<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K
FOR REPORT DATED FEBRUARY 19, 1996
AND FILED ON APRIL 1, 1996
Pursuant to Section 13 or 15(d) of The Securities Act of 1934
REGAL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-8334 75-1071589
(State of other (Commission (I.R.S. Employer
jurisdiction) File Number) Identification No.)
P. O. BOX 1237, CORSICANA, TEXAS 75151
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code: (903) 872-3091
Page 1
<PAGE> 2
The Registrant has previously filed its Current Report on Form 8-K, dated
February 19, 1996, without certain financial information required by Item 7 of
such Form 8-K. The Registrant hereby amends the Current Report on Form 8-K to
file such financial information. Item 7, subparagraphs (a) and (b) of the
Form 8-K, dated February 19, 1996, are hereby amended to read as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a) The Consolidated Financial Statement of Acewin Profits Limited and
Subsidiaries as of December 31, 1993, 1994 and 1995.
Page
----
(i) Acewin Profits Limited and its Subsidiaries.
Report of Independent Public Accountants.
Consolidated Statements of Income for the Period from October
1, 1993 to December 31, 1993 and for the years ended December
31, 1994 and 1995.
Consolidated Balance Sheets as of December 31, 1993, 1994 and
1995.
Consolidated Statements of Cash Flow for the Period from
October 1, 1993 to December 31, 1993 and for the years ended
December 31, 1994 and 1995.
Consolidated Statements of Change in Shareholders' Equity for
the Period from October 1, 1993 to December 31, 1993 and for
the years ended December 31, 1994 and 1995.
Notes to Consolidated Financial Statements.
(ii) Wuxi CSH Vibration Isolator Co., Ltd.
Report of Independent Public Accounts
Statement of Income for the nine months ended September 30,
1993.
Page 2
<PAGE> 3
Page
----
Statement of Cash Flow for the nine months ended September
30, 1993.
Statement of Changes in Equity for the nine months ended
September 30, 1993.
Notes to Financial Statements.
b) The Unaudited Pro Forma Consolidated Financial Statements of Regal
International, Inc. as of December 31, 1995.
Introduction to Unaudited Pro Forma Financial Statements.
Unaudited Pro Forma Consolidated Balance Sheet as of December
31, 1995.
Notes to Unaudited Pro Forma Consolidated Financial
Statement.
Page 3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to Form 8-K to be signed on its
behalf by the hereunto duly authorized agent.
DATED: August 1 , 1996.
----------
REGAL INTERNATIONAL, INC.
By /s/ IRA F. LEVY
---------------------------------
Ira F. Levy, Authorized Agent
Page 4
<PAGE> 5
[ARTHUR ANDERSEN & CO. SC LETTERHEAD]
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
=======================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1993, 1994 AND 1995
TOGETHER WITH AUDITORS' REPORTS
<PAGE> 6
[ARTHUR ANDERSEN & CO. SC LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ACEWIN PROFITS LIMITED:
We have audited the accompanying consolidated balance sheets of Acewin Profits
Limited (incorporated in the British Virgin Islands) and its subsidiaries as of
December 31, 1993, 1994 and 1995, and the related consolidated statements of
income, cash flows and changes in shareholder's equity for the three months
ended December 31, 1993 and the years ended December 31, 1994 and 1995,
expressed in Chinese Renminbi. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above present
fairly, in all material respects, the financial positions of Acewin Profits
Limited and its subsidiaries as of December 31, 1993, 1994 and 1995, and the
results of their operations and their cash flows for the three months ended
December 31, 1993 and the years ended December 31, 1994 and 1995 in conformity
with generally accepted accounting principles in the United States of America.
/s/ ARTHUR ANDERSEN & CO.
Hong Kong,
April 5, 1996.
- 1 -
<PAGE> 7
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIOD FROM OCTOBER 1, 1993 TO DECEMBER 31, 1993 AND
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months
ended Year ended December 31,
December 31 ---------------------------------------
1993 1994 1995 1995
----------- -------- ------- -------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Sales 14,940 72,570 108,408 13,014
----------- -------- ------- -------
Cost of goods sold 11,198 46,213 64,785 7,777
Selling and administrative
expenses 3,784 14,173 15,642 1,878
Interest expense (income), net 480 (104) (1,627) (195)
Other income, net (648) (481) (649) (78)
----------- -------- ------- -------
Total cost and expenses 14,814 59,801 78,151 9,382
----------- -------- ------- -------
INCOME BEFORE INCOME TAXES
AND MINORITY INTERESTS 126 12,769 30,257 3,632
Provision for income taxes (78) - - -
----------- -------- ------- -------
INCOME BEFORE MINORITY
INTERESTS 48 12,769 30,257 3,632
Minority interests 138 (5,238) (13,386) (1,607)
----------- -------- ------- -------
NET INCOME 186 7,531 16,871 2,025
=========== ======== ======= =======
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1996 of US$1.00 = Rmb8.33. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on March 31, 1996 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated statements of
income.
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<PAGE> 8
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1993, 1994 AND 1995
(Amounts in thousands, except number of shares and share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1993 1994 1995 1995
------- ------- -------- ------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents 28,857 30,440 50,320 6,041
Accounts receivable, net 11,224 13,781 15,977 1,918
Inventories 15,920 14,801 16,369 1,965
Prepayment and other current
assets 11,219 14,245 11,233 1,349
Due from related companies 1,149 3,130 4,166 500
------- ------- ------- ------
TOTAL CURRENT ASSETS 68,369 76,397 98,065 11,773
------- ------- ------- ------
Property, plant and equipment,
net 52,037 54,621 67,222 8,070
Long-term investment 2,543 2,348 2,278 273
Intangibles 1,345 1,173 1,001 120
------- ------- ------- ------
TOTAL ASSETS 124,294 134,539 168,566 20,236
======= ======= ======= ======
LIABILITIES AND
SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term bank loans 3,450 3,450 3,450 414
Long-term bank loans--current
portion 15,000 18,850 15,900 1,909
Accounts payable 4,390 4,248 8,796 1,056
Accrued expenses and other
payables 10,160 7,823 10,819 1,299
Taxes other than income 453 535 715 86
Due to related companies 3,037 1,214 2,718 326
------- ------- ------- ------
TOTAL CURRENT LIABILITIES 36,490 36,120 42,398 5,090
------- ------- ------- ------
Long-term bank loans 20,740 16,140 15,490 1,860
Loans from related parties 470 120 -- --
Due to Chinese joint venture
partner 963 1,319 13,397 1,608
Due to China Strategic Holdings
Limited 34,262 36,702 36,550 4,388
Minority interests 31,182 36,420 36,433 4,373
Obligations and commitments
(Note 10)
</TABLE>
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<PAGE> 9
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1993, 1994 AND 1995 (Cont'd)
(Amounts in thousands, except number of shares and share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1993 1994 1995 1995
------- ------- ------- ------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
SHAREHOLDER'S EQUITY:
Common stock, par value US$1
each, 50,000 shares authorized;
1 share outstanding 1 1 1 1
Dedicated capital 1 781 1,689 202
Retained earnings 185 6,936 22,608 2,714
------- ------- ------- ------
TOTAL SHAREHOLDER'S EQUITY 187 7,718 24,298 2,917
------- ------- ------- ------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY 124,294 134,539 168,566 20,236
======= ======= ======= ======
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate
quoted by the Bank of China on March 31, 1996 of US$1.00 = Rmb8.33. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on March 31, 1996 or at any
other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
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<PAGE> 10
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 1, 1993 TO DECEMBER 31, 1993 AND
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months
ended
December 31 Year ended December 31,
----------- -----------------------------
1993 1994 1995 1995
----------- ------- -------- --------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income 186 7,531 16,871 2,025
Adjustments to reconcile net
income to net cash provided
by operating activities:
Minority interests (138) 5,238 13,386 1,607
Depreciation and
amortization 462 2,359 2,942 353
(Gain) loss on disposal of
fixed assets (588) 31 (99) (12)
Allowance for doubtful
accounts 225 1,807 - -
(Increase) decrease in assets:
Accounts receivable (5,560) (4,364) (2,196) (264)
Inventories 515 1,119 (1,568) (188)
Prepayments and other
current assets (6,424) (3,026) 3,012 362
Due from related companies (1,149) (1,981) (1,036) (124)
Increase (decrease) in
liabilities:
Accounts payable 3,194 (142) 4,548 546
Accrued expenses and other
payables 6,492 (2,337) 2,996 360
Taxes other than income (395) 82 180 22
Due to related companies 3,037 (1,823) 1,504 180
---------- ------- -------- --------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (143) 4,494 40,540 4,867
---------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Redemption of government
bonds - 195 70 8
Acquisition of property, plant
and equipment (18,757) (4,805) (15,454) (1,855)
Sales proceeds from disposal of
fixed assets 8,525 3 182 22
---------- ------- -------- --------
NET CASH USED IN INVESTING
ACTIVITIES (10,232) (4,607) (15,202) (1,825)
---------- ------- -------- --------
</TABLE>
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<PAGE> 11
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 1, 1993 TO DECEMBER 31, 1993 AND FOR
THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months
ended
December 31 Year ended December 31,
------------ ---------------------------------
1993 1994 1995 1995
------------ ------ ------ ------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of loans from
related parties - (350) (120) (14)
Proceeds of long-term
bank loans 8,900 14,250 14,250 1,710
Repayment of long-term
bank loans (7,400) (15,000) (17,850) (2,143)
Due to Chinese joint
venture partner 963 356 (1,295) (155)
Due to China Strategic
Holdings Limited ("CSH") (442) (1,136) (443) (53)
Capital contribution to
Operating Subsidiary
by CSH 34,704 3,576 - -
------ ------ ------ -----
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES 36,725 1,696 (5,458) (655)
------ ------ ------ -----
NET INCREASE IN CASH AND
CASH EQUIVALENTS 26,350 1,583 19,880 2,387
Cash and cash equivalents,
at beginning of period/
year 2,507 28,857 30,440 3,654
------ ------ ------ -----
Cash and cash equivalents,
at end of period/year 28,857 30,440 50,320 6,041
====== ====== ====== =====
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1996 of US$1.00 = Rmb8.33. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on March 31, 1996 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated
statements of cash flows.
- 6 -
<PAGE> 12
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM OCTOBER 1, 1993 TO DECEMBER 31, 1993 AND
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(Amounts in thousands, except number of shares)
<TABLE>
<CAPTION>
Shares of Dedicated Retained
Common Stock Common Stock Capital Earnings Total
------------ ------------ --------- -------- ---------
Number Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 30, 1993 1 1 - - 1
Net income - - - 186 186
Transfer to dedicated capital - - 1 (1) -
---------- ----------- --------- ------- --------
BALANCE AT DECEMBER 31, 1993 1 1 1 185 187
Net income - - - 7,531 7,531
Transfer to dedicated capital - - 780 (780) -
---------- ----------- --------- ------- --------
BALANCE AT DECEMBER 31, 1994 1 1 781 6,936 7,718
Net income - - - 16,871 16,871
Transfer to dedicated capital - - 908 (908) -
Dividend declared - - - (291) (291)
---------- ----------- --------- ------- --------
BALANCE AT DECEMBER 31, 1995 1 1 1,689 22,608 24,298
========== =========== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
of changes in shareholder's equity.
- 7 -
<PAGE> 13
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Acewin Profits Limited ("the Company") was incorporated in the British Virgin
Islands on October 4, 1993 with an authorized share capital of 50,000 common
shares with a par value of US$l each, one share was issued at its par value to
China Strategic Holdings Limited ("CSH") (formerly known as China Strategic
Investment Limited), a company incorporated in Hong Kong whose shares are
listed on the Stock Exchange of Hong Kong.
The Company is a holding company established to hold a 100% interest in China
Machine (Holdings) Limited ("CMHL") (formerly known as Hank Reddit Limited), a
company incorporated in Hong Kong. CMHL, in turn, holds a 55% interest in Wuxi
CSI Vibration Isolator Co., Ltd. (the "Operating Subsidiary" or "Wuxi CSI").
CMHL's interests in Wuxi CSI was transferred from China Machinery Holdings
Limited ("China Machinery"), a company incorporated in Hong Kong and a wholly-
owned subsidiary of CSH, pursuant to a shareholder's resolution dated December
13, 1995.
Wuxi CSI is a Sino-foreign joint venture enterprise established on September
10, 1993 in the City of Wuxi, Jiangsu Province in the People's Republic of
China (the "PRC"). The total cash consideration paid by China Machinery for its
interests in Wuxi CSI amounted to RMB38,280, equivalent to US$4,400 at the date
of acquisition. In addition to the initial capital contribution, China
Machinery and the Chinese joint venture partner also capitalized their
respective share of distributable profits for the year ended December 31, 1994
as additional paid-in capital.
Key provisions of the joint venture agreement of Wuxi CSI include:
- - the joint venture period is 50 years from the date of formation;
- - the profit and loss sharing ratio is the same as the percentage of
equity interest; and
- - the Board of Directors consists of 7 members: 4 designated by CMHL and
3 designated by Wuxi Vibration Isolator Factory, the Chinese joint
venture partner of Wuxi CSI.
- 8 -
<PAGE> 14
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
The acquisition of the Operating Subsidiary by China Machinery has been
accounted for by the purchase method of accounting. The tangible assets were
valued in the acquisition at the estimated fair value, which approximated
historical net book value. The results of the Operating Subsidiary are included
in the consolidated statements of income from the effective date of the joint
venture, October 1, 1993. As a result of the allocation of income to minority
interests and reductions in the income tax and sales tax rates, the
consolidated statement of income of the Company and its subsidiaries for the
three months ended December 31, 1993, and the years ended December 31, 1994 and
1995 are not comparable to the results of operations of Wuxi CSI for the nine
months ended September 30, 1993 ("the Pre-Joint Venture period") in certain
material respects.
China Machinery's interests in Wuxi CSI were transferred to CMHL at historical
net book value of Rmb8,377 in exchange for CMHL's assumption of China
Machinery's liability to CSH in an equal amount. The transfer of CSH's interest
in CMHL to the Company was also effected at historical net book value. The
transfer to CMHL by China Machinery of its interests in the Operating
Subsidiary and the transfer of CSH's interest in CMHL to the Company were a
result of a re-organization of companies under common control and have been
accounted for effectively as poolings of interests. The accompanying
consolidated financial statements of the Company have been restated to present
the acquisition of the Operating Subsidiary as if it had been made in October
1993 by CMHL and the transfer of CSH's interest in CMHL to the Company had
occurred on October 1, 1993.
Wuxi CSI operates in the PRC and accordingly is subject to special
considerations and significant risks not typically associated with investments
in equity securities of United States and Western European companies. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. These are described further in the
following paragraphs:
POLITICAL ENVIRONMENT
The value of the Company's interests in the Operating Subsidiary may be
adversely affected by significant political, economic and social uncertainties
in the PRC. A change in policies by the Chinese government could adversely
affect the Company's interests in the Operating Subsidiary by, among other
factors: changes in laws, regulations or the interpretation thereof;
confiscatory taxation; restrictions on foreign currency conversion, imports or
sources of suppliers; or the expropriation or nationalization of private
enterprises.
ECONOMIC ENVIRONMENT
The economy of the PRC differs significantly from the economies of the United
States and Western Europe in such respects as structure, level of development,
gross national product, growth rate, capital reinvestment, resource allocation,
self-sufficiency, rate of inflation and balance of payments position, among
others. Only recently has the Chinese government encouraged substantial private
economic activities.
- 9 -
<PAGE> 15
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
The Chinese economy has experienced significant growth in the past five years,
but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly restrained economic expansion recently. Similar
actions by the central government of the PRC in the future could have a
significant adverse effect on economic conditions in the PRC and the economic
prospects for the Operating Subsidiary and the Company.
FOREIGN CURRENCY EXCHANGE
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result, the
Renminbi is not freely convertible into foreign currencies.
The Operating Subsidiary conducts substantially all of its business in the PRC,
and its financial performance and condition are measured in terms of Renminbi.
Any devaluation of the Renminbi against the United States Dollar would
consequently have an adverse effect on the financial performance and asset
values of the Company when measured in terms of United States Dollars. The
Operating Subsidiary's products are primarily sold in the PRC for Renminbi.
Thus, their revenues and profits are predominantly denominated in Renminbi, and
will have to be converted to pay dividends to the Company in United States
Dollars or Hong Kong Dollars. Should the Renminbi devalue against the United
States Dollar, such devaluation would have a material adverse effect on the
Company's profits and the foreign currency equivalent of such profits
repatriated by the Operating Subsidiary to the Company. The Company currently is
not able to hedge its Renminbi - Dollar exchange rate exposure in the PRC
because neither the banks in the PRC nor any other financial institution
authorized to engage in foreign exchange transactions offer forward exchange
contracts.
IMPORT RESTRICTIONS AND THE WORLD TRADE ORGANIZATION
The PRC levies a tariff on imported vibration isolators or shock absorbers;
this duty is intended in part to encourage the development of the domestic
vehicle accessories industry.
The PRC is currently seeking to become a member of the World Trade
Organization, which regulates trading among its signatory countries. If the PRC
becomes a member of the World Trade Organization, import restrictions on
vehicle accessories could be reduced. If such restrictions were removed, the
Operating Subsidiary would face increasing competition from imported foreign
vehicle accessory products.
LEGAL SYSTEM
Since 1979, many laws and regulations dealing with economic matters in general
and foreign investment in particular have been enacted in the PRC. However, the
PRC still does not have a comprehensive system of laws and enforcement of
existing laws may be uncertain and sporadic.
- 10 -
<PAGE> 16
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP"). This basis of accounting differs from that used in the statutory
financial statements of the Operating Subsidiary, which were prepared in
accordance with the accounting principles and the relevant financial
regulations applicable to joint venture enterprises as established by the
Ministry of Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory financial statements of
the Operating Subsidiary to U.S. GAAP included the following:
- - Addition of an allowance for doubtful accounts receivable;
- - Addition of a provision to reduce the carrying value of inventories to
net realizable value;
- - Reclassification of certain items, designated as "reserves
appropriated from net income", as a charge to income;
- - Restatement of monetary assets and liabilities denominated in foreign
currencies to reflect the exchange rates prevailing at the balance
sheet dates; and
- - Adjustment to recognize sales and cost of sales upon delivery and
acceptance of goods by customers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its majority owned and controlled subsidiaries. All
material intercompany balances and transactions have been eliminated
on consolidation.
b. SALES
Sales represent the invoiced value of goods, net of sales taxes,
supplied to unrelated customers. Sales are recognized upon delivery
and acceptance of goods by the customers.
c. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits with
banks and liquid investments with an original maturity of three months
or less. Cash and cash equivalents included United States Dollar
deposits of US$2,841 (Rmb24,717), US$2,831 (Rmb23,894) and US$1,912
(Rmbl5,908) as of December 31, 1993, 1994 and 1995 respectively.
- 11 -
<PAGE> 17
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
d. INVENTORIES
Inventories are stated at the lower of cost, on a first-in first-out
basis, or net realizable value. Costs of work-in-progress and finished
goods comprise direct materials, direct labor and an attributable
portion of production overheads.
e. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is
computed using the straight line method over the assets' estimated
useful lives, taking into account the estimated residual value of 10%
of the cost of fixed assets. The estimated useful lives are as
follows:
<TABLE>
<S> <C>
Plant and office buildings 8 - 30 years
Machinery and equipment 3 - 20 years
Motor vehicles 2 - 10 years
Furniture, fixtures and office equipment 2 - 10 years
</TABLE>
Construction-in-progress (see Note 6) represents factory and office
buildings under construction and plant and machinery pending
installation. This includes the costs of construction, the costs of
plant and machinery and interest charges arising from borrowings used
to finance these assets during the period of construction or
installation. Interest capitalized amounted to Rmb441, Rmbl,244 and
Rmbl,456 respectively for the three months ended December 31, 1993 and
for the years ended December 31, 1994 and 1995 respectively.
f. TAXATION: INCOME TAXES
The Company was incorporated under the laws of the British Virgin
Islands, and under current British Virgin Islands law, the Company is
not subject to tax on income or on capital gains.
The Company and its subsidiaries provide for Hong Kong profits tax on
the basis of its income for financial reporting purposes, adjusted for
income and expense items which are not assessable or deductible for
profits tax purposes. As of December 31, 1993, the Company and its
subsidiaries made provisions for Hong Kong profits tax of
approximately Rmb77. The Company and its subsidiaries had no profits
assessable to Hong Kong profits tax for the years ended December 31,
1994 and 1995.
- 12 -
<PAGE> 18
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
f. TAXATION: INCOME TAXES (Cont'd)
Wuxi CSI is subject to Chinese income taxes at the applicable tax rate
for Sino-foreign equity joint venture enterprises (currently 27%) on
the taxable income as reported in its statutory accounts adjusted for
taxation in accordance with the relevant income tax laws applicable to
Sino-foreign equity joint venture enterprises. Pursuant to the same
income tax laws, Wuxi CSI, with a joint venture term of not less than
10 years and engaged in production, will be fully exempt from Chinese
state unified income tax of 24% for two years starting from the first
profit-making year followed by a 50% reduction of the Chinese state
unified income tax for the next three years ("tax holiday"). Wuxi CSI
will be fully exempt from the Chinese local income tax of 3% for five
years starting from the first profit-making year.
Wuxi CSI has obtained approval from the Wuxi Tax Bureau to delay the
commencement of the tax holiday to January 1, 1994. Accordingly, from
the date of its incorporation to December 31, 1993, Wuxi CSI was
subject to Chinese state income tax at the rate of 24% plus Chinese
local income tax at 3%. If the Operating Subsidiary had not been in
the tax holiday period, the Company would have recorded additional
income tax expense of Rmb3,143 and Rmb8,032, and net income of the
Company would have been reduced by Rmbl,729 and Rmb4,418 for the years
ended December 31, 1994 and 1995 respectively.
The Company provides for deferred income taxes using the liability
method, by which deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities. The tax consequences of
those differences are classified as current or non-current based upon
the classification of the related assets or liabilities in the
financial statements.
g. TAXATION: SALES AND VALUE-ADDED TAXES
Sales and value-added taxes are recognized on the accrual basis and
sales are recorded net of these taxes.
Prior to December 31, 1993, the Operating Subsidiary was subject to
Consolidated Industrial and Commercial Tax at a rate of 5.05% on the
invoiced value of goods sold.
In December 1993, the Chinese government promulgated several major new
tax regulations which came into effect on January 1, 1994. These new
tax regulations replaced a number of former tax laws and regulations
including the Consolidated Industrial and Commercial Tax. Under these
new tax regulations, the Operating Subsidiary is subject to
value-added tax ("VAT") which is the principal indirect tax on the
sales of tangible goods and the provision of certain specified
services ("output VAT") and replaces the old Consolidated Industrial
and Commercial Tax ("CICT") and Product Tax. The general VAT rate
applicable to the Operating Subsidiary is 17.0%.
- 13 -
<PAGE> 19
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
g. TAXATION: SALES AND VALUE-ADDED TAXES (Cont'd)
Pursuant to a supplementary notice (the "notice") issued by the
Ministry of Finance and the State Administration of Taxation ("SAT"),
a deemed input VAT credit, calculated at 14.0% of the inventory
balance as of January 1, 1994 was segregated from the carrying value
of opening inventory balances of the Operating Subsidiary as of
January 1, 1994. As a result, an amount of approximately Rmbl,977,
being the deemed input VAT paid, was transferred from opening
inventory balances and recorded as deferred assets in the statutory
accounts of the Operating Subsidiary on January 1, 1994. The notice
also stipulated that these deferred assets would be available to
offset future VAT payable under certain specific circumstances. As of
December 31, 1995 the full amount of Rmbl,977 had been utilized by the
Operating Subsidiary to offset against VAT payable of the 1994 and
1995 fiscal years.
There is also a "grandfather" provision issued by the National
People's Congress on December 29, 1993 for foreign invested
enterprises previously paying CICT. The provision states that where
the tax burden of foreign invested enterprises established before
December 31, 1993 increases due to the above noted change in tax laws,
such enterprises may, upon application to and with the approval of the
tax authorities, obtain a refund of any tax paid in excess of the
amount which would have been paid under previous CICT legislation. The
maximum limit for application of this provision is five years from
January 1, 1994.
According to a circular ("the Circular") issued by SAT in September
1994, which further clarified the inter-play between the deemed input
credit and the grandfather provision, the computed grandfather refund
of excess tax liability is to be firstly reduced by the unutilized
balance of deemed input VAT credit. After the deemed input VAT credit
is fully offset in this manner, any remaining balance of the
grandfather refund would be refunded through a reduction in VAT
liability for that period or in cash.
As of December 31, 1994 and 1995, the Operating Subsidiary claimed
from the local tax bureau an aggregate amount of approximately
Rmb2,141 and Rmbl,249 as grandfather refunds. Approximately Rmb9OO was
received in the form of cash for 1995, while the remaining Rmb2,141
and Rmb349 for 1994 and 1995 respectively was utilized to offset
against VAT payable for 1994 and 1995 respectively. The grandfather
refunds have been included in the accompanying financial statements as
a reduction in cost of goods sold for the years ended December 31,
1994 and 1995 respectively.
- 14 -
<PAGE> 20
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
h. FOREIGN CURRENCY TRANSLATION
The Operating Subsidiary maintains its books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the
applicable unified rates of exchange or the applicable rates of
exchange quoted by the applicable foreign exchange adjustment center
("swap center"), prevailing at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies are
translated into Renminbi using the applicable unified rates of
exchange or the applicable swap center rates prevailing at the balance
sheet dates. The resulting exchange differences are included in the
determination of income.
The Company's registered capital is denominated in United States
Dollars and the reporting currency is Renminbi. For financial
reporting purposes, the United States Dollars capital amounts have
been translated into Renminbi at the swap centre rates prevailing at
the capital injection date.
The Renminbi is not freely convertible into foreign currencies. All
foreign exchange transactions involving Renminbi must take place
either through the Bank of China or other institutions authorized to
buy and sell foreign currencies, or at a swap center. Before January
1, 1994, the exchange rates used for transactions through the Bank of
China and other authorized institutions were set by the government
(the "official exchange rate") from time to time whereas the exchange
rates available at the swap centers (the "swap center rates") were
determined largely by supply and demand. The Chinese government
announced the unification of the two-tier exchange rate systems in
December 1993 effective January 1, 1994. The unification brought the
official exchange rate of the Renminbi in line with the swap center
rate. The unification did not have a major impact on the consolidated
financial statements of the Company under U.S. GAAP.
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and
remittance of earnings outside of the PRC are subject to the
availability of foreign currency which is dependent on the foreign
currency denominated earnings of the entity or must be arranged
through a swap center. Approval for exchange at the swap center is
granted to joint venture enterprises for valid reasons such as the
purchase of imported materials and remittance of earnings.
The official exchange rates, unified exchange rates and Shanghai swap
center rates as of December 31, 1993, December 31, 1994 and December
31, 1995 were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Rmb equivalents of US$l
Official exchange rate 5.80 N/A N/A
Unified exchange rate N/A 8.44 8.32
Shanghai swap center rate 8.70 8.44 8.32
</TABLE>
- 15 -
<PAGE> 21
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
i. DEDICATED CAPITAL
In accordance with the relevant laws and regulations for Sino-foreign
equity joint venture enterprises, the Operating Subsidiary maintains
discretionary dedicated capital, which includes a general reserve fund,
an enterprise expansion fund and a staff welfare and incentive bonus
fund. The Board of Directors of the Operating Subsidiary will determine
on an annual basis the amount of the annual appropriations to dedicated
capital. For the three months ended December 31, 1993 and for the year
ended December 31, 1994, the Operating Subsidiary appropriated 5% of
the after-tax profits as reflected in its statutory financial
statements to each of the above three funds. For the year ended
December 31, 1995, the Operating Subsidiary appropriated 5% of the
after-tax profits as reflected in its statutory financial statements to
each of the general reserve fund and the staff welfare and incentive
bonus fund. Such appropriations are reflected in the year end
consolidated balance sheets under shareholder's equity as dedicated
capital; however, the appropriation for the staff welfare and incentive
bonus fund is charged to income before arriving at net income and the
unused portion is recorded as a current liability.
j. LONG-TERM INVESTMENT
Long-term investment includes Chinese government bonds and unlisted
investments held for the long-term and are stated at cost less
provision for permanent diminution in value.
Income from investments is accounted for to the extent of dividends
received and receivable.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1993 1994 1995
-------- -------- --------
Rmb Rmb Rmb
<S> <C> <C> <C>
Trade and other receivables 11,449 15,813 18,009
Less: Allowance for doubtful accounts (225) (2,032) (2,032)
-------- ------- -------
Accounts receivable, net 11,224 13,781 15,977
======== ======= =======
</TABLE>
Wuxi CSI had a trade receivable with one of its customers, which accounted for
approximately Nil%, 12% and 11% of the accounts receivable as of December 31,
1993, 1994 and 1995 respectively. Sales to two major customers under the
ownership of the same ultimate holding company accounted for approximately 45%,
70% and 85% of the total sales for the three months ended December 31, 1993 and
the years ended December 31, 1994 and 1995 respectively. Sales to the third
largest customer accounted for approximately 4%, 11% and 10% for the respective
period/years mentioned above.
- 16 -
<PAGE> 22
5. INVENTORIES
<TABLE>
<CAPTION>
December 31,
----------------------------
1993 1994 1995
------ ------ ------
Rmb Rmb Rmb
<S> <C> <C> <C>
Raw materials 7,834 5,504 5,866
Work-in-progress 2,221 2,432 2,636
Finished goods 5,865 6,865 7,867
Less: Provision for obsolescence - - -
------ ------ ------
15,920 14,801 16,369
====== ====== ======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
----------------------------
1993 1994 1995
------ ------ ------
Rmb Rmb Rmb
<S> <C> <C> <C>
Plant and office buildings 12,775 15,516 20,021
Machinery and equipment 21,965 25,154 38,550
Motor vehicles 1,559 2,641 2,773
Furniture, fixtures and office
equipment 611 2,157 2,847
Construction-in-progress 15,561 11,740 8,375
Less: Accumulated depreciation (434) (2,587) (5,344)
------ ------ ------
Net book value 52,037 54,621 67,222
====== ====== ======
</TABLE>
7. LONG-TERM INVESTMENT
Long-term investment comprised:
<TABLE>
<CAPTION>
December 31,
----------------------------
1993 1994 1995
------ ------ ------
Rmb Rmb Rmb
<S> <C> <C> <C>
Unlisted investments, at cost 2,088 2,088 2,088
Government debentures 455 260 190
------ ------ ------
2,543 2,348 2,278
====== ====== ======
</TABLE>
- 17 -
<PAGE> 23
7. LONG-TERM INVESTMENT (Cont'd)
The directors are of the opinion that the underlying values of the investments
were not less than their carrying values as of December 31, 1993, 1994 and 1995
respectively.
There was no dividend income received or receivable from these long-term
investments for the three months ended December 31, 1993. Dividend income
received for the years ended December 31, 1994 and 1995 amounted to Rmb427 and
Rmb452 respectively.
8. SHORT-TERM BANK LOANS
Short-term bank loans were unsecured and were denominated in Renminbi with
repayment terms ranging from three months to one year.
Supplemental information with respect to short-term bank loans for the year
ended December 31, 1995 were as follows:
<TABLE>
<S> <C>
Maximum amount outstanding during the year: Rmb 4,950
Average amount outstanding during the year: Rmb 3,825
Weighted average interest rate at the end of the year: 11.07% per annum
Weighted average interest rate during the year: 10.67% per annum
</TABLE>
9. LONG-TERM BANK LOANS
Long-term bank loans, all of which were unsecured, bear average interest rates
at approximately 13% (December 31, 1994 - 9.7% and December 31, 1993 - 7.5%)
and are repayable as follows:
<TABLE>
<CAPTION>
December 31,
1995
------------
Rmb
<S> <C>
1996 15,900
1997 15,490
------------
Total 31,390
============
</TABLE>
All the long-term bank loans are denominated in Renminbi.
- 18 -
<PAGE> 24
10. OBLIGATIONS AND COMMITMENTS
As of December 31, 1995, the Company had outstanding capital commitments for
purchases of machinery and equipment of approximately Rmbl0,776. As of December
31, 1995, the Operating Subsidiary had also entered into a joint venture
agreement with a German company for the formation of a joint venture company in
Wuxi City, Jiangsu Province in the PRC. Total capital commitments as of March
25, 1996 (date of formation of the joint venture company) amounted to US$1,960
(see Note 17.a).
11. DISTRIBUTION OF PROFIT
Dividends from the Operating Subsidiary will be declared based on the profits
as reported in the statutory financial statements. Such profits will be
different from the amounts reported under U.S. GAAP. As of December 31, 1995,
the Operating Subsidiary had distributed all available retained earnings of
Rmb29,718 as reported in its statutory financial statements.
12. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
a. GUARANTEE OF RELATED PARTY LOAN
During the year ended December 31, 1995, the Operating Subsidiary
extended a corporate guarantee to a related company of CSH for bank
borrowings of Rmb800.
b. LAND USE RIGHT
The Wuxi City government has granted its approval to Wuxi Vibration
Isolator Factory ("Wuxi Factory"), the Chinese joint venture partner
of Wuxi CSI, to use the parcel of land on which Wuxi CSI's main
factory is located. Under the terms of the joint venture agreement and
a subsequent confirmation from Wuxi Factory, it has agreed to provide
for the use of the land by Wuxi CSI for the 50-year term of the joint
venture. Wuxi Factory does not currently charge Wuxi CSI for the use
of the land. Under current PRC regulations, where land use rights are
granted to a Sino-foreign equity joint venture, the joint venture
would pay no land use fees during an initial five-year period and a
50% reduction for the next five-year period. The annual land use fee
has been estimated by management to be approximately Rmb600. Should
Wuxi CSI wish to obtain title to the land use rights, a premium may be
levied by the relevant government authorities for the transfer.
- 19 -
<PAGE> 25
13. DUE TO CHINESE JOINT VENTURE PARTNER
The amounts due to Chinese joint venture partner represent the excess of the
book value of the net assets contributed by the Chinese joint venture partner
upon the formation of the Operating Subsidiary over its share of the registered
capital of the joint venture enterprise.
The balance as of December 31, 1995 included dividends payable to the Chinese
joint venture partner of Rmbl3,373 which represented its share of the
distribution of the profit after appropriations to dedicated capital for the
year ended December 31, 1995 as reflected in the statutory financial statements
of the Operating Subsidiary.
These amounts are unsecured, non-interest bearing and have no fixed repayment
date.
14. RETIREMENT PLANS
As stipulated by the regulations of the Chinese government, all of the Chinese
staff of the Operating Subsidiary are entitled to an annual pension on
retirement, which is equal to their basic salaries at their retirement dates.
The Chinese government is responsible for the pension liability to these
retired staff. The Operating Subsidiary is only required to make specified
contributions to the state-sponsored retirement plan calculated at 23.5% (for
1993) and 25.5% (for 1994 and 1995) of the basic salary of the staff. The
expenses reported in the consolidated financial statements related to these
arrangements were Rmb379 for the three months ended December 31, 1993, and
Rmb2,125 and Rmb2,222 for the years ended December 31, 1994 and 1995
respectively.
- 20 -
<PAGE> 26
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Three months
ended Year ended December 31,
December 31, -----------------------
1993 1994 1995
------------ ---------- ----------
Rmb Rmb Rmb
<S> <C> <C> <C>
Cash paid for:
Interest expense (net of
amount capitalized) 1,375 2,166 2,696
Income taxes 77 - -
Non-cash investing and
financing activities:
Paid-in capital from the
Chinese joint venture
partner through the
injection of the net
book value of the fixed
assets of the predecessor
plant 31,320 - -
</TABLE>
16. OTHER SUPPLEMENTAL INFORMATION
The following items are included in the consolidated statements of income:
<TABLE>
<CAPTION>
Three months
ended Year ended December 31,
December 31, -----------------------
1993 1994 1995
------------ ---------- ----------
Rmb Rmb Rmb
<S> <C> <C> <C>
Foreign exchange gain 11 191 476
Interest income 216 2,096 4,009
Sales taxes 850 - -
Provision for doubtful
accounts 225 1,807 -
</TABLE>
17. SUBSEQUENT EVENTS
a. Pursuant to a joint venture agreement signed in December 1995 by the
Operating Subsidiary with Vulkan Kupplungs - U Getriebebau B. Hackforth
GMBH & Co. KG, a Germany incorporated company, the Operating Subsidiary
formed a new Sino-foreign joint venture enterprise established in the City
of Wuxi, Jiangsu Province in the PRC. Details of the provisions in the
joint venture agreement are as follows:
- 21 -
<PAGE> 27
17. SUBSEQUENT EVENTS (Cont'd)
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF JOINT INTEREST HELD DATE OF TOTAL REGISTERED PRINCIPAL
VENTURE COMPANY BY WUXI CSI FORMATION INVESTMENT CAPITAL ACTIVITIES
- ----------------- ------------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
WUXI VULKAN 49% MARCH 25, 1996 US$ 8,000 US$ 4,000 PRODUCTION OF
COUPLINGS CO., COUPLINGS
LTD. ("WVCC")
</TABLE>
WVCC will have a duration of fifty years.
b. Pursuant to an acquisition agreement dated February 8, 1996 between
Regal International, Inc., ("Regal"), a Delaware Corporation whose
shares are listed on the National Association of Securities Dealers
Automated Quotations ("NASDAQ"), Acewin Profits Limited ("the Company")
and China Strategic Holdings Limited ("CSH"), Regal acquired all the
issued and outstanding shares of the Company at a consideration of
US$13.5 million to be satisfied through the issuance of a US$13.5
million Convertible Note (the "Convertible Note") by Regal to CSH
bearing interest at 9% per annum after an initial 6-month interest-free
period. The principal and any unpaid interest owing on the Convertible
Note can be convertible into shares of the Common Stock, US$0.01 par
value, of Regal ("Common Stock") at a conversion price of US$0.0302 per
share. The Convertible Note, if exercised by CSH would give CSH a
controlling interest of more than 80% in Regal. This Convertible Note is
secured by a pledge of Regal's interest in the shares of the Company in
favour of CSH.
Pursuant to the acquisition agreement, the principal amount of the
Convertible Note will be reduced by a pre-determined formula if the
audited financial statements of Wuxi CSI for the year ended December 31,
1995 reflect an after tax profit of less than US$3 million.
c. Pursuant to an agreement signed between CSH and the Company dated
January 19, 1996, the payable balance of Rmb36,550 due to CSH as of
December 31, 1995 will be contributed by CSH into the Company as
additional paid-in capital and shall only be payable upon liquidation of
the Company.
- 22 -
<PAGE> 28
FINANCIAL STATEMENTS
PART II
<PAGE> 29
[ARTHUR ANDERSEN & CO. SC LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ACEWIN PROFITS LIMITED:
We have audited the accompanying statements of income, cash flows and changes
in equity of Wuxi CSI Vibration Isolator Co., Ltd. ("Wuxi CSI"), incorporated
in the People's Republic of China, for the nine months ended September 30,
1993, expressed in Chinese Renminbi. The financial statements are the
responsibility of the Wuxi CSI's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations and cash flows of Wuxi CSI
for the nine months ended September 30, 1993, in conformity with generally
accepted accounting principles in the United States of America.
/s/ ARTHUR ANDERSEN & CO.
Hong Kong,
April 5, 1996.
- 1 -
<PAGE> 30
WUXI CSI VIBRATION ISOLATOR CO., LTD.
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(THE "1993 PRE-JOINT VENTURE PERIOD")
(Amounts in thousands)
<TABLE>
<CAPTION>
1993 Pre-Joint
Venture
Period
--------------
Rmb
<S> <C>
Sales 42,817
-------
Cost of goods sold (26,713)
Selling and administrative expenses (8,046)
Interest expense, net (681)
Other expense, net (418)
-------
Total costs and expenses (35,858)
-------
INCOME BEFORE INCOME TAXES 6,959
Provision for income taxes (850)
-------
NET INCOME 6,109
=======
</TABLE>
The accompanying notes are an integral part of this statement of income.
- 2 -
<PAGE> 31
WUXI CSI VIBRATION ISOLATOR CO., LTD
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(THE "1993" PRE-JOINT VENTURE PERIOD")
(Amounts in thousands)
<TABLE>
<CAPTION>
1993 Pre-Joint
Venture
Period
--------------
Rmb
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 6,109
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,617
Allowance for doubtful accounts 214
Loss on disposal of fixed assets 239
Increase in assets:
Accounts receivable (2,976)
Inventories (2,823)
Prepayments and other current assets (2,882)
Increase (decrease) in liabilities:
Accounts payable 480
Accrued expenses and other payables (7,693)
Taxes other than income 229
--------------
NET CASH USED IN OPERATING ACTIVITIES (7,486)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,887)
Investments in investee companies (1,005)
Redemption of government debentures 110
--------------
NET CASH USED IN INVESTING ACTIVITIES (2,782)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans 55
Proceeds from long-term bank loans 12,985
Repayment of long-term bank loans (7,019)
Contribution from Chinese partner, net 1,474
--------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,495
--------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (2,773)
Cash and cash equivalents, at beginning of period 5,280
--------------
Cash and cash equivalents, at end of period 2,507
==============
</TABLE>
The accompanying notes are an integral part of this statement of cash flows.
- 3 -
<PAGE> 32
WUXI CSI VIBRATION ISOLATOR CO., LTD
STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(THE "1993" PRE-JOINT VENTURE PERIOD")
(Amounts in thousands)
<TABLE>
<Caption
Dedicated Retained
Capital Earnings Total
--------- -------- ------
Rmb Rmb Rmb
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 22,678 925 23,603
Net income - 6,109 6,109
Transfer to dedicated capital 8,101 (8,101) -
Contribution from former
Chinese partner - 1,474 1,474
------ ------ ------
BALANCE AT END OF 1993 PRE-
JOINT VENTURE PERIOD 30,779 407 31,186
====== ====== ======
</TABLE>
The accompanying notes are an integral part of this
statement of changes in equity.
- 4 -
<PAGE> 33
WUXI CSI VIBRATION ISOLATOR CO., LTD
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Wuxi CSI Vibration Isolator Co., Ltd. (hereinafter, together with its
Predecessor, referred to as the "Operating Subsidiary") was incorporated in the
People's Republic of China (the "PRC") as a Sino-foreign equity joint venture
enterprise on September 10, 1993 under "The Law of China on Joint Ventures
using Chinese and Foreign Investment". Prior to its incorporation as a
Sino-foreign equity joint venture enterprise, the Operating Subsidiary was
owned by the municipal government of Wuxi City. The ultimate holding company of
Wuxi CSI is currently China Strategic Holdings Limited ("CSH"), a Hong Kong
corporation. The cash consideration paid by CSH for the acquisition of its
interests in Wuxi CSI was US$4,400. The Operating Subsidiary was initially
formed between China Machinery Holdings Limited ("China Machinery"), a company
incorporated in Hong Kong and a wholly-owned subsidiary of CSH. Pursuant to a
shareholder's resolution dated December 13, 1995 and approved by the relevant
PRC authorities, China Machinery's interest in Wuxi CSI was transferred to
China Machine (Holdings) Limited ("CMHL"). Details of the equity capital of the
Operating Subsidiary as of December 31, 1995 are as follows:
Wuxi CSI Vibration Isolator Co., Ltd.
<TABLE>
<CAPTION>
Contribution
to Registered Ownership
Capital Percentage
------------- -----------
Rmb
<S> <C> <C>
CMHL 44,937 55%
Wuxi Vibration Isolator Factory 36,766 45%
------------- -----------
81,703 100%
============= ===========
</TABLE>
Key provisions of the joint venture agreement of Wuxi CSI include:
- - the joint venture period is 50 years from the date of
formation;
- - the profit and loss sharing ratio is the same as the
percentage of equity interest; and
- - the Board of Directors consists of 7 members: 4 designated by
CMHL and 3 designated by Wuxi Vibration Isolator Factory, the
Chinese joint venture partner of Wuxi CSI.
- 5 -
<PAGE> 34
2. BASIS OF PRESENTATION
The accompanying financial statements present the results of operations and
cash flows of the business of the Predecessor for the nine-month period ended
September 30, 1993 prior to its incorporation as a Sino-foreign equity joint
venture enterprise and the acquisition by China Machinery (the "1993 Pre-Joint
Venture Period").
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("U.S. GAAP").
This basis of accounting differs from that used in the statutory accounts of
the Predecessor, which were prepared in accordance with the accounting
principles and the relevant financial regulations applicable to state-owned
enterprises as established by the Ministry of Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory accounts of the
Predecessor to U.S. GAAP included the following:
- - Addition of an allowance for doubtful accounts receivable;
- - Addition of a provision to reduce the carrying value of inventories to
net realizable value;
- - Reclassification of certain items, designated as "reserves
appropriated from net income", as a charge to income;
- - Restatement of monetary assets and liabilities denominated in foreign
currency to reflect the exchange rates prevailing at the balance sheet
dates; and
- - Adjustment to recognize sales and cost of sales upon delivery and
acceptance of goods by customers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. SALES
Sales represent the invoiced value of goods, net of sales taxes,
supplied to unrelated customers. Sales are recognized upon delivery
and acceptance of goods by the customers.
b. TAXATION
The Predecessor, being a state-owned enterprise, was subject to
Chinese income taxes in accordance with tax regulations applicable to
state-owned enterprises. During the 1993 pre-joint venture period, the
Predecessor, with the approval of the local Tax Bureau, was liable to
pay tax at a fixed amount of Rmb850.
- 6 -
<PAGE> 35
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
b. TAXATION (cont'd)
The Predecessor was subject to value added tax applicable to state-
owned enterprises during the 1993 pre-joint venture period at a rate
of 14% of the invoiced value of goods sold.
The Company provides for deferred income taxes using the liability
method, by which deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities. The tax consequences of
those differences are classified as current or non-current based
upon the classification of the related assets or liabilities in the
financial statements.
c. FOREIGN CURRENCY TRANSLATION
The Operating Subsidiary maintains its books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the
applicable unified rates of exchange or the applicable rates of
exchange quoted by the applicable foreign exchange adjustment center
("swap center"), prevailing at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies are
translated into Renminbi using the applicable unified rates of
exchange or the applicable swap center rates prevailing at the balance
sheet date. The resulting exchange differences are included in the
determination of income.
4. FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place either through the
Bank of China or other institutions authorized to buy and sell foreign exchange
or at a swap center. The exchange rates used for transactions through the Bank
of China and other authorized banks are set by the Chinese government from time
to time whereas the exchange rates available at a swap center are determined
largely by supply and demand. Sino-foreign equity joint venture enterprises can
enter into exchange transactions at swap centers. As a state-owned enterprise,
the Predecessor did not have access to swap centers. Payment for imported
materials and remittance of earnings outside of China are subject to the
availability of foreign currency which is dependent on the foreign currency
denominated earnings of the entity or must be arranged through a swap center.
Approval for exchange at the swap center is granted to joint venture
enterprises for valid reasons such as purchase of imported materials and
remittance of earnings.
The official exchange rates and Shanghai swap center rates as of September 30,
1993 were as follows:
<TABLE>
<CAPTION>
1993
Rmb equivalent of US$l ---------
<S> <C>
- Official exchange rate 5.8
- Shanghai swap center rate 8.7
</TABLE>
- 7 -
<PAGE> 36
5. RETIREMENT PLAN
All of the Company's Chinese staff are entitled to an annual pension equal to
their ending basic salaries at their retirement dates. The Chinese government
is responsible for the pension liability to these retired staff. The Operating
Subsidiary is only required to make specified contributions to the state
sponsored retirement plan. The expense reported in the financial statements
related to these arrangements was Rmb1,108 in the 1993 Pre-Joint Venture Period.
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
During the period, the Operating Subsidiary contributed cash and certain assets
into three investee companies ("the investee companies") in consideration of
non-controlling interests in each of the investee companies. Details of the
contributions made by the Operating Subsidiary were as follows:
<TABLE>
<CAPTION>
1993 Pre-Joint
Venture
Period
---------
Rmb
<S> <C>
Cash 1,005
Inventories 593
Fixed assets - at cost 239
- valuation surplus 151
Goodwill 100
-----
Total 2,088
=====
</TABLE>
7. OTHER SUPPLEMENTAL INFORMATION
The following items are included in the statement of income:
<TABLE>
<CAPTION>
1993 Pre-Joint
Venture
Period
---------
Rmb
<S> <C>
Interest income 15
Sales taxes (VAT) 3,507
</TABLE>
- 8 -
<PAGE> 37
REGAL INTERNATIONAL, INC.
=========================
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
<PAGE> 38
INTRODUCTION TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
OF REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
The unaudited pro forma consolidated financial statements as of and for the
year ended December 31, 1995 have been prepared to give effect to:
(i) the acquisition by Regal International, Inc. ("Regal") of China
Strategic Holdings Limited's ("CSH") entire interests in Acewin Profits
Limited and its subsidiaries, pursuant to an Acquisition Agreement
dated February 8, 1996; and
(ii) the sale and transfer of certain operating assets and real property by
Regal to Regal (New) International, Inc. ("New Regal"), pursuant to an
Asset Purchase Agreement dated February 8, 1996.
The unaudited pro forma consolidated financial statements are based upon the
historical consolidated financial statements of Regal International, Inc. as of
December 31, 1995 after giving effect to the pro forma adjustments described in
the notes thereto as if the acquisition of Acewin Profits Limited and its
subsidiaries by Regal as described in (i) above and sale and transfer of assets
to New Regal by Regal as described by (ii) above had occurred on January 1,
1995.
The unaudited pro forma consolidated financial statements do not purport to
represent what the financial positions and results of operations of Regal would
actually have been if the events described above had in fact occurred on
January 1, 1995, or to project the financial positions and results of
operations of Regal for any future date or period.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the consolidated financial statements of Regal International,
Inc. and of Acewin Profits Limited and its subsidiaries, including the notes
thereto.
- 1 -
<PAGE> 39
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
Historical As adjusted Historical
-------------- -------------- --------------
Notes to Pro forma
unaudited consolidated
pro forma statement of
Regal Regal Acewin Profits consolidated income of Regal
International, International, Limited and financial Pro forma International,
Inc. Inc. Subsidiaries statements adjustments Inc.
-------------- -------------- -------------- ------------ ----------- ---------------
$'000 $'000 $'000 $'000 $'000
(NOTE 1) (NOTE 2)
<S> <C> <C> <C> <C> <C> <C>
Sales 7,591 - 12,967 12,967
---------- -------- ---------- -----------
Cost of goods sold 5,022 - 7,749 7,749
Selling and administrative
expenses 2,660 - 1,871 1,871
Interest expenses (income),
net 328 - (195) (195)
Other income, net (447) - (77) (77)
---------- -------- ---------- -----------
Total costs and expenses 7,563 - 9,348 9,348
---------- -------- ---------- -----------
Income from continuing
operations before income
tax 28 - 3,619 3,619
Provision for income tax - - - -
---------- -------- ---------- -----------
Income from continuing
operations 28 - 3,619 3,619
Income from discontinued
operations - 28 - 28
---------- -------- ---------- -----------
Income before minority
interests 28 28 3,619 3,647
Minority interests - - (1,601) (1,601)
---------- -------- ---------- -----------
Net income 28 28 2,018 2,046
========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated statement of income.
- 2 -
<PAGE> 40
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
Historical As adjusted Historical
------------- ------------- ------------- Notes to Pro forma
unaudited consolidated
pro forma balance sheet
Regal Regal Acewin Profits consolidated of Regal
International, International, Limited and financial Pro forma International,
Inc. Inc. Subsidiaries statements adjustments Inc.
-------------- -------------- -------------- ------------ ----------- --------------
$'000 $'000 $'000 $'000 $'000
(Note 1) (Note 2) (Note 3)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents 11 800 6,026 6,826
Restricted cash 19 - - -
Note receivable - 149 - 149
Accounts receivable,
net 1,583 - 1,913 1,913
Inventories 2,460 - 1,960 1,960
Prepayments and other
current assets 219 - 1,345 1,345
Due from related
companies - - 499 499
------------- ------------- ------------- ------------
Total current assets 4,292 949 11,743 12,692
------------- ------------- ------------- ------------
Property, plant and
equipment, net 1,836 - 8,050 8,050
Long-term investment 16 13,500 273 (c) (13,500) 273
Note receivable - 1,551 - 1,551
Intangibles - - 120 120
------------- ------------- ------------- ------------
Total assets 6,144 16,000 20,186 22,686
============= ============= ============= ============
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current liabilities
Short-term bank
loans - - 413 413
Long-term loans -
current portion 865 - 1,904 1,904
Accounts payable 752 - 1,053 1,053
Accrued expenses and
other payables 595 - 1,296 1,296
Taxes other than
income - - 86 86
Due to related
companies - - 326 326
------------- ------------- ------------- ------------
Total current
liabilities 2,212 - 5,078 5,078
------------- ------------- ------------- ------------
</TABLE>
- 3 -
<PAGE> 41
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
Historical As adjusted Historical
------------ ------------- --------------
Pro forma
Notes to pro consolidated
forma balance sheet of
Regal Regal Acewin Profits consolidated Regal
International, International, Limited and financial Pro forma International,
Inc. Inc. Subsidiaries statements adjustments Inc.
-------------- -------------- -------------- ------------ ----------- ---------------
$'000 $'000 $'000 $'000 $'000
(Note 1) (Note 2) (Note 3)
<S> <C> <C> <C> <C> <C> <C>
Convertible Note Payable - 13,500 - (b) (13,500) -
Long term loans 475 - 1,855 1,855
Loans from related parties 819 - - -
Due to Chinese joint venture
partner - - 1,604 1,604
Due to China
Strategic Holdings Limited - - 4,377 (a) (4,377) -
Minority interest - - 4,363 4,363
Shareholders' equity:
Common stock 818 818 1 (b) 4,470 5,288
(c) (1)
Additional paid-in capital 20,307 20,169 - (b) 9,030 20,077
(a) 4,377
(c) (13,499)
Dedicated capital - - 202 202
(Accumulated deficits) Retained
earnings (18,487) (18,487) 2,695 (15,792)
Cumulative translation adjustments - - 11 11
------- ------- ------ -------
Total shareholders' equity 2,638 2,500 2,909 9,786
------- ------- ------ -------
Total liabilities and shareholders'
equity 6,144 16,000 20,186 22,686
======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of this
unaudited consolidated balance sheet.
- 4 -
<PAGE> 42
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
1. ADJUSTMENTS TO REGAL INTERNATIONAL, INC.'S HISTORICAL
FINANCIAL STATEMENTS
------------------------------------------------------
Pursuant to an Acquisition Agreement dated February 8, 1996
between Regal International, Inc. ("Regal"), Acewin Profits
Limited ("AP"), a British Virgin Islands corporation and China
Strategic Holdings Limited ("CSH"), a Hong Kong company, Regal
acquired all the issued and outstanding shares of AP at a
consideration of US$13.5 million to be satisfied through the
issuance of a US$13.5 million Convertible Note (the "Convertible
Note") by Regal to CSH bearing interest at 9% per annum after an
initial 6-month interest-free period. The principal and any
unpaid interest owing on the Convertible Note can be convertible
into shares of the Common Stock, US$0.01 par value, of Regal
("Common Stock") at a conversion price of US$0.0302 per share.
Acewin's sole asset is a 55% joint venture interest in Wuxi CSI
Vibration Isolator Co. Ltd., a Sino-foreign equity joint venture
incorporated in the People's Republic of China, held through an
intermediate Hong Kong company, China Machine (Holdings)
Limited.
Pursuant to another Asset Purchase Agreement ("the agreement")
dated February 8, 1996 between Regal International, Inc.
("Regal") and Regal (New) International, Inc. ("New Regal"),
Regal sold and transferred the existing operating assets and
real property of Regal to New Regal in exchange for US$2.5
million and New Regal's assumption of all liabilities of Regal,
other than the Convertible Note. Pursuant to the agreement, the
US$2.5 million portion of the purchase price was paid as
follows: US$800,000 in cash and the balance by delivery of two
promissory notes, one in the principal amount of US$900,000 (the
"US$900,000 Note") and the second in the principal amount of
US$800,000 (the "US$800,000 Note"). The US$900,000 Note bears
interest at 9% per annum and is payable in sixty equal monthly
installments of principal and interest. The US$800,000 Note
bears no interest and is due and payable in one installment on
January 31, 2001.
Adjustments have been made to reflect the financial positions of
Regal as if the net operating assets had been sold and
transferred to New Regal as of December 31, 1995 and the
acquisition of the interests in AP had occurred as of January 1,
1995. Income from continuing operations of Regal for the year
ended December 31, 1995 had been reclassified as "Income from
discontinued operations" as a result of the disposal of the net
operating assets to New Regal.
The transfer of CSH's equity interest in AP to Regal has been
accounted for as a pooling of interests in the accompanying
unaudited pro forma consolidated financial statements as the
transfer is considered a transfer of assets between entities
under common control.
- 5 -
<PAGE> 43
2. FOREIGN CURRENCY TRANSLATION TO REPORTING CURRENCY
The financial statements of Acewin Profits Limited and its subsidiaries are
translated into United States dollars using the closing rate method,
whereby the balance sheet items are translated into United States dollars
using the exchange rate prevailing at year end. Profit and loss items are
translated at the average rate for the year. The cumulative translation
adjustment arising therefrom is shown as a separate component of
shareholders' equity.
3. DESCRIPTION OF PRO FORMA ADJUSTMENTS
(a) To reflect the contribution by CSH to additional paid-in capital of AP,
originally recorded as a payable to CSH, pursuant to an agreement signed
between CSH and AP dated January 19, 1996.
(b) To adjust the share capital and additional paid-in capital as if the
Convertible Note of Regal had been exercised by CSH as of December 31,
1995.
(c) To eliminate the investment in AP on consolidation. The difference between
CSH's historical cost of investment in AP and the acquisition cost to
Regal has been treated as reduction of additional paid-in capital as the
transfer is considered a transfer of assets between entities under common
control.
4. INCOME TAXES
No provision for United States federal income taxes or tax benefits on the
undistributed earnings and/or losses of the PRC Operating Subsidiary has
been provided as the earnings have been reinvested and, in the opinion of
management, will continue to be reinvested indefinitely.
- 6 -
