $167,000 during the full year ended December
31, 1995. The decrease in interest expense was attributable to a decrease in
loan balances of Chengdu Steel which resulted from original formation of
Chengdu Steel pursuant to which Chengdu Steel did not assume certain loans of
CISP.
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OTHER INCOME (EXPENSE), NET. Other income, net, during 1995 totaled
$1.4 million. The Company reported no other income, net, during 1994. Other
income during 1995 was attributable to the Company's allocable share of
profits from China Treasure Construction following the sale the Project
Subsidiaries and the reduction in the Company's ownership interest in China
Treasure Construction to 50%.
On a pro forma basis, other income of Chengdu Steel decreased from $3.6
million during 1994 to $1.4 million during 1995. The decrease in other
income was attributable to a decrease in management fee income of Chengdu
Steel from affiliated companies relating to services not assumed by Chengdu
Steel following the acquisition.
INCOME TAXES. The Company's income tax provision for 1995 totaled
$228,000. No income tax provision was recorded during 1994. The income tax
provision for 1995 was attributable to income from the operations of China
Treasure Construction.
On a pro forma basis, income tax expense of Chengdu Steel totaled $4.9
million during 1994 as compared to pro forma income tax expense of the
Company of $228,000 during 1995. The decrease in pro forma tax expense was
attributable to the tax exemption granted to the Sino-Foreign Joint Venture
formed to operate the steel plant (Chengdu Steel).
As a condition of the acquisition of its interest in Chengdu Steel, the
Company received from CISP a guarantee that Chengdu Steel, as a sino-foreign
joint venture, would be granted a profits tax concession exempting Chengdu
Steel from PRC profits tax for the first two years of profitable operations
and allowing a 50% reduction in profits tax for the following three years.
Such tax exemption was granted as required.
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued
operations during 1995 totaled $1.7 million as compared to a loss from
discontinued operations during 1994 of $1.6 million. The income from
discontinued operations during 1995 was attributable to the recognition of
revenues from the operation of Sun City through the date of disposition which
produced revenues of $9.9 million and a gain of $843,000 (net of minority
interest). Gain relating to the sale of Sun City in the amount of $1.4
million (net of minority interest) was deferred until expiration of China
Treasure Construction's repurchase option. No revenues were recognized by
the Company relating to Sun City prior to 1995. Losses from discontinued
operations during 1994 reflect certain direct expenses relating to the
operation of Sun City which were previously reported as operating expenses
and, with the Sun City Sale, have been reclassified as losses from
discontinued operations.
MINORITY INTERESTS. 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 second half of 1995 and the 49% interest in China
Treasure Construction not owned by the Company during 1994 and 1995.
NET INCOME/(LOSS). Net income during 1995 totaled $6.1 million as
compared to a loss of $1.1 million during 1994. Pro forma net income for the
full year ended December 31, 1995, including results attributable to Chengdu
Steel for the first six months of 1995, totaled $8.9 million. Pro forma net
income of Chengdu Steel (before minority interest) during 1994 totaled $9.7
million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had a working capital balance of $12.1
million and a cash balance of $14.7 million as compared to a deficit in
working capital of $23.9 million and a cash balance of $135,000 at December
31, 1994. The improvement in working capital and cash balances was
attributable to a combination of (i) the assumption of various liabilities
($34.9 million) by a third party in connection with the Sun City Sale and
(ii) the receipt of $5.6 million of net proceeds from the sale of common
stock, convertible debentures and convertible preferred stock during 1995.
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Historically, the Company's operations have been funded by a combination
of capital contributions from the Company's ultimate shareholders, loans from
shareholders and affiliates, bank loans, and deposits received from advance
sales of units at Sun City. During 1995, operations relating to Sun City
were funded principally by operating cash flows derived from sales at Sun
City. The China Steel Acquisition was funded through the payment of $0.6
million in cash and a non-interest bearing note payable to an affiliated
company controlled by the Company's principal shareholder in the amount of
$14.5 million. Such note is repayable on demand and is secured by the stock
of Chengdu Steel. With the disposition of Sun City and the acquisition of
Chengdu Steel, management anticipates that operating cash flow will support
ongoing operations at its current level.
As a result of the Sun City Sale and the China Steel Acquisition, the
financial obligations of the Company consisted primarily of the obligations
of its 60% owned subsidiary, Chengdu Steel.
At December 31, 1995, the primary obligations of the Company consisted
of $12 million which remained payable to an affiliate relative to the China
Steel Acquisition as well as long-term debt in the amount of $14.7 million,
including (i) a non-interest bearing unsecured current account with CISP in
the amount of $7.3 million, (ii) 10% convertible debentures in the amount of
$0.8 million, and (iii) various loans from unaffiliated third parties in the
amount of $6.6 million. Maturities on long-term debt total $3.8 million
during 1996.
In addition to its various borrowings, the Company and its subsidiaries
are obligated under a number of leases covering its executive offices and
various operating assets leased by Chengdu Steel from the PRC partner in
Chengdu Steel. Pursuant to the terms of the China Steel Acquisition, CISP
agreed to lease to Chengdu Steel substantially all assets relating to the
operations of the Plant, other than those assets sold to Chengdu Steel,
valued at approximately RMB310 million, for approximately RMB15.5 million
annually or five percent (5%) of net after tax profit of Chengdu Steel,
whichever is less, through March 31, 1996; at an annual rate of 6.5% based on
the valuation of assets actually leased for the period from April 1, 1996 to
March 31, 1997; and, at an annual rental charge to be mutually agreed by both
CPS and CISP commencing April 1, 1997, based on market rental rates, but not
to exceed 8% based on the valuation of the assets actually leased. Total
minimum rentals payable by the Company during 1996 are $3.3 million.
As discussed elsewhere herein, Chengdu Steel is considering various
plans to expand steel production operations. While the Company has the right
to participate in any such expansion through additional capital contributions
or loans to Chengdu Steel, the Company has no obligation to provide
additional funding to Chengdu Steel except as indicated above. See
"Description of Business -- Steel Manufacturing -- Chengdu Steel --
Expansion Program."
During 1995, the Company issued common stock, convertible debentures and
convertible preferred stock raising approximately $5.6 million net of
offering costs. At December 31, 1995, $800,000 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 at due in November of 1997
if not previously converted. At December 31, 1995, the Company also had
outstanding 2,250 shares of Series A Preferred Stock and 650 shares of Series
B Preferred Stock. The Series A Preferred Shares are convertible into common
stock at a price equal to 70% 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 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.
Subsequent to year end, the Company raised approximately $11.1 million
of additional funds through the sale of common stock and convertible
preferred stock.
Pursuant to the Sun City Sale, China Treasure Construction, which is 50%
owned by the Company, holds a series of 8% promissory notes in the aggregate
amount of $16.2 million which are due and payable in December of 1998.
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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.
INFLATION AND EXCHANGE RATES
The Company does not believe that inflation has had a material impact on
the results of its operations. However, high levels of inflation and
exchange rate fluctuations have characterized the PRC economy in recent
years. Because the operations of Chengdu Steel are conducted exclusively
within the PRC, management believes that any price fluctuations attributable
to inflation or changes in exchange rates can be passed through to its
customers. There can be no assurance, however, that continued inflation and
exchange rate fluctuations will not adversely impact the Company in the
future. In particular, as the Company's revenues are primarily received in
Renminbi, the Company's ability to pay dividends and make other payments
denominated in other currencies may be adversely impacted by exchange rate
fluctuations.
ITEM 7. FINANCIAL STATEMENTS
CHINA PACIFIC, INC.
INDEX TO FINANCIAL STATEMENTS
________________
PAGE
----
Report of Independent Public Accountants.................................... F-1
Consolidated Balance Sheets as of December 31, 1995 and 1994................ F-2
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993.......................................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.......................................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993...................... F-5
Notes to Consolidated Financial Statements.................................. F-6
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Following the China Treasure Exchange, on February 1, 1995, H.J. Swart &
Co., the Company's auditors for the periods prior to such transaction,
declined to stand for re-appointment as the Company's auditors in connection
with the audit of the Company's 1994 financial statements. The Company's
board of directors then appointed Arthur Andersen & Co., which previously
served as auditors for China Treasure Construction, to serve as the Company's
new independent accountants.
H.J. Swart & Co.'s reports on the financial statements of the Company
for fiscal years 1992 and 1993 contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with its audits for fiscal years 1992
and 1993 and through the date of declining to stand for re-appointment, there
were no disagreements with H.J. Swart & Co. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of H.J.
Swart & Co. would have caused them to make reference thereto in its reports
on the financial statements for such years.
The information described above regarding the Company's change of
independent accountants, along with a letter from H.J. Swart & Co. stating
that it agrees with the above information, was fully disclosed in a Form 8-K
dated February 1, 1995 filed with the SEC.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
INFORMATION REGARDING DIRECTORS
The following table sets forth information with respect to each
Director. The information as to age, principal occupation and directorships
held has been furnished by each such nominee.
SERVED AS
DIRECTOR
PRINCIPAL CONTINUOUSLY
NAME AND AGE OCCUPATION (1) SINCE
------------ -------------- ------------
Mak Shiu Tong, Clement (43).. President, Chief Executive Officer
and Chairman of the Board 1993
Cheng Yuk Ching (42)......... Vice President and Secretary 1994
Huang Jinhui (42)............ Deputy Governor of the People's
Government of Huiyang City since
1987 1994
Tan Jian Sheng (37).......... General Manager of The Construction
Bank of China - Guangdong Branch
International Division since 1994 (2) 1996
Zhang Guo Liang (51)......... General Manager of Xinhua News
Agency - Asia-Pacific Region since
1992 (3) 1996
________________
16
<PAGE>
(1) Unless indicated otherwise in the table or in the section captioned
"Information Regarding Executive Officers," the individuals named in the
table have held their positions for more than five years.
(2) From 1989 to 1994, Mr. Tan served as Department Head of the International
Division of The People's Construction Bank of China - Guangdong Branch.
(3) From 1989 to 1994, Mr. Zhang served as Secretary General of the Xinhua News
Agency.
INFORMATION REGARDING EXECUTIVE OFFICERS
The following table sets forth the names, ages and offices of the
present executive officers of the Company. The periods during which such
persons have served in such capacities are indicated in the description of
business experience of such persons below. Information with respect to
non-employee directors is set forth above.
Mak Shiu Tong, Clement (43)... President and Chief Executive Officer
Mo Kat Ling, Connie (34)...... Vice President
Cheng Yuk Ching (42).......... Vice President and Secretary
Tong Long Tin, Thomas (29).... Chief Financial Officer
Officers and directors are elected on an annual basis. The present
terms for each director will expire at the next annual meeting of
shareholders or at such time as a successor is duly elected. Officers serve
at the discretion of the Board of Directors. See "Beneficial Ownership of
Common Stock."
There are no family relationships among any of the directors or officers
of the Company.
The following is a biographical summary of the business experience of
the present executive officers of the Company.
MAK SHIU TONG, CLEMENT. Mr. Mak has served as President, Chief
Executive Officer and Chairman of the Board of the Company since the
acquisition of China Pacific Construction (formerly China Treasure
Construction) by Bulls on the Run Productions in May of 1994. Mr. Mak was a
founder of China Pacific Construction and its affiliates and has served as
Chairman of China Pacific Construction since its inception in 1993. Since
1979, Mr. Mak has served as Chairman, and was the founder, of Kiu Yin
Investment Co., Ltd. (formerly, Bondwell Electronics Limited), an electronics
manufacturer.
MO KAT LING, CONNIE. Ms. Mo has served as Vice President of the Company
since the acquisition of China Pacific Construction in May of 1994. Ms. Mo
previously served as Treasurer and a director of the Company from May of 1994
until June of 1995. Previously, Ms. Mo served as Vice President, Treasurer
and a director of Kiu Yin Investment Co., Ltd. from 1989 to 1995.
CHENG YUK CHING. Mr. Cheng has served as Vice President, Secretary and
a director of the Company since the acquisition of China Pacific Construction
in May of 1994. Previously, Mr. Cheng served as Vice President, Secretary
and a director of Kiu Yin Investment Co., Ltd. from 1984 to 1995.
TONG LONG TIN, THOMAS. Mr. Tong has served as Financial Controller of
the Company since 1994 and as Chief Financial Officer since 1996. Prior to
joining the Company, Mr. Tong served as an audit supervisor of Ho and Ho &
Co., a certified public accounting firm in Hong Kong from 1988 to 1994.
COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT
Under the securities laws of the United States, the Company's directors,
its executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports
have been established and the Company is
17
<PAGE>
required to disclose in this Report any failure to file by these dates during
1995. All of the filing requirements were satisfied on a timely basis in
1995. In making these disclosures, the Company has relied solely on written
statements of its directors, executive officers and shareholders and copies
of the reports that they filed with the Commission.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning cash and non-cash
compensation paid or accrued for services in all capacities to the Company
during the year ended December 31, 1995 of the Chief Executive Officer and
each of the next four most highly compensated executive officers of the
Company whose compensation exceeded $100,000 (the "Named Officers").
<TABLE>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------ ------------
OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#)
- --------------------------- ---- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Mak Shiu Tong, Clement.......... 1995 194,069 - (1) -
President, Chief Executive 1994 252,264 - (1) -
Officer and Chairman 1993 - - (1) -
</TABLE>
__________________
(1) Although the officers receive certain perquisites such as auto allowances
and Company provided life insurance, the value of such perquisites did not
exceed the lesser of $50,000 or 10% of the officer's salary and bonus.
COMPENSATION OF DIRECTORS
The Company reimburses each director for all expenses of attending board
meetings. Otherwise, no compensation of any nature is paid to employee
directors.
EMPLOYMENT CONTRACTS
The Company has no employment agreements with any of its employees and
has no arrangements of any nature which would result in payments to officers
or other persons as a result of any termination of employment or change in
control of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table is furnished as of May 1, 1996, to indicate
beneficial ownership of shares of the Company's Common Stock by (1) each
shareholder of the Company who is known by the Company to be a beneficial
owner of more than 5% of the Company's Common Stock, (2) each director,
nominee for director and Named Officer of the Company, individually, and (3)
all officers and directors of the Company as a group. The information in the
following table was provided by such persons.
18
<PAGE>
<TABLE>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)(2) PERCENT OF CLASS (2)
------------------- --------------------------- --------------------
<S> <C> <C>
Mak Shiu Tong, Clement................... 6,775,715 (2)(4) 20.6%
Room 2008, Sun Hung Kai Centre
30 Harbour Road
Wanchai, Hong Kong
The Construction Bank of China -
Guangdong Branch........................ 6,509,999 (3)(4) 19.8%
No. 555, Dong Feng Dong Road
Guangzhou, Guangdong Province, China
Cheng Yuk Ching.......................... -0- 0.0%
Huang Jinhui............................. -0- (5) 0.0%
Tan Jian Sheng........................... -0- 0.0%
Zhang Guo Liang.......................... -0- 0.0%
All executive officers and directors
as a group (7 persons).................. 6,775,715 20.6%
</TABLE>
___________________
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws, where applicable, and the information
contained in the footnotes to the table.
(2) All shares indicated as being held by Mr. Mak are held of record by C.P.
Investment (B.V.I.) Ltd. ("CPI"), a wholly owned subsidiary of China
Pacific Investment Holdings Ltd. ("CPIH"). CPIH is owned 51% by Kiu Yin
Investment Co., Ltd., a company controlled by a discretionary trust
established for the benefit of Mr. Mak's family.
(3) All shares indicated as held by The Construction Bank of China - Guangdong
Branch are held of record by CPI. CPIH, the parent of CPI, is owned 49% by
Guangdong Construction (B.V.I.) Co., Ltd., which is, in turn, controlled by
The Construction Bank of China - Guangdong Branch.
(4) In connection with the Company's disposal of its interest in the Sun City
project, Mak Shiu Tong, Clement and The Construction Bank of China -
Guangdong Branch formed China Pacific Investment Holdings Ltd. which
acquired all of the shares of C.P. Investment (B.V.I.) Ltd. (formerly China
Treasure Investment (B.V.I.) Limited) from China Treasure Holding (B.V.I.)
Limited. As a result of such transactions, The Construction Bank of China
- Guangdong Branch increased its beneficial ownership in the Company by
3,188,571 shares and the beneficial ownership of a like number of shares by
The People's Government of Huiyang City, which previously was the
beneficial owner of such shares through its ownership in China Treasure
Holding (B.V.I.) Ltd., was terminated. See "Certain Relationships and
Transactions."
(5) Huang Jinhui is Deputy Governor of The People's Government of Huiyang City,
a former 5% shareholder of the Company, but disclaims any interest in the
shares previously beneficially held by The People's Government of Huiyang
City.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Due to the nature of Company's participation in the development of "Sun
City" and the Company's operations within the People's Republic of China,
the Company's operations from the commencement of the "Sun City" project
involved significant transactions with affiliates, including SanHe Group,
which is controlled by the Huiyang City government, which, until December 31,
1995, was a principal shareholder of the Company.
The Company's former subsidiary, China Treasure Industrial Enterprise
("CTIE"), acquired the land use rights with respect to the "Regent on the
Park" and "Star Place" sites in Sun City from SanHe Group in 1992. CTIE
acquired the land use rights with respect to such sites for $31.3 million and
was obligated to pay 20% of the after-tax profit on the development of Star
Place to SanHe Group and 10% of such after-tax profits to Huiyang Property
Development Company Limited, a company also controlled by the Huiyang City
government. $7.3 million of the consideration payable to SanHe for the land
use rights was paid through December 31, 1995.
19
<PAGE>
C.P. Investment Ltd. (formerly known as China Treasure Investment Ltd.),
an intermediate holding company, loaned $8.8 million and China Treasure
Holding Ltd. (the prior owner of China Treasure Investment Ltd.) loaned $0.8
million to the Company's subsidiary, China Pacific Construction (B.V.I.)
Limited (formerly known as China Treasure Construction (B.V.I.) Limited)
through December 31, 1994. Such loans were repayable with interest accruing
at commercial bank rates which ranged from 8% to 9% in 1994. During 1995,
China Treasure Holding loaned US$12 million to China Pacific Steel Limited in
the form of a non-interest bearing promissory note which is secured by the
stock of China Pacific Steel Limited. China Treasure Holding also loaned
US$1.3 million to China Pacific, Inc. and its subsidiaries at a commercial
interest rate of 9% per annum. Both of such companies agreed not to require
repayment of such loans until the Company was financially capable of repaying
such amounts.
The Construction Bank of China, Guangdong Branch, a shareholder of the
Company established a banking facility for the Company totaling $92 million
for the Sun City project, of which $9.1 million and $-0- had been utilized at
December 31, 1994 and 1995, respectively. Such facility is no longer
available after the disposal of the Sun City subsidiaries.
During 1994 and 1995, the Company paid management fees to China Treasure
Holding (B.V.I.) Limited, an indirect controlling shareholder of the Company,
of approximately $155,000 and $-0-, respectively.
On December 29, 1995, the Company entered into an agreement with Open
View Properties Ltd, which is controlled by the People's Government of
Huiyang City, whereby the Company's 51% owned subsidiary, China Pacific
Construction (formerly China Treasure Construction), sold its interest in
each of its subsidiaries involved in the Sun City development and, along
therewith, its entire interest in Sun City. As consideration for the
Company's interest in Sun City, Open View Properties delivered a series of
three year 8% promissory notes in the amount of $16.2 million representing a
return of China Pacific Construction's original capital contributions and
loans to the project subsidiaries plus a fee for services to be provided of
$4.1 million. Additionally, the Company was granted a five year option to
develop and market 5 million square meters of land surrounding Sun City at a
price of RMB100 ($12) per square meter and a five year option to repurchase
the Company's interest in Sun City at cost plus a 10% premium per year.
Prior to the Company's disposal of the Sun City subsidiaries, the
Company, during 1995, paid interest on amounts advanced by its principal
shareholders in the amount of $1,114,000.
The Company has no existing corporate policy which prohibits or governs
the terms of any such transactions.
20
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ------------
<S> <C> <C>
2.1 Exchange Agreement dated May 18, 1994 between Bulls on the Run
Production Corporation, China Treasure Construction (B.V.I.) Limited and
China Treasure Investments (B.V.I.) Limited - incorporated by
reference to the respective exhibits filed with the Company's Current
Report on Form 8-K dated May 18, 1994....................................... *
2.2 Acquisition Agreement dated October 30, 1995 between China Treasure
Capital Limited and China Pacific Ltd. - incorporated by reference to
the respective exhibits filed with the Company's Current Report on Form 8-K
dated October 30, 1995...................................................... *
3.1 Articles of Incorporation, as amended to date - incorporated by reference
to the respective exhibits filed with the Company's Current Report on
Form 8-K dated January 25, 1996; and Registration Statement on Form 8-A
declared effective June 15, 1995............................................ *
3.2 Bylaws, as amended to date - incorporated by reference to the respective
exhibits filed with the Company's Registration Statement on Form 8-A
declared effective June 15, 1995............................................ *
4.1 Certificate of Designation for Series A Convertible Preferred Shares........ **
4.2 Certificate of Designation for Series B Convertible Preferred Shares........ **
4.3 Certificate of Designation for Series C Convertible Preferred Shares........ **
4.4 Form of 10% Convertible Debentures.......................................... **
10.1 Joint Venture Agreement dated October 25, 1994 between Chengdu Iron
and Steel Plant and Team Steel, Inc. re: formation of Chengdu Chengkang
Iron and Steel Corporation - incorporated by reference to the respective
exhibits filed with the Company's Current Report on Form 8-K dated
October 30, 1995............................................................ *
10.2 Cancellation Agreement dated October 15, 1995 between China Pacific,
Inc. and Team International Holdings, Inc. - incorporated by reference
to the respective exhibits filed with the Company's Current Report on
Form 8-K dated October 30, 1995............................................. *
10.3 Leasing Agreement for fixed assets between Chengdu Iron and Steel Plant
and Team Steel, Inc. - incorporated by reference to the respective
exhibits filed with the Company's Current Report on Form 8-K dated
October 30, 1995............................................................ *
10.4 Letters of Guarantee from Chengdu Iron and Steel Plant - incorporated by
reference to the respective exhibits filed with the Company's Current
Report on Form 8-K dated October 30, 1995................................... *
10.5 Summary of Agreement dated December 29, 1995 between China Treasure
Construction (B.V.I.) Limited, Open View Properties Limited and Hui Yang
The People Prefecture Investment Ltd re: sale of China Treasure
Property Consultant, China Treasure Property Management and China Treasure
Enterprise Ltd. ............................................................ *
10.6 Memorandum dated December 29, 1995 between China Treasure Construction
(B.V.I.) Limited and Open View Properties Ltd. re: service fee -
incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated December 29, 1995................ *
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
10.7 Loan Agreement dated December 29, 1995 between China Treasure Construction
(B.V.I.) Limited and Open View Properties Ltd. re: assumption of
HK$93,347,466 of indebtedness of subsidiaries by Open View Properties
Limited - incorporated by reference to the respective exhibits filed with
the Company's Current Report on Form 8-K dated December 29, 1995............ *
10.8 Agreement dated December 29, 1995 between Huiyang The People Prefecture
Investment Limited, China Treasure Enterprise Limited, China Treasure
Construction (B.V.I.) Limited and Open View Properties Limited re:
assumption of HK$93,347,466 of indebtedness by Huiyang The People
Prefecture Investment Limited - incorporated by reference to the respective
exhibits filed with the Company's Current Report on Form 8-K dated
December 29, 1995........................................................... *
10.9 Share Mortgage dated December 29, 1995 between Hui Yan The People
Prefecture Investment Limited and China Treasure Construction (B.V.I.)
Limited re: pledge of collateral to secure obligations owed to China
Treasure Construction (B.V.I.) Limited - incorporated by reference to the
respective exhibits filed with the Company's Current Report on Form 8-K
dated December 29, 1995..................................................... *
10.10 Share Mortgage dated December 29, 1995 between Hui Yan The People
Prefecture Investment Limited and China Treasure, Inc. re: pledge of
collateral to secure obligations owed to China Treasure, Inc. -
incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated December 29, 1995................ *
10.11 Deed of Guarantee dated December 29, 1995 from Hui Yan The People
Prefecture Investment Limited to China Treasure Construction (B.V.I.)
Limited guaranteeing payment of service fee - incorporated by
reference to the respective exhibits filed with the Company's Current
Report on Form 8-K dated December 29, 1995.................................. *
16.1 Letter from H.J. Swart & Co., P.A. relating to change of independent
accountants - incorporated by reference to the respective exhibits
filed with the Company's Current Report on Form 8-K dated February 1,
1995........................................................................ *
</TABLE>
___________________
* Incorporated by reference pursuant to Exchange Act Rule 12b-23.
** Previously filed.
++ Compensatory plan or management agreement.
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1995, the Company filed the following
reports on Form 8-K:
(1) Form 8-K (and Form 8-K/A) dated October 30, 1995 reporting under Item 2
the acquisition of Chengdu Steel.
(2) Form 8-K dated December 29, 1995 reporting under Items 1 and 2 a
change in the identity and holdings of the controlling shareholder and
the sale of the Company's interest in the Sun City project.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHINA PACIFIC, INC.
BY: /S/ MAK SHIU TONG, CLEMENT
-------------------------------------
MAK SHIU TONG, CLEMENT
PRESIDENT
Dated: June 6, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mak Shiu Tong, Clement President, Chief Executive Officer June 6, 1996
- ------------------------------ and Chairman of the Board of Directors
Mak Shiu Tong, Clement (Principal Executive Officer)
/s/ Cheng Yuk Ching Vice President, Secretary and Director June 6, 1996
- ------------------------------
Cheng Yuk Ching
/s/ Huang Jinhui Director June 6, 1996
- ------------------------------
Huang Jinhui
/s/ Tan Jian Sheng Director June 6, 1996
- ------------------------------
Tan Jian Sheng
/s/ Zhang Guo Liang Director June 6, 1996
- ------------------------------
Zhang Guo Liang
/s/ Tong Long Tin, Thomas Chief Financial Officer (Principal June 6, 1996
- ------------------------------ Financial and Accounting Officer)
Tong Long Tin, Thomas
</TABLE>
23
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of China Pacific, Inc.:
We have audited the accompanying consolidated balance sheets of China
Pacific, Inc. (incorporated in the United States of America; "the Company")
and Subsidiaries ("the Group") as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for the years ended December 31, 1995, 1994 and 1993.
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.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Substantially all of the Group's operations are conducted in the People's
Republic of China. Accordingly, the Group is subject to special
considerations and significant risks as described in Note 1 to the
accompanying consolidated financial statements.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China
Pacific, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years ended December
31, 1995, 1994 and 1993, in conformity with generally accepted accounting
principles in the United States of America.
/s/ ARTHUR ANDERSEN & CO.
Hong Kong,
April 5, 1996.
F-1
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
1995 1994
------ ------
$'000 $'000
ASSETS
- ------
Current assets:
Cash 14,691 135
Accounts receivable, net 17,153 1,781
Due from related companies 12 197
Prepayments and other current assets 3,651 202
Inventories, net 32,723 -
------ ------
Total current assets 68,230 2,315
Investment in associated company 6,011 -
Investments and notes receivable 3,810 -
Deferred value added tax recoverable 4,950 -
Property, plant and equipment, net 10,908 581
Development properties - 41,131
Goodwill, net 2,104 -
------ ------
Total assets 96,013 44,027
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term borrowings 12,481 16,055
Long-term debt, current portion 3,783 -
Accounts payable 17,779 -
Deposits from customers 11,265 -
Accrued liabilities 7,340 10,162
Value added tax payable 1,898 -
Due to related companies 1,634 8
------ ------
Total current liabilities 56,180 26,225
Long-term debt 10,979 9,633
------ ------
Total liabilities 67,159 35,858
------ ------
Minority interests 12,947 4,124
------ ------
Shareholders' equity:
Preferred stock, par value $0.001; authorized
10,000,000 shares
Series A convertible - outstanding 2,250 shares
(total par value $2) - -
Series B convertible and redeemable - outstanding
650 shares (total par value $1) - -
Common stock, par value $0.001; authorized
100,000,000 shares
Outstanding - 16,661,709 shares in 1995,
14,285,714 shares in 1994 17 14
Additional paid-in capital 11,495 6,576
Dedicated capital 938 -
Retained earnings (Accumulated deficit) 2,872 (2,258)
Cumulative translation adjustments 585 (287)
------ ------
Total shareholders' equity 15,907 4,045
------ ------
Total liabilities and shareholders' equity 96,013 44,027
------ ------
------ ------
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
$'000 $'000 $'000
<S> <C> <C> <C>
Net sales 53,139 - -
Cost of goods sold (41,023) - -
---------- ---------- ----------
Gross profit 12,116 - -
Selling, general and administrative
expenses (3,753) (247) (5)
Interest expense, net (167) - (16)
Other income, net 1,388 - 16
---------- ---------- ----------
Income (Loss) from continuing
operations before income taxes 9,584 (247) (5)
Provision for income taxes (228) - -
---------- ---------- ----------
Income (Loss) from continuing
operations 9,356 (247) (5)
Discontinued operations:
Income (Loss) from operations of the
discontinued Sun City Subsidiaries
(less Nil amount of applicable
income taxes) 1,654 (1,603) (1,231)
---------- ---------- ----------
Income (Loss) before minority
interests 11,010 (1,850) (1,236)
Minority interests (4,942) 786 606
---------- ---------- ----------
Net income (loss) 6,068 (1,064) (630)
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share:
Income (Loss) from continuing
operations 0.34 (0.01) -
Income (Loss) from discontinued
operations 0.06 (0.06) (0.04)
---------- ---------- ----------
Net income (loss) 0.40 (0.07) (0.04)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares
outstanding 15,185,185 14,285,714 14,285,714
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Amounts expressed in United States dollars)
1995 1994 1993
------- ------- -------
$'000 $'000 $'000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 6,068 (1,064) (630)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities -
Amortization of goodwill 27 - -
Depreciation of fixed assets 660 191 116
Loss on disposals of fixed assets 71 7 -
Minority interests 4,942 (786) (606)
Effect of cumulative translation
adjustments 584 (242) (320)
(Increase) Decrease in operating assets -
Accounts receivable, net (8,324) - -
Inventories, net (13,064) - -
Deposits receivable 1,781 (1,356) (424)
Utility deposits 139 (59) (100)
Prepayments and other current assets (857) 31 (19)
Other receivables - - 12,109
Increase (Decrease) in operating
liabilities -
Accrued liabilities 17,979 4,093 5,940
Deposit from customers 11,265 - -
------- ------ -------
Net cash provided by operating
activities 21,271 815 16,066
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of subsidiary 10 - -
Proceeds from disposals of fixed assets - 229 -
Acquisition of subsidiary 247 - -
Acquisition of investments (631) - -
Acquisition of fixed assets (1,822) (381) (406)
Acquisition of development properties,
net (14,701) (9,120) (30,634)
------- ------ -------
Net cash used in investing activities (16,897) (9,272) (31,040)
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank loans 6,930 (29) 9,154
Increase in other loans 2,363 6,930 -
(Decrease) Increase in obligations
under lease purchase contracts (6) (90) 22
Loan from customers (4,300) - -
Loan from employees 174 - -
Loan from an intermediate holding
company (8,812) 976 7,838
Loan from ultimate holding company 12,426 820 -
Due from related companies and holding
company - (86) (111)
Due to related companies (850) 6 (1,865)
Other long-term liabilities (3,465) - -
Proceeds from issuance of convertible
debentures 800 - -
Proceeds from issuance of common and
preferred stock 4,922 - -
------- ------ -------
Net cash provided by financing
activities 10,182 8,527 15,038
------- ------ -------
Net increase in cash 14,556 70 64
Cash, as of beginning of year 135 65 1
------- ------ -------
Cash, as of end of year 14,691 135 65
------- ------ -------
------- ------ -------
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Amounts expressed in United States dollars)
<TABLE>
SERIES B CONVERTIBLE
SERIES A CONVERTIBLE AND REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK RETAINED
-------------------- -------------------- ------------------ ADDITIONAL EARNINGS CUMULATIVE
NUMBER OF NUMBER OF NUMBER OF PAID-IN DEDICATED (ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL CAPITAL DEFICIT) ADJUSTMENTS
--------- ------ --------- ------ ---------- ------ ---------- --------- ------------ -----------
$ $ $ $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1993 - - - - 14,285,714 14,286 6,576 - (564) -
Net loss - - - - - - - - (630) -
Translation
adjustments - - - - - - - - - (163)
------ -- --- -- ---------- ------ ------ --- ----- ---
Balance as of
December 31,
1993 - - - - 14,285,714 14,286 6,576 - (1,194) (163)
Net loss - - - - - - - - (1,064) -
Translation
adjustments - - - - - - - - - (124)
------ -- --- -- ---------- ------ ------ --- ----- ---
Balance as of
December 31,
1994 - - - - 14,285,714 14,286 6,576 - (2,258) (287)
Net income - - - - - - - - 6,068 -
Sale of common
stock - - - - 155,000 155 433 - - -
Sale of
preferred stock 5,905 6 650 1 - - 6,555 - - -
Conversion of
preferred stock
to common stock (3,655) (4) - - 2,220,995 2,221 - - - -
Costs of common
and preferred
stock sales - - - - - - (2,069) - - -
Transfer to
dedicated
capital - - - - - - - 938 (938) -
Translation
adjustments - - - - - - - - - 872
------ -- --- -- ---------- ------ ------ --- ----- ---
Balance as of
December 31,
1995 2,250 2 650 1 16,661,709 16,662 11,495 938 2,872 585
------ -- --- -- ---------- ------ ------ --- ----- ---
------ -- --- -- ---------- ------ ------ --- ----- ---
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Pacific, Inc. (the "Company") was incorporated in the State of
Nevada, United States of America on February 4, 1986, under the name of
McMann Investments, Inc. It changed its name to Bulls on the Run Productions
Corporation with effect from 1988, from Bulls on the Run Productions
Corporation to China Treasure, Inc. with effect from May 18, 1994, and then
from China Treasure, Inc. to China Pacific, Inc., the present one, with
effect from December 11, 1995.
CONTROLLING SHAREHOLDERS
As of December 31, 1994, 13,285,714 shares of common stock of the Company
were owned by C. P. Investment (B.V.I.) Limited ("CPI"; a company
incorporated in the British Virgin Islands and formerly known as China
Treasure Investment (B.V.I.) Limited). CPI was wholly owned by China Treasure
Holding (B.V.I.) Limited ("CTH"), which was owned as to 51% by Kiu Yin
Investment Co., Ltd, a company controlled by a discretionary trust
established for the benefit of the family of Clement Mak, the Company's
chairman and president, 25% by The People's Construction Bank of China -
Guangdong Branch, and 24% by The People's Government of Huiyang City, the
People's Republic of China.
In connection with the disposal of the Company's interest in the Sun City
Subsidiaries (see below), the entire interest in CPI was acquired by China
Pacific Investment Holding (B.V.I.) Limited ("CPIH"; a company incorporated
in the British Virgin Islands) from CTH. CPIH is owned as to 51% by Kiu Yin
Investment Co., Ltd., a company controlled by a discretionary trust
established for the benefit of the family of Clement Mak, the Company's
chairman and president, and 49% by The People's Construction Bank of China -
Guangdong Branch. As of December 31, 1995, CPIH, through CPI, owned
13,285,714 shares of common stock of the Company.
ACQUISITION OF SUBSIDIARIES
Under an agreement dated October 30, 1995, the Company acquired from China
Pacific Capital Limited, a wholly owned subsidiary of CTH which was an
indirect controlling shareholder of the Company, a 100% interest in China
Pacific Steel, Limited. ("CPS"; a company incorporated in the British
Virgin Islands and formerly known as Team Steel, Inc.) for consideration of
approximately $15.1 million, including $0.6 million in cash and $14.5 million
in the form of a non-interest bearing demand promissory note secured by the
stock of CPS.
F-6
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
ACQUISITION OF SUBSIDIARIES (Cont'd)
CPS entered into a joint venture agreement dated October 25, 1994 and
subsequent supplemental agreements with Chengdu Iron and Steel Plant
("CISP"), a state-owned enterprise incorporated in the People's Republic of
China ("PRC") directly under the Department of Metallurgy of Chengdu
Government, to incorporate a Sino-foreign joint venture enterprise in the
PRC, Chengdu Chengkang Iron and Steel Limited ("CCIS"). The principal
activities of CCIS are the manufacturing of iron, steel wires, reinforced
steel bars, and related iron and steel products, which were previously
undertaken by CISP. CCIS's manufacturing plant is located in Chengdu,
Sichuan, the PRC. It primarily sells to customers in the PRC. The joint
venture period is 50 years from 1994 to 2044.
Pursuant to the aforesaid agreements, CPS is required to contribute to CCIS
cash of approximately US$14.2 million (Rmb120 million determined at an
exchange rate of US$100 for Rmb852.96) as its capital contribution for a 60%
equity interest in CCIS, while CISP is required to contribute to CCIS part of
its production plant, including buildings and machinery and equipment with a
value of Rmb80 million as its capital contribution for a 40% equity interest
in CCIS. The aforesaid contributions of assets and operations were completed
before December 31, 1995. In connection with the formation of CCIS, CISP has
delivered a guarantee to CPS that the proforma net income after tax of CCIS
(as determined under generally accepted accounting principles in the United
States of America) would not be less than $11.5 million (equivalent of Rmb100
million) for the year ended December 31, 1995 and $17.2 million (equivalent
of Rmb150 million) for the year ended December 31, 1996. In the event that
CCIS's profits are below the guaranteed amounts, CISP shall reallocate a
portion of its interest in the profits of CCIS to CPS so as to cover any
shortfall with respect to CPS's share of the profits.
Pursuant to the aforesaid agreements, CISP has also agreed to lease to CCIS
certain buildings, machinery and equipment with an estimated valuation of
approximately $43.3 million (equivalent of Rmb360 million) at an annual rate
of 5% per annum based on the valuation of assets actually leased or the net
income of CCIS, whichever is lower, during the period from October 25, 1994
to March 31, 1996; at an annual rate of 6.5% based on the valuation of assets
actually leased during the period from April 1, 1996 to March 31, 1997; and
at an annual rental charge to be mutually agreed by both CPS and CISP
starting from April 1, 1997 onwards, which will be based on market rental and
will not exceed 8% based on the valuation of assets actually leased. In
addition, CPS has been given an option to participate in CCIS's future
business expansion plan in the form of additional capital or loan injections.
In connection with the transfer of operations, CCIS acquired certain
operating assets of CISP, including trade receivables and inventories, and
assumed certain operating liabilities of CISP outstanding as of July 1, 1995.
CCIS has been given an option to transfer the operating assets back to CISP
if the assets are not realised in cash by April 30, 1997.
F-7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
ACQUISITION OF SUBSIDIARIES (Cont'd)
The other key provisions of the joint venture agreement and subsequent
supplemental agreements include:
- - the profit and loss sharing ratio is the same as the percentage of equity
interest.
- - the Board of Directors of CCIS consists of ten members, with six designated
by CPS and four designated by CISP.
DISPOSAL OF SUBSIDIARIES
On December 29, 1995, China Pacific Construction (B.V.I.) Limited ("CPC";
formerly known as China Treasure Construction (B.V.I.) Limited), a 51% owned
subsidiary of the Company, entered into an agreement with Open View
Properties Limited ("OVP"), a company incorporated in the British Virgin
Islands, to sell to OVP its entire equity interest in and advances to three
wholly-owned subsidiaries, namely, China Treasure Property Management
Company, China Treasure Property Consultant Company Limited and China
Treasure Enterprise Limited (collectively referred to as the "Sun City
Subsidiaries"). As consideration, OVP delivered to CPC a three-year 8%
promissory note in the amount of $12.1 million (equivalent of HK$93.4
million). OVP is controlled by The People's Government of Huiyang City which,
until completion of this disposal, had an indirect interest in the Company
(see above). The Sun City Subsidiaries are engaged in the development of
residential and commercial properties in Sun City, Huiyang County, Guangdong
Province, the PRC ("Sun City").
In connection with the disposal of the Sun City Subsidiaries, the Company was
granted a five-year option expiring in December 2000 to develop and market 3
million square meters of land surrounding Sun City at a price of $12
(equivalent of Rmb100) per square meter, and another five-year option
expiring in December 2000 to repurchase the Company's interest in the Sun
City Subsidiaries for $4 million plus any amounts injected into the Sun City
Subsidiaries by OVP, and a 10% premium per annum on all such amounts. The
Group has deferred recognition of the gain of sales of the Sun City
Subsidiaries of approximately $738,000 (net of minority interests) until the
repurchase option expires.
The operating results of the Sun City Subsidiaries have been accounted for as
discontinued operations and prior years financial statements have been
restated accordingly. Revenue of the Sun City Subsidiaries for the years
ended December 31, 1995, 1994 and 1993 were $9,923,000, Nil and Nil,
respectively.
F-8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
RISK CONSIDERATIONS
The Group's concentration of credit risk with respect to trade receivables is
limited due to the large number of customers comprising the Group's customer
base. There were no customers who represented a significant concentration of
sales or trade accounts receivable as of December 31, 1995 and 1994. Ongoing
credit evaluations of each customer's financial condition are performed and,
generally, no collateral is required. The Group maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
As substantially all of the Group's operations are conducted in the PRC, the
Group is subject to special considerations and significant risks not typically
associated with investments in equity securities of North American and Western
European companies. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. These
are described further in the following paragraphs:
a. POLITICAL ENVIRONMENT
The operating subsidiaries' 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, inflationary
measures, currency conversion and remittance abroad, and rates and methods
of taxation, among other things. While the PRC's government is expected to
continue its economic reform policies, many of the reforms are new or
experimental and may be refined or changed. It is also possible that a
change in the PRC's leadership could lead to changes in economic policy.
b. ECONOMIC ENVIRONMENT
The economy of the PRC differs significantly from the economy in the United
States of America in many respects, including its structure, levels of
development and capital reinvestment, growth rate, government involvement,
resource allocation, self-sufficiency, rate of inflation and balance of
payments position. The adoption of economic reform policies since 1978 has
resulted in a gradual reduction in the role of state economic plans in the
allocation of resources, pricing and management of such assets, and
increased emphasis on the utilization of market forces, and rapid growth in
the PRC's economy. However, such growth has been uneven among various
regions of the country and among various sectors of the economy.
In recent years, the PRC's economy has experienced periods of rapid
economic expansion and high rates of inflation, which have led to the
adoption by the central government from time to time of various corrective
measures designed to regulate growth and contain inflation. High inflation
may cause the government to take other action which could inhibit economic
activity in the PRC and may thereby delay planned expansion. Such action
could adversely affect the Group's results of operations and expansion
plans.
F-9
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
RISK CONSIDERATIONS (Cont'd)
c. LEGAL ENVIRONMENT
The PRC's legal system is based on written statutes under which prior court
decisions may be cited as authority but do not have binding precedential
effect. The PRC's legal system is relatively new, and the government is
still in the process of developing a comprehensive system of laws, a
process that has been ongoing since 1979. Considerable progress has been
made in the promulgation of laws and regulations dealing with economic
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. Such legislation has significantly enhanced
the protection afforded to foreign investors. However, experience with
respect to the implementation, interpretation and enforcement of such laws
is limited.
d. FOREIGN CURRENCY EXCHANGE
The Group expects that substantially all of its revenues will be
denominated in Renminbi ("Rmb"). A portion of such revenues will need to
be converted into other currencies to meet foreign currency obligations
such as payment of any dividends declared. Both the conversion of Renminbi
into foreign currencies and the remittance of foreign currencies abroad
require PRC government approvals.
No assurance can be given that the operating subsidiaries within the Group
will continue to be able to convert sufficient amounts of foreign
currencies in the PRC's foreign exchange markets in the future for payment
of dividends.
2. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as the "Group") as of December 31, 1995 were as
follows:
<TABLE>
PLACE OF PERCENTAGE OF EQUITY
NAME INCORPORATION INTEREST HELD
- ---- ------------- --------------------
<S> <C> <C>
China Pacific Corporation Limited Hong Kong 100%
China Pacific Steel Limited The British Virgin Islands 100%
Chengdu Chengkang Iron
& Steel Limited (PRC) The People's Republic of China 60%
Chengdu Chengkang Iron
& Steel Limited (BVI) The British Virgin Islands 60%
</TABLE>
F-10
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All material intra-group balances and
transactions have been eliminated on consolidation. The Company's
investments in associated companies owned 20% to 50% are accounted for
using the equity method.
b. GOODWILL
Goodwill consists of the excess of cost over fair value of the net assets
of CCIS acquired. Goodwill is amortized on a straight-line basis over
forty years. The amortization recorded for 1995, 1994 and 1993 was
approximately $27,000, Nil and Nil, respectively. Accumulated amortization
as of December 31, 1995 and 1994 was approximately $27,000 and Nil,
respectively.
c. INVENTORIES
Inventories are stated at the lower of cost, on a first-in first-out basis,
or market value. Costs of work-in-progress and finished goods compose of
direct materials, direct labor and an attributable portion of production
overheads.
d. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Profits and losses on
dispositions are reflected in current operations. Depreciation for
financial reporting purpose is provided using the straight-line method over
the asset's estimated useful life after taking into account the estimated
residual value. The estimated useful lives are as follows:
Buildings 12-27 years
Machinery and equipment 5-12 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress represents buildings, machinery and equipment
under construction. This includes the costs of construction and interest
charges arising from borrowings used to finance these assets during the
period of construction. There was no interest capitalized for 1995, 1994
and 1993.
e. SALES
Sales represent the invoiced value of goods, net of valued added tax,
supplied to customers. Sales are recognized upon delivery of goods and
passage of title to customers.
F-11
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
f. INCOME TAXES
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Deferred income taxes are provided using the liability
method. Under the liability method, deferred income taxes are recognized
for all significant temporary differences between the tax and financial
statement bases of assets and liabilities. Income taxes are not accrued
for unremitted earnings of international operations that have been, or are
intended to be, reinvested indefinitely.
g. OPERATING LEASES
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the
lessors. Rental payments under operating leases are charged to expense on
a straight-line basis over the period of the relevant leases.
h. FOREIGN CURRENCY TRANSLATION
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.
Aggregate gains from foreign currency transactions included in the results
of operations were $33,000, $28,000 and $219,000 in 1995, 1994 and 1993,
respectively.
i. EARNINGS (LOSS) PER COMMON SHARE
The computation of primary earnings (loss) per share in each year is based
on the weighted average number of shares of common stock outstanding and
common stock equivalents arising from convertible debentures and
convertible preferred stock. Earnings (loss) per share assuming full
dilution is determined by dividing net income plus convertible debenture
interest (net of tax) by the weighted average number of shares of common
stock outstanding and common stock equivalents. The primary and fully
diluted earnings per share are the same for 1995, 1994 and 1993.
F-12
<PAGE>
4. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
1995 1994
------ -----
$'000 $'000
Trade receivables 17,303 1,781
Less: Allowance for doubtful accounts (150) -
------ -----
Accounts receivable, net 17,153 1,781
------ -----
------ -----
5. INVENTORIES
Inventories comprised:
1995 1994
------ -----
$'000 $'000
Raw materials 26,469 -
Work-in-progress 6,225 -
Finished goods 983 -
------ -----
33,677 -
Less: Allowance for obsolescence (954) -
------ -----
Inventories, net 32,723 -
------ -----
------ -----
6. INVESTMENT IN ASSOCIATED COMPANY
As of December 31, 1994, the Company had a 51% equity interest in China Pacific
Construction (B.V.I.) Limited ("CPC"; a company incorporated in the British
Virgin Islands and formerly known as China Treasure Construction (B.V.I.)
Limited). On December 29, 1995, following the disposal by CPC of its interest
in the Sun City Subsidiaries (see Note 1), CPC issued 240,000 additional
ordinary shares to a company controlled by The People's Government of Huiyang
City, which had an indirect interest in the Company. As a result, CPC has been
changed from a subsidiary (51% owned) to an associated company (50% owned).
F-13
<PAGE>
7. INVESTMENTS AND NOTES RECEIVABLE
Investments and notes receivable comprised:
1995 1994
------ -----
$'000 $'000
PRC Government debentures 763 -
Notes receivable 3,047 -
----- -----
3,810 -
----- -----
----- -----
The PRC Government debentures are issued by the Power Bureau of Qingbaijiang
District, Chengdu, Sichuan, the PRC and Chengdu Ministry of Finance. The
debentures are non-interest bearing and will mature from 1998 to 2002.
The notes receivable from OVP resulted in connection with the sale of the Sun
City Subsidiaries (see Note 1). The notes bear interest at 8% per annum and are
collateralized by the common stock of OVP and a corporate guarantee given by a
company controlled by The People's Government of Huiyang City, which had an
indirect interest in the Company.
8. DEFERRED VALUE ADDED TAX RECOVERABLE
The deferred value added tax ("VAT") recoverable arose from a change in the PRC
tax regulations effected January 1, 1994. Pursuant to the directive issued by
the PRC State Tax Bureau, such deferred VAT recoverable outstanding at January
1, 1995 can be used to offset output VAT payable over a period of five years.
The exact amount of annual utilization can vary between 15% and 20% of the
balance outstanding on January 1, 1995 as determined by the individual local tax
authorities. The amount utilized in 1995 was approximately $825,000.
F-14
<PAGE>
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
1995 1994
----- -----
$'000 $'000
Buildings 4,895 -
Machinery and equipment 4,718 -
Motor vehicles 225 530
Furniture, fixtures and
office equipment 101 346
Construction-in-progress:
Machinery and equipment 1,487 -
------ ----
11,426 876
Less: Accumulated depreciation (518) (295)
------ ----
10,908 581
------ ----
------ ----
As of December 31, 1995 and 1994, certain motor vehicles and office equipment
with a net book value of approximately $166,000 and $170,000, respectively were
held under finance leases. As of December 31, 1995 and 1994, the total amount
of obligations under these finance leases was approximately $118,000 and
$124,000, respectively, which was included in accrued liabilities in the
consolidated balance sheets.
10. SHORT-TERM BORROWINGS
Short-term borrowings comprised:
1995 1994
----- -----
$'000 $'000
Short-term loans from unrelated parties 481 6,930
Note 12,000 -
Short-term bank loans - 9,125
------ ------
12,481 16,055
------ ------
------ ------
As of December 31, 1995, short-term loans from unrelated third parties were
unsecured and non-interest bearing. As of December 31, 1994, short-term loans
from two unrelated parties were repayable in April 1995, and were collateralized
by certain of the Group's development properties as well as a corporate
guarantee given by an intermediate holding company. Interest on these loans was
charged at 10.98% to 20% per annum.
The outstanding note of approximately $12,000,000 is the balance of the demand
promissory note issued to CTH for the acquisition of CPS (see Note 1), which is
non-interest bearing and secured by the stock of CPS.
F-15
<PAGE>
11. LONG-TERM DEBT
Long-term debt comprised:
1995 1994
----- -----
$'000 $'000
10% convertible debentures due November 1997 800 -
Payable to CISP 7,326 -
Other long-term debt 6,636 9,633
------ -----
14,762 9,633
Less: Current maturities (3,783) -
------ -----
10,979 9,633
------ -----
------ -----
Aggregate maturities of long-term debts are as follows:
1995
-----
$'000
YEAR ENDING DECEMBER 31
1996 3,783
1997 2,226
1998 1,427
1999 -
2000 -
Thereafter 7,326
------
14,762
------
------
During 1995, the Company issued $800,000 of 10% convertible debentures due
November 1997. The debentures are convertible into the Company's common stock
at a conversion 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 which averaged to be approximately $4.68 or 80% of
the average closing market price of the Company's common stock for the three
days immediately preceding the conversion of the debentures.
The amount payable to CISP is unsecured and non-interest bearing.
As of December 31, 1995, other long-term debt included various loans from
unrelated third parties, which are unsecured, non-interest bearing and repayable
over a three-year period from 1996 to 1998. As of December 31, 1994, other
long-term debt represented loans from an intermediate holding company and the
ultimate holding company, which were unsecured and bore interest at rates
ranging from 8% to 9% per annum. Total interest paid to the intermediate
holding company and the ultimate holding company was approximately $1,114,000,
$802,000 and $558,000 for 1995, 1994 and 1993, respectively.
F-16
<PAGE>
12. CAPITAL STOCK AND WARRANTS
COMMON STOCK
In 1995, the Company issued 155,000 shares of common stock, par value $0.001
each, for approximately $433,000, at an average price of approximately $2.79
each.
SERIES A CONVERTIBLE PREFERRED STOCK
In 1995, the Company sold 5,905 shares of Series A convertible preferred stock,
par value $0.001 each, for $5,905,000. The subscription value of Series A
convertible preferred stock is convertible into common stock of the Company at a
conversion price equal to 70% 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. During the year, 3,655 shares of Series A preferred stock
were converted into 2,220,995 shares of common stock of the Company at an
average conversion price of $1.65 each.
SERIES B CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
In 1995, the Company sold 650 shares of Series B convertible and redeemable
preferred stock, par value $0.001 each, for $650,000. 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. During the year, no Series B convertible and redeemable
preferred stock was converted into common stock.
WARRANTS
During 1995, the Company issued 550,755 warrants to a third party for investment
banking services at a conversion basis of 1 warrant for 1 share of common stock
of the Company at an exercise price of $3.81 per share. The warrants will
expire in September 2000. Management believes that the exercise prices of the
warrants issued exceed the fair market value of the Company's common stock on
the date of issuance of the warrants.
OPTIONS
During 1995, the Company granted common stock options under an incentive plan to
purchase 500,000 shares of common stock at exercise prices ranging from $2.40 to
$4.00 to be exercised according to a pre-determined schedule from 1996 to 2000.
Management believes that the exercise prices of the options exceed the fair
market value of the Company's common stock on the date of grant.
F-17
<PAGE>
13. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they are
domiciled and operate. British Virgin Islands subsidiaries are not liable for
income taxes. The Hong Kong subsidiary (China Pacific Corporation Limited) is
subject to Hong Kong profits tax at a rate of 16.5%. The joint venture
enterprise established in the PRC (Chengdu Chengkang Iron & Steel Limited) is
subject to PRC income taxes at a rate of 33% (30% state unified income tax and
3% local income tax). However, CCIS is exempted from local income tax and state
unified income tax for two years starting from the first year of profitable
operations and then is subject to a 50% reduction in state unified income tax
for the next three years. CCIS recognized its first year of profitable
operations in 1995.
The reconciliation of the United States federal income tax rate to the effective
income tax rate based on income (loss) from continuing operations before income
taxes stated in the consolidated statements of operations is as follows:
1995 1994 1993
----- ----- -----
$'000 $'000 $'000
United States federal income tax rate 35% 35% 35%
Aggregate effect of different tax rates
in foreign jurisdictions (5%) - -
Effect of tax exemption for CCIS (28%) - -
Tax losses for foreign subsidiary
income that is not subject to income
taxes - (35%) (35%)
----- ----- -----
Effective income tax rate 2% 0% 0%
----- ----- -----
----- ----- -----
The company does not provide for federal income taxes or tax benefits on the
undistributed earnings and/or losses of its international subsidiaries because
earnings are reinvested and, in the opinion of management, will continue to be
reinvested indefinitely.
14. DISTRIBUTION OF PROFIT
At present, substantially all of the Group's income is contributed by its 60%
owned joint venture enterprise in the PRC - Chengdu Chengkang Iron and Steel
Limited ("CCIS").
F-18
<PAGE>
14. DISTRIBUTION OF PROFIT (Cont'd)
Income of CCIS as determined under generally accepted accounting principles in
the PRC are distributable to investors after transfer to contributory dedicated
capital as required under PRC government regulations and the company's articles
of association, and discretionary dedicated capital as determined by the
company's board of directors. Contributory dedicated capital is a form of legal
reserve fund. Discretionary dedicated capital includes a general reserve fund,
an enterprise expansion fund and a staff welfare and employee incentive bonus
fund. Contributory and discretionery dedicated capital are not distributable in
the form of dividends. In the consolidated statements of operations prepared
under generally accepted accounting principles in the United States of America,
amounts designated for payments of staff welfare and employee incentive bonus
have been charged to income and the related provisions are reflected as accrued
liabilities in the consolidated balance sheets.
The income of CCIS on which dividend declaration based is determined according
to the income reported in its statutory accounts prepared under accounting
principles generally accepted in the PRC. This differs from the amount reported
under accounting principles generally accepted in the United States of America.
As of December 31, 1995, such differences were insignificant. It is anticipated
that such differences will not be significant in the future in view of the
recent changes in the PRC accounting standards.
15. COMMITMENTS
The Group has agreed to lease from CISP certain operating assets (see Note 1).
In addition, the Group has various other operating lease agreements for offices
and factory premises which extend through June 2045. Rental expenses for the
years ended December 31, 1995, 1994 and 1993 were approximately $1,589,000,
$411,000 and $171,000, respectively. Most leases contain renewal options.
Future minimum rental payments as of December 31, 1995, under agreements
classified as operating leases with non-cancellable terms in excess of one year,
are as follows:
1995
-----
$'000
1996 3,283
1997 1,336
1998 572
1999 501
2000 501
Thereafter 27,301
------
33,494
------
------
F-19
<PAGE>
16. RELATED PARTY TRANSATIONS
The Group entered into the following transactions with related parties:
1995 1994 1993
----- ----- -----
$'000 $'000 $'000
Sales to companies relating to CISP 13,736 - -
Purchases from companies relating to CISP 1,827 - -
Rental expenses paid/payable to CISP
in respect of lease of buildings,
machinery and equipment 1,408 - -
Service fee income from OVP 1,379 - -
Interest expenses paid to ultimate/
intermediate holding company 1,114 802 558
Less: Capitalised in the cost of
development properties (943) (802) (558)
------ ---- ----
171 - -
Accounts receivable from companies
relating to CISP 3,650 - -
Accounts payable to companies relating
to CISP 609 - -
Deposits received from companies
relating to CISP 1,459 - -
All outstanding balances with related companies are unsecured, non-interest
bearing and without pre-determined repayment terms.
17. RETIREMENT PLAN
As stipulated by the regulations in the PRC, CCIS has maintained a defined
contribution retirement plan for all its employees. All employees of CCIS are
entitled to an annual pension equal to their basic annual salary at retirement.
CCIS pays to a PRC insurance company 14.6% of the basic salary of its employees,
and the insurance company is responsible for the entire pension obligations
payable to retired employees.
F-20
<PAGE>
18. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of
operations:
1995 1994 1993
----- ----- -----
$'000 $'000 $'000
Interest expense 171 17 17
Operating lease rentals for
- rented premises 181 411 171
- machinery and equipment 1,408 - -
Interest income 3 26 24
Net foreign exchange gain 33 28 219
----- --- ---
----- --- ---
19. SUBSEQUENT EVENTS
After December 31, 1995, the following subsequent events took place:
a. 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 1,378,719 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
1,114,253 shares of such common stock have exercised their rights which
entitle them for the issue of 738,463 additional shares of common stock.
b. 2,250 shares of Series A convertible preferred stock were converted
into 2,236,666 shares of common stock of the Company at an average
conversion price of $1.01 each.
c. The Company sold 1,030 shares of Series B convertible and redeemable
preferred stock, par value of $0.001 each, for $1,030,000. In addition,
1,680 shares of Series B convertible and redeemable preferred stock have
been submitted for conversion into 2,185,723 shares of common stock of the
Company at an average conversion price of $0.77 each.
F-21
<PAGE>
19. SUBSEQUENT EVENT (Cont'd)
d. 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 carrys 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, 4,876 shares of Series C
convertible and redeemable preferred stock have been submitted for
conversion into 6,491,815 shares of common stock of the Company at an
average conversion price of $0.75 each.
e. The costs of the above-mentioned common and preferred stock sales were
approximately $1,202,000.
F-22
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1995 has been prepared to give effect to the acquisition
of China Pacific Steel, Inc. ("CPS") and the commencement of operations of
its 60%-owned Chengdu Chengkang Iron and Steel Limited ("CCIS") had occurred
on January 1, 1995. It is based upon the statement of operations of Chengdu
Iron and Steel Plant ("CISP"), the predecessor of CCIS for the
pre-acquisition period, after giving effect to the pro forma adjustments
described in the notes thereto.
The unaudited pro forma consolidated statement of operations does not purport
to represent what the results of operations of the Group would actually have
been if the events described above had in fact occurred on January 1, 1995,
or to project the results of operations of the Group for any future period.
F-23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts expressed in United States dollars)
<TABLE>
PRE-ACQUISITION PERIOD
POST- -------------------------------------
ACQUISITION PRO FORMA
PERIOD AS REPORTED ADJUSTMENTS PRO FORMA PRO FORMA
----------- ----------- ----------- --------- ---------
$'000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C>
Net sales 53,139 55,741 55,741 108,880
Cost of goods sold (41,023) (47,902) (a) 917 (48,130) (89,153)
(b) (1,407)
(c) 262
------ ------ ------ ------
Gross profit 12,116 7,839 7,611 19,727
Selling, general and
administrative expenses (3,753) (5,898) (d) 3,250 (2,920) (6,673)
(e) (245)
(i) (27)
Interest expense, net (167) (1,541) (f) 1,541 - (167)
Other income (expenses), net 1,388 (82) (d) 86 (20) 1,368
(g) (24)
------ ------ ------ ------
Income from continuing
operations before income
taxes 9,584 318 4,671 14,255
Provision for income taxes (228) (41) (h) 41 - (228)
------ ------ ------ ------
Income from continuing
operations 9,356 277 4,671 14,027
Discontinued operations:
Income from operations of the
discontinued Sun City
Subsidiaries 1,654 - - 1,654
------ ------ ------ ------
Income before minority
interests 11,010 277 4,671 15,681
Minority interests (4,942) (110) (j) (1,758) (1,868) (6,810)
------ ------ ------ ------
Net income 6,068 167 2,803 8,871
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The accompanying notes are an integral
part of this unaudited pro forma statement.
F-24
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
The descriptions of pro forma adjustments to the financial information of
CISP during the pre-acquisition period are as follows:
a. To adjust for reduction in depreciation expenses as certain property, plant
and equipment have not been injected into but have been leased to CCIS (see
also adjustment (b) below).
b. To record operating lease rentals payable in respect of property, plant and
equipment leased to CCIS (see also adjustment (a) above).
c. To adjust for reversal of staff welfare fund previously recorded by CISP.
d. To adjust for reduction in general and administrative expenses in respect
of activities/operations that have not been assumed by CCIS.
e. To provide for the staff welfare fund according to the joint venture
agreement.
f. To adjust for reduction in interest expenses as certain loans of CISP were
not assumed by CCIS.
g. To adjust for reduction in investment income as certain investments of CISP
were not acquired by CCIS.
h. To adjust for reversal of income tax of CISP as CCIS is exempted from
income tax for two years starting from the first year of profitable
operations and then is subject to a 50% reduction in income tax for the
next three years.
i. To record provision for amortization of goodwill resulting from the
acquisition of CCIS.
j. To provide for aggregate effect on minority interests for the above
proforma adjustments.
F-25
