<PAGE> 1
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 June 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's telephone number)
- --------------------------------------------------------------------------------
(Former Name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
As of Aug. 1, 1997, 9,039,645 shares of Common Stock of the issuer
were outstanding.
<PAGE> 2
CHINA PACIFIC, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION............................................................1
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1997 and December 31, 1996.......1
Consolidated Statements of Operations - For the six months
ended June 30, 1997 and 1996............................................2
Consolidated Statements of Operations - For the three months
ended June 30, 1997 and 1996............................................3
Consolidated Statements of Cash Flows- For the six months
ended June 30, 1997 and 1996............................................4
Notes to Consolidated Financial Statements............................5-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................9
PART II - OTHER INFORMATION..............................................................10
Item 1. Legal Proceedings......................................................10
Item 4. Submission of Matters to a Vote of Security Holders....................10
Item 6. Exhibits and Reports on Form 8-K.......................................10
SIGNATURES...............................................................................11
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------------------- ------------------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 37,492 4,523 61,296 7,394
Accounts receivable, net 115,530 13,936 112,006 13,511
Due from related companies 4,720 569 2,031 245
Due from CISP, current portion 32,562 3,928 12,999 1,568
Prepayments, deposits, and other current assets 50,416 6,082 48,264 5,822
Inventories, net 337,126 40,667 316,919 38,229
---------- ---------- ---------- ----------
Total current assets 577,846 69,705 553,515 66,769
Investment Properties 52,247 6,302 -- --
Due from CISP, long-term portion 126,947 15,313 38,192 4,607
Investment in an associated company 63,671 7,680 58,992 7,116
Investments and notes receivable 30,494 3,678 30,789 3,714
Deferred value added tax recoverable 36,766 4,436 35,050 4,228
Property, plant and equipment, net 208,093 25,102 214,222 25,841
Construction in progress -- -- -- --
Goodwill, net 16,844 2,032 17,061 2,058
---------- ---------- ---------- ----------
Total assets 1,112,908 134,248 947,821 114,333
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 25,782 3,110 49,715 5,997
Long-term debt, current portion 5,964 719 10,603 1,279
Accounts payable 170,101 20,519 164,159 19,802
Deposits from customers 121,909 14,706 132,798 16,019
Accrued liabilities 109,385 13,195 103,882 12,531
Value added tax payable 21,629 2,609 22,449 2,708
Due to related companies 20,418 2,463 9,368 1,130
---------- ---------- ---------- ----------
Total current liabilities 475,188 57,321 492,973 59,466
Long-term debt 23,861 2,878 -- --
---------- ---------- ---------- ----------
Total liabilities 499,049 60,199 492,973 59,466
---------- ---------- ---------- ----------
Minority interests 164,886 19,890 147,454 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
10% Convertible Debenture -- -- -- --
9% Convertible Notes 124,290 14,993 -- --
Dedicated capital 30,009 3,620 23,245 2,804
Retained earnings 110,102 13,281 92,235 11,126
Cumulative translation adjustments 4,266 515 3,840 463
---------- ---------- ---------- ----------
Total shareholders' equity 448,973 54,159 307,393 37,080
---------- ---------- ---------- ----------
Total liabilities, minority interests and
shareholders' equity 1,112,908 134,248 947,821 114,333
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Pg. 1
<PAGE> 4
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JAN-JUN 1997 JAN-JUN 1996
----------------------------- ----------------------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
Net sales 497,524 60,015 457,351 55,169
Cost of goods sold (431,981) (52,109) (390,285) (47,079)
----------- ----------- ----------- -----------
Gross profit 65,543 7,906 67,066 8,090
Selling, general and administrative expenses (27,685) (3,340) (30,499) (3,679)
Interest income/(expenses), net (3,087) (372) 1,293 156
Other income, net 3,023 365 21,595 2,605
Share of income of an associated company 4,684 565 2,329 281
----------- ----------- ----------- -----------
Income before income taxes 42,478 5,124 61,784 7,453
Provision for income taxes (415) (50) -- --
----------- ----------- ----------- -----------
Income before minority interests 42,063 5,074 61,784 7,453
Minority interests (17,432) (2,103) (18,477) (2,229)
----------- ----------- ----------- -----------
Net income 24,631 2,971 43,307 5,224
=========== =========== =========== ===========
Primary earnings per common share:
Net income 2.72 0.33 5.22 0.63
=========== =========== =========== ===========
Weighted average number of shares outstanding 9,039,645 9,039,645 8,293,938 8,293,938
=========== =========== =========== ===========
Fully dilutive earnings per common share 2.16 0.26
=========== =========== =========== ===========
Weighted average number of shares
outstanding used in fully dilutive calculation 13,657,761 13,657,761
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Pg. 2
<PAGE> 5
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
APR-JUN 1997 APR-JUN 1996
---------------------------- ----------------------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
Net sales 245,624 29,629 223,341 26,941
Cost of goods sold (209,627) (25,287) (190,637) (22,996)
----------- ----------- ----------- -----------
Gross profit 35,997 4,342 32,704 3,945
Selling, general and administrative expenses (11,445) (1,381) (14,168) (1,709)
Interest income/(expenses), net (1,711) (206) 738 89
Other income, net 2,474 298 7,793 940
Share of income of an associated company 2,382 287 33 4
----------- ----------- ----------- -----------
Income before income taxes 27,697 3,340 27,100 3,269
Provision for income taxes (415) (50) -- --
----------- ----------- ----------- -----------
Income before minority interests 27,282 3,290 27,100 3,269
Minority interests (10,993) (1,325) (9,401) (1,134)
----------- ----------- ----------- -----------
Net income 16,289 1,965 17,699 2,135
=========== =========== =========== ===========
Primary earnings per common share:
Net income 1.80 0.22 2.05 0.25
=========== =========== =========== ===========
Weighted average number of shares outstanding 9,039,645 9,039,645 8,639,557 8,639,557
=========== =========== =========== ===========
Fully dilutive earnings per common share 1.38 0.17
=========== =========== =========== ===========
Weighted average number of shares
outstanding used in fully dilutive calculation 13,657,761 13,657,761
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Pg. 3
<PAGE> 6
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 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 (loss) 24,631 2,971 43,307 5,224
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Equity gain on CPC (4,683) (565) (4,676) (564)
Amortization of goodwill 220 27 1,824 220
Amortization of depreciation 5,553 670 3,150 380
Loss on disposals of fixed assets 132 16 274 33
Profit on disposals of investment properties (2,335) (282) -- --
Minority interests 17,431 2,103 18,478 2,229
Effect of cumulative translation adjustment 425 51 (3,225) (389)
(Increase) Decrease in operating assets
Accounts receivable, (3,527) (425) 3,590 433
Inventories, net (20,207) (2,438) (17,028) (2,054)
Prepayments and other current assets (2,147) (259) (3,067) (370)
Increase (Decrease) in operating liabilities:
Accounts payable, net (102,376) (12,349) (35,000) (4,222)
Accrued liabilities 5,501 664 2,271 274
Deposit from customers (10,883) (1,313) 2,984 360
Taxation (2,535) (306) 5,820 702
-------- -------- -------- --------
Net cash provided by (used in) operating activities (94,800) (11,435) 18,702 2,256
-------- -------- -------- --------
Cash flows from investing activities:
Acquisition of investments and notes receivable (296) (36) (5,745) (693)
Acquisition of fixed assets (574) (69) (3,648) (440)
Acquisition of investment properties, net (102,912) (12,414) -- --
Proceeds from disposals of investment properties 53,000 6,393 -- --
Acquisition of construction progress -- -- (52,061) (6,280)
-------- -------- -------- --------
Net cash provided by (used in) investing activities (50,782) (6,126) (61,454) (7,413)
-------- -------- -------- --------
Cash flows from financing activities:
Decrease in short-term borrowings (23,934) (2,887) (58,038) (7,001)
(Decrease) increase in obligations under
lease purchase contracts (2,034) (245) 141 17
Other long-term liabilities 15,090 1,820 (35,249) (4,252)
Due from related companies and holding company (2,689) (324) (25) (3)
Due to related companies and holding company 11,055 1,334 (5,687) (686)
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 121,778 14,690 (5,471) (660)
-------- -------- -------- --------
Net increase (decrease) in cash (23,804) (2,871) (48,223) (5,817)
Cash at beginning of period 61,296 7,394 121,788 14,691
-------- -------- -------- --------
Cash at end of period 37,492 4,523 73,565 8,874
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements
Pg. 4
<PAGE> 7
China Pacific, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 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's 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 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 of:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------
RMB'000 USD'000
<S> <C> <C>
Raw materials 265,361 32,010
Work-in-process 60,705 7,323
Finished goods 11,060 1,334
------- -------
337,126 40,667
======= =======
</TABLE>
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.
5. INVESTMENT PROPERTIES
As of June 30, 1997, the Company held one residential property in Hong
Kong, with a carrying value of RMB52.2 million. During the six months
ended June 30, 1997, the Company disposed one of its two residential
properties in Hong Kong for an aggregate consideration of approximately
RMB56.8 million. The Company acquired the two residential properties
during the first quarter of 1997 for an aggregate consideration of
approximately RMB104.1 million.
Pg. 5
<PAGE> 8
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------
RMB'000 USD'000
<S> <C> <C>
Buildings 184,523 22,259
Machinery and equipment 39,455 4,759
Motor Vehicles 3,621 437
Furniture and office equipment 1,213 146
-------- --------
228,812 27,601
Less Accumulated depreciation (20,719) (2,499)
-------- --------
208,093 25,102
======== ========
</TABLE>
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 for the period ended June
30, 1997 was approximately RMB 439,370.00 and RMB220,000.00 respectively.
Accumulated amortization as of December 31, 1996 and June 30, 1997 was
approximately RMB671,490.00 and RMB886,000.00. 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 June 30, 1997.
8. SHAREHOLDERS' EQUITY
ISSUANCE OF 9% CONVERTIBLE NOTES
During the six months ended June 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 RMB 124.3 million) of 9% Convertible
Notes for net consideration of USD13.95 million (equivalent to RMB 115.65
million).
10% CONVERTIBLE DEBENTURE
During the six months ended June 30, 1997, USD200,000.00 (equivalent to
RMB1.66 million) of 10% Convertible Debentures due on November 27, 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 remain 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 three months ended March 31, 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 common stock of
the Company at a price of USD4.00 per share. The warrant has not been
exercised.
Pg. 6
<PAGE> 9
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK TREASURY
-------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- -------
RMB'000 RMB'000
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 8,956,384 75 (27,500) 1,420
Net income -- -- -- --
Issuance of 10% Convertible Debenture 83,261 -- -- --
Transfer to dedicated capital -- -- -- --
Translation adjustments -- -- -- --
--------- ------ --------- -------
Balance as of June 30, 1997 9,039,645 75 (27,500) 1,420
========= ====== ========= =======
<CAPTION>
RETAINED
ADDITIONAL EARNINGS CUMULATIVE
PAID-IN DEDICATED (ACCUMULATED TRANSLATION
CAPITAL CAPITAL DEFICIT) ADJUSTMENTS
---------- --------- ------------ -----------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 189,418 23,245 92,235 3,840
Net income -- -- 24,631 --
Issuance of 10% Convertible Debenture (7,767) -- -- --
Transfer to dedicated capital -- 6,764 (6,764) --
Translation adjustments -- -- -- 426
-------- -------- -------- ------
Balance as of June 30, 1997 181,651 30,009 110,102 4,266
======== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Pg. 7
<PAGE> 10
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.
9. 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 Rmb 150 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 would 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 for the six months ended June 30, 1996, the estimated short-fall
in after tax profits of Chengdu Steel during the 1st and 2nd quarters of
1996 resulted in a payment to China Pacific Steel Limited of USD2,319,000
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 June 30, 1997, no guarantee payments were
applicable because no such guarantee payments are to be made after
December 31, 1996.
10. 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.
11. 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 1,141,000
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.
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 (equivalent to RMB4.15 million).
In addition, on May 1, 1997 the Company also filed a third-party complaint
against the Company's former counsel for fraud, fraud-concealment and
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).
12. SUBSEQUENT EVENTS
After June 30, 1997, the following subsequent events took place:
The Company disposed its investment property in Hong Kong for an aggregate
consideration of RMB60 million and with an estimated profit of RMB4.7
million.
Pg. 8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
MATERIAL CHANGES AND RESULTS OF OPERATIONS
Net sales during the six months ended June 30, 1997 totaled USD60.0 million
compared to net sales of USD55.2 million during the six months ended June 30,
1996. The increase of 8.8% in net sales was attributable to an improvement in
production capacity relating to the installation of a new blast furnace during
the second quarter of 1996.
Cost of goods sold during the six months ended June 30, 1997 totaled
USD52.1 million as compared to USD47.1 million during the six months ended June
30, 1996. The increase in cost of goods sold was attributable to (1) the
increase in sales resulting from commencement of operations of the new blast
furnace and (2) the increase in direct materials costs of about 10% as compared
with the six months ended June 30, 1996.
Gross profits decreased by 1.5% from USD8.1 million (14.7% of net sales)
during the period ended June 30, 1996 to USD7.9 million (13.2% of net sales)
during the same period in 1997. The slight decrease in profit margin during the
period was due to (i) unrelenting market competition, and (ii) an increase of
10% in direct materials costs, yet these unfavorable circumstances were partly
relieved by (i) cost reductions implemented at the Company's factory, and (ii)
the improvement of production efficiency and capacity resulting from the
completion of the No. 3 blast furnace and No. 1 continuous casting machine.
Selling, general and administrative expenses ("SG&A") during the six months
ended June 30, 1997 totaled USD3.3 million as compared to USD3.7 million during
the six months ended June 30, 1996. There is no significant change as compared
with the prior period.
Interest expenses, net, during the six months ended June 30, 1997 totaled
USD372,000, as compared to interest income of USD156,000 during the six months
ended June 30, 1996. The current period interest expenses, net, were
attributable to (1) USD605,000 convertible note interest for the 9% convertible
note due January 15, 1999, (2) promissory notes interest receivable of
USD173,000 and (3) bank interest received of USD60,000.
Other income, net, during the six months ended June 30, 1997 totaled
USD365,000. The Company reported USD2.9 million of other income, net, during the
six months ended June 30, 1996. Other income for the 1997 period represents (i)
a gain upon disposal of an investment property in Hong Kong of USD302,000, and
(ii) the Company's allocable share of profits of USD565,000 in 1997 from China
Pacific Construction (B.V.I.) Limited. Other income for the prior period was
attributable to (1) estimated compensation of USD2.3 million payable to the
Company's subsidiary, China Pacific Steel Limited, based on estimated 1996
earnings of Chengdu Steel, pursuant to a letter of guarantee from Chengdu Iron
and Steel Plant ("CISP") to China Pacific Steel Limited whereby CISP guaranteed
after tax profits of Chengdu Steel of not less than RMB 150 million
(approximately USD18 million) during 1996, and (2) the Company's allocable share
of profits of USD281,000 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 six months of 1996 and 1997.
Net income during the period ended June 30, 1997 totaled USD3.0 million as
compared to USD5.2 million during the first six months of 1996.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 the Company had working capital of USD12.4 million and
cash balances of USD4.5 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) the acquisition of two residential properties in Hong Kong for
investment purposes, for an aggregate consideration of approximately USD12.56
million (equivalent to RMB104.1 million) and subsequent disposal of one of the
above properties for a consideration of USD6.4 million (equivalent to RMB53.1
million), and (v) other expenditures.
At June 30, 1997, the primary obligations of the Company consisted of (i)
USD3.6 million in mortgage loans for financing the Company's one remaining
investment property, and (ii) 9% convertible notes in the amount of USD15.00
million.
Pg. 9
<PAGE> 12
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.
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 USD$5 million, and an order compelling the Company to issue
warrants to subscribe to 1,141,000 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, on May 1, 1997 the Company also filed a
third-party complaint against the Company's former counsel for fraud,
fraud-concealment and 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, 0
Against, 110,687 Abstentions or Broker Non-Votes), Cheng Yuk
Cheng (8,365,065 For, 0 Against, 112,762 Abstentions or Broker
Non-Votes), Thomas Tong Long 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 (8,364,265
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. 10
<PAGE> 13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA PACIFIC, INC.
Date: August 11, 1997
/s/ Clement Mak Shiu Tong
------------------------------------
Clement Mak Shiu Tong, President and
Chief Executive Officer
Date: August 11, 1997
/s/ Thomas Tong
------------------------------------
Thomas Tong, Treasurer and Chief
Financial Officer
Pg. 11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,523
<SECURITIES> 0
<RECEIVABLES> 13,936
<ALLOWANCES> 0
<INVENTORY> 40,667
<CURRENT-ASSETS> 69,704
<PP&E> 25,102
<DEPRECIATION> 2,499
<TOTAL-ASSETS> 134,247
<CURRENT-LIABILITIES> 57,321
<BONDS> 2,878
0
0
<COMMON> 9
<OTHER-SE> 14,993
<TOTAL-LIABILITY-AND-EQUITY> 134,247
<SALES> 29,629
<TOTAL-REVENUES> 29,629
<CGS> 25,287
<TOTAL-COSTS> 1,381
<OTHER-EXPENSES> 206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,341
<INCOME-TAX> 50
<INCOME-CONTINUING> 3,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,965
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.17
</TABLE>
