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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31,1996
[ ] 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.
(Name of small business issuer in its charter)
NEVADA 87-0429945
____________________________________ ________________________________________
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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 per 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 $123,504,000.
As of March 10, 1997, 8,956,384 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 $19,364,378.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed within
120 days of the Registrant's fiscal year ended December 31, 1996 are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format: Yes No x
_____ _____
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TABLE OF CONTENTS
Page
____
PART I................................................................. 1
ITEM 1. DESCRIPTION OF BUSINESS........................................ 1
ITEM 2. DESCRIPTION OF PROPERTIES...................................... 9
ITEM 3. LEGAL PROCEEDINGS.............................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 10
PART II............................................................... 10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
AND RESULT OF OPERATIONS.................................... 10
ITEM 7. FINANCIAL STATEMENTS........................................... 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 16
PART III............................................................... 16
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT........... 16
ITEM 10. EXECUTIVE COMPENSATION........................................ 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 17
PART IV................................................................ 18
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................. 18
SIGNATURES............................................................. 20
FINANCIAL STATEMENTS................................................... F-1
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PART I
THIS FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE SECTION ENTITLED
"CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS" BEGINNING ON PAGE 14 OF
THIS FORM 10-KSB.
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 as
McMann Investments, Inc., a "blind pool blank check" company, for the purpose of
seeking and acquiring business ventures. In March of 1988, the Company completed
a public offering of its common stock raising net offering proceeds of
approximately $233,000. The Company operated as a movie production company from
1988 until 1992 when operations were terminated 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
at the time 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, effective as of July 1, 1995,
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. ("China Treasure Holding") 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 ("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 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 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.
In conjunction with the Sun City Sale, Kiu Yin Investment Co. Ltd. ("Kiu
Yin Investment") and China Construction Bank, Guangdong Branch ("CCB") formed
China Pacific Investment Holdings Ltd. ("China Pacific Investment Holdings"),
China Pacific Investment Holdings acquired 100% of the stock of the Company's
direct parent, 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
CCB 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 Sale 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 10
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
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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.
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 Chengdu Steel'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 was 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 Treasure Holding, which was an indirect
controlling shareholder of the Company at the time of the acquisition. 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 set out 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. Chengdu 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 287,986
square meters on a site area of approximately 1,150,000 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 and in 1996. 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; 318 cubic meter and 335
cubic meter blast furnaces, (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 6.5mm, (g) a rolling mill producing steel wire rods in
sizes over 6.5mm (h) a rolling mill producing steel rebar, (i) a 50,000 cubic
meter coal gas container, (j) an oxygen production plant which provides the
oxygen necessary to feed the furnaces, with a capacity of 7,400m3/h, (k) a
53,150KV electricity transformer substation, (l) 3 storage yards and 3 finished
goods warehouses,
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(m) various gas storage units, (n) various administrative buildings, and (o)
a system of roads, rail, cranes and transportation belts, and (p) a
continuous casting machine.
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
manufacture 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. Liquid steel
from the converter furnace is casted into 120 square meter billets in a
continuous casting machine.
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. Until the
addition of a new 335 ton blast furnace in July of 1996, the iron production
capacity of Line I was 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. With the addition of the new blast furnace during 1996, the iron
production capacity of Line I has been increased to 450,000 metric tons annually
increasing the effective total steel production capacity of the Plant to 600,000
metric tons annually. In 1996, Chengdu Steel produced approximately 382,000
metric tons of steel or steel related finished products as compared to 370,000
metric tons produced in 1995.
PRODUCTS. Chengdu Steel's manufacturing currently focuses on the production
of reinforced steel bars and steel wires. Chengdu Steel's manufactured steel
products include reinforced bar, 6.5mm and 8.5mm steel wire, 6.5mm welding rod,
spring steel (billets) and other steel products used principally for
construction of building 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 1996, rebar and steel wire comprised
in excess of 97.3 % of Chengdu Steel' s output of steel production.
RAW MATERIALS. The principal raw materials used by Chengdu 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 1996, Chengdu Steel used approximately
506,800 metric tons of iron ore, 387,000 metric tons of coke and 120,000 metric
tons of scrap steel. Raw materials have historically accounted for approximately
80% of Chengdu Steel's cost of production.
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Iron ore and coke are purchased from various suppliers with approximately
60% of such raw materials being supplied from within Sichuan Province, 30% of
such materials being supplied from neighboring provinces and the remaining 10%
of such materials being supplied from overseas. Scrap steel is purchased from
numerous suppliers within Sichuan Province and neighboring provinces. 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.
With the expansion of operations during 1996, Chengdu Steel added a natural gas
recycling plant 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 AND MODERNIZATION.. During 1996, Chengdu Steel constructed a
335m(3) blast furnace to increase the iron production of Line I from 250,000
metric tons to 450,000 metric tons, added a continuous casting process for the
converter furnace to improve efficiency of steel production, and constructed a
natural gas recycling plant.
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 50% of products are sold to and distributed
through wholesalers with the balance being sold directly to end-users.
Approximately 90% of Chengdu Steel's sales have historically been within Sichuan
Province, with approximately 10% 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.
Chengdu Steel has over 100 customers, which are primarily state-owned
construction companies, with no single customer accounting for more than 5% of
total sales during 1996. Chengdu Steel's principal customers are
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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. 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 25% of total sales during 1996, while sales on credit terms of
90 days or longer accounted for approximately 45% of 1996 sales. 30% of 1996
sales were to raw material suppliers of Chengdu Steel in exchange for iron
ore, coke and other materials. Chengdu Steel has made an allowance of
$898,000 for bad debts, or approximately 0.72% of Chengdu Steel's 1996 net
sales.
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 Sichuan 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 1995, more than 15 million tons of steel products were imported into the PRC.
Such imports typically adversely affect domestic steel producers.
To protect domestic steel producers, the PRC government implemented
measures to restrict the levels of foreign imports and enhance enforcement
against illegal steel importation.
The potential 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
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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. 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.
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.
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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 nonpolluting 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 Guangdong 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 in exercising 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 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
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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 10, 1997, the Company had approximately 7,000 employees, including
15 executive officers, 190 employees engaged in administration and 6,795
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.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company, at December 31, 1996, 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.
ITEM 3. LEGAL PROCEEDINGS
The Company's future operating results and financial position may be
affected by the following dispute. 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 $5,000,000, and an order compelling
the Company to issue approximately 1,141,000 common stock warrants 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.
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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, 1996.
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 (1) Low (1)
________ _______
1995 - First Quarter 9.50 5.00
Second Quarter 22.50 8.00
Third Quarter 26.13 18.50
Fourth Quarter 24.75 6.00
1996 - First Quarter 8.125 4.00
Second Quarter 8.1875 4.50
Third Quarter 6.8125 3.9375
Fourth Quarter 6.125 3.21875
(1) The Company declared a 1-for-four reverse stock split
effective July 9, 1996. All reported historical
information has been adjusted accordingly to reflect the
impact of the reverse stock split.
The quotations reflect inter-dealer prices without retail mark-up, mark-
down or commission and may not represent actual transactions.
At March 10, 1997, the bid price of the Common Stock was $3.40625.
As of March 10, 1997, there were approximately 395 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AND RESULT
OF OPERATIONS
The Company's operations during 1996 consisted the manufacturing and
marketing of steel products in the PRC, while operations in 1995 consisted of
participation in the development and marketing of various phases of Sun City
in addition to the manufacturing and marketing of steel in the PRC.
In December of 1995, China Treasure Construction sold its entire interest
in each of its subsidiaries involved in the Sun City development (the "Project
Subsidiaries") 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 China Treasure Construction a
three year 8% promissory note in the amount of $16.2
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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).
As a result of the Sun City Sale, the operating results of the Project
Subsidiaries have been accounted for as discontinued operations in 1995 and
1994.
Effective July 1, 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 Chengdu 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 1995 and for all
of 1996.
The combined effect of the Sun City Sale and Chengdu 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 1996 consist of the Company's 60% interest in Chengdu
Steel results for the full year.
RESULTS OF OPERATIONS - FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
As a result of the Sun City Sale, operating results discussed below have
been restated in 1995 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 1996 totaled $123.5 million compared to net
sales of $53.1 million during 1995. 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. The increase
in pro forma net sales was attributable to increased production capacity
relating to the installation of a new blast furnace late in the second quarter
of 1996, which was partially offset by temporary disruption in operations during
the installation of the new blast furnace. Sales of steel products during 1996
totaled approximately 382,000 tons as compared to 364,020 tons sold during 1995.
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COST OF GOODS SOLD AND GROSS PROFIT. Cost of goods sold during 1996
totaled $105.7 million (85.6% of net sales) compared to $41 million (77.2% of
net sales) during 1995. The increase in cost of goods sold was attributable to
the Company's acquisition of a 60% interest in Chengdu Steel which was effective
as of July 1, 1995. On a pro forma basis, cost of goods sold for the full year
ended December 31, 1995 totaled $89.2 million (81.9% of pro forma net sales).
The increase in pro forma cost of goods sold was attributable to an overall
increase in direct costs of 10% during 1996, for items such as coke, iron ore
and transportation, as compared to 1995.
Gross profits during 1996 totaled $17.8 million as compared to $12.1
million of gross profits reported during 1995 and pro forma gross profits during
1995 of $19.7 million. The decrease in pro forma gross profits during 1996 was
attributable to the increase in direct expenses of 10% overall as compared to
1995, and a temporary disruption in operations during the installation of the
new blast furnace.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") during 1996 totaled $7.8 million (6.3% of
net sales) as compared to $3.8 million (7.1% of net sales) during 1995. The
increase in SG&A was attributable to an increased level of corporate
activities relating to operation of Chengdu Steel for the full year during
1996.
On a pro forma basis, SG&A increased 16.4% from $6.7 million (6.1% of net
sales) for the full year ended 1995. The increase in SG&A, on a pro forma basis,
was attributable to increased inflation and an increase in sales volume.
NET INTEREST INCOME (EXPENSE), NET OTHER INCOME (EXPENSE), AND INCOME FROM
AN ASSOCIATED COMPANY. Because of certain differences in presentation between
1995 and 1996, the sum of these three categories can be compared more
meaningfully than any single category. The total of net interest income, net
other income, and the Company's share of income from an associated company,
China Pacific Construction (B.V.I.) Limited ("China Pacific Construction"), in
1996 was $1,700,000, compared to a total of $1,225,300 during 1995. The 1996
figure includes the Company's $1.3 million allocable share of the income from
China Pacific Construction, which has been 50% owned by the Company since
December 31, 1995, and interest received on the promissory notes obtained by the
Company in connection with the Sun City Sale. The 1995 total of $1,225,300 also
includes the Company's allocable share of income from China Pacific
Construction, which was a 51% owned subsidiary of the Company until December 31,
1995, interest receivable and gain on the assets sold in the Sun City Sale. See
Item 1, Description of Business, Property Development - Sun City, Sale of
Company's Interest.
OPERATION DIFFERENTIAL SUBSIDIES. The Company received Operation
Differential Subsidies of $3.406 million in 1996 payable to the Company's
subsidiary, China Pacific Steel Limited ("China Pacific Steel"), 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 whereby CISP
guarantees after tax profits of Chengdu Steel of not less than RMB150 million
(approximately $18 million ) during 1996. The Company did not receive such
subsidies during 1995.
INCOME TAXES. The Company's income tax provision for 1996 totaled $219,000
as compared to $228,000 during 1995.
On a pro forma basis, income tax expense of Chengdu Steel totaled $219,000
during 1996, compared to $228,000 during 1995.
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 1996 totaled $0 as compared $1.7 million during 1995.
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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 1996 and the second half of 1995 and the 49% interest in China
Treasure Construction not owned by the Company during 1996 and 1995.
NET INCOME/(LOSS). Net income during 1996 totaled $10.1 million as compared
to $6.1 million during 1995. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31,1996, the Company had a working capital balance of $7.3
million and a cash balance of $7.4 million, as compared to a surplus in
working capital of $12.1 million and a cash balance of $14.7 million at
December 31, 1995. The change in working capital and cash balances was
attributable to a combination of (i) the acquisition of various fixed assets,
inventories and other expenditures to commence and support operations of a
new blast furnace, and a continuous casting machine, (ii) cash flows from
profitable operations, and (iii) the receipt of $11.4 million of net proceeds
from the sale of common stock, convertible debentures and convertible
preferred stock during 1996.
Historically the Company's operations have been funded by a combination of
periodic sales of common stock and convertible securities to fund specific
expansion plans, 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 Chengdu 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 Chengdu Steel Acquisition, the
financial obligations of the Company consisted primarily of the obligations of
its 60% owned subsidiary, Chengdu Steel.
At December 31,1996, the primary obligations of the Company consisted of
$6.0 million which remained payable to an affiliate relative to the Chengdu
Steel Acquisition as well as long-term debt in the amount of $1.2 million,
including (i) $0.2 million of 10% convertible debentures that remain
outstanding, and (ii) various loans from unaffiliated third parties in the
amount of $1.0 million. Maturities on long-term debt total $1.2 million during
1997.
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 Chengdu 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 1997 are
$3.3 million.
During 1995, the Company issued common stock, convertible debentures and
convertible preferred stock raising approximately $5.6 million net of offering
costs. During 1996, the Company issued common stock, convertible debentures and
convertible preferred stock raising approximately $11.4 million net of offering
costs. These issuance during 1995 and 1996 have reduced the percentage of the
Company's outstanding stock owned by C.P. Investment (B.V.I.) Ltd. from 93% to
37.1%.
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At December 31, 1996, $200,000 of 10% convertible debentures remained
outstanding and eligible for conversion into common stock. Such debentures are
convertible at a price equal to the lesser of 100% of the average closing market
price of the Company's common stock for the three days immediately preceding the
issuance of the debentures ($4.68) or 80% of the average closing market price of
the common stock for the three days preceding the conversion of the debentures.
The debentures are due in November of 1997 if not previously converted. At
December 31, 1996, no shares of either Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock or Series C Convertible Preferred Stock
remained outstanding. A total of 2,250 shares of Series A Preferred Stock
(being all of the outstanding Series A Preferred Shares), 1,680 shares of Series
B Preferred Stock (being all of the outstanding Series B Preferred Shares),
9,105 shares of Series C Preferred Stock (being all of the outstanding Series C
Preferred Shares), and $600,000 of convertible debentures and $20,316 of the
related accrued interest were converted during 1996 resulting in the issuance of
an aggregate of approximately 4,790,956 shares of common stock (after giving
effect to a 1-for-4 reverse stock split effective July 9, 1996).
In addition, the Company issued 195,750 shares of common stock (after
giving effect to the same reverse stock split), valued at $783,000, at an
average price of $3.99 per share to certain third party consultants for
consultancy services rendered by them in connection with the Chengdu Steel
Acquisition.
The proceeds from the sale of securities during 1995 and 1996 were used to
fund the expansion and modernization of the Plant undertaken during 1996.
Pursuant the Sun City Sale, China Pacific 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.
Subsequent to December 31,1996, the Company completed the placement of $15
million of 9% convertible notes due January 15, 1999 (the "Notes"). The Notes
are convertible into common stock of the Company at a conversion price equal to
eighty percent (80%) of the average closing bid price of the Company's common
stock over the five (5) trading-day period ending on the day prior to the date
of written notice from a holder of such conversion. The conversion price shall
in no event be less than $4.00 per share nor greater than $8.00 per share. No
conversions shall be permitted prior to May 15, 1997. The Notes shall be
convertible at the rate of 25% of the original amount of such Notes after May
15, 1997, 50% of the original amount of the Notes after September 12, 1997, 75%
of the original amount of the Notes after January 10, 1998 and 100% of the
original amount of the Notes after May 10, 1998. As a result of the Note
placement, the Company's cash and working capital positions were improved by
approximately $13.9 million from the December 31, 1996 levels.
At December 31,1996, the Company had outstanding 550,755 warrants which had
been issued to various parties in connection with consulting services and fund
raising efforts. The warrants are exercisable at a price of $15.24 per share and
expire in September 2000. Also, after December 31, 1996, the placement agent
for the $15 million convertible note offering described above was granted a five
year warrant exercisable to acquire up to 300,000 shares of common stock at
$4.00 per share. The exercise of all presently outstanding warrants would
provide an additional $9,593,506.20 of capital to the Company. There is no
assurance, however, that any of such warrants will be exercised.
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 $9.60
to $16.00, to be exercised according to a predetermined schedule from 1996 to
2000. No such options have been exercised in 1995 and 1996.
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.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results
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could differ materially from those set forth in the forward-looking
statements. Certain factors that might cause such a difference include the
following: potential shortage and price increases in iron ore, scrap iron and
other raw materials which result in curtailment of steel operations or
reduced operating margins; inflationary forces and governmental responses
thereto within the PRC which may result in curtailment or delays in
infrastructure construction projects which utilize the Company's products
which, in turn, may reduce or delay revenues of the Company; other
governmental factors peculiar to operation in the PRC relating to labor cost
and availability, raw material availability, access to credit and other key
operational and regulatory factors which may adversely affect the demand for
the Company's products and profitability; potential competition from existing
steel operators within the PRC, foreign steel operators which may enter the
PRC market and new competition within the PRC from operators controlled by or
operating in partnership with local, regional, or national governmental
agencies; dependence upon key personnel and the ability to attract and retain
qualified management and operations personnel to support existing operations
and future growth and modernization; the ability to access and implement
modern steel manufacturing technology in order to operate efficiently and
profitably; potential conflicts of interest associated with periodic loans
between, sales among and transactions with affiliated shareholders; the
potential issuance of substantial numbers of additional shares in connection
with the conversion of outstanding convertible securities and future issuance
of similar securities without shareholder approval which may result in
substantial dilution to existing shareholders; and, risks associated with the
receipt of substantially all of the Company's revenues in Renminbi and the
ability to convert operating profits into other currencies and expatriate
such profits.
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.
15
<PAGE>
TEM 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, 1996 and 1995............. F-2
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994...................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994...................................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994.......................... F-8
Notes to Consolidated Financial Statements............................... F-9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Change in accountants as required to be disclosed herein was previously
disclosed in the Company's Form 10-KSB for the year ended December 31, 1995 and
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
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120
days after the close of the Company's fiscal year. Such information is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
16
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
17
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Description of Exhibit
_______ ______________________
2.1 Acquisition Agreement dated October 30,1995 between China Treasure Capital
Limited and China Pacific Ltd. (1)
3.1 Articles of Incorporation, as amended to date (2)
3.2 Bylaws, as amended to date (3)
4.1 Certificate of Designation for Series A Convertible Preferred Shares (4)
4.2 Certificate of Designation for Series B Convertible Preferred Shares (4)
4.3 Certificate of Designation for Series C Convertible Preferred Shares (4)
4.4 Form of 10% Convertible Debentures (4)
4.5 Form of Warrant dated January 15, 1997 (7)
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 (1)
10.2 Cancellation Agreement dated October 15, 1995 between China Pacific, Inc.
and Team International Holdings, Inc. (1)
10.3 Leasing Agreement for fixed assets between Chengdu Iron and Steel Plant
and Team Steel, Inc. (1)
10.4 Letters of Guarantee from Chengdu Iron and Steel Plant (1)
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. (S)
10.6 Memorandum dated December 29,1995 between China Treasure Construction
(B.V.I.) Limited and Open View Properties Ltd. re: service fee (5)
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 (5)
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 (5)
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 (5)
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. (5)
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 (5)
10.12 Form of 9% Convertible Note (7)
16.1 Letter from H.J. Swart & Co., P.A. relating to change of independent
accountants (6)
21.1 Subsidiaries of Registrant
27.1 Financial Data Schedules
_____________________________________________________________________________
++ Compensatory plan or management agreement.
18
<PAGE>
(1) Incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated October 30,1995.
(2) 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) Incorporated by reference to the respective exhibits filed with the
Company's Registration Statement on Form 8-A declared effective June 15,
1995.
(4) Incorporated by reference to the respective exhibits filed with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995.
(5) Incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated December 29,1995.
(6) Incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated February 1, 1995
(7) Incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated January 15, 1997.
(B) REPORTS ON FORM 8-K
None
19
<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: APRIL 14, 1997
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 April 14, 1997
- ------------------------------ and Chairman of the Board of Directors
Mak Shiu Tong, Clement (Principal Executive Officer)
/s/ CHENG YUK CHING
- ------------------------------ Vice President, Secretary and Director April 14, 1997
Cheng Yuk Ching
/s/ TONG LONG TIN, THOMAS Chief Financial Officer and Director April 14, 1997
- ------------------------------ (Principal Financial and Accounting
Tong Long Tin, Thomas Officer)
/s/ TAN JIAN SHENG
- ------------------------------ Director April 14, 1997
Tan Jian Sheng
/s/ ZHANG GUO LIANG
- ------------------------------ Director April 14, 1997
Zhang Guo Liang
/s/ KWAN PAK HOO
- ------------------------------ Director April 14, 1997
Kwan Pak Hoo
/s/ ZHANG XIN MIN
- ------------------------------ Director April 14, 1997
Zhang Xin Min
</TABLE>
20
<PAGE>
FINANCIAL STATEMENTS
21
<PAGE>
CHINA PACIFIC, INC.
==================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1996 AND
FOR YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
TOGETHER WITH AUDITORS' REPORT
------------------------------------------------
<PAGE>
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. (a company incorporated in the United States of America; "the Company") and
Subsidiaries ("the Group") as of December 31, 1995 and 1996, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the years ended December 31, 1994, 1995 and 1996. 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.
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 1996, and the results of their
operations and their cash flows for the years ended December 31, 1994, 1995 and
1996, in conformity with generally accepted accounting principles in the United
States of America.
As further discussed in Note 21 to the accompanying financial statements, a
brokerage firm filed a civil action against the Company in a United States
District Court to seek monetary damages and expenses in excess of US$5 million
(equivalent to approximately Rmb41,450,000 and/or an order compelling the
Company to issue warrants to subscribe 1,141,000 share of common stock (after
considering the one-for-four reverse stock split). Although the Company
believes this claim is without merit and ground, as at the date of this
report, the Company is unable to predict the outcome of this dispute with
reasonable certainty. No provision has been recorded in the accompanying
financial statements in connection with the aforesaid claims.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
April 12, 1997.
-1-
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
1995 1996
_______ _________________
Rmb'000 Rmb'000 US$'000
ASSETS
Current assets:
Cash 122,221 61,293 7,394
Accounts receivable, net 142,704 112,003 13,511
Due from related companies - 2,031 245
Due from CISP, current portion - 13,000 1,568
Prepayments, deposits and other current assets 30,474 48,269 5,822
Inventories, net 272,238 316,919 38,229
_______ _________ _______
Total current assets 567,637 553,515 66,769
Due from CISP, long-term portion - 38,191 4,607
Investment in an associated company 50,008 58,988 7,116
Investments and note receivable 31,697 30,790 3,714
Deferred value added tax recoverable 41,181 35,054 4,228
Property, plant and equipment, net 90,749 214,220 25,841
Goodwill, net 17,504 17,064 2,058
_______ _________ _______
Total assets 798,776 947,822 114,333
======= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 103,835 49,716 5,997
Long-term debt, current portion 31,472 10,603 1,279
Accounts payable 149,369 164,159 19,802
Deposits from customers 93,719 132,792 16,019
Other payables 13,602 - -
Accrued liabilities 59,609 103,884 12,531
Value added tax payable 15,790 22,452 2,708
Due to related companies - 9,363 1,130
_______ _________ _______
Total current liabilities 467,396 492,969 59,466
Long-term debt 91,339 - -
_______ _________ _______
Total liabilities 558,735 492,969 59,466
_______ _________ _______
Minority interests 107,716 147,455 17,787
_______ _________ _______
Shareholders' equity:
Preferred stock, par value US$0.001; authorized
10,000,000 shares
Series A convertible - outstanding 2,250
shares (total par value Rmb17) in 1995, nil
in 1996 - - -
Series B convertible and redeemable -
outstanding 650 shares (total par value
Rmb5) in 1995, nil in 1996 - - -
Series C convertible and redeemable -
outstanding nil in 1995 and 1996 - - -
Common stock, par value US$0.001; authorized
25,000,000 shares; outstanding 4,165,428
shares in 1995 and 8,956,384 shares in 1996 139 74 9
Treasury stock, nil in 1995 and 27,500 shares
in 1996 - (1,420) (171)
Additional paid-in capital 95,632 189,423 22,849
Dedicated capital 7,804 23,245 2,804
Retained earnings 23,894 92,235 11,126
Cumulative translation adjustments 4,856 3,841 463
_______ _________ _______
Total shareholders' equity 132,325 307,398 37,080
_______ _________ _______
Total liabilities, minority interests and
shareholders' equity 798,776 947,822 114,333
======= ========= =======
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont'd)
AS OF DECEMBER 31, 1995 AND 1996
____________________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers, and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1996 of
US$1.00=Rmb8.29. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.
-3-
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
_________ _________ _____________________
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Net sales - 442,088 1,023,846 123,504
Cost of goods sold - (341,289) (876,162) (105,689)
_________ _________ _________ _________
Gross profit - 100,799 147,684 17,815
Selling, general and administrative expenses (2,129) (31,223) (64,679) (7,802)
Interest income 216 34 3,634 438
Interest expense (141) (1,423) (818) (99)
Other income, net - 11,547 257 31
Operation differential subsidies - - 28,236 3,406
Share of income of an associated company - - 11,023 1,330
_________ _________ _________ _________
Income (Loss) from
continuing operations
before income taxes (2,054) 79,734 125,337 15,119
Provision for income taxes - (1,897) (1,816) (219)
_________ _________ _________ _________
Income (Loss) from continuing operations (2,054) 77,837 123,521 14,900
Discontinued operations:
Income (Loss) from operations of
the discontinued Sun City
Subsidiaries (less Nil amount of
applicable income taxes) (13,336) 13,760 - -
_________ _________ _________ _________
Income (Loss) before
minority interests (15,390) 91,597 123,521 14,900
Minority interests 6,539 (41,115) (39,739) (4,794)
_________ _________ _________ _________
Net income (loss) (8,851) 50,482 83,782 10,106
========= ========= ========= =========
Primary earnings per common share:
Income (Loss) from continuing
operations Rmb(0.35) Rmb 11.45 Rmb 9.78 US$ 1.18
Income (Loss) from discontinued
operations (2.13) 1.85 - -
_________ _________ _________ _________
Net income (loss) Rmb (2.48) Rmb 13.30 Rmb 9.78 US$ 1.18
========= ========= ========= =========
Weighted average number of shares
outstanding used in primary
calculation 3,571,429 3,796,296 8,569,459 8,569,459
========= ========= ========= =========
Fully dilutive earnings per common share:
Income (Loss) from continuing operations Rmb (0.35) Rmb 11.43 Rmb 9.29 US$ 1.12
Income (Loss) from discontinued operations (2.13) 1.85 - -
_________ _________ _________ _________
Net income (loss) Rmb (2.48) Rmb 13.28 Rmb 9.29 US$ 1.12
========= ========= ========= =========
Weighted average number of shares
outstanding used in fully dilutive
calculation 3,571,429 3,802,316 9,023,271 9,023,271
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Cont'd)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
____________________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers, and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1996 of
US$1.00=Rmb8.29. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.
-5-
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
_________ _________ _____________________
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (8,851) 50,482 83,782 10,106
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities -
Share of income of an associated
company - - (9,204) (1,110)
Depreciation of property, plant
and equipment 1,589 5,491 11,275 1,360
Net loss on disposals of property,
plant and equipment 57 591 240 29
Amortization of goodwill - 225 440 53
Minority interests (6,539) 41,115 39,739 4,794
(Increase) Decrease in operating
assets -
Accounts receivable, net - (69,251) 30,701 3,703
Deposits receivable (11,281) 14,817 - -
Prepayments, deposits and other
current assets (233) (5,974) (17,795) (2,147)
Inventories, net - (108,685) (44,681) (5,390)
Deferred value added tax
recoverable - - 6,127 739
Increase (Decrease) in operating
liabilities -
Accounts payable - 149,369 13,287 1,603
Deposits from customers - 93,719 39,073 4,713
Accrued liabilities 34,051 (15,583) 44,275 5,341
Value added tax payable - 15,790 6,662 804
________ ________ ________ ________
Net cash provided by
operating activities 8,793 172,106 203,921 24,598
________ ________ ________ ________
Cash flows from investing activities:
Proceeds from disposal of subsidiary - 83 - -
Proceeds from disposals of
property, plant and equipment 1,905 - 804 97
Proceeds from disposals of
investments and note receivable - - 907 109
Acquisition of subsidiary - 2,055 - -
Acquisition of investments - (5,250) - -
Acquisition of property, plant and
equipment (3,170) (15,158) (133,071) (16,052)
Acquisition of development
properties, net (75,873) (122,304) - -
Effect of cumulative translation
adjustments (2,013) 4,858 (791) (95)
________ ________ ________ ________
Net cash used in investing
activities (79,151) (135,716) (132,151) (15,941)
________ ________ ________ ________
</TABLE>
(To be continued)
-6-
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
_________ _________ _____________________
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in short-term
borrowings 57,413 77,313 (54,119) (6,528)
Decrease in obligations under
finance leases (749) (50) (1,216) (147)
Decrease in long-term debt - (64,601) (112,208) (13,535)
Loan from an intermediate holding
company 8,120 (73,311) - -
Loan from ultimate holding
company 6,822 103,378 - -
Due from CISP - - (51,191) (6,174)
Due from related companies (716) - (2,031) (245)
Due to related companies 50 (7,072) 9,363 1,130
Other payables - - (13,602) (1,641)
Proceeds from issuance of
convertible debentures - 6,655 - -
Proceeds from issuance of
common and preferred stock - 40,948 93,726 11,305
Acquisition of treasury stock - - (1,420) (171)
________ ________ ________ ________
Net cash provided by
financing activities 70,940 84,708 (132,698) (16,006)
________ ________ ________ ________
Net increase (decrease) in cash 582 121,098 (60,928) (7,349)
Cash, as of beginning of year 541 1,123 122,221 14,743
________ ________ ________ ________
Cash, as of end of year 1,123 122,221 61,293 7,394
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
____________________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers, and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1996 of
US$1.00=Rmb8.29. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.
-7-
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Series B Series C
Series A convertible and convertible and
convertible redeemable redeemable
preferred stock preferred stock preferred stock Common stock
____________________ ___________________ _____________________ ___________________
Number of Number of Number of Number of
shares Amount shares Amount shares Amount shares* Amount
_________ _________ _________ ________ __________ _________ _________ _________
Rmb Rmb Rmb Rmb'000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1994 - - - - - - 3,571,429 119
Net loss - - - - - - - -
Translation adjustments - - - - - - - -
_________ _________ _________ ________ __________ _________ _________ _________
Balance as of December 31, 1994 - - - - - - 3,571,429 119
Net income - - - - - - - -
Sale of common stock - - - - - - 38,750 1
Sale of preferred stock 5,905 45 650 5 - - - -
Costs of common stock and
preferred stock sales - - - - - - - -
Conversion of preferred stock
into common stock (3,655) (28) - - - - 555,249 19
Transfer to dedicated capital - - - - - - - -
Translation adjustments - - - - - - - -
_________ _________ _________ ________ __________ _________ _________ _________
Balance as of December 31, 1995 2,250 17 650 5 - - 4,165,428 139
Net income - - - - - - - -
Sale of common stock - - - - - - 795,641 27
Sale of preferred stock - - 1,030 9 9,105 76 - -
Costs of common stock and
preferred stock sales - - - - - - - -
Conversion of preferred
stock into common stock (2,250) (17) (1,680) (14) (9,105) (76) 3,833,286 124
Conversion of convertible
debenture into common stock - - - - - - 162,029 5
Treasury stock - - - - - - - -
Reverse stock split - - - - - - - (221)
Transfer to dedicated capital - - - - - - - -
Translation adjustments - - - - - - - -
_________ _________ _________ ________ __________ _________ _________ _________
Balance as of December 31, 1996 - - - - - - 8,956,384 74
========= ========= ========= ======== ========== ========= ========= =========
</TABLE>
* Adjusted for the one-for-four reverse stock split.
<PAGE>
<TABLE>
<CAPTION>
Treasury stock Retained
_____________________ Additional earnings Cumulative
Number of paid-in Dedicated (Accumulated translation
shares* Amount capital capital deficit) adjustments
_________ _________ ___________ _____________ _____________ _____________
Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1994 - - 54,709 - (9,933) (1,356)
Net loss - - - - (8,851) -
Translation adjustments - - - - - (1,032)
_________ _________ ___________ _____________ _____________ _____________
Balance as of December 31, 1994 - - 54,709 - (18,784) (2,388)
Net income - - - - 50,482 -
Sale of common stock - - 3,602 - - -
Sale of preferred stock - - 54,534 - - -
Costs of common stock and
preferred stock sales - - (17,213) - - -
Conversion of preferred
stock into common stock - - - - - -
Transfer to dedicated capital - - - 7,804 (7,804) -
Translation adjustments - - - - - 7,244
_________ _________ ___________ _____________ _____________ _____________
Balance as of December 31, 1995 - - 95,632 7,804 23,894 4,856
Net income - - - - 83,782 -
Sale of common stock - - 17,429 - - -
Sale of preferred stock - - 83,977 - - -
Costs of common stock and
preferred stock sales - - (12,874) - - -
Conversion of preferred stock
into common stock - - (124) - - -
Conversion of convertible debenture
into common stock - - 5,162 - - -
Treasury stock (27,500) (1,420) - - - -
Reverse stock split - - 221 - - -
Transfer to dedicated capital - - - 15,441 (15,441) -
Translation adjustments - - - - - (1,015)
_________ _________ ___________ _____________ _____________ _____________
Balance as of December 31, 1996 (27,500) (1,420) 189,423 23,245 92,235 3,841
========= ========= =========== ============= ============= =============
</TABLE>
* Adjusted for the one-for-four reverse stock split.
<PAGE>
CHINA PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 from McMann Investments, Inc. 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 from China Treasure, Inc. to China Pacific, Inc., the present one, with
effect from December 11, 1995.
CONTROLLING SHAREHOLDERS
As of December 31, 1996, 3,271,429 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). CPI is wholly owned by China Pacific Investment
Holdings Limited ("CPIH"; a company incorporated in the British Virgin Islands),
which 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 Guangdong Construction
(B.V.I.) Company Limited (a company incorporated in the British Virgin Islands)
which is wholly owned by the Guangdong Branch of The China Construction Bank.
ACQUISITION OF SUBSIDIARIES - CPCT AND ITS SUBSIDIARIES
On May 18, 1994, the Company acquired from CPI 51% equity interest in China
Pacific Construction (B.V.I.) Limited ("CPCT"; a company incorporated in the
British Virgin Islands) by issuing to CPI 3,321,429 shares of common stock of
the Company (after adjusting for a one-for-four reverse stock split, see Note
17). CPCT and its subsidiaries are engaged in the development of residential
and commercial properties in Sun City, Huiyang County, Guangdong Province, the
People's Republic of China ("the PRC").
ACQUISITION OF SUBSIDIARIES - CPS AND CCIS
Under an agreement dated October 30, 1995, the Company acquired from China
Pacific Capital Limited ("CPC"), a company owned by Kiu Yin Investment Co. Ltd.,
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 a
consideration of approximately Rmb125.5 million, including Rmb5.0 million in
cash and Rmb120.5 million in the form of a non-interest bearing demand
promissory note secured by the stock of CPS.
- 9 -
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
ACQUISITION OF SUBSIDIARIES - CPS AND CCIS (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 established in the People's Republic of China directly under the
Department of Metallurgy of Chengdu Government) to establish a Sino-foreign
equity joint venture in the PRC - Chengdu Chengkang Iron and Steel Limited
("CCIS") for a period of 50 years from 1994 to 2044. 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 Province, the PRC. It
primarily sells to customers in the PRC.
Pursuant to the aforesaid agreements, CPS was required to contribute into CCIS
cash of approximately Rmb120 million as its capital contribution for a 60%
equity interest in CCIS, while CISP was required to contribute into CCIS part of
its production plant, including buildings, machinery and equipment, with a
valuation of Rmb80 million as its capital contribution for a 40% equity interest
in CCIS. The aforesaid capital injections were completed before December 31,
1995.
In connection with the establishment of CCIS, CISP delivered a guarantee to CPS
that the net income after tax of CCIS as determined under generally accepted
accounting principles in the United States of America would not be less than
Rmb100 million in 1995 and Rmb150 million in 1996. In 1996, the net income of
CCIS as determined under generally accepted accounting principles in the United
States of America amounted to approximately Rmb102,940,000. Accordingly,the
Company will recover from CISP an amount of approximately Rmb28,236,000,
representing its 60% share of the shortfall.
Pursuant to the aforesaid agreements, CISP agreed to lease to CCIS certain
buildings, machinery and equipment with an estimated valuation of approximately
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 CPS
and CISP starting from April 1, 1997, which will be based on market rental and
will not exceed 8% based on the valuation of assets actually leased. In
addition, 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.
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.
- 10 -
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
ACQUISITION OF SUBSIDIARIES - CPS AND CCIS (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 - THE SUN CITY SUBSIDIARIES
On December 29, 1995, CPCT, then a 51% owned subsidiary of the Company, entered
into an agreement with Open View Properties Limited ("OVP") to sell to OVP its
entire equity interests 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
CPCT a three-year 8% promissory note due on December 28, 1998 in the amount of
Rmb100.1 million. OVP is controlled by The People's Government of Huiyang City
which, until completion of this disposal, had an indirect minority interest in
the Company. 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 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 Rmb33.3
million plus any amounts injected into the Sun City Subsidiaries by OVP, and a
10% premium per annum on all such amounts. CPCT has deferred recognition of the
gain on disposal of the Sun City Subsidiaries of approximately Rmb6,135,000 (net
of minority interests) until the repurchase option expires.
The operating results of the Sun City Subsidiaries have been accounted for as
discontinued operations for the years ended December 31, 1994 and 1995. Revenue
of the Sun City Subsidiaries for the years ended December 31, 1994 and 1995 were
approximately Nil and Rmb82,485,000, respectively.
Following the disposal of the Sun City Subsidiaries, on December 29, 1995, the
Group's interest in CPCT was diluted from 51% (a subsidiary) to 50% (an
associated company).
- 11 -
<PAGE>
2. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1996 were as
follows:
Place of Percentage of equity
Name incorporation interest held
- ---------------------------------- -------------------- --------------------
China Pacific Corporation Limited Hong Kong 100%
China Pacific Steel, Limited The British Virgin
Islands 100%
Chengdu Chengkang Iron and Steel The People's
Limited (PRC) Republic of China 60%
Chengdu Chengkang Iron & Steel The British Virgin
Limited (BVI) Islands 60%
3. BASIS OF PRESENTATION
The acquisition of CPCT in 1994 was treated as a recapitalization of CPCT with
CPCT as the acquirer (reverse acquisition). On this basis, the historical
consolidated financial statements of the Company prior to May 18, 1994 are those
of CPCT and the historical shareholders' equity amounts of CPCT as of December
31, 1993 have been retroactively restated to reflect the equivalent number of
shares of common stock of the Company issued for that acquisition.
The acquisition of CPS and CCIS in 1995 has been accounted for using the
purchase method of accounting. Accordingly, the assets acquired and liabilities
assumed have been recorded at their estimated fair values at the date of
acquisition, and the operations of CPS and CCIS are included in the consolidated
financial statements of the Company from the date of acquisition.
4. 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.
- 12 -
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
b. 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 1994, 1995 and 1996 was approximately Nil,
Rmb225,000 and Rmb440,000, respectively. Accumulated amortization as of
December 31, 1995 and 1996 was approximately Rmb225,000 and Rmb665,000,
respectively. 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 December 31, 1995 and 1996.
c. INVENTORIES
Inventories are stated at the lower of cost, on a first-in first-out basis,
and market value. Costs of work-in-process and finished goods are composed
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. Depreciation for
financial reporting purpose is provided using the straight-line method over
the estimated useful lives of the assets after taking into account the
estimated residual value. The estimated useful lives are as follows:
buildings - 12 to 30 years, machinery and equipment - 5 to 12 years, motor
vehicles - 5 years, and furniture and office equipment - 5 years. Gains or
losses on disposals are reflected in current operations. All ordinary
repair and maintenance costs are expensed as incurred.
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. Interest capitalized for 1994, 1995 and 1996 was
Rmb6,672,000, Rmb7,845,000 and Nil, respectively.
e. SALES
Sales represent the invoiced value of goods (excluding valued added tax)
supplied to customers, net of sales returns and allowances. Sales are
recognized upon delivery of goods and passage of title to customers.
All of the Group's sales are made in the PRC and are subject to PRC
valueadded tax at a rate of 17% ("output VAT"). Such output VAT is payable
after offsetting VAT paid by the Group on purchases ("input VAT").
- 13 -
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
f. INCOME TAXES
Income tax is provided 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 Company considers Renminbi ("Rmb") as its functional currency as most
of the Group's business activities are based in Renminbi.
The translation of the financial statements of group companies into
Renminbi is performed for balance sheet accounts using the closing exchange
rate in effect at the balance sheet date and for revenue and expense
accounts using an average exchange rate during each reporting period.
Gains or losses resulting from translation are included in shareholders'
equity separately as cumulative translation adjustments. The net gains
from foreign currency transactions included in the results of operations in
1994, 1995 and 1996 were approximately Rmb233,000, Rmb275,000 and Rmb2,000,
respectively.
i. EARNINGS (LOSS) PER COMMON SHARE
The computation of primary earnings (loss) per common share is based on the
weighted average number of shares of common stock outstanding and common
stock equivalents arising from conversion of convertible preferred stock,
and exercise of warrants and options based on the average market price of
common stock during the year. Earnings (Loss) per common 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 arising from
conversion of convertible debentures and convertible preferred stock, and
exercise of warrants and options based on the market price of common stock
as of the balance sheet date.
- 14 -
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
j. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that effect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
1995 1996
---------- -------------------
Rmb'000 Rmb'000 US$'000
Trade receivables 143,952 119,448 14,409
Less: Allowance for doubtful accounts (1,248) (7,445) (898)
-------- -------- --------
142,704 112,003 13,511
======== ======== ========
6. DUE FROM CISP
Due from CISP comprised:
1995 1996
---------- -------------------
Rmb'000 Rmb'000 US$'000
Current portion - 13,000 1,568
Long-term portion - 38,191 4,607
-------- -------- --------
- 51,191 6,175
======== ======== ========
The amount due from CISP is unsecured and non-interest bearing. The directors
expected that majority of the amount due from CISP will be settled by CISP
through transfer of plant and machinery to CCIS.
- 15 -
<PAGE>
7. PREPAYMENTS, DEPOSITS AND OTHER CURRENT ASSETS
Prepayments, deposits and other current assets comprised:
1995 1996
---------- -------------------
Rmb'000 Rmb'000 US$'000
Deposits for purchases of raw materials 19,970 22,743 2,743
Deposits for construction in progress 1,499 12,827 1,547
Prepaid insurance and utilities 8,905 5,532 667
Advances to employees - 1,374 166
Due from companies related to OVP (see Note 1) 100 5,793 699
-------- -------- --------
30,474 48,269 5,822
======== ======== ========
8. INVENTORIES
Inventories comprised:
1995 1996
---------- ------------------
Rmb'000 Rmb'000 US$'000
Raw materials 220,208 246,172 29,695
Work-in-process 51,789 69,985 8,442
Finished goods 8,178 8,699 1,049
-------- -------- --------
280,175 324,856 39,186
Less: Allowance for obsolete and (7,937) (7,937) (957)
slow-moving items -------- -------- --------
272,238 316,919 38,229
======== ======== ========
- 16 -
<PAGE>
9. INVESTMENT IN AN ASSOCIATED COMPANY
As of December 31, 1995 and 1996, the Company had a 50% equity interest in China
Pacific Construction (B.V.I.) Limited ("CPCT"; a company incorporated in the
British Virgin Islands). The major asset of CPCT is a three-year 8% promissory
note due on December 28, 1998 in the amount of Rmb100.1 million issued by OVP in
connection with the disposal of the Sun City Subsidiaries (see Note 1). In 1995
and 1996, the major income of CPCT was consultancy fees of approximately
Rmb11,472,000 and Rmb11,466,000, respectively received from OVP following the
disposal of the Sun City Subsidiaries, and interest income of Nil and
approximately Rmb10,927,000, respectively accrued from the aforementioned
promissory note.
10. INVESTMENTS AND NOTE RECEIVABLE
Investments and note receivable comprised:
1995 1996
---------- ------------------
Rmb'000 Rmb'000 US$'000
PRC Government debentures 6,348 5,546 669
Note receivable 25,349 25,244 3,045
-------- -------- --------
31,697 30,790 3,714
======== ======== ========
The PRC Government debentures are issued by the Power Bureau of Qingbaijiang
District, Chengdu, Sichuan Province, the PRC and Chengdu Ministry of Finance.
The debentures are non-interest bearing and will mature from 1998 to 2002.
The note receivable from China Treasure Enterprises Ltd., a subsidiary of OVP
(see Note 1), bears interest at 8% per annum and is 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 minority interest in
the Company.
11. DEFERRED VALUE ADDED TAX RECOVERABLE
Deferred value added tax ("VAT") recoverable arose from a change in the PRC tax
regulations effected January 1, 1994. Pursuant to a directive issued by the PRC
State Tax Bureau, the amount of deferred VAT recoverable outstanding at January
1, 1995 can be uitilised to offset net VAT payable over a period of five years
with the exact amount of annual utilization varying from 15% and 20% of the
balance outstanding at January 1, 1995 as determined by individual local tax
bureaus. The amount utilized in 1995 and 1996 was approximately Rmb6,864,000
and Rmb6,127,000, respectively.
- 17 -
<PAGE>
12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
1995 1996
---------- ------------------
Rmb'000 Rmb'000 US$'000
Buildings 40,724 146,758 17,703
Machinery and equipment 39,251 39,455 4,759
Motor vehicles 1,872 4,227 510
Furniture and office equipment 840 1,182 143
-------- -------- --------
82,687 191,622 23,115
Less: Accumulated depreciation (4,309) (15,166) (1,829)
-------- -------- --------
78,378 176,456 21,286
Construction-in-progress:
Machinery and equipment 12,371 37,764 4,555
-------- -------- --------
90,749 214,220 25,841
======== ======== ========
As of December 31, 1995 and 1996, certain motor vehicles and office equipment
with a net book value of approximately Rmb1,381,000 and Rmb2,700,000,
respectively, were held under capital leases. The total amount of obligations
under these capital leases as of December 31, 1995 and 1996 was approximately
Rmb982,000 and Rmb2,485,000, respectively, which was included in accounts
payable in the consolidated balance sheets.
13. SHORT-TERM BORROWINGS
Short-term borrowings comprised:
1995 1996
---------- ------------------
Rmb'000 Rmb'000 US$'000
Short-term loans 4,001 - -
Demand promissory note 99,834 49,716 5,997
-------- -------- --------
103,835 49,716 5,997
======== ======== ========
The demand promissory note was issued to CPC for the acquisition of CPS (see
Note 1), is non-interest bearing and is secured by the stock of CPS.
14. OTHER PAYABLES
Other payables represented amounts due to companies related to OVP (see Note 1).
- 18 -
<PAGE>
15. ACCRUED LIABILITIES
Accrued liabilities comprised:
1995 1996
---------- ------------------
Rmb'000 Rmb'000 US$'000
Accruals for operating expenses
-Staff wages and bonus 7,535 12,137 1,464
-Staff welfare and incentive 6,148 11,044 1,332
-Utilities 16,196 42,005 5,067
-Transportation 3,499 6,134 740
-Others 12,510 27,566 3,325
Accrual for construction costs - 4,998 603
Accrual for professional fee in connection
with the acquisition of CPS/CCIS 13,721 - -
-------- -------- --------
59,609 103,884 12,531
======== ======== ========
16. LONG-TERM DEBT
Long-term debt comprised:
1995 1996
---------- ------------------
Rmb'000 Rmb'000 US$'000
10% convertible debentures
due November 1997 6,655 1,657 200
Payable to CISP 60,948 - -
Other long-term debt 55,208 8,946 1,079
-------- -------- --------
122,811 10,603 1,279
-------- -------- --------
Less: Current maturities (31,472) (10,603) (1,279)
-------- -------- --------
91,339 - -
======== ======== ========
- 19 -
<PAGE>
16. LONG-TERM DEBT (Cont'd)
In 1995, the Company issued US$800,000 (equivalent to approximately
Rmb6,655,000) of 10% convertible debentures due November 1997. The debentures
are convertible into common stock of the Company 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 was approximately US$18.72 (after adjusting for the one-for-four reverse
stock split), 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.
In 1996, approximately Rmb4,998,000 of the 10% convertible debenture together
with approximately Rmb169,000 of the related accrued interest were converted
into 162,029 shares of common stock of the Company at an average conversion
price of approximately US$3.85 each (equivalent to approximately Rmb31.89 each),
after adjusting for the one-for-four reverse stock split.
The amount payable to CISP is unsecured and non-interest bearing.
Other long-term debt includes various loans from unrelated third parties, which
are unsecured, non-interest bearing and repayable over a two-year period from
1996 to 1997.
17. CAPITAL STOCK AND WARRANTS
COMMON STOCK
In 1995, the Company sold 38,750 shares of common stock, par value US$0.001
each, for cash of approximately US$433,000 (equivalent to approximately
Rmb3,603,000), at an average price of approximately US$11.17 per share (after
adjusting for the one-for-four reverse stock split). In 1996, the Company sold
599,891 shares of common stock, par value US$0.001 each, for cash of
approximately US$1,325,000 (equivalent to approximately Rmb10,975,000), at an
average price of approximately US$2.21 per share (after adjusting for the one-
for-four reverse stock split). Also, the Company issued 195,750 shares of
common stock, par value US$0.001 each, valued at US$783,000 (equivalent to
approximately Rmb6,481,000), at average price of approximately US$3.99 per share
(after adjusting for the one-for-four reverse stock split) to certain third
party consultants for the consultancy services rendered by them in connection
with the acquisition of CPS and CCIS.
On July 9, 1996, the Company effected a one-for-four reverse stock split, under
which the then outstanding 35,760,398 shares of common stock with a par value of
US$0.001 each have become 8,940,109 shares of common stock with a par value of
US$0.001 each. In this connection, an amount of approximately US$27,000
(equivalent to approximately Rmb221,000) was transferred from the common stock
account to additional paid-in capital. Also, the number of authorized shares of
common stock of the Company was reduced from 100,000,000 to 25,000,000. All
references in these financial statements of number of shares, share prices and
per share amount of common stock have been adjusted retroactively for this one-
for-four reverse stock split.
- 20 -
<PAGE>
17. CAPITAL STOCK AND WARRANTS (Cont'd)
COMMON STOCK (Cont'd)
In May 1996, the Company repurchased 27,500 shares of common stock in the open
market for approximately US$171,000 (equivalent to Rmb1,420,000), representing
an average price of US$6.22 per share (after adjusting for the one-for-four
reverse stock split).
SERIES A CONVERTIBLE PREFERRED STOCK
In 1995, the Company sold 5,905 shares of Series A convertible preferred stock,
par value US$0.001 each, for US$5,905,000 (equivalent to approximately
Rmb49,129,000). The Series A convertible preferred stock carries preferential
rights to dividends and distributions upon liquidation. 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 notice of conversion. In 1995, 3,655 shares of series A preferred stock were
converted into 555,249 shares of common stock of the Company at an average
conversion price of US$6.60 per share (after adjusting for the one-for-four
reverse stock split). In 1996, 2,250 shares of Series A preferred stock were
converted into 559,167 shares of common stock of the Company at an average
conversion price of US$4.02 per share (after adjusting for the one-for-four
reverse stock split).
SERIES B CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
The Company sold 650 shares of Series B convertible and redeemable preferred
stock, par value US$0.001 each, for US$650,000 (equivalent to approximately
Rmb5,408,000) in 1995 and 1,030 shares of Series B convertible and redeemable
preferred stock, par value US$0.001 each, for US$1,030,000 (equivalent to
approximately Rmb8,534,000) in 1996. The Series B convertible and redeemable
preferred stock carries preferential rights to dividends and distributions upon
liquidation. The subscription value of Series B convertible and redeemable
preferred stock is convertible into common stock of the Company at a conversion
price equal to 65% of the average closing market price of the Company's common
stock for the five days immediately preceding the date of the notice of
conversion. The outstanding convertible and redeemable preferred stock is
redeemable at the option of the Company at any time after January 1, 1997 by
giving ten days notice at the original subscription price. In 1996, all of the
1,680 shares of Series B convertible and redeemable preferred stock were
converted into 544,961 shares of common stock of the Company at an average
conversion price of US$3.08 per share (after adjusting for the one-for-four
reverse stock split).
- 21 -
<PAGE>
17. CAPITAL STOCK AND WARRANTS (Cont'd)
SERIES C CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
In 1996, the Company sold 9,105 shares of Series C convertible and redeemable
preferred stock, par value US$0.001 each, for US$9,105,000 (equivalent to
approximately Rmb75,443,000). The Series C Convertible and redeemable preferred
stock carries preferential rights to dividends and distributions upon
liquidation. 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 the lesser of 100% of the average closing market price of the
Company's common stock upon issuance of the preferred stock or 75% of the
average closing market price of the Company's common stock for the five days
immediately preceding the date of notice of conversion. The outstanding
convertible and redeemable preferred stock is redeemable at the option of the
Company at any time after January 1, 1998 by giving ten days notice at a premium
of 133% in excess of the issued price together with any declared dividends. In
1996, all of the 9,105 shares of Series C convertible and redeemable preferred
stock were converted into 2,729,158 shares of common stock of the Company at an
average conversion price of US$3.34 per share (after adjusting for the one-for-
four reverse stock split).
WARRANTS
In 1995, the Company issued 550,755 warrants to a third party for investment
banking services at a conversion basis of 4 warrants for 1 share of common stock
of the Company at an exercise price of US$15.24 per share (after adjusting for
the one-for-four reverse stock split). The warrants will expire in September
2000. The Company's management believes that the exercise price of the warrants
issued exceeded the fair market value of the Company's common stock on the date
of issuance of the warrants. No warrants have 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 US$9.60
to US$16.00 (after adjusting for the one-for-four reverse stock split) to be
exercised according to a pre-determined schedule from 1996 to 2000. The
Company's management believes that the exercise prices of the options exceeded
the fair market value of the Company's common stock on the date of grant. No
options were exercised in 1995 and 1996. An option to purchase 25,000 shares of
common stock at US$9.60 expired as of December 31, 1996.
- 22 -
<PAGE>
18. 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 operate.
British Virgin Islands subsidiaries are incorporated under the International
Business Companies Act of the British Virgin Islands and, accordingly, are
exempted from payment of the British Virgin Islands 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 and 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.
If the tax holiday for CCIS did not exist, the Group's provision for income tax
would have been increased by approximately Nil, Rmb24,471,000 and Rmb33,970,000
for the years ended December 31, 1994, 1995 and 1996, respectively. Primary
earnings per common share would have been approximately Rmb9.43 and Rmb9.78 for
the years ended December 31, 1995 and 1996, respectively.
The Company does not provide for income taxes on the undistributed earnings of
its international subsidiaries because the earnings are reinvested and, in the
opinion of management, will continue to be reinvested in the foreseeable future.
The reconciliations 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 are as
follows:
Years ended December 31,
---------------------------
1994 1995 1996
-------- ------- --------
United States federal income tax rate 35.0% 35.0% 35.0%
Weighted average effect of different
tax rates in foreign jurisdictions - (1.9%) (6.5%)
Effect of tax holiday for CCIS - (30.7%) (27.1%)
Tax effect of foreign subsidiary income
not subject to income taxes (35.0%) - -
-------- ------- --------
Effective income tax rate 0.0% 2.4% 1.4%
======== ======= ========
- 23 -
<PAGE>
19. DISTRIBUTION OF PROFIT
At present, the majority of the Group's income is contributed by its 60% owned
joint venture enterprise in the PRC - Chengdu Chengkang Iron and Steel Limited
("CCIS").
Income of CCIS as determined under generally accepted accounting principles in
the PRC is distributable to investors after transfer to (i) contributory
dedicated capital as required under PRC government regulations and the company's
articles of association, and (ii) 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 is not
distributable in the form of dividends. In the Company's finanical statements
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 balance sheets.
The income of CCIS available for distribution to its shareholders is based on
the income reported in its statutory accounts prepared under generally accepted
accounting principles in the PRC. This differs from the amount reported under
generally accepted accounting principles in the United States of America. As of
December 31, 1996, such difference was insignificant.
20. 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, 1994, 1995 and 1996 were approximately Rmb3,419,000,
Rmb13,220,000 and Rmb25,311,000, respectively. Most leases contain renewal
options. Future minimum rental payments as of December 31, 1996, under
agreements classified as operating leases with non-cancellable terms in excess
of one year, are as follows:
1996
-----------------------------
Rmb'000 US$'000
1997 12,356 1,490
1998 5,165 623
1999 4,167 503
2000 4,167 503
2001 4,167 503
Thereafter 222,965 26,895
--------- ---------
252,987 30,517
========= =========
- 24 -
<PAGE>
21. OUTSTANDING LITIGATION
In March 1997, a brokerage firm filed a civil action against the Company in a
United States District Court. 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 US$5 million (equivalent to
approximately Rmb41,450,000) and/or 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. If the outcome is adverse, the Company's financial
position and operating results could be materially affected. No provision has
been recorded in the financial statements in connection with the aforesaid
claims.
22. RETIREMENT PLAN
As stipulated by PRC regulations, CCIS maintains a defined contribution
retirement plan for all its employees. All retired employees of CCIS are
entitled to an annual pension equal to their basic annual salary at retirement.
CCIS contributes to a state sponsored retirement plan approximately 14.6% of the
basic salary of its employees and has no further obligations for the actual
pension payments or post-retirement benefits beyond the annual contributions.
The state sponsored retirement plan is responsible for the entire pension
obligations payable to retired employees. The contributions made in 1994, 1995
and 1996 amounted to approximately Nil, Rmb360,000 and Rmb450,000, respectively.
- 25 -
<PAGE>
23. RELATED PARTY TRANSATIONS
Name and relationship of related parties:
<TABLE>
<CAPTION>
Name of related parties Existing relationship with the Company
- --------------------------------------------- ----------------------------------------------
<S> <C>
China Pacific Investment Holdings Limited Intermediate holding company (see Note 1)
Kiu Yin Investment Co., Ltd. Owned by a discretionary trust established
for the benefit of the family of Clement
Mak, the Company's chairman and
president (see Note 1)
CCT Telecom Holdings Limited Common directors
China Treasure Telecom (H.K.) Limited Common directors
China Treasure Holding (B.V.I.) Limited Common directors
CP Investment Limited Common directors
China Pacific Capital Limited Common directors
Guangdong Construction (HK) Limited Owned by the Guangdong Branch of The
China Construction Bank (see Note 1)
China Pacific Construction (B.V.I.) Limited Associated company
</TABLE>
Summary of related party transactions
1995 1996
---------- ------------------
Rmb'000 Rmb'000 US$'000
Due from related companies
-Kiu Yin Investment Co., Ltd. - 1 -
-CCT Telecom Holdings Limited - 360 44
-China Treasure Telecom (H.K.) Limited - 1 -
-China Treasure Holding (B.V.I.) Limited - 1,235 149
-China Pacific Capital Limited - 3 -
-Guangdong Construction (H.K.) Limited - 99 12
-China Pacific Construction (B.V.I.) Limited - 332 40
-------- -------- --------
- 2,031 245
======== ======== ========
Due to related companies
-China Pacific Investment Holdings Limited - 4,445 537
-CP Investment Limited - 4,918 593
-------- -------- --------
- 9,363 1,130
======== ======== ========
Accounts receivable from companies
related to CISP 30,366 5,377 649
Accounts payable to companies related to CISP 5,067 8,710 1,051
Deposits from customers related to CISP 12,138 8,567 1,033
======== ======== ========
- 26 -
<PAGE>
23. RELATED PARTY TRANSATIONS (Cont'd)
All outstanding balances with related companies are unsecured, non-interest
bearing and without pre-determined repayment terms, except for balances with
China Treasure Holding (B.V.I.) Limited which bear interest at 9% per annum.
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Sales to companies related to CISP - 114,276 103,574 12,494
Purchases from companies related to CISP - 15,120 12,900 1,556
Rental expenses paid/payable to
CISP in respect of lease of
buildings, machinery
and equipment - 11,714 23,400 2,823
Interest expenses paid to China
Treasure Holding (B.V.I.)
Limited 6,672 9,268 816 98
Less: Capitalized in the cost of
development properties (6,672) (7,845) - -
-------- -------- -------- --------
- 1,423 816 98
-------- -------- -------- --------
Acquisition of buildings and
construction-in-progress from
CISP - - 131,631 15,878
======== ======== ========= ========
</TABLE>
24. SEGMENT INFORMATION
In 1995 and 1996, excluding the discontinued operations sold in 1995, the Group
was engaged primarily in the manufacturing of iron and steel products.
Operations by geographical areas are analyzed as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Net sales to customers in PRC - 442,088 1,023,846 123,504
======== ========= ========= ========
Income (loss) from continuing
operations --
PRC (2,050) 42,404 91,061 10,984
Hong Kong - 1,060 (7,279) (878)
Income (loss) from
discontinued operations--
PRC (6,801) 7,018 - -
-------- -------- -------- -------
(8,851) 50,482 83,782 10,106
======== ========= ========= ========
Identifiable assets as of
December 31--
PRC 696,753 864,076 104,231
Hong Kong 102,023 148,294 17,888
-------- -------- -------
798,776 1,012,370 122,119
========= ========= ========
</TABLE>
- 27 -
<PAGE>
25. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and income taxes comprised:
1994 1995 1996
-------- -------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Interest paid 141 - 2 -
======== ========= ========= ========
Income taxes - - - -
======== ========= ========= ========
26. OPERATING RISK
a. DEPENDENCE ON STRATEGIC RELATIONSHIP
A majority of the Group's operations are conducted by CCIS, a Sino-foreign joint
venture established between the Group and Chengdu Iron and Steel Plant, a PRC
state-owned enterprise (see Note 1). Any deterioration of this strategic
relationship may have an adverse effect on the operations of the Group.
b. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
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 which represented a significant concentration of
sales in 1994, 1995 and 1996 or trade accounts receivable as of December 31,
1995 and 1996. 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.
c. COUNTRY RISK
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 companies operating in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environments, and foreign currency exchange. The Group's 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. In addition, a significant portion of
the Group's revenue is denominated in Renminbi ("Rmb") which must be converted
into other currencies before remittance outside the PRC. Both the conversion of
Renminbi into foreign currencies and the remittance of foreign currencies abroad
require approvals of the PRC government.
- 28 -
<PAGE>
27. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of operations:
1994 1995 1996
_______ _______ ___________________
Rmb'000 Rmb'000 Rmb'000 US$'000
Interest expense 6,813 9,268 818 99
Less: Capitalized as
property, plant and
equipment (6,672) (7,845) - -
_______ _______ ________ ________
141 1,423 818 99
_______ _______ ________ ________
Operating lease rentals for
- rented premises 3,419 1,506 1,911 231
- buildings, machinery
and equipment
(CISP) - 11,714 23,400 2,823
Repairs and maintenance - 5,051 7,518 907
Depreciation
- Owned assets 1,589 5,314 10,565 1,274
- Assets held under
capital leases - 177 710 86
Advertising - 294 1,167 141
Interest income 216 34 3,634 438
Net foreign exchange gain 233 275 2 -
======= ======= ======== ========
28. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the following major events took place:
a. In January 1997, the Company issued US$15,000,000 (equivalent to
Rmb124,350,000) of 9% convertible notes to certain unrelated third
parties. The notes are due on January 15, 1999, and are
convertible at any time between May 15, 1997 and January 15, 1999
into common stock of the Company at a conversion price equal to 80%
of the average closing market price of the Company's common stock
for the five days immediately proceeding the date of notice from
notes holders of such conversion, with the conversion price subject
to a minimum amount of US$4.00 per share and a maximum amount of
US$8.00 per share.
- 29 -
<PAGE>
28. SUBSEQUENT EVENTS (Cont'd)
a. (Cont'd)
As consideration for the sales of the convertible notes, the company
paid placement commissions of US$1,050,000 (equivalent to
Rmb8,704,500), representing 7% of the proceeds of the convertible
notes, and issued to the placing agent five-year warrants to
acquire up to 300,000 shares of common stock of the Company at
US$4.00 per share. Management believes that the exercise price of
the warrants issued exceeded the fair market value of the Company's
common stock on the date of issuance of the warrants.
b. The Group acquired certain properties in Hong Kong for investment
purposes for an aggregation consideration of approximately
Rmb100,518,000.
- 30 -
<PAGE>
EXHIBIT 21.1
<PAGE>
Place of Percentage of equity
Name Incorporation interest held
---- ------------- -------------
China Pacific Hong Kong 100%
Corporation Limited
China Pacific Steel, The British 100%
Limited Virgin
Islands
Chengdu Chengkang Iron The People's 60%
and Steel Limited Republic of
(PRC) China
Chengdu Chengkang Iron The British 60%
and Steel Limited (BVI) Virgin Islands
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1996 FOR YEARS ENDED DECEMBER
31, 1994, 1995 AND 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,394
<SECURITIES> 0
<RECEIVABLES> 13,511
<ALLOWANCES> 898
<INVENTORY> 38,229
<CURRENT-ASSETS> 66,769
<PP&E> 25,841
<DEPRECIATION> 1,829
<TOTAL-ASSETS> 114,333
<CURRENT-LIABILITIES> 59,466
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 114,333
<SALES> 123,504
<TOTAL-REVENUES> 123,504
<CGS> 105,689
<TOTAL-COSTS> 7,806
<OTHER-EXPENSES> 99
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,119
<INCOME-TAX> 219
<INCOME-CONTINUING> 14,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,106
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.12
</TABLE>
