<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
AMENDMENT NO. 1
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________ .
Commission File No. 0-26232
CHINA PACIFIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 87-0429945
(STATE OR OTHER JURISDICTION (IRS Employer Identification No.)
OF INCORPORATION OR ORGANIZATION)
Rm. 2008 Sun Hung Kai Centre, 30 Harbour Road
Wanchai, Hong Kong
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(852) 2802 3068
(Issuer's telephone number)
----------------------------------------------------------------
(Former Name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) ,and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ______
As of June 20, 1998, 9,039,644 shares of Common Stock of the issuer
were outstanding.
<PAGE> 2
CHINA PACIFIC, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION........................................................... 1
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998 and December 31, 1997......... 1
Consolidated Statements of Operations - For the three months
ended March 31, 1998 and 1997.............................................. 2
Consolidated Statements of Cash Flows - For the three months
ended March 31, 1998 and 1997.............................................. 3
Notes to Consolidated Financial Statements................................. 5-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................11-14
PART II - OTHER INFORMATION.............................................................. 15
Item 1. Legal Proceedings.......................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................... 15
SIGNATURES ........................................................................... 16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------------------------- ---------------------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and Bank deposits 32,011 3,857 16,582 2,003
Restricted Bank deposits 33,284 4,020 33,284 4,020
Accounts receivable, net 51,447 6,203 51,487 6,218
Due from related companies 1,022 123 1,449 175
Prepayments, deposits , and other current assets 16,186 1,950 15,485 1,870
Loan receivable 3,000 362 3,000 362
Inventories, net 172,529 20,812 228,853 27,639
Deferred debt costs 3,330 401 4,440 536
---------- ---------- ---------- ----------
Total current assets 312,809 37,728 354,580 42,823
Investment Properties 39,071 4,707 56,919 6,875
Due from CISP, long-term portion 375,358 45,278 365,435 44,135
Investment in an associated company 58,988 7,124 58,988 7,124
Investments and notes receivable 36,098 4,360 36,098 4,360
Deferred value added tax recoverable 4,663 563 4,663 563
Property, plant ,equipment and capital leases , net 216,976 26,142 220,943 26,684
---------- ---------- ----------- ----------
Total assets 1,043,963 125,902 1,097,626 132,564
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
9% Convertible Notes due on Jan 15, 1999 124,290 15,000 -- --
Short-term borrowings 211,110 25,496 211,110 25,496
Long-term debt, current portion 21,069 2,538 22,858 2,761
Capital Lease obligations, current portion 630 76 630 76
Accounts payable 117,980 14,214 129,125 15,595
Deposits from customers 150,809 18,170 172,595 20,845
Accrued liabilities 117,934 14,209 88,323 10,667
Taxation payable 1,233 149 1,233 149
Value added tax payable 16,098 1,940 18,027 2,177
Due to related companies 1,291 156 1,592 192
---------- ---------- ---------- ----------
Total current liabilities 762,444 91,948 645,493 77,958
Long-term debt 42,276 5,068 166,767 20,141
Capital Lease obligations, non-current portion 1,356 163 1,516 183
---------- ---------- ---------- ----------
Total liabilities 806,076 97,179 813,776 98,282
---------- ---------- ---------- ----------
Minority interests 91,671 11,045 100,245 12,107
---------- ---------- ---------- ----------
Shareholders' equity:
Authorized 25,000,000 shares; outstanding 9,039,644
shares in 1997 and 1998
Common Stock, par value $0.001 75 9 75 9
Treasury stock, 27,500 shares in 1997 and 1998 (1,420) (171) (1,420) (171)
Additional paid-in capital 191,036 23,072 191,036 23,072
Dedicated capital 23,245 2,807 23,245 2,807
Accumulated deficit (70,384) (8,480) (33,001) (3,985)
Cumulative translation adjustments 3,664 441 3,670 443
---------- ---------- ---------- ----------
Total shareholders' equity 146,216 17,678 183,605 22,175
---------- ---------- ---------- ----------
Total liabilities, minority interests
and shareholders' equity 1,043,963 125,902 1,097,626 132,564
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
<PAGE> 4
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
RMB USD RMB USD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 199,579 24,075 251,900 30,386
Cost of goods sold (200,644) (24,203) (222,354) (26,822)
---------- ---------- ---------- ----------
Gross (loss) / profit (1,065) (128) 29,546 3,564
Selling, general and administrative expenses (24,549) (2,961) (16,240) (1,959)
Interest expenses, net (2,784) (336) (1,376) (166)
Other (expenses) / income, net (17,559) (2,118) 2,851 344
---------- ---------- ---------- ----------
Income before minority interests (45,957) (5,543) 14,781 1,783
Minority interests 8,574 1,034 (6,439) (777)
---------- ---------- ---------- ----------
Net (loss) / Income (37,383) (4,509) 8,342 1,006
========== ========== ========== ==========
Basic (loss)/earnings per common share:
Net (loss) / income (4.14) (0.50) 0.97 0.12
========== ========== ========== ==========
Weighted average number of shares outstanding
used in basic calculation 9,039,644 9,039,644 8,569,459 8,569,459
========== ========== ========== ==========
Diluted (loss)/earnings per common share (4.14) (0.50) 0.97 0.12
========== ========== ========== ==========
Weighted average number of shares
outstanding used in diluted calculation 9,039,644 9,039,644 8,589,989 8,589,989
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 5
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
(AMOUNTS EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------------------- --------------------
RMB USD RMB USD
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) / income (37,383) (4,509) 8,342 1,006
Adjustments to reconcile net income (loss)
To net cash provided by (used in)
operating activities:
Net loss (gain) on disposals of subsidiary (371) (45) -- --
Equity gain on CPC -- -- (2,296) (277)
Amortization of goodwill -- -- 108 13
Amortization of deferred debt costs 1,110 134 -- --
Amortization of depreciation 4,473 539 1,650 199
Impairment loss on investment properties 17,366 2,092 -- --
Minority interests (8,574) (1,033) 6,441 777
Effect of cumulative translation adjustment (6) (1) 373 45
(Increase) Decrease in operating assets
Accounts receivable, 40 9 (27,946) (3,371)
Inventories, net 56,324 6,786 28,650 3,456
Prepayments, deposit and other current assets (905) (109) 13,055 1,575
Increase (Decrease) in operating liabilities:
Accounts payable, net (11,145) (1,343) (56,695) (6,839)
Accrued liabilities 29,611 3,568 (7,751) (935)
Deposit from customers (21,786) (2,625) 48,762 5,882
Taxation -- -- 1,010 122
Value-added tax payable (1,929) (232) -- --
-------- -------- -------- --------
Net cash provided by (used in) operating activities 26,825 3,231 13,703 1,653
-------- -------- -------- --------
Cash flows from investing activities:
Acquisition of property, machinery and equipment (24) (3) (104,089) (12,556)
Acquisition of fixed assets -- -- (133) (16)
Proceeds from disposals of subsidiary 11 1 -- --
-------- -------- -------- --------
Net cash provided by (used in) investing activities (13) (2) (104,222) (12,572)
-------- -------- -------- --------
Cash flows from financing activities:
Increase (Decrease) in short-term borrowings -- -- (16,572) (1,999)
Repayment of capital element of capital lease obligations (160) (19) -- --
(Decrease) Increase in long-term debt (1,990) (240) 184,403 22,244
Due from CISP (9,923) (1,196) (22,325) (2,692)
Due from related companies and holding company 991 119 (23,618) (2,850)
Due to related companies and holding company (301) (36) (1,028) (124)
Proceeds from issuance of stock -- -- (9,426) (1,137)
-------- -------- -------- --------
Net cash provided by (used in) financing activities (11,383) (1,372) 111,434 13,442
-------- -------- -------- --------
Net increase (decrease) in cash 15,429 1,857 20,915 2,523
Cash at beginning of period 49,866 6,008 61,296 7,394
-------- -------- -------- --------
Cash at end of period 65,295 7,865 82,211 9,917
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 6
China Pacific, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. The December 31, 1997 balance
sheet data was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting
principles. The interim financial statements and notes thereto should
be read in conjunction with the financial statements and notes included
in the Company's Form 10K for the fiscal year ended December 31, 1997.
In the opinion of management, the interim financial statements reflect
all adjustments of a normal recurring nature necessary for a fair
statement of the results for the interim periods presented.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in Reminbi (RMB). The
translation of the financial statements of foreign subsidiaries into
U.S. dollars (USD) is performed for balance sheet accounts using
closing exchange rates in effect at the balance sheet date and for
revenue and expense accounts using an average exchange rate during each
reporting period. The gains or losses resulting from translation are
included in shareholders' equity separately as cumulative translation
adjustments.
3. BUSINESS AND ORGANIZATION
GENERAL 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
Republic of China (the "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. On October 30,
1995, the Company acquired, effective as of July 1, 1995, 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.,
Ltd. ("Chengdu Steel"), a PRC steel manufacturer.
4
<PAGE> 7
4. RECEIVABLES DUE FROM CHENGDU IRON AND STEEL PLANT ("CISP") AND OPEN
VIEW PROPERTIES
As of March 31, 1998, the Company had outstanding receivables of
approximately RMB375.4 million from CISP, the Chinese joint venture
partner of Chengdu Steel. RMB211 million of this balance arises from
short term bank loans maturing in less than a year that were
transferred from CISP into the name of Chengdu Steel without
authorization from Chengdu Steel. The loans, on a revolving basis, are
due within 1998, so must be recognized in the Company's financial
statements. The remainder of the RMB375.4 million in receivables, about
RMB164.4 million, arises from loans by Chengdu Steel to CISP to finance
CISP's operations. As the Company's auditors were not able to review
CISP's financial statements, the Company and its auditors are thus
unable to determine whether CISP has the necessary financial ability to
repay its obligations to the Company or its subsidiaries. Chengdu Steel
and CISP have entered into an agreement recognizing that CISP, and not
Chengdu Steel, is responsible for repayment of the RMB211 million bank
loans, but it is unclear when, or whether, the bank loans will be
transferred back to CISP. As a condition to requesting a transfer of
the loans back to CISP, CISP must obtain the permission of the relevant
Chinese governmental authorities to use its real property as collateral
for the loans. CISP has made an application for such use of its real
property to the relevant Chinese governmental authorities and is
awaiting their approval.
If such short term bank loans are not transferred back to CISP and the
Company is required to repay such loans during 1998, it is unclear
whether the Company will have the necessary cash resources to pay back
the loans. This is due to the substantial losses the Company incurred
during 1997 and the first quarter of 1998 and the fact that its current
liabilities exceeded its current assets as of March 31, 1998 by
approximately RMB449.6 million.
As noted below in Item 2, Management Discussion and Analysis of
Financial Condition and Results of Operations, substantial doubt exists
as to whether Open View Properties Ltd. ("Open View Properties") and
its related companies have sufficient cash resources to complete the
development of the Sun City project and repay certain obligations to
the Company and to China Pacific Construction (B.V.I.) Limited
("CPCT"). As of March 31, 1998, these obligations have a carrying value
of approximately RMB92.7 million.
5. INVENTORIES
<TABLE>
<CAPTION>
Inventories comprised: March 31, 1998
-----------------------
RMB'000 USD'000
<S> <C> <C>
Raw materials 73,011 8,805
Work-in-process 56,234 6,784
Finished goods 43,284 5,223
------- -----
172,529 20,812
======= ======
</TABLE>
Inventories are stated at the lower of cost, on a first-in first-out
basis, or market value. Costs of work-in-process and finished goods are
composed of direct materials, direct labor and an attributable portion
of production overheads.
5
<PAGE> 8
6. INVESTMENT PROPERTIES
As of March 31, 1998 the Company held two residential properties in
Hong Kong that were acquired during the third quarter of 1997, with a
carrying value of RMB39.1 million, which included a provision for total
impairment loss of the two residential properties amounting to RMB34.7
million, of which RMB17.4 million was an additional provision made
during the quarter ended March 31, 1998, as a result of turmoil in the
Hong Kong property market.
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment comprised : March 31, 1998
-----------------------------------------
RMB'000 USD'000
<S> <C> <C>
Buildings 146,758 17,693
Machinery and equipment 77,219 9,305
Motor Vehicles 2,953 353
Furniture and office equipment 1,384 167
------- ------
228,314 27,518
Less: Accumulated depreciation (33,923) (4,097)
------- ------
194,391 23,421
Construction-in-progress : 22,585 2,721
------- ------
216,976 26,142
======= ======
</TABLE>
8. GOODWILL
Goodwill, being the excess of cost over fair value of the net assets of
CPS (including CPS's 60% interest in Chengdu Steel) acquired, was
amortized on a straight-line basis over forty years. The amortization
recorded for the year ended December 31, 1997 was approximately
RMB440,000. In addition, the Company's management assessed the
remaining life of the goodwill and decided to write off the unamortized
amount of approximately RMB16,624,000 during the year ended December
31, 1997 after taking into consideration the substantial operating loss
of Chengdu Steel during the year ended December 31, 1997. No goodwill
is carried forward for the period ended March 31, 1998.
6
<PAGE> 9
9. SHAREHOLDERS' EQUITY
9% Convertible Notes
During 1997, the Company completed the placement of USD15 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 receipt of written notice from a
noteholder of such conversion. The conversion price shall in no event
be less than USD4.00 per share nor greater than USD8.00 per share. No
conversions shall be permitted prior to May 15, 1997. The Notes are
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 of March 31, 1998, the Company has outstanding liabilities under the
Notes of approximately USD15 million. Because the shares of the Company
common stock have been trading below the required USD4.00 minimum
conversion price for some time, it is uncertain whether the noteholders
will convert the Notes into common stock. If the holders of the Notes
choose not to convert and require repayment of the Notes, it is
uncertain whether the Company will have the necessary cash resources to
pay the obligation on the due date. This is in part because of the
substantial losses incurred by the Company, the low prices at which the
shares of the Company's common stock are trading, below the minimum
conversion price of USD4.00, and the questionable value of the
Company's receivables from CISP and Open View Properties. The original
arranger of the Notes is currently negotiating with the noteholders to
modify the repayment terms of the Notes, although no agreement has yet
been reached, and there can be no assurance that any agreement will be
reached.
Warrants
In 1995, the Company issued 550,755 warrants to a third party for
investment banking services on a conversion basis of 4 warrants for 1
share of common stock of the Company at an exercise price of USD15.24
per share (after adjusting for the one-for-four reverse stock split).
The warrants will expire in September 2000. No warrants have been
exercised.
In 1997, the placement agent for the sale of the 9% Convertible Notes
described above was also granted a five year warrant exercisable to
acquire up to 300,000 shares of the Company's common stock at a price
of USD4.00 per share. As of the balance sheet date, the warrant has not
been exercised.
Options
In 1995, the Company granted common stock options under an incentive
plan to purchase 125,000 shares of common stock at exercise prices
ranging from USD9.60 to USD16.00 (after adjusting for the one-for-four
reverse stock split) to be exercised according to a pre-determined
schedule from 1996 to 2000. No options were exercised in 1997 or during
the first quarter of 1998.
Reverse Stock Split
The Company declared a 1-for-4 reverse stock split effective July 9,
1996,. All information herein relating to shares issued or outstanding,
including information in the footnotes, reflects the effect of such
reverse stock split.
7
<PAGE> 10
10. (LOSS) EARNINGS PER COMMON SHARE
Basic (loss) earnings per common share is computed in accordance with
Statement of Financial Accounting Standards No.128 by dividing net
(loss) income for each year by the weighted average number of shares of
common stock outstanding. Diluted (loss) earnings per common share
reflects the dilution that would have resulted from the conversion of
convertible debentures and convertible preferred stock, and exercise of
warrants and options based on the average market price of common stock
during the periods. For the period ended March 31, 1998 and 1997,
diluted earnings per common share is computed by dividing net income
for each year plus convertible debenture interest (net of tax) by the
weighted average number of shares of common stock outstanding and all
dilutive securities during the years arising from conversion of
convertible debentures and convertible preferred stock, and exercise of
warrants and options based on the market price of common stock. For the
period ended March 31, 1998 and 1997, exercise of warrants and
convertible debentures would have been anti-dilutive and, accordingly,
was not considered in the computation of dilutive (loss) earnings per
common share. All earnings per common share data have been restated in
accordance with Statement of Financial Accounting Standards No.128.
11. OUTSTANDING LITIGATION
On or about March 5, 1997 , a brokerage firm filed a civil action
against the Company in the United States District Court, Southern
District of New York. The complaint alleges breach of contract by the
Company in connection with a Selling Agreement allegedly entered into
between the Company and the brokerage firm, and involves securities of
the Company that were sold in private placements in 1995 and 1996. The
brokerage firm is seeking monetary damages and expenses in excess of
USD5 million, and an order compelling the Company to issue warrants to
subscribe to 1,141,000 shares of common stock (after considering the
one-for-four reverse stock split) under the terms of the alleged
Selling Agreement. The Company believes this claim is without merit and
plans to contest such claim vigorously. However, the Company is unable
to predict the outcome of this dispute and if the outcome is adverse to
the Company, the Company's financial position and operating results
could be materially affected. No provision has been recorded in the
financial statements in connection with the aforesaid claims.
12. GOING CONCERN
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As further discussed in
note 4 to the accompanying financial statements, as of March 31, 1998,
the principal operating subsidiary of the Group (Chengdu Chengkang Iron
and Steel Company Limited) had short-term bank loans of approximately
RMB211.1 million, which are due for repayment within twelve months. It
is uncertain whether the Company will have the necessary cash resources
to repay these short-term bank loans on the due dates. In addition as
shown in the accompanying financial statements, the Company incurred
significant losses during the period ended March 31, 1998 and as of
that date the Company current liabilities exceeded its current assets
by approximately USD54.2 million. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
8
<PAGE> 11
CHINA PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK TREASURY ADDITIONAL CUMULATIVE
-------------------- ---------------------
ACCUMULATED NUMBER OF NUMBER OF PAID-IN DEDICATED TRANSLATION
DEFICIT SHARES* AMOUNT SHARES* AMOUNT CAPITAL CAPITAL ADJUSTMENTS
--------- --------- --------- --------- --------- --------- --------- ---------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 (33,001) 9,039,644 75 (27,500) 1,420 191,036 23,245 3,670
Net loss (37,383) -- -- -- -- -- -- (6)
--------- --------- --------- --------- --------- --------- --------- ---------
Bal. as of March 31, 1998 (70,384) 9,039,644 75 (27,500) 1,420 191,036 23,545 3,664
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
MATERIAL CHANGES AND RESULTS OF OPERATIONS
Net sales during the first quarter of 1998 totalled $24.1 million
compared to net sales of $30.4 million during 1997. This decline was caused
partially by a decrease in sales volume from approximately 100,000 tons in the
first quarter of 1997 to 90,000 tons in the first quarter of 1998. Furthermore,
there has been a reduction in the average unit prices of steel products the
Company has realized in 1998 due to keen competition in the steel market, from
an average of $304 per ton during the first quarter of 1997 to $268 per ton
during the first quarter of 1998.
Cost of goods sold during the three months ended March 31,1998 totalled
$24.2 million as compared to $26.8 million during the three months ended March
31, 1997. The decrease in cost of goods sold was attributable to the decrease in
production volume from 100,000 tons in the first quarter of 1997 to 90,000 tons
in the first quarter of 1998.
Gross losses for the period in 1998 amounted to $128,000 (negative 0.5%
of net sales) as compared to gross profits of $3.6 million (11.7% of net sales)
for the same period in 1997. The decline in profit margin was attributable to
the decrease in selling prices of the Company's steel products from $304 per ton
during the first quarter of 1997 to $268 per ton during the first quarter of
1998.
Selling, general and administrative expenses ("SG&A") during the three
months ended March 31, 1998 totalled $3.0 million as compared to $1.96 million
during the three months ended March 31,1997. The increase in SG&A was
attributable to an increased level of corporate activities, including marketing
expenses, relating to the operations of Chengdu Steel for the period
during 1998.
Interest expenses net, during the three months ended March 31, 1998
totalled $336,000 as compared to interest expenses of $166,000 during the three
months ended March 31, 1997. The increase in net interest expenses was
attributable to an increase in mortgage loan interest in respect of the two Hong
Kong residential properties held by the Company.
Other expenses, net, during the three months ended March 31, 1998,
totalled $2.1 million. The Company reported $344,000 of other income, net,
during the three months ended March 31, 1997. Other expenses net, in 1998 were
mainly attributable to a further provision of $2 million for diminution in value
of the two remaining residential properties held by the Company for the period
ended March 31, 1998. This further diminution in value was caused by a
substantial general decline in the value of Hong Kong real estate due to turmoil
in various Asian financial markets which affected Hong Kong in the first quarter
of 1998 and which was aggravated by high interest costs in Hong Kong.
The Company had income of $325,000 during the first quarter of 1997 from
an associated company, China Pacific Construction (B.V.I.) Ltd., ("CPCT"), but
such income was written back during the fourth quarter of 1997, as explained
below, and no such income was recognized in the first quarter of 1998. Due to
the substantial diminution in real property values in Hong Kong in the last
quarter of 1997, which affected Southern China-- Huiyang City where the Sun City
project is situated, the Company obtained an updated valuation of such project.
After a review of the updated appraisal which showed a substantial decrease in
the appraised
10
<PAGE> 13
value from over RMB632 million to RMB493.2 million, despite accruals of $325,000
interest income in the first quarter of 1997, no interest income was recognized
from CPCT during 1997 and the first quarter of 1998. CPCT's major assets are two
promissory notes, together with accrued interest, for approximately RMB156
million issued by Open View Properties and its holding company. Open View
Properties is responsible for the development of the Sun City project, which
development has been suspended since 1995. Because of the substantial decrease
in the appraised value of the Sun City project and the suspension of the
project's development, the ability of Open View Properties to pay the promissory
notes, which are due in December 1998, is uncertain.
Minority interest represents the allocable share of income or loss
attributable to the 40% share of Chengdu Steel not owned by the Company during
the first three months of 1997 and 1998.
Net losses during the quarter ended March 31, 1998 totalled $4.5 million
as compared to $1.1 million of net income during the first quarter of 1997. The
net losses were caused by decreases in production volume and in the unit selling
price of the Company's steel products and a provision for diminution in value of
two Hong Kong residential properties, as more fully described above.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998. the Company had receivables totaling approximately
RMB33.7 million from Open View Properties and companies related to Open View
Properties, and an investment of approximately RMB59 million in an associated
company, CPCT, the major assets of which are two promissory notes issued by Open
View Properties and its holding company. Both the receivables and the promissory
note are due for payment in December 1998. As described above under "Material
Changes in Operations" and in note 4 to the financial statements, Open View
Properties and its subsidiaries are engaged in the development of the Sun City
project, which development has been suspended since 1995. When or whether Open
View Properties will recommence the development of such project is uncertain.
Consequently, it is unclear whether Open View Properties and its related
companies have the necessary cash resources to pay their respective obligations
to the Company and to CPCT on the due dates, and the Company's realization on
the above mentioned receivables and its investment in CPCT, with a carrying
value of approximately RMB92.7 million, is uncertain.
As of March 31, 1998, the Company had outstanding receivables of
approximately RMB375.4 million from CISP, the Chinese joint venture partner of
Chengdu Steel. As described in note 4 to the accompanying financial statements.
RMB211 million of this balance arises from short term bank loans maturing in
less than a year that were transferred from CISP into the name of Chengdu Steel
without authorization from Chengdu Steel. The loans, on a revolving basis, are
due within 1998, so must be recognized in the Company financial statements. The
remainder of the RMB375.4 million in receivables, about RMB164.4 million, arises
from loans by Chengdu Steel to CISP to finance CISP's operations. As the
Company's auditors were not able to review CISP's financial statements, the
Company and its auditors are thus unable to determine whether CISP has the
financial ability necessary to repay its obligations to the Company or its
subsidiaries. Chengdu Steel and CISP have entered into an agreement recognizing
that CISP, and not Chengdu Steel, is responsible for repayment of the RMB2l1
million bank loans, but it is unclear when, or whether, the bank loans will be
transferred back to CISP. As a condition to requesting a transfer of the loans
back to CISP, CISP must obtain the permission of the relevant Chinese
governmental authorities to use its real property as collateral for the loans.
CISP has made an
11
<PAGE> 14
application for such use of its real property to the relevant Chinese
governmental authorities and is awaiting their approval.
If such short term bank loans are not transferred back to CISP and the
Company is required to repay such loans during 1998, it is unclear whether the
Company will have the necessary cash resources to pay back the loans. This is
due to the substantial losses the Company incurred during 1997 and the first
quarter of 1998 and the fact that its current liabilities exceeded its current
assets as of March 31, 1998 by approximately RMB325.3 million.
As of March 31, 1998, the Company has outstanding liabilities under 9%
convertible notes due January 15, 1999 (the "Notes") of approximately $15
million. As described above in note 9 to the accompanying financial statements,
because the shares of the Company's common stock have been trading below the
required $4.00 per share minimum conversion price of the Notes for some time, it
is uncertain whether the noteholders will convert the Notes into common stock.
If the holders of the Notes choose not to convert and require repayment of the
Notes, it is uncertain whether the Company will have the necessary cash
resources to pay the obligation on the due date. This is in part because of the
substantial losses incurred by the Company as described above, the low prices at
which the shares of the Company's common stock are trading, below the minimum
conversion price of the Notes, and the questionable value of the Company's
receivables from CISP and Open View Properties. The original arranger of the
Notes is currently negotiating with the noteholders to modify the repayment
terms of the Notes, although no agreement has yet been reached, and there can be
no assurance that any agreement will be reached.
On March 31, 1998 the Company had working capital deficit of $54.2 million
and cash balances of $7.9 million, of which $4 million cash was pledged as
collateral in respect of bank loans borrowed by CISP, as compared to a working
capital deficit of $35.1 million and cash balances of $6 million on December 31,
1997, of which $4 million in cash was also pledged as collateral in respect of
such bank loans borrowed by CISP. The change in working capital and cash
balances was attributable to the negative cash flows from operations and the 9%
convertible notes due Jan 15, 1999 being reclassified as current liabilities
because they are repayable in less than one year.
As a result of the Sun City Sale and the Chengdu Steel Acquisition, the
financial obligations of the Company consist primarily of the obligations of its
60% owned subsidiary, Chengdu Steel.
On March 31, 1998, the primary obligations of the Company consisted of
$48.2 million as compared to $48.4 million on December 31, 1997. The primary
obligations of the Company on March 31, 1998 consisted of (a) short-term bank
loans amounting to $25.5 million, (b) $15 million of 9% convertible notes due
January 15, 1999, (c) long-term bank loans and various loans from unaffiliated
third parties in the amount of $5.2 million and $2.5 million, respectively.
Maturities on long-term debt total $2.6 million during 1998.
Restricted Bank Deposits
As of March 31, 1998, bank deposits of approximately $4 million were pledged as
collateral in respect of the short-term bank loans borrowed by CISP and were
classified as restricted bank deposits.
12
<PAGE> 15
As of March 31,1998, the Company's current liabilities exceeded its
current assets by approximately $54.2 million. This fact, together with the
Company's operating loss, its uncertain ability to realize on certain of its
financial assets and its obligation to repay the Notes in January 1999 will
require the Company to restructure its indebtedness and/or raise additional
funds during 1998. While the Company is exploring ways to do each of these,
there can be no assurance that it will be able to do so.
13
<PAGE> 16
PART II . OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On or about March 5, 1997, a brokerage firm filed a civil action
against the Company in the United States District Court, Southern
District of New York. The complaint alleges breach of contract by the
Company in connection with a Selling Agreement allegedly entered into
between the Company and the brokerage firm, and involves securities of
the Company that were sold in private placements in 1995 and 1996. The
brokerage firm is seeking monetary damages and expenses in excess of $5
million, and an order compelling the Company to issue warrants to
subscribe to 1,141,000 shares of common stock (after considering the
one-for-four reverse stock split) under the terms of the alleged
Selling Agreement. The Company believes this claim is without merit and
plans to contest such claim vigorously. However, the Company and its
legal counsel are 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 materially affected.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA PACIFIC, INC.
Date: June 19, 1998 /s/ CLEMENT MAK SHIU TONG
----------------------------------------
Clement Mak Shiu Tong, President and
Chief Executive Officer
Date: June 19, 1998 /s/ THOMAS TONG
----------------------------------------
Thomas Tong, Treasurer and Chief
Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,857
<SECURITIES> 0
<RECEIVABLES> 6,203
<ALLOWANCES> 0
<INVENTORY> 20,812
<CURRENT-ASSETS> 37,728
<PP&E> 26,142
<DEPRECIATION> 4,097
<TOTAL-ASSETS> 125,902
<CURRENT-LIABILITIES> 91,948
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 125,902
<SALES> 24,075
<TOTAL-REVENUES> 24,075
<CGS> 24,203
<TOTAL-COSTS> 2,961
<OTHER-EXPENSES> 2,118
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336
<INCOME-PRETAX> (5,543)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,509)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
