<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________ .
COMMISSION FILE NO. 0-26232
CHINA PACIFIC, INC.
-------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 87-0429945
- --------------------------------- -------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
RM. 2008 SUN HUNG KAI CENTRE, 30 HARBOUR ROAD
WANCHAI, HONG KONG
------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(852) 2802 3068
---------------
(ISSUER TELEPHONE NUMBER)
--------------------------------------------------------------------
(Former Name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No
----- -----
As of October 31, 1997, 9,039,645 shares of Common Stock of the issuer
were outstanding.
<PAGE>
CHINA PACIFIC, INC.
INDEX
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION.................................... 1
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996........................................ 1
Consolidated Statements of Operations - For the nine
months ended September 30, 1997 and 1996................. 2
Consolidated Statements of Operations - For the three
months ended September 30, 1997 and 1996................. 3
Consolidated Statements of Cash Flows - For the nine
months ended September 30, 1997 and 1996................. 4
Notes to Condensed Consolidated Financial Statements..... 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10-11
PART II - OTHER INFORMATION....................................... 12
Item 1. Legal Proceedings...................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.... 12
Item 6. Exhibits and Reports on Form 8-K....................... 12
SIGNATURES........................................................ 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS AT SEPTEMBER 30, 1997
(AMOUNTS EXPRESSED IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
RMB USD RMB USD
ASSETS
Current assets:
Cash 31,810 3,837 61,296 7,394
Accounts receivable, net 151,346 18,256 112,006 13,511
Due from related companies 7,783 939 2,031 245
Due from CISP, current portion 35,395 4,270 12,999 1,568
Prepayments, deposits, and other
current assets 43,887 5,294 48,264 5,822
Inventories, net 324,888 39,190 316,919 38,229
--------- -------- --------- --------
Total current assets 595,109 71,786 553,515 66,769
Investment Properties 75,333 9,087 - -
Due from CISP, long-term portion 126,947 15,313 38,192 4,607
Investment in an associated company 66,225 7,989 58,992 7,116
Investments and notes receivable 30,494 3,678 30,789 3,714
Deferred value added tax recoverable 23,766 2,867 35,050 4,228
Property, plant and equipment, net 206,318 24,888 214,222 25,841
Construction in progress - - - -
Goodwill, net 16,734 2,019 17,061 2,058
--------- -------- --------- --------
Total assets 1,140,926 137,627 947,821 114,333
--------- -------- --------- --------
--------- -------- --------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 16,003 1,930 49,715 5,997
Long-term debt, current portion 668 81 10,603 1,279
Accounts payable 120,369 14,520 164,159 19,802
Deposits from customers 136,586 16,476 132,798 16,019
Accrued liabilities 144,592 17,442 103,882 12,531
Value added tax payable 42,713 5,152 22,449 2,708
Due to related companies 5,793 699 9,368 1,130
--------- -------- --------- --------
Total current liabilities 466,724 56,300 492,974 59,466
Long-term debt 42,660 5,146 - -
--------- -------- --------- --------
Total liabilities 509,384 61,446 492,974 59,466
--------- -------- --------- --------
Minority interests 171,372 20,672 147,454 17,787
--------- -------- --------- --------
Shareholders' equity:
Preferred stock, par value $0.001 - - - -
Series A convertible - - - -
Series B convertible and redeemable - - - -
Common stock, par value $0.001 75 9 75 9
Treasury stock, 27,500 shares (1,420) (171) (1,420) (171)
Additional paid-in capital 181,651 21,912 189,418 22,849
7% Convertible Debenture - - - -
9% Debenture Notes 124,290 14,993 - -
Dedicated capital 32,592 3,931 23,245 2,804
Retained earnings 118,726 14,322 92,235 11,126
Cumulative translation adjustments 4,256 513 3,840 463
--------- -------- --------- --------
Total shareholders' equity 460,170 55,509 307,393 37,080
--------- -------- --------- --------
Total liabilities, minority
interests and shareholders'
equity 1,140,926 137,627 947,821 114,333
--------- -------- --------- --------
--------- -------- --------- --------
See accompanying notes to condensed consolidated financial statements
Pg. 1
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JAN-SEPT 1997 JAN-SEPT 1996
-------------------- -------------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
Net sales 757,627 91,390 719,605 86,804
Cost of goods sold (656,046) (79,137) (617,340) (74,468)
--------- --------- --------- ---------
Gross profit 101,581 12,253 102,265 12,336
Selling, general and administrative
expenses (48,312) (5,828) (45,603) (5,501)
Interest income/(expenses), net (4,966) (599) 1,675 202
Other income, net 8,751 1,056 29,670 3,579
Share of income of an associated company 7,236 873 7,444 898
--------- --------- --------- ---------
Income before income taxes 64,290 7,755 95,451 11,514
Provision for income taxes (4,533) (547) - -
--------- --------- --------- ---------
Income before minority interests 59,757 7,208 95,451 11,514
Minority interests (23,918) (2,885) (28,617) (3,452)
--------- --------- --------- ---------
Net income 35,839 4,323 66,834 8,062
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary earnings per common share:
Net income 3.96 0.48 7.71 0.93
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares
outstanding 9,039,645 9,039,645 8,673,156 8,673,156
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully dilutive earnings per common share 3.2 0.39
--------- ---------
--------- ---------
Weighted average number of shares
outstanding used in fully dilutive
calculation 13,680,889 13,680,889
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
Pg. 2
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JULY-SEPTEMBER 1997 JULY-SEPTEMBER 1996
-------------------- ---------------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
Net sales 260,103 31,375 262,254 31,635
Cost of goods sold (224,065) (27,028) (227,055) (27,389)
---------- ---------- --------- ---------
Gross profit 36,038 4,347 35,199 4,246
Selling, general and administrative
expenses (20,627) (2,488) (15,104) (1,822)
Interest income/(expenses), net (1,879) (227) 381 46
Other income, net 5,728 691 8,079 975
Share of income of an associated company 2,552 308 5,115 617
---------- ---------- --------- ---------
Income before income taxes 21,812 2,631 33,670 4,062
Provision for income taxes (4,118) (497) - -
---------- ---------- --------- ---------
Income before minority interests 17,694 2,134 33,670 4,062
Minority interests (6,486) (782) (10,139) (1,223)
---------- ---------- --------- ---------
Net income 11,208 1,352 23,531 2,839
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Primary earnings per common share:
Net income 1.24 0.15 2.61 0.32
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Weighted average number of shares
outstanding 9,039,645 9,039,645 8,998,901 8,998,901
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Fully dilutive earnings per common share 1.02 0.12
---------- ----------
---------- ----------
Weighted average number of shares
outstanding used in fully dilutive
calculation 13,680,889 13,680,889
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
Pg. 3
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(AMOUNTS EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------------------- -----------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
Cash flows from operating activities :
Net income 35,839 4,323 43,307 5,224
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Equity gain on CPC (7,237) (873) (7,444) (898)
Amortization of goodwill 330 40 1,824 220
Amortization of depreciation 8,249 995 3,150 380
Loss on disposals of fixed assets 132 16 274 33
Profit on disposals of investment properties (12,346) (1,489) - -
Minority interests 23,918 2,885 18,478 2,229
Effect of cumulative translation adjustment 415 50 (3,225) (389)
(Increase) Decrease in operating assets
Accounts receivable, (39,342) (4,746) 3,590 433
Inventories, net (7,969) (961) (17,028) (2,054)
Prepayments and other current assets (5,620) (678) (3,067) (370)
Increase (Decrease) in operating liabilities:
Accounts payable, net (113,610)(13,704) (35,000) (4,222)
Accrued liabilities 10,710 1,292 2,271 274
Deposit from customers 3,788 457 2,984 360
Taxation 31,552 3,806 5,820 702
-------- ------- ------- -------
Net cash provided by (used in) operating activities (71,191) (8,587) 15,934 1,922
-------- ------- ------- -------
Cash flows from investing activities:
Acquisition of investments and notes receivable - - (5,745) (693)
Acquisition of fixed assets (3,163) (382) (3,648) (440)
Acquisition of investment properties, net (179,827)(21,692) - -
Proceeds from disposals of fixed assets 2,685 324
Proceeds from disposals of investment properties 116,840 14,094 - -
Acquisition of construction progress - - (52,061) (6,280)
-------- ------- ------- -------
Net cash provided by (used in) investing activities (63,465) (7,656) (61,454) (7,413)
-------- ------- ------- -------
Cash flows from financing activities:
Decrease in short-term borrowings (33,712) (4,067) (58,038) (7,001)
(Decrease) increase in obligations under
lease purchase contracts (181) (22) 142 17
Other long-term liabilities 33,018 3,983 (27,805) (3,354)
Due from related companies and holding company (6,903) (833) (25) (3)
Due to related companies and holding company (3,575) (431) (5,687) (686)
Increase in additional paid-in capital (7,767) (937) (4,676) (564)
Proceeds from issue of Convertible note 124,290 14,993 - -
Increase in Treasury stock - - (1,418) (171)
Proceeds from issuance of stock - - 94,804 11,436
-------- ------- ------- -------
Net cash provided by (used in) financing
activities 105,170 12,686 (2,703) (326)
-------- ------- ------- -------
Net increase (decrease) in cash (29,486) (3,557) (48,223) (5,817)
Cash at beginning of period 61,296 7,394 121,788 14,691
-------- ------- ------- -------
Cash at end of period 31,810 3,837 (73,565) 8,874
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements
Pg. 4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. The December 31, 1996
balance sheet data was derived from audited financial statements
but does not include all disclosures required by generally accepted
accounting principles. The interim financial statements and notes
thereto should be read in conjunction with the financial statements
and notes included in the Company's Form 10-KSB dated December 31,
1996. In the opinion of management, the interim financial
statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for the interim
periods presented.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
The Company financial information is presented in Reminbi
(RMB). The translation of the financial statements of foreign
subsidiaries into U.S. dollars (USD) is performed for balance sheet
accounts using closing exchange rates in effect at the balance
sheet date and for revenue and expense accounts using an average
exchange rate during each reporting period. The gains or losses
resulting from translation are included in shareholders' equity
separately as cumulative translation adjustments.
3. BUSINESS AND ORGANIZATION
Effective July 1, 1995, the Company acquired a 60% interest in
Chengdu Chengkang Iron and Steel Company Limited ("Chengdu Steel"),
a sino-foreign joint venture engaged in the manufacturing of iron
and steel products in the People's Republic of China.
Effective December 29, 1995, the Company's then 51% owned
subsidiary, China Pacific Construction (B.V.I.) Limited (formerly
known as China Treasure Construction (B.V.I.) Limited), disposed of
its entire equity interest in the Sun City development.
4. INVENTORIES
Inventories comprised: September 30, 1997
------------------------------
RMB'000 USD'000
Raw materials 251,546 30,343
Work-in-process 68,813 8,301
Finished goods 4,529 546
------- -------
324,888 39,190
------- -------
------- -------
Inventories are stated at the lower of cost, on a first-in
first-out basis, or market value. Costs of work-in-process and
finished goods are composed of direct materials, direct labor and
an attributable portion of production overheads.
Pg. 5
<PAGE>
5. INVESTMENT PROPERTIES
As of September 30, 1997, the Company held two residential
properties in Hong Kong which were acquired during the third
quarter of 1997, with a carrying value of RMB75.3 million. During
the nine months ended September 30, 1997, the Company disposed of
two residential properties in Hong Kong for an aggregate
consideration of approximately RMB116.8 million, which the Company
acquired during the first quarter of 1997 for an aggregate
consideration of approximately RMB104.5 million.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised of:
September 30, 1997
----------------------
RMB'000 USD'000
Buildings 184,523 22,259
Machinery and equipment 39,455 4,759
Motor Vehicles 3,621 437
Furniture and office equipment 1,354 163
-------- -------
228,953 27,618
Less: Accumulated depreciation (22,635) ( 2,730)
-------- -------
206,318 24,888
-------- -------
-------- -------
7. GOODWILL
Goodwill, being the excess of cost over fair value of the net
assets of CPS and CCIS acquired, is amortized on a straight-line
basis over forty years. The amortization recorded for 1996 and
period ended September 30, 1997 was approximately RMB439,370.00 and
RMB330,000.00, respectively. Accumulated amortization as of
December 31, 1996 and September 30, 1997 was approximately
RMB671,490.00 and RMB996,000.00. At each balance sheet date, the
Company evaluates the realizability of goodwill based on
expectations of non-discounted cash flows and operating income for
CPS/CCIS having a material goodwill balance. Based on its most
recent analysis, the Company believes that no material impairment
of goodwill exists at September 30, 1997.
8. TAXATION
During the nine months ended September 30, 1997, the Company
made a provision for taxation from the gain on the disposals of two
investment properties in Hong Kong which amounted to RMB1.2
million. The provision for taxation of income from the Chengdu
Steel joint venture enterprise established in the PRC amounted to
RMB3.3 million, which is being calculated on the basis of profit
arising from the operation of the PRC's joint venture from June 30,
1997 to September 30, 1997.
Pg. 6
<PAGE>
9. SHAREHOLDERS' EQUITY
ISSUANCE OF 9% CONVERTIBLE NOTES
During the nine months ended September 30, 1997, the Company
offered Convertible Notes to non-US Investors pursuant to the
provisions of Regulation S under the U.S. Securities Act of 1933.
Pursuant to such offering, the Company sold USD15 million
(equivalent to RMB124.35 million) of 9% Convertible Notes for net
consideration of USD13.95 million (equivalent to RMB115.65 million)
10% CONVERTIBLE DEBENTURE
During the nine months ended September 30, 1997, USD200,000.00
(equivalent to RMB1.66 million) of 10% Convertible Debentures due
on November 1997, together with approximately USD26,205.44 of the
related accrued interest, were converted into 83,261 shares of
common stock of the Company at an average conversion price of
approximately USD2.7168 each. No 10% Convertible Debentures are
outstanding.
TREASURY STOCK
During May 1996, the Company acquired 27,500 shares of its
common stock in the open market for aggregate consideration of
USD171,000.00 (equivalent to RMB1.42 million) representing an
average price of USD6.20.
WARRANTS
In 1995, the Company issued 550,755 warrants to a third party
for investment banking services on a conversion basis of 4 warrants
for 1 share of common stock of the Company at an exercise price of
USD15.24 per share (after adjusting for the one-for-four reverse
stock split). The warrants will expire in September 2000. No
warrants have been exercised.
During the nine months ended September 30, 1997, the placement
agent for the sale of the 9% Convertible Notes described above was
granted a five year warrant exercisable to acquire up to 300,000
shares of the Company's common stock at a price of USD4.00 per
share. Up to the balance sheet date, the warrant has not been
exercised.
OPTIONS
In 1995, the Company granted common stock options under an
incentive plan to purchase 125,000 shares of common stock at
exercise prices ranging from USD9.60 to USD16.00 (after adjusting
for the one-for-four reverse stock split) to be exercised according
to a pre-determined schedule from 1996 to 2000. No options were
exercised in 1996 or during the first quarter of 1997.
REVERSE STOCK SPLIT
The Company declared a 1-for-4 reverse stock split effective
July 9, 1996. All information herein relating to shares issued or
outstanding, including information in the footnotes, reflects the
effect of such reverse stock split.
Pg. 7
<PAGE>
10. OTHER INCOME - MINIMUM PROFIT GUARANTEES
In 1996, pursuant to the terms governing the formation of
Chengdu Steel and the Company's acquisition of a 60% interest in
Chengdu Steel, Chengdu Iron and Steel Plant guaranteed a minimum
after tax profit to Chengdu Steel of RMB150 million (approximately
equivalent to USD18 million).
During 1996, the Company estimated annual after tax profits of
Chengdu Steel periodically in order to determine whether payments
will be due to China Pacific Steel Limited, the Company's
wholly-owned subsidiary and 60% owner of Chengdu Steel, pursuant to
such profit guarantee. Based on earnings in the nine months ended
September 30, 1996, the estimated short-fall in after tax profits
of Chengdu Steel during the 1st, 2nd and 3rd quarters 1996 resulted
in a payment to China Pacific Steel Limited of USD3,400,000
pursuant to the estimated payments under such guarantee. Such
estimated guarantee payments are recorded as other income and will
be adjusted periodically to reflect actual results of Chengdu Steel.
During the period ended September 30, 1997, no guarantee
payments were applicable because no such guarantee payments are to
be made after December 31, 1996.
11. EARNINGS PER SHARE
Earnings per share is calculated for each period and the shares
outstanding have been adjusted to give retroactive effect to the
1-for-4 reverse stock split which became effective July 9, 1996.
12. OUTSTANDING LITIGATION
On or about March 5, 1997, a brokerage firm filed a civil
action against the Company in the United States District Court,
Southern District of New York. The complaint alleges breach of
contract by the Company in connection with a Selling Agreement
allegedly entered into between the Company and the brokerage firm,
and involves securities of the Company that were sold in private
placements in 1995 and 1996. The brokerage firm is seeking monetary
damages and expenses in excess of USD5 million, and an order
compelling the Company to issue warrants to subscribe to 1,141,729
shares of common stock (after considering the one-for-four reverse
stock split) under the terms of the alleged Selling Agreement. The
Company believes this claim is without merit and plans to contest
such claim vigorously. However, the Company is unable to predict
the outcome of this dispute and if the outcome is adverse to the
Company, the Company's financial position and operating results
could be adversely affected. No provision has been recorded in the
financial statements in connection with the aforesaid claims.
Subsequent to the period, the Company filed an answer to the
Complaint and a counterclaim for breach of contract and
misappropriation of property against the brokerage firm, seeking
damages of not less than USD0.5 million (equivalent to RMB4.15
million). In addition, the Company also filed a third-party
complaint against the Company's former counsel for fraud,
fraud-concealment, breach of fiduciary duty, professional
malpractice and misappropriation of property, seeking compensatory
damages of not less than USD5 million (equivalent to RMB41.5
million) and punitive damages of not less than USD1.5 million
(equivalent to RMB12.44 million).
Pg. 8
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common stock Treasury Retained
-------------------- --------------------- Additional earnings Cumulative
Number of Number of paid-in Dedicated (Accumulated translation
shares Amount shares Amount capital capital Deficit) adjustments
--------- -------- --------- -------- --------- --------- ------------ ------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 8,956,384 75 (27,500) (1,420) 189,418 23,245 92,235 3,840
Net income -- -- -- -- -- -- 35,839 --
Issuance of 10% debenture Notes 83,261 -- -- -- (7,767) -- -- --
Transfer to dedicated capital -- -- -- -- -- 9,347 (9,347) --
Translation adjustments -- -- -- -- -- -- (1) 416
--------- -------- --------- -------- --------- --------- ------------ ------------
Balance as of September 30, 1997 9,039,645 75 (27,500) (1,420) (181,651) 32,592 118,726 4,256
--------- -------- --------- -------- --------- --------- ------------ ------------
--------- -------- --------- -------- --------- --------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Pg. 9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
MATERIAL CHANGES AND RESULTS OF OPERATIONS
Net sales during the nine months ended September 30, 1997 totaled USD91.4
million compared to net sales of USD86.8 million during the nine months ended
September 30,1996. The increase of 5.3% in net sales was attributable to an
improvement in production capacity as compared with the second and third
quarters of 1996.
Cost of goods sold during the nine months ended September 30,1997 totaled
USD79.1 million as compared to USD74.5 million during the nine months ended
September 30, 1996. The increase in cost of goods sold was attributable to (1)
the increase in production volume as a result of the commencement of operations
of the new blast furnace and (2) the increase in direct materials costs as a
result of inflation in 1997 as compared with the nine months ended September 30,
1996.
Gross profits decreased by 0.8% from USD12.33 million (14.2% of net sales)
during the period ended September 30, 1996 to USD12.25 million (13.4% of net
sales) during 1997. The slight decrease in profit margin during the period was
due to the factory now undergoing heavy maintenance of the No. 1 blast furnace,
but was partly relieved by the implementation of a cost reduction program,
despite the increase of direct material costs mentioned above, and also by the
improvement of efficiency and capacity of steel production upon the completion
of the new No. 3 blast furnace and the No. 1 continuous casting machine.
Selling, general and administrative expenses ("SG&A") during the nine months
ended September 30, 1997 totaled USD5.8 million, as compared to USD5.5 million
during the nine months ended September 30, 1996. The increase in SG&A resulted
from general inflation in the first nine months of 1997.
Interest Expenses, net, during the nine months ended September 30, 1997
totaled USD599,000, as compared to interest income of USD202,000 during the nine
months ended September 30, 1996. The current period interest expenses, net, were
attributable to (1) USD907,500 in interest payable on the 9% convertible note
due January 15, 1999, (2) promissory note interest receivable of USD259,500, and
(3) bank interest received of USD49,000.
Other income, net, during the nine months ended September 30, 1997 totaled
USD1,056,000. The Company reported USD3.6 million of other income, net, during
the nine months ended September 30, 1996. Other income represents (i) the net
gain from disposal of investment property located in Hong Kong of USD753,000,
and (ii) the Company's allocable share of profits of USD873,000 in 1997 from
China Pacific Construction (B.V.I.) Limited. Other income for the last period
was attributable to (1) estimated compensation of USD3.4 million payable to the
Company's subsidiary, China Pacific Steel Limited, based on estimated 1996
earnings of Chengdu Steel, pursuant to a letter of guarantee from Chengdu Iron
and Steel Plant ("CISP") to China Pacific Steel Limited whereby CISP guaranteed
after tax profits of Chengdu Steel of not less than RMB150 million
(approximately USD18 million) during 1996 and (2) the Company's allocable share
of profits of USD898,000 in 1996 from China Pacific Construction (B.V.I.)
Limited following the sale of the Company's interest in Sun City and the
reduction in the Company's ownership interest in China Pacific Construction to
50%.
Minority interest represents the allocable share of income or loss
attributable to the 40% share of Chengdu Steel not owned by the Company during
the first nine months of 1996 and 1997.
Net income during the quarter ended September 30, 1997 totaled USD4.3
million as compared to USD8.1 million during the first nine months of 1996.
Pg. 10
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had working capital of USD15.5 million
and a cash balance of USD3.8 million, as compared to a working capital
balance of USD7.3 million and a cash balance of USD7.4 million at December 31
1996. The change in cash and working capital was attributable to a
combination of (i) cash flows from profitable operations, (ii) the receipt of
USD13.95 million (equivalent to RMB115.65 million) of net proceeds from the
sale of 9% convertible notes during 1997, (iii) the acquisition of various
fixed assets and inventories, (iv) up to September 30, 1997, the acquisition
of four residential properties in Hong Kong for investment purposes, for an
aggregate consideration of approximately USD21.7 million (equivalent to
RMB180 million) and subsequent disposal of two of the above properties at a
consideration of USD14.1 million (equivalent to RMB116.8 million), and (v)
other expenditures .
At September 30, 1997, the primary obligations of the Company consisted
of (i) USD5.2 million in mortgage loans for financing the Company's two new
investment properties acquired during the third quarter of 1997, and (ii) 9%
convertible notes in the amount of USD15 million.
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.
Pg. 11
<PAGE>
PART II . OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On or about March 5, 1997, a brokerage firm filed a civil
action against the Company in the United States District Court,
Southern District of New York. The complaint alleges breach of
contract by the Company in connection with a Selling Agreement
allegedly entered into between the Company and the brokerage firm,
and involves securities of the Company that were sold in private
placements in 1995 and 1996. The brokerage firm is seeking monetary
damages and expenses in excess of USD5 million, and an order
compelling the Company to issue warrants to subscribe to 1,141,729
shares of common stock (after considering the one-for-four reverse
stock split) under the terms of the alleged Selling Agreement.
However, the Company is unable to predict the outcome of this
dispute, and if the outcome is adverse to the Company, the
Company's financial position and operating results could be
adversely affected. No provision has been recorded in the financial
statements in connection with the aforesaid claims.
On May 1, 1997 the Company filed an answer to the complaint
and a counterclaim for breach of contract and misappropriation of
property against the brokerage firm, seeking damages of not less
than USD0.5 million. In addition, the Company has also filed a
third-party complaint against the Company's former counsel for
fraud, fraud-concealment, breach of fiduciary duty, professional
malpractice and misappropriation of property, seeking compensatory
damages of not less than USD5 million and punitive damages of not
less than USD1.5 million.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On July 16, 1997, an Annual Meeting of Shareholders of China
Pacific, Inc. was held.
(b) Not Applicable.
(c) The following directors were elected (by the votes indicated)
at such meeting: Clement Mak Shiu Tong (8,367,140 For, O Against,
110,687 Abstentions or Broker Non-Votes), Cheng Yuk Ching
(8,365,065 For, O Against, 112,762 Abstentions or Broker
Non-Votes), Thomas Tong Ling Tin (8,364,365 For, 0 Against, 113,462
Abstentions or Broker Non-Votes), Kwan Pak Hoo (8,367,465 For, 0
Against, 110,362 Abstentions or Broker Non-Votes), Tan Jian Sheng
(8,367,465 For, 0 Against, 110,362 Abstentions or Broker
Non-Votes), Zhang Guo Liang (8,364,765 For, 0 Against, 113,562
Abstentions or Broker Non-Votes), and Zhang Xin Min (8,365,015 For,
0 Against, 112,812 Abstentions or Broker Non-Votes).
In addition to the election of directors as noted above, the following
matters were voted upon at such meeting:
(i) Ratification of appointment of Arthur Andersen & Co. SC as the
Company's independent auditor (8,449,113 For, 20,682 Against,
8,032 Abstentions and Broker Non-Votes).
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
Pg. 12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA PACIFIC, INC.
/s/ Clement Mak Shiu Tong
Date: -------------------------------------
Clement Mak Shiu Tong, President and
Chief Executive Officer
/s/ Thomas Tong
Date: -------------------------------------
Thomas Tong, Treasurer and Chief
Financial Officer
Pg. 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,837
<SECURITIES> 0
<RECEIVABLES> 18,256
<ALLOWANCES> 0
<INVENTORY> 39,190
<CURRENT-ASSETS> 71,786
<PP&E> 24,888
<DEPRECIATION> 2,730
<TOTAL-ASSETS> 137,627
<CURRENT-LIABILITIES> 56,300
<BONDS> 5,146
0
0
<COMMON> 9
<OTHER-SE> 14,993
<TOTAL-LIABILITY-AND-EQUITY> 137,627
<SALES> 31,375
<TOTAL-REVENUES> 31,375
<CGS> 27,028
<TOTAL-COSTS> 2,488
<OTHER-EXPENSES> 227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,631
<INCOME-TAX> 497
<INCOME-CONTINUING> 2,134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,352
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.12
</TABLE>
