FORM 10-K SB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1995.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Ex-
change Act of 1934.
Commission file number: 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-1071589
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization Identification No.)
P.O. Box 1237
Corsicana, Texas 75151
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (903) 872-3091
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $.01 par value
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange At during the past 12 months
(or for such shorter period that the Registrant was required to file such re-
ports) and (2) has been subject to such filing requirements for the past 0
days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filters in response to Item 405
of Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or in-
formation statements incorporated by reference in Part III of this Form 10-K
SB or any amendment to this Form 10-K SB. [ X ]
Revenues for the year ended December 31, 1995 were $7,591,000
The aggregate market value of the common stock of the Registrant held by non-
affiliates of the Registrant on March 15, 1996 was $913,623. The aggregate
market value was computed by reference to the average bid and asked prices
for the Common Stock on March 15, 1996. Solely for the purposes of this re-
sponse, executive officers and directors are considered the affiliates of the
Company at that date.
As of March 15, 1996, 81,806,198 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
SUBSEQUENT EVENTS
In September 1996, Regal International, Inc. (the "Registrant" or the
"Company") completed a series of transactions which resulted in the
Registrant's disposition of Wuxi CSI (as defined below) business, which the
Company acquired in February of 1996. Following the disposition of Wuxi CSI,
the Company acquired all the issued and outstanding shares of Westronix
Limited, a British Virgin Islands corporation ("Westronix"), whose sole asset
is a 100% equity interest in China Construction International Group Limited,
a Hong Kong company ("China Construction") which owns 51% joint venture
interest in Hangzhou Zhongche Huantong Development Co., Ltd. ("Hangzhou
Huantong"), a Sino-foreign joint venture established in Hangzhou, Zhejiang
Province, the People's Republic of China ("China"). Hangzhou Huantong has
been established to develop the construction project called "Hangzhou Ring
Road" to direct the congested traffic outside the city of Hangzhou.
The information set forth herein does not include the description of the
Registrant's current business after the sale of Wuxi CSI and acquisition of
Hangzhou Huantong. The Company has filed reports on Form 8-K with respect to
the above transactions.
GENERAL
The information set forth herein discloses information required by Form
10-KSB with respect to business of the Registrant (i) prior to the
acquisition of the new business (Wuxi CSI, as defined below) in February
1996 and (ii) after the sale of the existing business and acquisition of the
new assets in February 1996.
BACKGROUND OF RECENT TRANSACTIONS
On February 19, 1996, the Registrant acquired all the issued and out-
standing shares of Capital Stock of Acewin Profits Limited, a British Virgin
Islands corporation ("Acewin"), from China Strategic Holdings Limited, a Hong
Kong company ("CSH"). Acewin's sole asset is all the issued and outstanding
China Machine (Holdings) Limited, a Hong Kong company ("CMHL"). CMHL's sole
asset is a 55% joint venture equity interest in Wuxi CSI Vibration Isolator
Co., Ltd. ("Wuxi CSI"), a Sino-foreign joint venture established in September
1993.
The consideration paid by the Registrant for the Acewin Stock was $13.5
million. Said purchase price was paid by the Registrant's delivery of its
Convertible Note bearing interest at the rate of nine percent (9%) per annum
after an initial six (6) month interest-free period (the "Convertible Note").
Interest on the Convertible Note is payable on an annual basis, with all
principal being due and payable on January 31, 1999. The principal and any
unpaid interest owing on the Convertible Note are convertible into shares of
the Common Stock, $0.01 par value, of the Registrant ("Common Stock") at a
conversion price of $0.0302 per share. The number of shares of Common Stock
issuable upon conversion of the Convertible Note represents eighty-four and
one-half percent (84.5%) of the Registrant's currently outstanding Common
Stock. The Convertible Note is secured by a Pledge Agreement granting CSH a
security interest in the Acewin Stock.
Immediately following the acquisition of the Acewin Stock and as a con-
dition thereto, the Registrant sold and transferred the existing operating
assets and real property of the Registrant to a newly formed corporation, Re-
gal (New) International, Inc. ("New Regal") in exchange for New Regal's as-
sumption of all liabilities of the Registrant, other than the Convertible
Note, and $2.5 million, all in accordance with the terms and conditions of a
certain Asset Purchase Agreement, dated as of February 8, 1996, by and be-
tween Registrant and New Regal.
<PAGE>
The $2.5 million purchase price was paid as follows: $800,000 in cash
and the balance by delivery of two (2) Promissory Notes, one in the principal
amount of $900,000 (the "$900,000 Note") and the second in the principal
amount of $800,000 (the "$800,000 Note"). The $900,000 Note bears interest at
9% per annum and is payable in sixty (60) equal monthly installments of prin-
cipal and interest. The $800,000 Note bears no interest and is due and pay-
able in one installment on January 31, 2001. New Regal's obligations under
the $900,000 Note and the $800,000 Note are secured by a pledge of all of the
issued and outstanding shares of capital stock of New Regal. All the issued
and outstanding shares of New Regal are owned by Harlequin Investment Hold-
ings Limited ("Harlequin"). Harlequin was at the time of this transaction the
beneficial owner of approximately fifty-five percent (55%) of the currently
outstanding shares of the Registrant's Common Stock. Subsequent to this
transaction, Harlequin reduced its beneficial ownership of the Registrant to
approximately fifteen percent (15%). See Item 13 - Certain Relationships and
Related Transactions.
In connection with the above-described transactions, Janak Desai, Nils
Ollquist and Garish Sharma resigned as directors of the Registrant, and Oei
Hong Leong, the Chairman of CSH, Chung Cho Yee Mico, and Ma Wai Man Catherine
were elected to fill the vacancies created by such resignations.
REGAL INTERNATIONAL INC.
(Delaware Corporation)
Acewin Profits Limited - 100%
(British Virgin Islands Holding Company)
China Machine (Holdings) Limited - 100%
(Hong Kong Holding Company)
WUXI CSI Vibration Isolator Co., Ltd. - 55%
(Operating Company)
(Sino-foreign Joint Venture)
FORMATION AND DEVELOPMENT OF REGISTRANT
On May 10, 1982 the Registrant became a separately publicly held corpo-
ration as a result of a spin-off from Texas International Company. Share-
holders of Texas International Company were issued one share of the Regis-
trant's common stock for each two shares of Texas Internationals Common
Stock.
<PAGE>
The Company changed its state of incorporation to Delaware in March 1982
through merger with a wholly-owned subsidiary organized for that purpose.
The surviving Company's authorized capital stock consisted of 20,000,000
shares of common, par value $.10 per share, ("Common Stock") and 10,000,000
shares of preferred stock, par value $.10 per share, ("Preferred Stock"). At
the November 17, 1987 Annual Meeting, shareholders voted to increase the
authorized number of hares of Common Stock to 75,000,000. At the May 25,
1993 Annual Meeting the shareholders voted to change the par value of Common
Stock from $.10 per share to $.01 per share and to increase the authorized
number of shares of Common Stock to 150,000,000.
In 1987 the Company acquired all of the issued and outstanding common
stock of Bell Petroleum Services, Inc. ("Bell"), an oilfield products and
services company.
On December 7, 1994 the New York Stock Exchange ("NYSE") suspended trad-
ing of the Company's Common Stock pending delisting as the Company did not
meet the NYSE's criteria for continued listing. The Company decided not to
contest the delisting and the Common Stock was removed from listing and reg-
istration on the NYSE effective February 9, 1995. The Company's Common Stock
began trading on the NASD Electronic Bulletin Board in August, 1995.
BUSINESS OF REGISTRANT AFTER FEBRUARY 19, 1996
After February 19, 1996 the Registrant owned, as its sole asset, all the
issued and outstanding capital stock of Acewin, a company which owns all the
outstanding capital stock of CMHL. CMHL is the holder of a 55% interest in
Wuxi CSI. Wuxi CSI is the only operating subsidiary of the Registrant. Wuxi
CSI, established in September 21, 1993, is a Sino-foreign joint venture in
the Peoples Republic of China ("PRC") between CMHL and Wuxi Vibration Isola-
tor Factory. Wuxi Vibration Isolator Factory, built in 1960, is a National
Grade II Enterprise (the National Grade System grades all factories in terms
of size, profitability, sales, productivity and excellence in products. There
are only a few Grade I Enterprises in each province) and is the largest vi-
bration isolator producer in China. Wuxi CSI, a primary supplier to domesti-
cally produced Volkswagens, Peugeots and Audis and has developed close ties
to China's burgeoning automobile industry.
Wuxi CSI, with registered capital of $8.0 million, occupies 39,540
square meters of land, including a building area of 45,504 square meters and
workshop area of 37,232 square meters.
The factory is situated in Wuxi City which is located in Southern Ji-
angsu Province, at the center of the "golden delta" of the Yangtze River,
bordering Suzhou in the East and the Hangzhou in the West. It is 128 km.
apart from Shanghai; 183 km. from Nangjing and 40 km. away from the natural
port of Zhangjiagang. The urban area around Wuxi City covers 397 square km.
with a population of 0.928 million. Wuxi City has become a major interna-
tional open-port city at the mouth of the Yangtze River.
<PAGE>
Business Of Wuxi CSI Vibration Isolator
- ---------------------------------------
Wuxi CSI is engaged in the manufacture and sale of vibration isolators,
rubber damping materials, stainless steel bellows expansion joint and similar
products, which are primarily sold within China. Its primary customer base is
in Shanghai, although the distribution of its sales is regional. Being lo-
cated only 128 km. from Shanghai where three (3) of the largest automobile
manufacturers in China produce over 50% of the entire automobile market of
the PRC, Wuxi CSI supplies approximately 70%-100% of each of these three (3)
factory's demand. These factories are producers of the domestically produced
Volkswagens, Peugeots and Audis. Over 70% of Wuxi CSI's total sales are to
Shanghai Volkswagen.
Although Wuxi CSI is reliant on Shanghai Volkswagen for over 70% of to-
tal sales, the Company feels that its dominant position can be maintained due
to the fact that; (a) Wuxi CSI has had a successful business relationship
with Shanghai Volkswagen since 1989, (b) Shanghai Volkswagen is highly reli-
ant upon Wuxi CSI for vibration isolator parts, and (c) Shanghai Volkswagen
continues to thrive, as do other automobile producers in the Shanghai area
that Wuxi CSI sells to.
Wuxi CSI Sales For The Years Ended December 31, 1995 And 1994
- -------------------------------------------------------------
Sales increased by 49% to Rmb 108.41 million in 1995 from Rmb 72.57 mil-
lion in 1994 (See Table 1 - Sales Analysis). This increase was principally
attributable to substantial increases in unit sales of vibration isolators to
the manufacturer of Santana Volkswagen and Audi automobiles.
Table 1 Sales Analysis
(Rmb in thousands)
1994 1995 % Change
------ -------- ---------
Sales 72,570 108,408 49%
Gross Profit 26,357 43,623 66%
Operating income (1) 12,184 27,981 130%
Net income 7,531 16,871 124%
________________________
(1) Operating income means income before minority interest, income tax, net
interest expense and other income.
Products And Markets
- --------------------
Wuxi CSI produces a complete range of the following products under the brand
name "Xizhen" (See Table 2 - Sales by Units).
(1) Rubber-Metal Vibration Isolators
---------------------------------
Minimizes harmful vibrations and noise. Widely utilized in automobiles,
ships, trains and heavy machinery.
<PAGE>
(2) Metal Bellows
-------------
Widely used in the shipbuilding, petroleum, chemical, industry, railway,
construction, electric power and nuclear industries.
(3) Bitumen Damping Materials
-------------------------
Reduces vibration and noise from mechanical equipment installed in auto-
mobiles, refrigerators, fans and machinery.
Table 2 Sales by Units
Type of Vibration Isolator 1994 1995 % Change Market
- -------------------------- ---- ---- -------- ------
- -General Vehicle Vibration
Isolator 388,007 353,774 -8.8% Auto
- -Santana (Volkswagen) 1,795,260 3,133,754 74.6% Auto
- -Audi 97,833 161,992 65.6% Auto
- -Damping Materials and Damp-
ing Materials with fabrics 1,511,007 4,691,384 210% Auto
Others 285,032 253,631 -11.0% Auto
Wuxi CSI has experienced significant growth in demand in recent years as
a result of the fast growing automobile industry in the PRC. Moreover, Wuxi
CSI has successfully retained old customers while pursuing new markets by im-
plementing an aggressive marketing program and improving product quality.
Planned future capital expenditures are focused on increasing production ca-
pacity, efficiency, and capabilities in product design, development and qual-
ity control. Thus, Wuxi CSI will be positioned to meet increasing demand for
vibration isolators in the automobile component market.
Approximately 74% of Wuxi CSI's total sales in 1995 were made to Shanghai
Volkswagen. Shanghai Volkswagen manufactures the "Santana". Compared to the
Shanghai region, sales to other regions were relatively small. Sales to Jilin
and Jiangsu come in second and third place but only accounted for 5.4% and
3.5% of total sales, respectively. (See Table 3 Geographical Sales Distribu-
tion).
Table 3 Geographical Sales Distribution - 1995
Region % of total sales
- ------------------------------------
Shanghai 74.1
Jilin 5.4
Jiangsu 3.5
Guangdong 0.2
Sichuan 0.1
Jiangxi 0.8
Shandong 1.3
Others(1) 14.6
- ---------------------------
Total 100%
(1) Others refer to regions which are not listed above in the table
<PAGE>
Overview of Automobile Industry in China
- ----------------------------------------
In the past 14 years, growth in China's motor vehicle sector has been
phenomenal, reporting average annual increases of 23%, with the total number
of vehicles swelling to 9.40 million in 1994 from 1.68 million in 1980. Unit
sales performance has been even more impressive, reflecting an annual 1995
sales of 1.435 million vehicles, up 19% from 1,206 million in 1994. The
Volkswagen Santana continues to be the volume leader among passenger cars, as
output topped 127,000 in 1995 for the first time. Approximately 26,000 Jeep
Cherokees were built in 1995 at Chrysler's Beijing Jeep joint venture.
Among the leaders, First Auto Works saw production increase 8% to
202,197 units; Shanghai-Volkswagen (Santana) output topped 160,000 units, a
39% rise; Beijing Automobile Industry Corp. production hit 161,418 -- includ-
ing 50,058 at Beijing Jeep, a 19% hike from 1994 levels. Dongfeng production,
at 141,228, was down 15% from 166,247. Dongfeng built less than 4,000 Citroen
ZX-based Fukang cars. Tianjin production, at 130,848, was up 6.8%.
Most industry forecasts call for Chinese vehicle production to finish
among 1.6 million and 1.7 million units in 1996. The industry is highly frag-
mented, with more than 130 manufacturers. Some are state-owned giants, but
many are garage-sized operations that turn out only a dozen cars a year, each
one different. In 1994, the U.S. market for passenger cars was 8.9 million
vehicles, behind Western Europe with 11.9 million. In contrast, China, with
more than four times the population of the U.S., had a passenger car market
of approximately 300,000 vehicles.
The Chinese government has indicated it wants to consolidate the indus-
try into three or four large-scale operations, together with a few niche
players, that can survive on a supply of locally produced parts and are effi-
cient enough to compete in export markets. It hopes to achieve this ambitious
goal in the coming 10 years. Given this mandate, it is anticipated that sev-
eral years of consolidation are likely as the industry's weaker players go
bankrupt and the survivors scramble to fortify their positions.
Regardless of the anticipated consolidation, China's motor vehicle pro-
duction is expected to accelerate since the automobile industry has been des-
ignated as a "pillar" industry in China. On a go forward basis, industry ex-
perts expect growth to moderate but remain strong, registering a Compound An-
nual Growth Rate ("CAGR") of 7% for the 1995-2000 period, with unit sales
volume surpassing 2.1 million vehicles Per annum by the turn of the century
Since 1982, the total number of registered motor vehicles in the PRC
grew from approximately 2 million vehicles to 9.5 million vehicles in 1995.
Trucks remain the largest product category, accounting for approximately
two-thirds of all registered vehicles.
<PAGE>
DEMAND AND SALES
The principal buyers of motor vehicles in the PRC are government enti-
ties, state-owned enterprises, collective enterprises, private companies and
enterprises with foreign investment. Individuals currently account for only
a small number of vehicle purchases.
Sales of motor vehicles generally have reflected strong demand since the
PRC adopted its open door policy in 1979. Although there have been periods
of sales declines, this demand has contributed to strong long-term growth,
particularly from 1989 through 1993 when total vehicle unit sales grew at an
annual compound rate of 22%. Motor vehicle sales historically have been
strong influenced by government spending and economic growth.
Companies 1994 1995
- --------- ----- -----
First Auto 15.10% 14.10%
Beijing Auto 11.30% 11.20%
Shanghai - VW 9.60% 11.20%
Dongfeng 13.80% 9.80%
Tianjin 10.20% 9.10%
Nanjing 6.10% 5.60%
Jinbei 1.60% 0.10%
Other
Source: Automotive Industry of China
Table 5 Passenger Car Market Share By Make And Model, 1994
VW Santana 51%
Daihatsu Charade 26%
Audi 100 9%
Suzuki Alto 4%
Citroen ZX 4%
VW Jetta 3%
-----
Peugeot 505 100%
Source: Automotive Industry of China
Raw Materials
- -------------
Wuxi CSI's raw materials mainly consist of natural/synthetic rubber,
steel and semi-finished goods. Semi-finished goods accounted for approxi-
mately 72% of total raw materials cost in 1995 and raw materials represented
approximately 80% of total manufacturing cost in 1995. As indicated below,
prices of natural/synthetic rubber and steel increased in 1994 and 1995. How-
ever, the prices of semi-finished goods maintained a fairly stable level dur-
ing 1994 and 1995, because Wuxi CSI was able to set the purchase price for
such goods with suppliers at the beginning of the year Prices of
semi-finished goods were determined by negotiations between Wuxi CSI and sup-
pliers. Due to its status as a primary buyer to these suppliers, Wuxi CSI is
<PAGE>
able to negotiate favorable prices and terms. Wuxi CSI also purchases semi-
finished goods from its related company - Jieda Vibration Isolator Factory.
Prices of these goods are relatively stable partly because of established
long-term cooperation relationship between the two companies. In addition,
Jieda sells 95% of its products to Wuxi CSI (See Table 6).
Table 6 Table of Raw Material Costs:
(Rmb in thousands)
1994 1995
----- ----
Average Average
Input material cost per ton Total cost cost per ton Total cost
- -------------- ------------ ---------- ------------ -----------
1) Natural and 19.0 6,250 21.5 9,300
synthetic rubber
2) Steel 4.9 1,490 6.8 2,480
3) Semi-finished 29,780 36,940
4) Others 1,290 2,340
----- -----
Total 38,810 51,060
Wuxi CSI sources all of its raw materials domestically in China from the
following suppliers: China Shipbuilding Industrial Material Corp., Shanghai
Baoshan Iron and Steel Corp., Shanghai No. 5 Iron and Steel Factory, Henan
Wuyian Iron and Steel Factory. Imported raw material is sourced by Wuxi CSI
from local import-export companies. According to a raw material cost analysis
from Wuxi CSI, the cost per ton of chemicals increased by 13% in 1995. The
company raised its selling price of vibration isolators for Santana accord-
ingly, therefore the negative impact of cost increases in these major raw ma-
terials was offset by higher selling price.
Almost 100% of the rubber used in production was imported material ac-
quired from a local chemical company in Wuxi, while steel is supplied domes-
tically. The Company's purchasing department is continuously searching the
market for quality materials at the best price and terms. Shortages of raw
materials rarely occurs in the company.
Management And Employees
- ------------------------
The management of Wuxi CSI consists of a seven (7) member Board of Di-
rectors consisting of four (4) directors appointed by CMHL and three (3) di-
rectors appointed by Wuxi Vibration Isolator Factory. Day-to-day management
is conducted by a committee headed by a General Manager. The General Man-
ager's management team consists of a Deputy General Manager, a Chief Engineer
and a Chief Accountant. Mr. Shi Le Yi is the General Manager of Wuxi CSI.
Mr. Shi Le Yi, General Manager, 53. Mr. Shi graduated from a technical
college in 1964, and has held positions such as Supervisor, Head of Produc-
tion Department and Head of Factory in various manufacturing companies. He
was the Deputy Head of Factory at Wuxi Television Factory before being pro-
moted to Head of Factory of Wuxi Vibration Isolator Factory in 1987.
<PAGE>
Mr. Tso Xin Hui, Vice General Manager, 50. Mr. Tso graduated received an
electrical engineering degree from Shanghai University. Mr. Tso has more than
20 years of experience in the engineering field and held senior positions
with Wuxi Television Factory and the Electrical Instrument & Meter Industry
Bureau of Wuxi before joining Wuxi CSI in October 1995
Mr. Zhuang Guo Hua, Chief Engineer, 50. Mr. Zhuang holds a Masters De-
gree from Shanghai Transportation University and a Bachelor Degree from
Shanghai Science and Technology University. Mr. Zhuang started working in
Wuxi Vibration Isolator Factory as a technician in 1983, and was promoted to
various technical positions before taking on the role of Chief Engineer.
Ms. Jiang Hui Hua, Chief Accountant, 46. Ms. Jiang possesses a Bachelor
Degree of Business Administration from a Chinese University. Prior to joining
Wuxi Vibration Isolator Factory in 1986, Ms. Jiang taught Chinese literature
in a high school and worked as an accountant for an industrial manufacturing
company. Ms. Jiang held the position of Accounting Supervisor prior to being
named Chief Accountant of Wuxi CSI.
As of December 1995, Wuxi CSI had approximately 800 employees, 76% of
whom were production workers, 11% of whom were managerial staff and 13% of
whom were engineering and technical staff. In general, Wuxi CSI has entered
into employment contracts with its workers, with wages to be decided annually
by the enterprise's Board of Directors in accordance with applicable Chinese
regulations governing the labor management of Sino-foreign equity joint ven-
ture enterprises. The total cost of Wuxi CSI salaries was approximately 8.7%
of total production costs in 1995.
The average annual cash compensation for employees of Wuxi CSI employees
in 1995 was approximately Rmb 12,000 ($1,442). Salaries and wages of employ-
ees increase 20-30% every year, while the inflation rate remains around
15-20%. Trade Unions fees account for 2% of total salaries and wages. In ad-
dition to cash compensation, employer-funded benefits include pension funds,
free meals and medical costs. Wuxi CSI maintains a bonus program based on its
production volume and profit.
All employees of Wuxi CSI, including members of senior management, are
members of a trade union. Wuxi CSI has not suffered from strikes or other
significant labor disputes and believes it has a good relationship with all
of its employees and unions.
Competition
- -----------
Wuxi CSI competes based upon the following factors:
<PAGE>
VARIETY OF PRODUCTS. Wuxi CSI currently produces 19 models of vibration
isolators; 24 models of damping materials, 8 models of bitumen damping mate-
rials and over 50 models of metal bellows (metal bellows are made in small
batches and low volumes).
The products of its competitors in the PRC are relatively homogeneous
and less efficient in bring able to meet changing demand from customers.
QUALITY AND TECHNOLOGICAL ADVANCEMENT. Products of Wuxi CSI are made
with the support of advanced technologies and machinery imported such as
testing instruments from West Germany, U.S.A. and injection machines from
Taiwan.
GUARANTEED SUPPLY OF COMPONENTS. Since Wuxi CSI also produces many of
the components for its vibration isolator manufacturing, both the quality and
stable supply of a significant portion of the components can be guaranteed.
Because of its ability to produce components, Wuxi CSI is able to service or-
ders of specified design products and small quantity orders of which the
profit margin is higher. Moreover, such a self relationship reduces the pro-
duction cost of Wuxi CSI's final output and, in turn, increases the competi-
tion of Wuxi CSI's products.
LOW PRODUCTION COSTS. Vibration isolator manufacturing is a labor in-
tensive industry which gives low wage countries such as the PRC a significant
advantage. In addition, Wuxi CSI is a Sino-foreign joint venture that enjoys
special benefits of tax exemption during the first three years of operation
and a 50% reduction in tax rate for the following two years of operation.
FLEXIBILITY. Wuxi CSI's sales are customized for customers. This in-
creases the popularity and flexibility of Wuxi CSI's products because the
product is made according to customers' requests. Such a demand driven sales
policy reduces the risk of producing unwanted products.
Wuxi CSI is the largest vibration isolator manufacturer in the automo-
bile component industry. It currently has 70% of the entire vibration isola-
tor market in China. Wuxi CSI's primary competitors are Ninghai Dipu Co.,
Nanjing Vibration Isolator Factory and Shenyang Vibration Isolator Factory.
These three primary competitors have far smaller market shares when com-
pared with Wuxi CSI. Currently, there are no direct foreign competitors due
to high import tariffs of 40% on vibration isolator products.
Other competitors include Chengdu Auto Shock Absorber Manufacturer,
Dongfeng Automotive Drive Shaft Manufacturer, Dongfeng Automotive Powered
Metal Parts Manufacturer, Guangdong National Fengshun Shock Absorber Manufac-
turer, Hangzhou Founding Traffic Parts Co., Ltd., Jiangzhi Auto Shock Ab-
sorber Manufacturer, Shandong Heze Auto Accessories Manufacturer, Shanghai
Auto Chassis Manufacturer, Shenyang Auto Shock Absorber General Manufacturer
Sichuan, Chuannan Shock Absorber Co., Ltd., and Tianjin Auto Shock Absorber
Manufacturer.
<PAGE>
Wuxi CSI has been able to obtain a 70% of market share in China because
of its established reputation in the industry, excellent machinery and equip-
ment, large scale of production, competitive pricing and consistent product
quality.
To maintain a dominant position in the China Market, Wuxi CSI strives to
improve in the three following areas:
1) Technology. The company seeks to benefit from a technology transfer
through a strategic alliance with a leading foreign company in the industry.
(2) Equipment and Machinery. The company maintains a rigorous technical
maintenance and improvement program with its existing equipment and machin-
ery.
(3) Human Resources. The company places a strong emphasis on the qual-
ity of its workforce. On an annual basis, the company recruits university
graduates with bachelor or master degrees, and provides training for the ex-
isting work force to ensure employees possess updated technical knowledge and
skills.
Research & Development
- ----------------------
The Wuxi CSI factory focuses strongly on technical improvements. During
the period of the seventh five year plan (1986-1989), the factory spent about
Rmb 20 million to install a state of the art damping material production line
from West Germany. This damping material production line produces the automo-
bile products and noise-reducing products.
During the eighth five year plan (1991-1995), the factory invested Rmb
30 million to upgrade its vulcanization workshop and to introduce from abroad
advanced testing instruments and production equipment.
The Research and Development Department, headed by the Chief Engineer,
has over 30 engineering technicians. This department is responsible for de-
veloping and testing new products to keep the company on a competitive edge
in the vibration isolator market.
During the ninth five year plan (1996-2000), Wuxi CSI intends to invest
Rmb 190 million in technical advancements with anticipated results of in-
creasing manufacturing twofold by 1997. To accomplish this expansion, Wuxi
plans to invest a total of Rmb 86 million consisting of Rmb 29 million in
1996 and Rmb 57 million in 1997. These planned capital expenditures are part
of Wuxi's ninth five-year plan which focuses on improvements in production,
technology and quality. Of the total required capital of Rmb 86 million, it
is planned that Rmb 64 million will be obtained through government loans and
Rmb 22 million financed by a combination of bank loans and Wuxi's profits.
Funds used in research and development activities each year account for
approximately 1 to 2% of annual sales.
<PAGE>
Insurance
- ---------
Wuxi CSI maintains insurance coverage with the Pacific Insurance Com-
pany, covering its assets in the amount of approximately Rmb 118.7 million.
Wuxi CSI pays a premium of approximately Rmb 200,000 each year.
Distributions From Wuxi CSI
- ---------------------------
Applicable Chinese laws and regulations require that, before a
Sino-foreign equity joint venture enterprise (such as each Operating Subsidi-
ary) distributes profits to investors, it must: (I) satisfy all tax liabili-
ties; (2) provide for losses in previous years; and (3) make allocations, in
proportions determined at the sole discretion of the Board of Directors, to a
general reserve fund, an enterprise expansion fund and a staff welfare and
employee bonus fund. For 1995 and 1994, Wuxi CSI contributed 15% and 10%, re-
spectively, of after-tax profits as determined under Chinese accounting prin-
ciples for such purposes. Distributions of profits by the Wuxi CSI to the
Registrant and its other equity investors are required to be in proportion to
each party's investment in the joint venture. To date, the Registrant and the
Chinese joint venture partners plan to re-invest their respective share of
the retained earnings in Wuxi CSI as additional paid-in capital. This ar-
rangement is subject to approvals from the relevant government authorities.
Operating In China
- ------------------
ECONOMIC POLICIES. General economic conditions in China could have a
significant impact on the Wuxi CSI. The economy of China differs in certain
material respects from that of the United States, including its structure,
levels of development, capital reinvestment, growth rate, government involve-
ment, resource allocation, rate of inflation and balance of payments posi-
tion. Although the majority of China's productive assets are still owned by
the state, the adoption of economic reform policies since 1978 has resulted
in its' gradual reduction in the role of state economic plans, allocation of
resources, pricing and management of such assets. The economic reform poli-
cies have increased emphasis on the utilization of market forces and rapid
growth of the Chinese economy. The success of the Wuxi CSI depends in part on
the continued economic growth of China.
INFLATION. The general inflation rate in the PRC was approximately
13.2%, 21.7% and 14.8% per annum in 1993, 1994 and 1995 respectively. Accord-
ingly, the Chinese government has taken steps to control inflation by means
of credit restrictions and an increase in interest rates which, in turn, may
lead to a slow down of the Chinese economy. Nevertheless, Wuxi CSI has been
able to control production costs by implementing a variety of cost control
measures. These measures included utilizing internal production resources to
minimize sub-contracting expenses and purchasing from suppliers who offer the
lowest price. In recent years, the Chinese economy has experienced periods of
rapid economic growth as well as high rates of inflation, which in turn, has
resulted in the adoption by the Chinese government from time to time of vari-
ous corrective measures designated to regulate growth and contain inflation.
Since 1993, the Chinese government has implemented an economic program to
control inflation which has resulted in the tightening of credit available to
Chinese state-owned enterprises.
<PAGE>
FOREIGN CURRENCY EXCHANGE. Prior to January 1, 1994, all foreign ex-
change transactions involving Renminbi ("Rmb") in the PRC had to take place
either through authorized financial institutions at the official exchange
rate set by the State Administration of Exchange Control ("SAEC"), the PRC
Government department responsible for foreign exchange administration or at
local swap centers at exchange rates largely determined by supply and demand.
However, transaction, effected through swap centers still required the prior
approval of the SAEC.
On January 1, 1994, the PRC Government implemented a controlled floating
exchange rate system based on market supply and demand and established a man-
aged foreign exchange system. In place of the official rate and swap center
rate, the People's Bank of China ("PBOC") now publishes a daily exchange rate
(the "PBOC Exchange Rate") for Renminbi based on the previous day's dealings.
The financial institutions authorized to deal in foreign currency may enter
into foreign exchange transactions at exchange rates within a set range above
or below the PBOC Exchange Rate, according to market conditions. In further-
ance of these currency reforms, the China Foreign Exchange Trading Center
("CFETC") was formally established in Shanghai and came into operation in
April 1994. The establishment of CFETC was originally intended to coincide
with the phasing out of the swap centers. However, the swap centers have been
retained as an interim measure and it is envisaged that the local centers
will be phased out gradually.
Currently, foreign investment enterprises ("FIE") in the PRC (including
Sino-foreign equity and co-operative joint ventures) are required to apply to
the local bureau of the SAEC for "foreign exchange registration certificates
for foreign investment enterprises". With such foreign exchange registration
certificates (which are annually reviewed by the local bureau of the SAEC) or
with the foreign exchange sales notice from the local bureau of the SAEC,
FIEs may enter into foreign exchange transactions at the swap center, or in
the future, through the unified market when all swap centers are connected to
CFETC. On January 29, 1996, the State Council promulgated the regulations of
the People's Republic of China Regarding Foreign Exchange Control (the
"Regulations") which came into effect on April 1, 1996. Pursuant to the Regu-
lations, conversion of RMB into foreign exchange for the use of recurring
items, including the distribution of dividends and profits to foreign inves-
tors of joint ventures, is permissible. FIEs are permitted to remit its for-
eign exchange from its foreign exchange bank account in the PRC on the basis
of the relevant joint venture contracts, the board resolution declaring the
distribution of payment of the dividend, etc. Conversion of RMB into foreign
exchange for capital items, such as direct investment, loans, security in-
vestment are still under control.
The exchange rate between the Renminbi and the U.S. Dollar as quoted by
the Bank of China ranged between Rmb 8.44 and Rmb 8.33 to $1.00 in 1995.
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with eco-
nomic matters in general and foreign investment in particular have been prom-
ulgated in China.. The Chinese Constitution, adopted in 1989, authorizes for
<PAGE>
eign investment, and guarantees the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past twelve years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises
in China.
There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in leader-
ship, social or political disruption, or unforeseen circumstances affecting
China's political, economic or social life.
Despite some progress in developing a legal system, China does not have
a comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement
of existing laws may be uncertain and sporadic, and implementation and inter-
pretation may be inconsistent. The Chinese judiciary is relatively inexperi-
enced in enforcing the laws or terms of contracts, leading to a higher than
usual degree of uncertainty in the outcome of litigation. Even where adequate
laws exist in China, it may be impossible to obtain swift and equitable law
enforcement, or to obtain enforcement of a judgment by a court of another ju-
risdiction. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by na-
tional laws may adversely affect foreign investors, such as the Registrant.
Wuxi CSI's activities in China may be subject, in some cases, to admin-
istrative review and approval by various national, provincial and municipal
authorities of the Chinese government. While China has promulgated an admin-
istrative procedural law permitting redress to the courts with respect to
certain administrative actions, this law appears to be largely untested in
its context.
Legal Structure Of Wuxi CSI
- ---------------------------
Wuxi CSI Vibration Isolator Company Limited was organized under Chinese
law as a Sino-foreign equity joint venture enterprise, which is a distinct
legal entity with limited liability. Such entities are governed by the Law of
the People's Republic of China on Joint Ventures Using Chinese and Foreign
Investments and implementing regulations related thereto (the "Equity Joint
Venture Law"). The parties to an equity joint venture have rights in the re-
turns of the joint venture in proportion to the joint venture interests that
they hold. The operations of equity joint ventures are subject to an exten-
sive body of law governing such matters as formation, registration, capital
contribution, capital distributions, accounting, taxation, foreign exchange,
labor and liquidation. The transfer or increase of an interest in a
Sino-foreign equity joint venture enterprise requires agreement among the
parties to the venture and is effective upon the approval of relevant govern-
ment agencies.
Taxation
- -------
A Sino-foreign equity joint venture with a term of 10 years or more and
engaged in production is exempt from state income tax for the first two years
after it attains profitability, and for three years thereafter it is eligible
for a 50% reduction in the state income tax. Wuxi CSI has elected to have its
two year tax exemption period begin in 1994.
<PAGE>
Governance, Operations And Discussion
- -------------------------------------
Governance, operations and dissolution of a Sino-foreign equity joint
venture enterprise are governed by the Equity Joint Venture Law and by the
parties' joint venture contract and the joint venture's articles of associa-
tion. Pursuant to the joint venture contracts and articles of association of
Wuxi CSI, Wuxi CSI has a 50-year term and is governed by a Board of Directors
consisting of seven members appointed for 4-year terms. CMHL appoints four
directors, including the chairman, to Wuxi CSI, while the Chinese joint ven-
ture partner appoints the remaining three directors, including the Vice
Chairman.
The Board of Directors of Wuxi CSI exercises authority by majority vote
over major corporate decisions, including the appointment of officers, stra-
tegic planning, budgeting, employee compensation and welfare and distribution
of after-tax profits. Management of Wuxi CSI is conducted by a management
committee headed by a General Manager and one or two Deputy General Managers,
who act on behalf of Wuxi CSI pursuant to the direction and guidance of its
board of Directors.
Pursuant to relevant Chinese Law, certain major actions of Wuxi CSI re-
quire unanimous approval by all the directors present at the meeting called
to decide upon the following actions: amendments to its contract and articles
of association; increases in, or assignment of, the registered capital of the
joint venture; a merger of the joint venture with another entity; or dissolu-
tion of the enterprise.
Wuxi CSI is subject to the Sino-foreign Equity Joint Venture Enterprise
Labor Management Regulations. In compliance with these regulations, the man-
agement may hire and discharge employees and make other determinations with
respect to wages, welfare, insurance and discipline of its employees.
As set forth in the joint venture contract of Wuxi CSI, applicable Chi-
nese laws and regulations provide that after payment of taxes, provision for
losses of prior years and contribution to special funds for enterprise expan-
sion, employee welfare, bonuses and a general reserve fund, the profits of
Wuxi CSI are available for distribution to the Company and the Chinese joint
venture partner in proportion to their respective shareholdings. The amount
of after-tax profits allocated to the special funds is determined at the dis-
cretion of Wuxi CSI on a yearly basis. For 1995, the Board of Directors of
Wuxi CSI designated that total amounts equal to 15% of after tax profits be
allocated to the special funds.
Pursuant to the Equity Joint Venture Law, Sino-foreign equity joint ven-
ture enterprises may be terminated in certain limited circumstances, includ-
ing the inability of the enterprise to conduct its business owing to a breach
by one of its parties, insolvency, force majeure, or confiscation of the en-
terprise's assets by the government. Upon termination, the board of directors
establishes a liquidating committee to dissolve the enterprise, which disso-
lution is subject to government review and approval.
<PAGE>
Resort to Chinese courts to enforce a joint venture contract or to re-
solve disputes between the parties over the terms of the contracts is permis-
sible. In practice, however, disputes between the parties are often resolved
by negotiation. The Company believes that it has good working relationships
with its joint venture partners and that it will be able to reach agreement
with them on business policies and decisions for Wuxi CSI.
New Tax Regulations
- -------------------
Under new tax regulations which came into effect from January 1, 1994,
the Wuxi CSI are subject to value added tax ("VAT") which is the principal
indirect tax in the PRC on the sale of tangible goods and the provision of
certain services and has replaced the previous Industrial and Commercial Con-
solidated Tax ("ICCT") and Product Tax. The general VAT rate applicable to
the PRC Operating Subsidiaries is 17.0%.
The new tax regulations include a "grandfather" provision issued by the
National People's Congress on December 29, 1993 from which Wuxi CSI will
benefit. The provision states that where the tax burden of a foreign invested
enterprise established before December 31, 1993 increases due to the above
changes in tax laws, such enterprise may obtain a refund, upon application to
and with the approval of the tax authorities, of any tax paid in excess of
the amount which would have been paid under the previous ICCT legislation.
This provision will be valid for a maximum period of five years. The amount
of tax refunded to Wuxi CSI for 1994 and 1995 was Rmb 2.1 million and Rmb 1.2
million, respectively. The import duty exemption for equipment purchased by a
Sino-foreign equity Joint Venture was canceled January 1, 1996. The addi-
tional tax burden for equipment to be purchased in 1996 by Wuxi CSI is ex-
pected to be minimal as the contracts for the purchases of such equipment had
been entered into prior to January 1, 1996.
BUSINESS OF REGISTRANT PRIOR TO FEBRUARY 19, 1996
The discussion of the Business of the Registrant prior to the purchase
of the interest in Wuxi CSI on February 19, 1996 and the subsequent sale of
the Registrant's existing business and liabilities is set forth in detail as
Exhibit 99-I attached hereto and made a part hereof for all purposes.
ITEM 2. DESCRIPTION OF PROPERTIES OF THE REGISTRANT
On August 31, 1996, the Registrant had no office or facility for U.S.
operations, but rents a small office at its predecessor's facility in Corsi-
cana, Texas.
Wuxi CSI occupies a gross land area of 39,985 square meters in Wuxi
City. The main production area for manufacturing vibration isolators consists
of 7 separate buildings encompassing approximately 17,178 square meters. The
Research and Development department, laboratories and related technology de-
partments are located in supplementary rooms in the main factory buildings.
<PAGE>
There are two three-story administrative buildings in the main manufac-
turing area. One building is occupied by the accounting department, manage-
ment offices and production department. The other building is occupied by the
personnel department, trade union and functions as a warehouse. The total
floor area occupied by these two buildings is approximately 2,936 square me-
ters.
The discussion of the Properties of the Registrant at December 31, 1995
is set forth in Exhibit 99-I.
ITEM 3. LEGAL PROCEEDINGS
Neither the Registrant nor its subsidiaries are a party to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1995.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's Common Stock was listed on the New York Stock Exchange
("NYSE") (symbol: RGL) until December 7, 1994, at which time the NYSE sus-
pended trading since the Registrant did not meet the continued listing re-
quirements. On February 9, 1995, the Common Stock was removed from registra-
tion and listing on the NYSE. The Registrant's Common Stock began trading on
the NASD Electronic Bulletin Board in August 1995. The following table sets
forth the high and low prices of the Common Stock as reported in the consoli-
dated transaction reporting system during the periods indicated:
Quarter Ended High Low
- ------------- ---- ---
March 31, 1994 1/8 1/8
June 30, 1994 3/8 1/8
September 30, 1994 1/4 1/8
December 31, 1994* 1/8 1/16
March 31, 1995* 1/40
June 30, 1995* 1/40
September 30, 1995* 1/40
December 31, 1995* 1/40
___________________________
* The low price reflects the average of the bid and asked prices
As of March 13, 1996, there were 7,637 holders of record of the shares
of the Registrant's Common Stock.
<PAGE>
Dividend Policy
The Registrant has never paid a cash dividend. It is the current policy
of the Board to retain earnings, if any, to provide funds for the Company's
operations. The payment of dividends is at the discretion of the Board, and
dividends may be paid only out of current earnings and profits or retained
earnings. The Company had an accumulated deficit of $18,487,000 at December
31, 1995. No funds have been legally available for the payment of dividends
since at least January 1, 1983.
SELECTED FINANCIAL DATA
Selected Proforma Financial Data - Wuxi CSI
- -------------------------------------------
The following table presents the selected proforma financial information
of the Registrant as of and for the year ended December 31, 1994 and 1995 as-
suming that the Registrant had owned the shares of Acewin Stock in 1994 and
1995 and had sold other assets and disposed of its other assets and liabili-
ties. The information was extracted from the audited financial statement of
Acewin Profits Limited and subsidiaries prepared under US GAAP (See Table 7
Summary of Proforma Financial Results - 1994 & 1995).
Table 7 Summary of Proforma Financial Results - 1994 & 1995
1994 1995
(Amount in thousand) Rmb(a) USD(a) Rmb(a) USD
---- --- --- ---
Income Statement Date
Sales 72,570 8,712 108,408 13,014
Gross Profit (b) 26,357 3,164 43,623 5,237
Income before income tax (c) 12,769 1,533 30,257 3,632
Net income 7,531 904 16,871 2,025
Balance Sheet Data
Total assets 134,539 16,151 168,566 20,236
Current liabilities 36,120 4,336 42,398 5,090
Long-term bank loan 16,140 1,938 15,490 1,860
Shareholders' equity 7,718 927 24,298 2,917
________________________________
(a). The U.S. dollar convenience translation amount have been trans-
lated using the unified exchange rate quoted by the Bank of China on December
31, 1994 and 1995 of $1.00 = Rmb 8.33 and $1.00 = Rmb 8.33, respectively. No
representation is made that the Renminbi amounts could have been, or could
be, converted into U.S. dollar at those rates on December 31, 1994 and 1995
or at any other certain rate.
<PAGE>
Swap Center Rates/Unified Exchange Rate
Year Ending December 31
Rmb equivalent to $1.00 1994 1995
- End of year 8.44 8.33
-High 8.70 8.44
-Low 8.44 8.30
-Average 8.62 8.35
(b). Gross profit is defined as sales less cost of goods sold.
(c). As of December 31, 1994 and 1995, Wuxi CSI did not make any provi-
sion for PRC profits tax as it has a joint venture term of not less than 10
years and is engaged in production, is fully exempt from the Chinese State
unified income tax for two years starting from profit-making year, followed
by a 50% reduction of the Chinese State unified income tax for the next three
years thereafter ("tax holiday"). In accordance with the same tax laws, the
PRC Operating Subsidiaries are also exempt from the PRC local income tax. The
Chinese State unified income tax rate for the coming three years, 1996, 1997,
and 1998 will be 12% and resumed to 24% thereafter.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The following discussion and financial information relates solely to
Wuxi CSI and the business which was acquired by the Registrant in February
1996. Reference is made to Exhibit 99-I attached hereto for the Management's
Discussion and Analysis of Financial Conditions and Results of Operations for
the fiscal year ended December 31, 1995.
Results of Operations - 1994 compared to 1995
- ----------------------------------------------
Table 8. Wuxi CSI - Summary Financial Information
% change
1994 1995 from prior year
---- ---- ---------------
(Rmb in million)
Sales 72.57 108.41 49%
Gross Profit 26.36 43.62 66%
Operating Income (1) 12.18 27.89 130%
Net Income (2) 7.53 16.87 124%
______________________
(1) Operating income means income before minority interest, income tax, net
interest expense and other income.
(2) Before minority interest
<PAGE>
Sales
- -----
Sales increased by 49% to Rmb 108.41 million in 1995 from Rmb 72.57 mil-
lion in 1994. This increase was principally attributable to a substantial in-
crease in unit sales of Santana Volkswagen and Audi isolators and damping ma-
terials during 1995. Unit sales to Shanghai Volkswagen accounted for approxi-
mately 41% and 51% of total sales in 1994 and 1995, respectively, represent-
ing approximately 3.1 million units in 1995 compared to 1.8 million units in
1994. The annual adjustment of the selling price of isolators for Shanghai
Volkswagen's Santana, amounted to a 5% unit price increase in 1995 as com-
pared to 1994. In addition, sales of damping materials and damping materials
with fabrics, which altogether accounted for approximately 25% of the total
sales in these two years, increased to approximately Rmb 27.5 million in 1995
from approximately Rmb 17.3 million in 1994.
Gross Profit
- ------------
Wuxi CSI's gross profit increased 66% to Rmb 43.6 million in 1995 from
26.4 million in 1994, and also as a percentage to sales to 40% in 1995 com-
pared to 36% in 1994. This was contrary to the general increase in raw mate-
rials price in 1995. It was because production output of Wuxi CSI increased
substantially during 1994 and 1995. The fixed manufacturing cost apportioned
to unit output reduced consequently. On the other hand, the sub-contracting
expenses of Wuxi CSI were reduced as Wuxi CSI utilized internal slack re-
sources to produce what formerly had been subcontracted. In addition, a bonus
based compensation system increased the productivity of workers. Although
unit production output increased substantially, the number of workers did not
increase during 1994 and 1995.
Selling and Administration Expenses
- -----------------------------------
Selling and administration expense increased by 10% to Rmb 15.6 million
in 1995, as compared to Rmb 14.2 million in 1994. This increase was lower
than the percentage increase in sales volume and general inflation rate in
1995 and reflects Wuxi CSI adopting a strict expenditure control policy. Only
those expenditures considered necessary and unavoidable were approved by man-
agement. Selling and administrative expenses as a percentage of sales was
14.4% in 1995 as compared to 19.5 % in 1994.
Interest Expense
- ----------------
Interest expense increased by 23% to Rmb 2.7 million in 1995 from Rmb
2.2 million in 1994. The increase was mainly attributable to the general in-
crease in loan interest rates in the PRC during 1995. On the other hand, in-
terest income increased by 90% to Rmb 4 million in 1995 from Rmb 2.1 million
in 1994. The substantial increase in interest income was due to a net cash
increase of approximately Rmb 20 million in 1995. Wuxi CSI enjoyed a prefer-
ential interest rate for its large deposit balances, some of which had an an-
nual interest rate of 18%, resulting in net interest income of Rmb 649 thou-
sand in 1995.
<PAGE>
In 1994, an exchange loss of Rmb 1 million was incurred due to a de-
valuation of US dollar against the Renminbi. This exchange loss, combined
with interest income of approximately Rmb 1.1 million, resulted in net inter-
est income of approximately Rmb 104 thousand.
Operating Income
- ----------------
Operating income increased 130% to Rmb 27.98 million in 1995 from Rmb
12.18 million in 1994. Operating income as a percentage of sales increased to
26% in 1995 as compared to 17% in 1994. This was primarily due to the in-
crease of gross profit during the period.
Net Income
- ----------
Net income increased 115% to Rmb 16.9 million in 1995 from Rmb 7.53 mil-
lion 1994. Net income as a percentage of sales increased to 16% in 1995 as
compared to 10% in 1994. This was due to an increase in operating and inter-
est income in 1995.
Liquidity and Capital Resources
- -------------------------------
Operating Activities
During the year ended December 31, 1995 net cash provided by operating
activities was approximately Rmb 40.5 million. The major sources of 1995 cash
flows from operating activities included net income of Rmb 16.9 million and
minority interest net income of Rmb 13.4 million. Cash outflows in investing
activities, totaling Rmb 15.2 million, were principally used on the purchase
of property, plant and equipment. The equipment was acquired with the intent
of expediting plant automation and enhancing production efficiency. Cash used
in financing activities was Rmb 5.5 million. This was primarily attributable
to net movement of long-term bank loans during the year, reflecting repayment
of Rmb 17.9 million, which was offset by proceeds of Rmb 14.3 million. As a
result of the above, the cash position of the company was further strength-
ened. Cash and cash equivalents increased by Rmb 19.9 million to Rmb 50.3
million at the end of 1995.
During the year ended December 31, 1994, net cash provided by operating
activities was approximately Rmb 4.5 million. The major sources of 1994 net
cash flows from operating activities included net income of Rmb 7.5 million
and minority interest net income of Rmb 5.2 million. Cash flows in investing
activities, totaling Rmb 4.6 million, were principally used for the purchase
of property, plant and equipment.. Net cash flows from financing activities
were Rmb 3.6 million, and reflect China Strategic Holdings Limited, through
an operating subsidiary, increased its capital contribution in the Operating
Subsidiary by Rmb 3.6 million. The year ended with an increase in cash and
cash equivalents of Rmb 1.6 million producing a balance of cash and cash
equivalents as at December 31, 1994 of Rmb 30.4 million.
<PAGE>
Commitments for Capital Expenditure
At year end 1995, Wuxi CSI had capital commitments to acquire machinery
and equipment of approximately Rmb 10.8 million, as compared to Rmb 30.3 mil-
lion at year end 1994. In addition, the subsidiary entered into an agreement
with a German company to form a joint venture company in Wuxi City, and the
capital commitment for this was estimated to be approximately Rmb 16.0 mil-
lion. Wuxi CSI has a 49% interest in this joint venture company, which was
formed to manufacture couplings for the automobile market in China.
Management believes that Wuxi CSI has sufficient cash flow from opera-
tions, combined with bank balances and bank borrowings, to provide sufficient
cash to finance internal growth, capital projects and debt service require-
ments for the foreseeable future.
Financing Activities
Wuxi CSI relies on both short-term and long-term bank loans from Chinese
banks to support its operating and capital requirements. On December 31,
1995, Wuxi CSI had short-term and long-term bank loans of Rmb 3.5 million and
Rmb 31.4 million, respectively. Short-term loans have repayment terms ranging
from three months to one year. Long-term loans have repayment terms ranging
from one to two years. All of the short-term and long-term loans are unse-
cured. Historically, Wuxi CSI has not experienced any difficulty in loan
rollover, and Management has no reason to believe that this practice will not
continue.
Effect of Inflation
The general inflation rate in terms of the Retail Price Index in China
was approximately 13.2%, 21.7% and 14.8% for 1993, 1994 and 1995 respec-
tively. Management believes that inflation has not had a significant impact
on Wuxi CSI's cost of components and raw materials in view of the fact that
Wuxi CSI entered into fixed price agreements with key suppliers for supplying
semi-finished goods. Inflation has resulted in upward pressure on wages and
salaries for its employees. However, Management does not expect inflation to
have a substantial effect on profit margins and income, since Wuxi CSI has
been able to pass on such cost increases to customers.
Seasonal Aspects
Wuxi CSI's products have almost no seasonal fluctuations especially for
Santana vibration Isolators. Wuxi CSI's primary customer, Shanghai
Volkswagen, usually provides an annual production quota of vibration isola-
tors at the beginning of the year to help Wuxi CSI lay out its production
plan. However, sales are typically higher in the second half of the year as
compared to the first half due to the Lunar Chinese New Year holidays.
<PAGE>
Special Note
- ------------
The following includes financial information prior to September 10, 1993,
when Wuxi CSI was incorporated in the People's Republic of China as a
Sino-foreign equity joint venture enterprise, and operated as Wuxi Vibration
Isolator Factory. Therefore, the following comparative financial information
is provided for general information purposes only.
Results of Operations - 1993 compared to 1994
- ----------------------------------------------
Table 9 Wuxi CSI - Summary Financial Information
% change
1994 1995 from prior year
---- ---- ---------------
(Rmb in million)
Sales 57.76 72.57 26%
Gross Profit 19.85 26.36 33%
Operating Income (1) 8.02 12.18 52%
Net Income 6.30 7.53 20%
(1) Operating income means income before minority interest, income tax, net
interest expense and other income.
Sales
Sales of Wuxi CSI increased by approximately 26%, to Rmb 72.6 million in
1994, as compared to Rmb 57.8 million in 1993. This was attributable to the
continued growth of the Chinese automobile industry. Demand from its major
customer, Shanghai Volkswagen manufacturer, increased significantly in 1994
as compared to 1993. Unit sales to Shanghai Volkswagen accounted for approxi-
mately 41% - 51% of total sales in 1994, representing approximately 1.8 mil-
lion units.
Gross Profit
Gross profit of Wuxi CSI increased 33% to Rmb 26.4 million in 1994, as
compared to 19.9 million in 1993. Gross profit as a percentage of sales in-
creased to 36.3% in 1994, as compared to 34.4% in 1993 (whole year). The in-
crease in gross profit was primarily the result of two factors. First, Wuxi
CSI increased productivity which resulted in a decrease of fixed overhead as
related to production volume. Second, as a result of the improved production
efficiencies, there was an overall reduction in scrap loss.
Selling and Administrative Expenses
Selling and administrative expense increased by 19.8% or Rmb 14.2 mil-
lion in 1994 compared to Rmb 11.83 million in 1993 (whole year). The increase
was attributable to a general increase in expenses as a result of higher
sales volume, general inflation and a 30% increase in wage expenses. Selling
and administrative expense as a percentage of sales were 19.5% in 1994, as
compared to 20.5% in 1993 (whole year).
<PAGE>
Interest Expense
Interest expense amounted to Rmb 2.2 million in 1994 and Rmb 2.1 million
in 1993 (whole year). Outstanding bank loans were maintained at approximately
the same level during these periods. Interest income increased by 950% to 2.1
million in 1994 from 0.2 million in 1993 (whole year). The increase reflects
Interest income accrued on USD cash invested by China Machinery, however,
such income was partially offset by a devaluation of USD against Renminbi
during 1994. Consequently, there was net interest income of approximately Rmb
104 thousand in 1994 as compared to a net interest expense of Rmb 201 thou-
sand in 1993.
Operating Income
Operating income increased 52% to Rmb 12.18 million in 1994, as compared
to Rmb 8.02 million in 1993 (whole year). Operating income as a percentage of
sales was 16.8% in 1994, as compared to 13.9% in 1993 (whole year). The in-
crease in operating income as a percentage of sales was due primarily to an
increase in gross profit.
Net Income
Net income increased 20% to 7.53 million in 1994, as compared to Rmb
6.30 million in 1993 (whole year). Net income as a percentage of sales de-
creased to 10.4% in 1994, as compared to 10.9% in 1993 (whole year). The in-
crease in net income was attributable to an increase in operating income and
also reflects Wuxi CSI starting its income tax holiday in 1994.
Liquidity and Capital Resources
- -------------------------------
Operating Activities
During the year ended December 31, 1994, net cash provided by operating
activities was approximately Rmb 4.5 million, which came primarily from net
income and minority interest contributions. Net cash from investing activi-
ties were used in the acquisition of property, plant and equipment and
amounted to net 4.6 million. Net cash provided by financing activities
amounted to Rmb 1.7 million. This was mainly because China Strategic Holdings
Limited, through an operating subsidiary, increased its capital contribution
in the Operating Subsidiary by Rmb 3.6 million. The year ended with an in-
crease in cash and cash equivalents of Rmb 1.6 million, producing a balance
of cash and cash equivalents as at December 31, 1994 of Rmb 30.4 million.
During the year ended December 31, 1993, net cash used in operating ac-
tivities was approximately Rmb 7.63 million, which primarily reflected ac-
counts receivable, inventories, prepayments, accrued expenses and other pay-
ables. Net cash flows from investing activities were used in the acquisition
of property, plant and equipment and amounted to net Rmb 13 million, includ-
ing sales proceeds from the disposal of fixed assets of Rmb 8.5 million. Net
cash provided by financing activities amounted to Rmb 44.2 million. This
amount reflects China Strategic Holdings Limited, through an operating sub-
sidiary, making a capital contribution of Rmb 34.7 million. The year ended
with an increase in cash and cash equivalents of Rmb 23.6 million, producing
a balance of cash and cash equivalents as at December 31, 1993 of Rmb 28.8
million.
<PAGE>
Commitments for Capital Expenditure
At the end of the year 1994, Wuxi CSI had capital commitment to acquire
machinery and equipment of approximately Rmb 30.3 million as compared to Rmb
13.6 million at year end 1993. Management believes that Wuxi CSI has suffi-
cient cash flow from operations, combined with bank balances and bank borrow-
ings, to provide sufficient cash to finance internal growth, capital projects
and debt service requirements for the foreseeable future.
Financing Activities
Wuxi CSI relies on both short-term and long-term bank loans from Chinese
banks to support its operating and capital requirements. On December 31,
1994, Wuxi CSI had short-term and long-term bank loans of Rmb 3.5 million and
Rmb 35 million respectively. Short-term loans have repayment terms ranging
from three months to one year. Long-term loans have repayment terms ranging
from one to two years. All of the short-term and long-term loans are unse-
cured. Historically, Wuxi CSI had not experienced any difficulty in loan
rollover, and Management has no reason to believe that this practice will not
continue.
Effect of Inflation
The general inflation rate in terms of the Retail Price Index in China
was approximately 21.7% in 1994 and 13.2% in 1993. Management believes that
inflation has not had significant impact on the Operating Subsidiary's cost
of components and raw materials in view of the fact that the Operating Sub-
sidiary entered into fixed price agreements key suppliers for supplying
semi-finished goods. Inflation has resulted in upward pressure on wages and
salaries for employees at the Operating Subsidiary. However, Management does
not expect inflation to have a material effect on profit margins and income,
since Wuxi CSI has been able to pass on such cost increases to customers.
Seasonal Aspects
Wuxi CSI's products have almost no seasonal fluctuations especially for
Santana vibration Isolators. Wuxi CSI's primary customer, Shanghai
Volkswagen, usually provides an annual production quota of vibration isola-
tors at the beginning of the year to help the company lay out its production
plan. However, sales are typically higher in the second half of the year as
compared to the first half due to the Lunar Chinese New Year holidays.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data for the Registrant for
the period ended December 31, 1995 and 1994 are set forth in Exhibit 99-I at-
tached hereto and made a part hereof. The following are (i) the Consolidated
Financial Statements of Acewin Profits Limited and Subsidiaries as of Decem-
ber 31, 1993, 1994 and 1995, (ii) the Statements of Income and Related Re-
ports of Wuxi CSI for the nine months ended September 30, 1993 and (iii) the
Unaudited Proforma Consolidated Financial Statements of the Registrant as of
December 31, 1995.
<PAGE>
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO. SC
Arthur Andersen & Co.
Certified Public Accountants
----------------------------
25/F., Wing On Centre
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 111 Connaught Road Central
Hong Kong
To Acewin Profits Limited:
We have audited the accompanying consolidated balance sheets of Acewin Prof-
its Limited (incorporated in the British Virgin Islands) and its subsidiaries
as of December 31, 1993, 1994 and 1995, and the related consolidated state-
ments 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 re-
sponsibility 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 stan-
dards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the finan-
cial statements are free of material misstatement. An audit includes examin-
ing, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting prin-
ciples used and significant estimates made by management, as well as evaluat-
ing 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 confor-
mity with generally accepted accounting principles in the United States of
America.
/s/Arthur Andersen & Co.
Hong Kong,
April 5, 1996.
- 1 -
<PAGE>
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
---------------------------------------
<TABLE>
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)
<CAPTION>
Three months
ended
December 31 Year ended 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$1.00 = Rmb8.33. No repre-
sentation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on March 31, 1996 or at any
other certain rate.
The accompanying notes are an integral part of these consolidated statements
of income.
- 2 -
- - 2 -
<PAGE>
ACEWIN PROFITS LIMITED AND SUBSIDLARIES
---------------------------------------
<TABLE>
CONSOLIDATED BALANCE SHEETS AS OF
----------------------------------
DECEMBER 31, 1993, 1994 AND 1995
--------------------------------
(Amounts in thousands, except number of shares and share data)
<CAPTION>
December 31,
----------------------------------------------
1993 1994 1995 1995
---------- ---------- ---------- ----------
Rmb Rmb Rmb US$
<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
Prepayments 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>
-3-
<PAGE>
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
---------------------------------------
<TABLE>
CONSOLIDATED BALANCE SHEETS AS OF
----------------------------------
DECEMBER 31, 1993, 1994 AND 1995 (Cont'd)
-----------------------------------------
(Amounts in thousands, except number of shares and share data)
<CAPTION>
December 31,
---------------------------------------------
1993 1994 1995 1995
---------- ---------- ---------- ----------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C> <C>
Shareholder's equity:
Common stock, par value US$l
each, 50,000 shares authorized;
1 share outstanding 1 1 1 1
Dedicated capital 1 781 1,689 202
Retained earnings 185 6,936 22,608 2,714
---------- --------- ---------- ----------
Total shareholder's equity 187 7,718 24,298 2,917
---------- --------- ---------- ----------
Total liabilities and
shareholder's equity 124,294 134,539 168,566 20,236
========== ========= ========== ==========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
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$1.00 = Rmb8.33. No repre-
sentation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on March 31, 1996 or at any
other certain rate.
The accompanying notes are an integral part of these consolidated bal-
ance sheets.
- 4 -
<PAGE>
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
---------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE PERIOD FROM OCTOBER 1, 1993 TO DECEMBER 31, 1993 AND
------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31.1994 AND 1995
---------------------------------------------
(Amounts in thousands)
<CAPTION>
Three months
ended
December 31 Year ended December 31,
----------- ---------------------------------
1993 1994 1995 1995
---------- ---------- ---------- ---------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Cashflows 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>
- 5 -
<PAGE>
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
---------------------------------------
<TABLE>
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)
<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 repre-
sentation 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>
ACEWIN PROFITS LIMITED AND SUBSIDIARIES
---------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EOUITY
----------------------------------------------------------
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)
<CAPTION>
Shares of
Common Stock Common Stock Dedicated Retained
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>
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$1 each, one share was issued at its par value
to China Strategic Holdings Limited ("CSH") (formerly known as China Strate-
gic 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>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- --------------------------------------------------
The acquisition of the Operating Subsidiary by China Machinery has been ac-
counted 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 in-
cluded 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 histori-
cal net book value of Rmb8,377 in exchange for CMHL's assumption of China Ma-
chinery's liability to CSH in an equal amount. The transfer of CSH's inter-
est 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 con-
solidated 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 considera-
tions and significant risks not typically associated with investments in eq-
uity securities of-United States and Western European companies. These in-
clude 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 ad-
versely 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; confis-
catory taxation; restrictions on foreign currency conversion, imports or
sources of suppliers; or the expropriation or nationalization of private en-
terprises.
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 develop-
ment, gross national product, growth rate, capital reinvestment, resource al-
location, self-sufficiency, rate of inflation and balance of payments posi-
tion, among others. Only recently has the Chinese government encouraged sub-
stantial private economic activities.
- 9 -
<PAGE>
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 sig-
nificant 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 re-
serves through control over imports and through direct regulation of the con-
version 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 Ren-
minbi. 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 ad-
verse 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 finan-
cial 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 Organiza-
tion, which regulates trading among its signatory countries. If the PRC be-
comes a member of the World Trade Organization, import restrictions on vehi-
cle accessories could be reduced. If such restrictions were removed, the Op-
erating Subsidiary would face increasing competition from imported foreign
vehicle accessory products.
Legal System
Since 1979, many laws and regulations dealing with economic matters in gen-
eral and foreign investment in particular have been enacted in the PRC. How-
ever, the PRC still does not have a comprehensive system of laws and enforce-
ment of existing laws may be uncertain and sporadic.
- 10 -
<PAGE>
2. BASIS OF PRESENTATION
- --------------------------
The accompanying consolidated financial statements were prepared in accor-
dance 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 fi-
nancial 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 cur-
rencies to reflect the exchange rates prevailing at the balance sheet
dates; and
Adjustment to recognize sales and cost of sales upon delivery and accep-
tance 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 in-
tercompany 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 (Rmb15,908) as of December 31,
1993, 1994 and 1995 respectively.
- 11 -
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -------------------------------------------------------
d. Inventories
-----------
Inventories are stated at the lower of cost, on a first-in first-out ba-
sis, or net realizable value. Costs of work-in-progress and finished
goods comprise direct materials, direct labor and an attributable por-
tion of production overheads.
e. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost less accumulated deprecia-
tion. 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:
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
Construction-in-progress (see Note 6) represents factory and office
buildings under construction and plant and machinery pending installa-
tion. 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, Rmb1,244 and Rmb1,456 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 Is-
lands, 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>
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 sub-
ject 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 Rmb1,729 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 signifi-
cant temporary differences between the tax and financial statement
bases of assets and liabilities. The tax consequences of those differ-
ences are classified as current or non-current based upon the classifi-
cation of the related assets or liabilities in the financial state-
ments.
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 Consoli-
dated 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 regula-
tions replaced a number of former tax laws and regulations including the Con-
solidated 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>
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 ap-
proximately Rmb1,977, 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 Rmb1,977 had been utilized by the Operating Subsidiary to off-
set against VAT payable of the 1994 and 1995 fiscal years.
There is also a "grandfather" provision issued by the National People's Con-
gress on December 29, 1993 for foreign invested enterprises previously paying
CICT. The provision states that where the tax burden of foreign invested en-
terprises 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 ex-
cess of the amount which would have been paid under previous CICT legisla-
tion. 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 li-
ability 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 man-
ner, 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 Rmb1,249
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 re-
spectively was utilized to offset against VAT payable for 1994 and 1995 re-
spectively. 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>
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 appli-
cable unified rates of exchange or the applicable rates of exchange
quoted by the applicable foreign exchange adjustment center ("swap cen-
ter"), prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated into Ren-
minbi 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 pur-
poses, the United States Dollars capital amounts have been translated
into Renminbi at the swap centre rates prevailing at the capital injec-
tion 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 Ren-
minbi in line with the swap center rate. The unification did not have a
major impact on the consolidated financial statements of the Company un-
der U.S. GAAP.
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and remit-
tance 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. Ap-
proval for exchange at the swap center is granted to joint venture en-
terprises 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:
December 31,
----------------------------------------------
1993 1994 1995
-------------- ----------- ---------------
Rmb equivalents of US$1
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
- 15 -
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -------------------------------------------------------
i. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign eq-
uity joint venture enterprises, the Operating Subsidiary maintains discre-
tionary dedicated capital, which includes a general reserve fund, an enter-
prise 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 Subsidi-
ary appropriated 5% of the after-tax profits as reflected in its statutory
financial statements to each of the general reserve fund and the staff wel-
fare and incentive bonus fund. Such appropriations are reflected in the
year end consolidated balance sheets under shareholder's equity as dedi-
cated capital; however, the appropriation for the staff welfare and incen-
tive 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 invest-
ments held for the long-term and are stated at cost less provision for per-
manent diminution in value.
Income from investments is accounted for to the extent of dividends re-
ceived and receivable.
4. ACCOUNTS RECEIVABLE
- ------------------------
Accounts receivable consists of:
December 31,
-------------------------------------
1993 1994 1995
----------- ------------- ----------
Rmb Rmb Rmb
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
============ ============ ==========
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 Decem-
ber 31, 1993, 1994 and 1995 respectively. Sales to two major customers un-
der the ownership of the same ultimate holding company accounted for ap-
proximately 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 respec-
tively. Sales to the third largest customer accounted for approximately 4%,
11 % and 10% for the respective period/years mentioned above.
- 16 -
<PAGE>
5. INVENTORIES
- ---------------
December 31,
-----------------------------------------
1993 1994 1995
---------- ------------- ------------
Rmb Rmb Rmb
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
========== ============= ============
6. PROPERTY, PLANT AND EOUIPMENT
- -----------------------------------
December 31,
-------------------------------------------
- --
1993 1994 1995
---------- ------------ ------------
Rmb Rmb Rmb
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 depreciati (434) (2,587) (5,344)
----------- -------------- ------------
- -
Net book value 52,037 54,621 67,222
=========== ============= ============
7. LONG-TERM INVESTMENT
- --------------------------
Long-term investment comprised:
December 31,
-----------------------------------------------
1993 1994 1995
------------ -------------- ---------------
Rmb Rmb Rmb
Unlisted investments, at cost 2,088 2,088 2,088
Government debentures 455 260 190
----------- --------------- --------------
2,543 2,348 2,278
============ ============== =============
- 17 -
<PAGE>
7. LONG-TERM INVESTMENT Cont'd
- -------------------------------
The directors are of the opinion that the underlying values of the invest-
ments 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:
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
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:
December 31,
1995
--------------
Rmb
1996 15,900
1997 15,490
-------------
Total 31,390
=============
All the long-term bank loans are denominated in Renminbi.
- 18 -
<PAGE>
10. OBLIGATIONS AND COMMITMENTS
- --------------------------------
As of December 31, 1995, the Company had outstanding capital commitments for
purchases of machinery and equipment of approximately Rmb10,776. As of De-
cember 31, 1995, the Operating Subsidiary had also entered into a joint ven-
ture 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 dif-
ferent 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 CSl, 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>
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 part-
ner 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 Chi-
nese joint venture partner of Rmb13,373 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 state-
ments of the Operating Subsidiary.
These amounts are unsecured, non-interest bearing and have no fixed repay-
ment date.
14. RETIREMENT PLANS
- ----------------------
As stipulated by the regulations of the Chinese government, all of the Chi-
nese 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 re-
lated 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>
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
- -------------------------------------------------------
Three months
ended
December 31, Year ended December 31,
---------------- ---------------------------
1993 1994 1995
---------------- ------------ ------------
Rmb Rmb Rmb
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 - -
16. OTHER SUPPLEMENTAL INFORMATION
- -----------------------------------
The following items are included in the consolidated statements of income:
Three months
ended
December 31, Year ended December 31,
----------------- ---------------------------
1993 1994 1995
--------------- ------------ ------------
Rmb Rmb Rmb
Foreign exchange gain 11 191 476
Interest income 216 2,096 4,009
Sales taxes 850 - -
Provision for doubtful accounts 225 1,807 -
17. SUBSEQUENT EVENTS
- ----------------------
a. Pursuant to a joint venture agreement signed in December 1995 by the Oper-
ating 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 ven-
ture agreement are as follows:
- 21 -
<PAGE>
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> <S> <C> <S> <C> <S>
Wuxi Vulkan 49% March 25,1996 US$ $8,000 US$ 4,000 Production of
Couplings Co., Couplings
Ltd. ("WVCC")
WVCC will have a duration of fifty years.
b. Pursuant to an acquisition agreement dated February 8, 1996 between Re-
gal 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 Re-
gal's interest in the shares of the Company in favour of CSH.
Pursuant to the acquisition agreement, the principal amount of the Converti-
ble Note will be reduced by a pre-determined formula if the audited finan-
cial 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 Janu-
ary 19, 1996, the payable balance of Rmb36,550 due to CSH as of Decem-
ber 31, 1995 will be contributed by CSH into the Company as additional
paid-in capital and shall only be payable upon liquidation of the Com-
pany.
- 22 -
<PAGE>
FINANCIAL STATEMENTS
--------------------
PART II
-------
<PAGE>
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO., SC
Arthur Andersen & Co.
Certified Public Accountants
----------------------------
25/F., Wing On Centre
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 111 Connaught Road Central
Hong Kong
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 state-
ments are the responsibility of the Wuxi CSI's management. Our responsi-
bility is to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the fi-
nancial statements are free of material misstatement. An audit includes ex-
amining, 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 gener-
ally accepted accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
Hong Kong,
April 5, 1996.
- 1 -
<PAGE>
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)
1993 Pre-joint
Venture
Period
----------------
Rmb
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
==============
The accompanying notes are an integral part of this statement of income.
- 2 -
<PAGE>
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)
1993 Pre-joint
Venture
Period
----------------
Rmb
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
=============
The accompanying notes are an integral part of this statement of cash flows.
- 3 -
<PAGE>
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)
Dedicated Retained
Capital Earnings Total
------------ ------------ -----------
Rmb Rmb Rmb
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
============== ============== =============
The accompanying notes are an integral part of this statement of changes in
equity.
- 4 -
<PAGE>
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 Prede-
cessor, 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 com-
pany incorporated in Hong Kong and a wholl -owned subsidiary of CSH. Pursu-
ant to a shareholder's resolution dated December 13, 1995 and approved by the
relevant PRC authorities, China Machinery's interest in Wuxi CSI was trans-
ferred 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.
- -------------------------------------
Contribution
to Registered Ownership
Capital Percentage
------------- ------------
Rmb
CMHL 44,937 55%
Wuxi Vibration Isolator Factory 36,766 45%
------------- ------------
81,703 100%
============= ============
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 in-
terest, and
the Board of Directors consists of 7 members: 4 designated by CMHL and 3 des-
ignated by Wuxi Vibration Isolator Factory, the Chinese joint venture part-
ner of Wuxi CSI.
- 5 -
<PAGE>
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 eq-
uity joint venture enterprise and the acquisition by China Machinery (the
"1993 Pre-joint Venture Period").
The accompanying financial statements are prepared in accordance with gen-
erally 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 ap-
plicable to state-owned enterprises as established by the Ministry of Fi-
nance 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 in-
come taxes in accordance with tax regulations applicable to state-owned en-
terprises. 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>
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
b. Taxation (cont'd)
----------------
The Predecessor was subject to value added tax applicable to state-owned en-
terprises 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 an significant temporary dif-
ferences between the tax and financial statement bases of assets and liabili-
ties. The tax consequences of those differences are classified as current or
non-current based upon the classification of the related assets or liabili-
ties in the financial statements.
C. Foreign Currency Translation
----------------------------
The Operating Subsidiary maintains its books and records in Renminbi. For-
eign 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 uni-
fied 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 ex-
change 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 govern-
ment from time to time whereas the exchange rates available at a swap center
are determined largely by supply and demand. Sino-foreign equity joint ven-
ture 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:
1993
---------
Rmb equivalent of US$1
- - Official exchange rate 5.8
- - Shanghai swap center rate 8.7
- 7 -
<PAGE>
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 govern-
ment 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 Rmbl,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 as-
sets into three investee companies ("the investee companies") in considera-
tion of non-controlling interests in each of the investee companies. Details
of the contributions made by the Operating Subsidiary were as follows:
1993 Pre-joint
Venture
Period
----------------
Rmb
Cash 1,005
Inventories 593
Fixed assets - at cost 239
- valuation surplus 151
Goodwill 100
----------------
Total 2,088
================
7. OTHER SUPPLEMENTAL INFORMATION
- ----------------------------------
The following items are included in the statement of income:
1993 Pre-Joint
Venture
Period
---------------
Rmb
Interest income 15
Sales taxes (VAT) 3,507
- 8 -
<PAGE>
REGAL INTERNATIONAL, INC.
=========================
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
AS OF DECEMBER 31 1995
-----------------------
<PAGE>
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 de-
scribed 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 op-
erations 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 Interna-
tional, Inc. and of Acewin Profits Limited and its subsidiaries, including
the notes thereto.
- 1 -
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
-------------------------------------------
</TABLE>
<TABLE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,1995
------------------------------------
(Amounts expressed in United States dollars)
<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>
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>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
<TABLE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
----------------------------------------------
AS OF DECEMBER 31,1995
-----------------------
(Amounts expressed in United States dollars)
<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) (Note 3)
<S> <C> <C> <C> <C> <C>
ASSETS
- -------
Current assets
Cash and cash
equivalents 11 800 6,026 6,826
Restricted cash 19 - - -
Note - 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 crurrent 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
============== ============= =============== ============= ============ =============
LIABILITES 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>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
<TABLE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
----------------------------------------------
AS OF DECEMBER 31,1995
----------------------
(Amounts expressed in United States dollars)
<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) (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 interests - - 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>
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 In-
ternational, 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 con-
sideration 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 pe-
riod. 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 Re-
gal ("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 Repub-
lic of China, held through an intermediate Hong Kong company, China Machine
(Holdings) Limited.
Pursuant to another Asset Purchase Agreement ("the agreement") dated Febru-
ary 8, 1996 between Regal International, Inc. ("Regal") and Regal (New) In-
ternational, Inc. ("New Regal"), Regal sold and transferred the existing op-
erating 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 prin-
cipal 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 i AP to Regal has been accounted for
as a pooling- of interests in the accompanying unaudited pro forma consoli-
dated financial statements as the transfer is considered a transfer of as-
sets between entities under common control.
- 5 -
<PAGE>
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 be-
tween 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 manage-
ment will continue to be reinvested indefinitely.
- 6 -
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Board of Directors of the Registrant has elected to change its inde-
pendent accountants from Pannell Kerr Forster of Texas P.C. ("Pannell Kerr")
to Authur Anderson & Co. The decision resulted from the fact that after Feb-
ruary 19, 1996 the Registrant's sole operating subsidiary is located in the
Peoples Republic of China, a location where Pannell Kerr does not have of-
fices. Although Pannell Kerr's report on the Registrant's audited financial
statements for the fiscal year ended December 31, 1994 and 1995 contained a
"going concern" qualification, the change in independent accountants is not
related to such qualification or to any disagreement with Pannell Kerr.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLI-
ANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Listed below are the names, ages and positions as of August 31, 1996 of
the executive officers and directors of the Company. The Company's executive
officers are appointed by the Board of Directors to serve in their respective
capacities until their successors are duly appointed by the Directors and
qualified to serve. The Certificate of Incorporation of the Company provides
for classification of the Board of Directors into three classes (Class I,
Class II and Class III) having staggered terms of three years each. The Board
of Directors of the Company shall consist of not less than five nor more than
twelve members as determined by resolution of the Board or by the Stockhold-
ers at any annual meeting. At present, the Company's Board of Directors con-
sist of five directors who serve during the term of their class, or until
their class is assigned, and until their successor is appointed:
Name Age Position and office
- ---- --- -------------------
Oei Hong Leong (2) 48 Director
Richard N. Gray (1) 50 Chairman of Board of Directors
Martin Furner (1) 43 Director
Chung Cho Yee Mico (2) 35 Director
Ma Wai Man (Catherine) (2) 30 Director and Secretary
___________________________
(1) No Class Assigned. The Directors were chosen to fill a newly created di-
rectorship and shall hold office until the next annual election and until his
successor is duly qualified and elected.
(2) No Class Assigned. The Directors were chosen to fill vacancies and shall
hold office until the next annual election and until his successor is duly
qualified and elected.
Oei Hong Leong, Director, 48. Mr. Oei was elected to Regal's Board of
Directors in February 1996. Mr. Oei is the founder and Chairman of the Board
of China Strategic Holdings Limited ("CSH"), having formed such company in
<PAGE>
1991. CSH is a holding company formed to invest in China in enterprises which
can benefit from improved production, financial assistance and marketing man-
agement. CSH has acquired interests in many industries, including the manu-
facturer of beer, tires and paper. CSH is the Chairman of China Tire Holdings
Limited ("CTHL"), a subsidiary of the Mr. Oei listed on the New York Stock
Exchange and he is also the Chairman of MRI Holdings Limited ("MRI") and Bol-
ton Group (International) Limited ("Bolton"), associate companies listed on
the Australia Exchange and the London Stock Exchange respectively.
Richard Gray, Chairman of Board of Directors, 50. Mr. Gray, a Trustee of
GHL (Senior) Pension Fund that has as its wholly owned subsidiary Harlequin
Investment Holdings Limited, a British Virgin Islands company, was elected to
the Board of Directors on September 24, 1993 and as Chairman of the Board of
Directors on October 14, 1993, succeeding Girish Sharma. Mr. Gray is a prac-
ticing Chartered Accountant and Business Consultant who has substantial expe-
rience in establishing new businesses, particularly international trading
companies.
Martin Furner, Director, 43. Mr. Furner was elected to Regal's Board of
Directors on February 1, 1995. Mr. Furner is the Chairman of the Board of
Tapestry Holidays, a specialist tour operator in the UK. Mr. Furner is mem-
ber of the Association of Certified Management Accountants and the Institute
of Travel and Tourism, and holds a Wine & Spirits Education Trust Higher Cer-
tificate.
Chung Cho Yee, Mico, Director, 35. Mr. Chung is a solicitor by profes-
sion and has extensive experience in corporate finance. Mr. Chung graduated
from London University and previously worked for a law firm and an investment
bank. Mr. Chung sits on the board of CTHL and several other companies listed
on foreign exchanges, including CSH, CTHL, MRI and Bolton.
Ma Wai Man, Catherine, Director and Secretary, 30. Ms. Ma is a chartered
secretary and has over 9 years of working experience in the company secretar-
ial profession. Ms. Ma is a Director of CSH and MRI. She is also the Secre-
tary of CTHL and Bolton.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid to the
Chief Executive Officer of the Company during the fiscal year ended December
31, 1995. No other officer of the Company received salary and bonus in excess
of $100,000 during such period. Janak N. Desai, the President and Chief Ex-
ecutive Officer of the Registrant, resigned as an officer and director of the
Company effective February 19, 1996. The Board of Directors have not elected
a person to fill this position.
<PAGE>
Table 10 Summary of Compensation
Annual Long-Term Compensation
Compensation Award Stock Underlying
Name and Position Year Salary ($) Options
- ----------------- ---- ------------ ----------------------
Janak N. Desai 1995 $108,000 -0-
President and Chief 1994 $107,000 -0-
Executive Officer 1993 $99,000 -0-
Stock Options
- -------------
No Stock options or stock appreciation rights were granted to Janak N.
Desai.
Directors Fees
- --------------
During the fiscal year ended December 31, 1995, Directors were reim-
bursed for travel and other expenses relating to Board and committee meet-
ings. The Chairman of the Board was paid $5,000 monthly. Other non-employee
Directors received $500, an additional $500 for serving on the Compensation
Committee or Audit Committee, and an additional $1,500 for serving on the Ex-
ecutive Committee, paid on a monthly basis. The Board has not determined
what, if any, fees will be paid to Directors during fiscal 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Owners And Management
- --------------------
a) The following sets forth the only persons known to the Company to be
beneficial owners as of August 15, 1996, of more than five percent (5%) of
the Company's Common Stock:
COMMON STOCK
Name and Address of Stockholders Number of Shares Owner Percentage of Class
- -------------------------------- ---------------------- -------------------
China Strategic Holdings Ltd. (1) 487,519,868 92.2% (2)
52/F Bank of China Tower
1 Garden Road, Hong Kong
Harlequin Investment Holdings Ltd.(3)(4) 12,452,082 15.22%
Creque Building
Tortola, British Virgin Islands
__________________
(1) China Strategic Holdings Limited has sole voting and investment
power with respect to 447,019,868 shares issuable upon the conversion of a
$13.5 million Convertible Note and indirect voting and investment power of
40,500,000 shares held by Horler Holdings Limited, P.O. Box 71, Craigmuer
Chamber, Road Town, Tortola, British Virgin Islands, a wholly owned subsidi-
ary of China Strategic Holdings Limited.
<PAGE>
(2) Percent of Class is based upon 81,806,198 shares of Common Stock
outstanding at August 15, 1996 and 447,019,868 shares of Common Stock issu-
able upon conversion of the $13.5 million Convertible Note.
(3) Harlequin Investment Holdings Limited has sole voting and invest-
ment power with respect to the shares of Common Stock. Does not include 8
million shares of Common Stock which can be acquired at any time upon exer-
cise of a Stock Purchase Option granted by China Strategic Holdings Limited
to Harlequin. The percentage of class is based on 81,806,198 shares of Common
Stock outstanding at August 15, 1996.
(4) Harlequin Investment Holdings Limited is a wholly owned subsidiary
of GHL (Senior) Pension fund, Noble House, Queens Road, St. Peter Port,
Guernsey, Channel Islands. Richard N. Gray and Overseas Trust Company Limited
are trustees of GHL (Senior) Pension Fund and have the same address. Mr. Gray
and Overseas Trust Company Limited each disclaim beneficial ownership of the
shares of Common Stock.
b) The following table sets forth information as of August 15, 1996 re-
garding beneficial ownership of Common Stock of the Company by (i) each di-
rector of the Company and (ii) all directors and officers as a group:
Number of Shares of
Common Stock Percentage
Name Beneficially Owned of Class
- ---- ------------------ -----------
Richard N. Gray (B) 12,452,082 15.22%
Oei Hong Leong (A)(C) 487,519,868 91.2%
Chung Cho Yee Mico (A)(C) 487,519,868 91.2%
Ma Wai Man (A) 487,519,868 91.2%(D)
Martin Furner - *
All Directors and Officers
as a Group (5 persons) 499,971,940 94.54%
____________________________
* Ownership of less than one percent (1%)
(A) Elected a director on February 19, 1996.
(B) See notes (3) and (4) above.
(C) See notes (1) and (2) above.
(D) Percent of Class for all officers and directors as a group is based upon
Common Stock which are owned or may be acquired by the group upon exercise of
option and conversion of $13.5 million Convertible Note.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition of Wuxi CSI
- -----------------------
On February 19, 1996, the Registrant acquired all the issued and out-
standing shares of Acewin Profits Limited, a British Virgin Islands corpora-
tion ("Acewin"), from China Strategic Holdings Limited, a Hong Kong company
("CSH"). Acewin's sole asset is a 55% joint venture interest in Wuxi CSI Vi-
bration Isolator Co., Ltd. ("Wuxi CSI"), a Sino-foreign joint venture. Regal
paid $13.5 million for the shares of Acewin capital stock. Such purchase
price was paid by delivery of a $13.5 million Convertible Note bearing inter-
est at the rate of nine percent (9%) per annum (the "Convertible Note").
The Convertible Note is payable interest only on an annual basis, with
all principal being due and payable on January 31, 1999. The principal and
any unpaid interest owing on the Convertible Note are convertible into shares
of Regal Common Stock at a conversion price of $0.0302 per share. The pur-
chase price was approved by the Board of Directors of the Registrant based
upon Wuxi CSI having an after-tax profit of not less than $3.0 million so
that the purchase price paid by the Company for the Wuxi CSI interest would
not exceed eight (8) times Wuxi CSI's 1995 after-tax earrings. The Converti-
ble Note is secured by a Pledge Agreement granting CSH a security interest in
the shares of Acewin capital stock. In connection with the above-described
transactions, Janak Desai, Nils Ollquist and Garish Sharma resigned as direc-
tors of Regal, and Oei Hong Leong, the Chairman of CSH, Chung Cho Yee Mico,
and Ma Wai Man were elected to fill the vacancies created by such resigna-
tions. As a result of this transaction, CSH became a principal stockholder
of the Company. Oei Hong Leong, Chung Cho Yee Mico and Ma Wai Man are Chair-
man of the Board, Executive Director and Company Secretary, respectively, of
CSH.
Sale of Assets
- --------------
Immediately following the acquisition of the shares of Acewin capital
stock and as a condition thereto, the Registrant sold and transferred all its
existing operating assets and real property of the Registrant to a newly
formed corporation, Regal (NEW) International, Inc. ("New Regal") in exchange
for $2.5 million and New Regal's assumption of all outstanding liabilities of
the Registrant, other than the Convertible Note. The $2.5 million portion of
the purchase price was paid as follows: $800,000 in cash and the balance by
delivery to the Registrant of two (2) promissory notes, one in the principal
amount of $900,000 (the "$900,000 Note") and the second in the principal
amount of $800,000 (the $800,000 Note"). The $900,000 Note bears interest at
9% per annum and is payable in sixty (60) equal monthly installments of prin-
cipal and interest. The $800,000 Note bears no interest and is due and pay-
able in one installment on January 31, 2001. New Regal's obligations under
the $900,000 Note and the $800,000 Note are secured by a pledge to the Regis-
trant of all the issued and outstanding shares of capital stock of New Regal.
Harlequin Investment Holdings, Inc., a principal stockholder of the Com-
pany ("Harlequin"), owns all the outstanding capital stock of New Regal. Har-
lequin is a wholly owned subsidiary of GHL (Senior) Pension Fund. Mr. Gray,
the Chairman of the Board of the Company, is a trustee of GHL (Senior) Pen-
sion Fund.
<PAGE>
Sale of Harlequin Stock
- -----------------------
In April 1996, Horler Holdings Limited, a wholly owned subsidiary of
CSH, acquired 40,500,000 shares of outstanding Common Stock of the Company
from Harlequin in exchange for $1,223,000. The purchase price was paid as
follows: (i) $209,328 in cash, (ii) $211,672 by cancellation of a certain
promissory note, dated August 8, 1994, from Harlequin to CSH and (iii)
$800,000 by cancellation of another promissory note from Harlequin to CSH.
Other Matters
- -------------
During the fiscal year ended December 31, 1995, the Company paid inter-
est on loans made by Harlequin of $131,000.
During 1995, directors fees of $9,500, $6,000 and $11,000 were paid to
Messrs. Sharma, Furner and Ollquist, respectively, and $60,000 payable to Mr.
Richard Gray was accrued during 1995. Messrs. Sharma and Ollquist have subse-
quently resigned as directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 21 - Subsidiaries of the Registrant.
Exhibit 99-I - Information about business and properties of Regis-
trant prior to February 19, 1996.
Exhibit 99-II - Corporate Data.
(b) Reports on Form 8-K
---------------------
The Registrant filed on Form 8-K and on Form 8-K/A.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
REGAL INTERNATIONAL, INC.
By:__________________________________________
Date:_____________________________
By:__________________________________________
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
Prior to February 19, 1996
--------------------------
Bell Petroleum Services, Inc.
a Texas Corporation
Regal Rubber Products, Inc.
a Texas Corporation
After February 19, 1996
-----------------------
Acewin Profits Limited
a British Virgin Islands Company
China Machine (Holdings) Limited
a Hong Kong Corporation
Wuxi CSI Vibration Isolator Co., Ltd. (55%)
a Sino-foreign joint venture
<PAGE>
EXHIBIT 99-I
-------------
In February 1996, the Registrant acquired its interest in Wuxi CSI and
soon thereafter sold all its operating assets and liabilities to Regal (New)
International, Inc. ("New Regal"), a company formed by such purpose by Harle-
quin Investment Holdings Limited. After these transactions the business of
the Registrant changed, since the business as previously conducted was dis-
posed of and the liabilities of the Registrant were assumed by New Regal.
The following information is presented to reflect the historical business and
operations of the Registrant for the year ended December 31, 1995. Since all
of the assets and liabilities relating to the business of the Registrant dur-
ing the fiscal year ended December 31, 1995 have been sold and assumed re-
spectively, the following information should be considered for historical
purposes only and does not in any way reflect the current business and opera-
tions of the Registrant.
ITEM 1 - DESCRIPTION OF THE BUSINESS PRIOR TO FEBRUARY 19, 1996
GENERAL
- -------
The following discussion is intended to describe the business of the
Registrant during the twelve (12) month period ending December 31, 1995 and
the period from December 31, 1995 to February 19, 1996.
RECENT FINANCIAL PERFORMANCE AND SIGNIFICANT EVENTS
- ---------------------------------------------------
During the Second Quarter of 1995, the Registrant sold equipment per-
taining to a certain product line. The sale resulted in a gain of $300,000.
On December 18, 1995 a conditional Joint Venture Agreement between
Mardec Berhad, a company incorporated in Malaysia, and the Registrant was
consummated. Subject to various conditions and approvals, specific machinery
and equipment and technical knowledge of the Registrant, will be transferred
to Malaysia. The Joint Venture is to manufacture products for the interna-
tional oil and gas industry. The Registrant's 49% equity interest was con-
tributed in the form of an agreed upon value for the transfer of machinery
and equipment and technology. This joint venture interest was transferred to
New Regal as part of the February 19, 1996 sale of assets.
The 1995 net income of $28,000 is an increase of $560,000 from 1994 net
loss of $532,000. This favorable outcome was primarily the result of a
$500,000 decrease in revenue and a gain on the sale of assets of $345,000.
Revenues in 1995 were $7,591,000 as compared to $7,091,000 in 1994.
In 1992 the Registrant entered into a financing agreement which provided
for advances on selected accounts receivable. The balance outstanding at De-
cember 31, 1995 was $175,000 as compared to $283,000 at December 31, 1994. In
December, 1995 the Registrant entered into a new financing arrangement,
funded in January, 1996, to replace the existing facility. The new Agreement
provides for financing on both accounts receivable and inventory. This fi-
nancing arrangement was assumed by New Regal.
<PAGE>
PRODUCTS AND MARKETS
- --------------------
The Registrant's primary business was the manufacturing and sale of oil-
field and marine rubber products. The Registrant also provided safety serv-
ices for oilfield drilling, production and workover activities.
The oilfield rubber products primarily consisted of drill pipe protec-
tors, swab cups, and replacement elements for blow-out preventers ("BOP") for
use in onshore and offshore drilling and production activities. The marine
rubber products group mainly includes shock absorbers and contact surfaces
for use in bumper systems on offshore oil and gas platforms.
Total operating revenues were as follows:
<TABLE>
<CAPTION>
Operating Revenues As a % of Continuing
In Thousands Operating Revenues
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Oilfield, Marine and
Custom Molded Products
Oilfield Products $5,793 $5,129 76.3% 72.3%
Marine Products 967 937 12.7 13.3
Custom Molded Products 341 307 4.5 4.3
------- ------- ------ -------
Total 7,101 6,373 93.5 89.0
Energy Services
Safety Services 490 718 6.5 10.1
Total Operating Revenues $7,591 $7,091 100.0% 100.0%
======= ======== ====== =====
</TABLE>
Oilfield Rubber Products:
- -------------------------
The Registrant produced and sold several lines of products for the oil
and gas industry that historically have been its major source of revenue.
This product group served two primary markets: (1) exploration and develop-
ment drilling and (2) well completion, production and servicing. Both markets
include onshore and offshore activities.
The following is a summary description of the Registrant's major oil-
field rubber products:
DRILL PIPE PROTECTORS - Expendable collars attached to the drill pipe
string during drilling to protect the drill pipe and casing string against
severe wear as the drill pipe rotates within the casing. Drill pipe protec-
tors are particularly desirable for wells requiring more than twenty days of
drilling through casing, directionally drilled wells (such as those drilled
from offshore platforms) and wells with directional problems.
<PAGE>
BLOWOUT PREVENTER REPLACEMENT ELEMENTS - A BOP is a heavy metal valve
system that permits a well to be shut-off in an emergency during drilling or
servicing of the well. The rubber elements of a BOP play a critical part in
its performance. As a result of frequent testing and closing during normal
drilling or well servicing operations, BOP rubber parts are subject to dete-
rioration and require frequent replacement.
SWAB CUPS - Swab cups are used to remove fluids from wells, to test pro-
duction rates or to cause a well to flow naturally. Generally, swabbing is
accomplished by attaching the swab cup to a metal connector which is then
lowered on a cable into the well by a servicing rig. As the cable is with-
drawn, the swab cup lifts the fluids and other substances to the surface.
Swabbing a new well removes completion fluids left in the hole while old
wells treated with remedial fluids are swabbed to clean out the wells. The
life of a swab cup is relatively unpredictable depending largely upon down-
hole conditions in the well. Ordinarily, swab cups must be replaced after a
few swabbing runs.
The Registrant produced a broad line of swab cups to fit various tubing
and casing sizes and for a variety of downhole conditions including sandy
fluids and high water content.
OTHER OILFIELD PRODUCTS - The Registrant also manufactured and sold: (1)
rod and tubing stripper rubbers used to control well pressures while circu-
lating during well servicing; (2) oil saver rubbers, which are replacement
items used on wireline strippers to clean fluids from the wirelines being re-
moved from the well during servicing; (3) pipe wipers, which are circular
elements used to remove drilling mud, oil and other fluids from tubing and
drill pipe as they are removed from the well; (4) rod and tubing guides,
which enhance pump efficiency and reduce sucker rod and tubing wear in pro-
ducing wells; (5) control line protectors, to protect cables that go
"downhole" into the well; and (6) pulsation dampener bladders, that are used
in equipment designed to minimize the effects of pressure changes.
Marine Rubber Products:
- ----------------------
The Registrant manufactured and sold barge bumpers and shock-mounted
boat landings used to protect offshore platforms from the combined effects of
wave forces and service vessel impacts. These products, more particularly de-
scribed below, are available as complete systems, as individual shock absorb-
ing components for new platforms or as retrofit systems for existing plat-
forms.
REGAL DEFENDER SYSTEM - The Regal DEFENDER is a patented bumper system
consisting primarily of two shock cells with eccentric bumper rings attached
to a steel contact surface. When installed on an offshore drilling or produc-
tion platform, this system provides omnidirectional shock absorption that
protects the platform and service vessels. The Registrant's DEFENDER System
provides substantially greater protection than rubber bumpers or similar de-
vices frequently used on offshore platforms. Available as a standard product
in a number of different design configurations, the DEFENDER System can be
individually adjusted to suit each specific platform application. Individual
DEFENDER System components are also sold for use on offshore platforms. DE-
FENDER is a registered trademark of the Registrant.
<PAGE>
Energy Services:
- ---------------
Bell Energy Services provides H2S Safety Services. H2S Safety Services
are primarily utilized during drilling and workover operations of oil and gas
wells in known "sour gas" locations or zones. Equipment is made available for
the detection of and protection from the adverse consequences of these harm-
ful gases.
MANUFACTURING AND QUALITY CONTROL
- ---------------------------------
A central element of the Registrant's competitive strategy in oilfield
and marine rubber products was a highly integrated manufacturing operation
which enables the Registrant to maintain quality standards over each step of
its production process. The process begins with the blending of unvulcanized
natural or synthetic rubbers, reinforcing agents and curing agents. The Reg-
istrant blends the rubber compounds used in each product and over the years
has developed substantial experience in creating compounds with specific per-
formance characteristics. After blending, the rubber is extruded and sized
for the specific product. The extruded rubber and any necessary metal parts
are then placed in a mold and a press, subjecting the rubber to heat and
pressure that vulcanizes and bonds it to the metal. Metal components used in
marine products are generally fabricated by the Registrant.
The Registrant exercises quality control over each step of the produc-
tion process. A sample of each batch of rubber compounds is tested to assure
acceptability. Each product under when numerous quality control checks during
extrusion and molding. Finished products were subjected to further testing.
Some products are sampled and undergo simple functional tests, while others
are individually tested for performance. The Registrant achieved Interna-
tional Standards Organization (ISO) 9001 certification through Lloyd's Regis-
ter Quality Assurance, Ltd. on March 1, 1995. The Quality Management System
is applicable to the design, development, manufacture and distribution of
rubber products and ancillary metal products for oilfield, offshore, marine
and customized applications.
RAW MATERIALS
- -------------
Significant raw materials used by the Registrant are natural and syn-
thetic rubber and metal stock. Natural rubber used by the Registrant, pro-
duced primarily in Malaysia, is purchased through import brokers and is read-
ily available. Synthetic rubber, metal inserts, and metal stock are available
from a number of suppliers in the United States.
PATENTS
- -------
Many of the Registrant's oilfield and marine rubber products are pro-
prietary products, several of which are covered by patents. In the opinion of
management, no single patent was essential to the Registrant's operations and
the loss or invalidity of a single patent would not have a material adverse
effect on the business or financial condition of the Registrant.
<PAGE>
SALES AND DISTRIBUTION
- ----------------------
The Registrant marketed its products and services, both domestically and
internationally, through a network of sales representatives and agents. In
addition to its sales headquarters located in Corsicana, Texas, the Regis-
trant maintained a sales office in Houston, Texas and was represented world-
wide in all major oil and gas producing areas. Export sales totaled $2.1 mil-
lion in 1995, and $1.5 million in 1994.
EMPLOYEES
- ---------
At February 19, 1996, the Registrant employed 87 persons. The Registrant
was a party to a three-year contract executed on May 21, 1993 with the Regis-
trant's 50 plant workers who are represented by the United Rubber, Cork, Li-
noleum and Plastic Workers of America. The Registrant had not experienced a
strike in the last 1S years and believes that management has good relations
with all of the Registrant's employees and the Union. Most of the employees
have joined New Regal.
BACKLOG
- -------
Backlog at December 31, 1995 totaled $131,000, consisting of $1,000 for
oilfield rubber products, $128,000 for marine products, and $2,000 for con-
tract molding products. At December 31, 1994 backlog totaled $155,000 con-
sisting of $18,000 for oilfield rubber products, $129,0~ for marine rubber
products, and $8,000 for contract molding products. All backlog orders were
expected to be completed before December 1996 and all orders were transferred
to New Regal.
OPERATING RISKS AND INSURANCE
- -----------------------------
The Registrant's products and oilfield services were used in drilling,
workover, and production operations. These operations are subject to inherent
risks such as blow-outs and other oilfield hazards, any of which can cause
personal injury and loss of life, damage or destroy equipment, suspend pro-
duction operations, or cause damage to property of others.
The Registrant maintained public liability, product liability, property
damage, workers' compensation insurance, and occupational accident and li-
ability policies.
ITEM 2 - DESCRIPTION OF PROPERTIES PRIOR TO FEBRUARY 19, 1996
The Registrant's materially important physical properties were located
in Corsicana, Midland and Odessa. The Corsicana, Texas facility was a 100,000
square feet manufacturing plant on 70 acres of land and was owned by the Reg-
istrant. The Midland, Texas facility was leased from a third party.
The Registrant's land and equipment in Corsicana were pledged to secure
various Registrant obligations . All land and equipment of the Registrant
were transferred to New Regal.
<PAGE>
ITEM 3 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS PRIOR TO FEBRUARY 19, 1996.
(1) Liquidity
The Registrant's working capital at December 31, 1995 was $2,080,000, a
decrease of $38,000 from the December 31, 1994 balance of $2,118,000. This
decrease was due to several factors. An increase in the current maturities of
long-term debt of $324,000 results from the proper classification of notes in
accordance with the note repayment schedules. A decrease in cash balances of
$189,000 was the result of timing differences in cash payments in December,
1994. A large increase in Fourth Quarter 1995 sales as compared to 1994 were
primarily responsible for the increases of $676,000 in accounts receivable,
$244,000 in accounts payable and $170,000 in other accrued expenses.
The Registrant continued to utilize the financing obtained in September
1992 to compensate for shortages in working capital during 1994. The net
amounts due on such loans were $175,000 and $283,000 at December 31, 1995 and
1994, respectively.
(2) Capital Resources
The Registrant had commitments for purchases of property, plant and
equipment of approximately $35,000 at December 31, 1995. Additional purchases
of equipment may be required as new markets and products are developed. The
Registrant's working capital comes from operations, the sale of excess or un-
profitable plants and equipment, and from financing.
(3) Results of Operations
Revenues from continuing operations for 1995 were $7,591,000, an in-
crease of 7% from 1994 revenues of $7,091,000. This was primarily the result
of an increase in international oilfield rubber product sales.
Cost of Sales as a percentage of revenue was 2% lower in 1995 as com-
pared to 1994. An increase in sales volume while the fixed overhead costs
such as depreciation, rent and taxes, remain substantially unchanged, causes
cost of sales as a percentage of sales to decrease.
Selling and Marketing expense of $1,402,000 increased by $162,000 from
1994 expense of $1,240,000. The increase was primarily due to increased dis-
tribution costs related to the higher sales volume.
General and Administrative expenses decreased by $113,000 from
$1,369,000 in 1994. The increase was primarily attributable to a decline in
the amount of legal and professional fees, and engineering expenses.
Interest expense decreased due to more efficient utilization of third
party financing.
<PAGE>
Other income in 1994 was higher due to the gain on the sale of assets of
$345,000 in 1995.
The specific source of profits and losses for 1995 and 1994 are shown
below:
1995 1994
---- ----
Corsciana manufacturing operation $ 83,000 $(106,000)
Energy Services (72,000) (38,000)
Gain on the sale of assets 345,000 8,000
Interest (328,000) (396,000)
--------- ----------
$28,000 $(532,000)
========= ==========
ITEM 4 - FINANCIAL STATEMENTS OF REGAL INTERNATIONAL, INC.
Page
------
Report of Independent Accountants 8
Consolidated Balance Sheets as of December 31, 1995 and 1994 9
Consolidated Statements of Operations for the years ended De-
cember 31, 1995 and 1994 10
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995 and 1994 11
Consolidated Statements of Cash Flows for the years ended De-
cember 31, 1995 and 199 12-13
Notes to Consolidated Financial Statements 14-24
<PAGE>
PANNELL
KERR
FORSTER
of
TEXAS, P.C.
Certified Public Accountants
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Regal International, Inc.
Corsicana, Texas
We have audited the consolidated balance sheets of Regal International, Inc.
and subsidiaries ("the Company") as of December 31, 1996 and 1994, and the
related consolidated Statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the responsi-
bility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, an a test basis, evidence
supporting the amounts and disclosures In the financial statements. All
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable ba-
sis for our opinion.
In our opinion, the consolidated financial statements referred to above pres-
ent fairly, in all material respects, the consolidated financial petition of
Regal International, Inc. and subsidiaries at December 31, 1995 and 1994 and
the consolidated results of their operations and their cash flows for the
years then ended In conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assum-
ing that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has historically in-
curred operating losses which raises substantial doubt about its ability to
continue as a going concern. There is no assurance that the Company will be
able to realize its recorded assets and liquidate its liabilities in the or-
dinary course of business. Management's plans are also described in Note 1.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ pannell Kerr Forster of Texas, P.C.
PANNELL KERR FORSTER OF TEXAS, P,C.
February 9, 1996
5847 San Felipe, Suite 2300 Houston, Texas 77057 - Telephone (713) 700-8007 -
Fax (713) 764-3360
<PAGE>
-2-
REGAL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Year Ended December
--------------------
1995 1994
------- -------
ASSETS
CURRENT ASSETS:
Cash $ 11 $ 200
Restricted Cash 19 15
Accounts Receivable, less
allowance for doubtful accounts
of $53 and $74, respectively 1,583 907
Inventories 2,460 2,426
Prepaid expenses 219 69
-------- --------
Total Current Assets 4,292 3,617
PROPERTY PLANT AND EQUIPMENT, less
accumulated depreciation of $8,230 and
$8,448 respectively 1,836 2,229
OTHER ASSETS 16 36
-------- --------
TOTAL ASSETS $ 6,144 $ 5,882
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt, including
$577 and $248 due to related parties,
respectively $ 865 $ 541
Accounts payable 752 508
Accrued Interest 10 35
Other accrued expenses 585 415
-------- --------
Total Current Liabilities 2,212 1,499
LONG-TERM DEBT, including $819 and $1,036
due to related parties. Respectively 1,294 1,773
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS'EQUITY:
Common stock - $.O1 par value: 150,000,000
shares authorized;. 81,806,211 shares issued
and outstanding in 1995 and 81,803,198 in 1994 818 818
Additional paid-in capital 20,307 20,307
Deficit (18,487) (18,515)
-------- --------
Total Stockholders' Equity 2,638 2,610
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY $ 6,144 $ 5,882
======= =========
The accompanying notes are an Integral part of these financial statements..
<PAGE>
-3-
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Year Ended December 31
-------------------------
1995 1994
--------- ----------
REVENUES $ 7,591 $ 7,091
COSTS AND EXPENSES:
Cost of Sales 5,022 4,831
Selling and marketing 1,402 1,240
General and administrative 1,258 1,369
---------- ----------
7,682 7,440
---------- ----------
OPERATING LOSS (91) (349)
---------- ----------
OTHER INCOME (EXPENSES)
Interest Expense, Including $131 and
$189 to related parties (328) (396)
Other Income
Gain on sale of fixed assets 345 8
Gain on settlements of liabilities 11 116
Other 91 89
---------- ----------
NET INCOME (LOSS) $ 28 $ (532)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 81,806 53,331
========== ==========
NET INCOME (LOSS) PER COMMON SHARE $ 0.000 $ (0.010)
========== ==========
The accompanying notes are an integral part of these financial statements,
<PAGE>
-4-
<TABLE>
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<CAPTION>
Convertible
Preferred stock
Series A and B Common Stock Additional
----------------------- --------------------
Number of Number of Pald-in
shares Amount shares Amount Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 2,630,134 $ 263 53,330,164 $ 633 $ 19,327 $ (17,983) $ 2,140
Conversion of Series B preferred
Stock to Common Stock (130,134) (13) 923,952 9 4 -
Conversion of Series A preferred
Stock to Common Stock (2,500,000) (250) 7,500,000 75 175
Conversion of $1,002,604 Harlequin
Debt to Common Stock 20,052,082 201 801 1,002
Net Loss (532) (532)
---------- ------- ---------- ------ --------- -------- ---------
BALANCE, DECEMBER 31, 1994 - - 81,806,198 818 20,307 $ (18,515) $ 2,610
---------- ------- ---------- ------ ---------- --------- ----------
Conversion of Series B Preferred
Stock to Common Stock 13
Not Income 28 28
--------- -------- ---------- ------ ---------- --------- -----------
BALANCE, DECEMBER 31, 1995 - $ - 81,806,211 $ 818 $ 20,307 $ (18,487) $ 2,638
========= ======== ========== ====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
-5-
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------
1995 1994
----- ------
Cash flows from operating activities:
Not Income (loss): $ 28 $ (532)
Adjustments to reconcile net Income (loss) to
net cash provided by (used in) operations:
Depreciation 317 338
Provision for losses on accounts receivable 24 3
Gain on sale of assets (345) (44)
Gain on debt restructured (11) (8)
Changes In assets and liabilities:
Decrease (increase) in accounts receivable (700) 792
Decrease (increase) in restricted cash (4) 31
Decrease in Inventories 72 67
Increase In prepaid expenses (7) (21)
Decrease (increase) in other asset 20 (33)
Increase (decrease) in accounts payable 244 (215)
Increase in accrued interest and
other currant liabilities 157 90
-------- ---------
Not cash provided by (used in) operating activities (205) 468
Cash flows from Investing activities:
Proceeds from the sale of fixed assets 324 8
Capital expenditures (153) (173)
------- ----------
Net cash provided by (used in) Investing
activities 171 (165)
Cash flows from financing activities:
Proceeds from borrowing 114 26
Principal payment on debt (269) 157
-------- -------
Not cash used in investing activities (155) (131)
-------- --------
Net Increase (decrease) in cash (189) 172
Cash at beginning of year 200 28
Cash at end of year $ 11 $ 200
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
- 6 -
REGAL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(in thousands, except share and per share data)
Supplemental disclosure of cash flow information (in thousands):
Cash paid for interest during the years ended December 31, 1995 and 1994
was $333 and $352, respectively.
Supplemental schedule of noncash investing and financing activities (in thou-
sands, except share data):
Holders of Series B Preferred Stock exchanged 130,134 of such shares
into 923,952 shares of Common Stock during December 1994.
Long-term debt to related party of $1,002 was converted to Common Stock
of $201 and additional paid-in capital of $801 during 1994.
Holders of 2,500,000 shares of Series A Preferred Stock converted their
shares into 7,500,000 shares of Common Stock during 1994.
During 1995, in connection with the Company's restructuring, $99,000 of
Notes Payable were retired of which $30,000 was paid in cash by Harle-
quin (a wholly-owned subsidiary of a pension fund of which a Director-
is Trustee) on behalf of Regal and $69K of old Notes Payable to Harle-
quin were converted to new Notes Payable to Harlequin.
<PAGE>
- 7 -
REGAL INTFRNATIONAL9, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER, 31, 1995
(1) CONTINUING OPERATIONS AND BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Regal In-
ternational, Inc. ("Regal") and its wholly owned subsidiaries
(collectively, the "Company") which are Regal Rubber Products, Inc.
("Regal Rubber"), and Bell Petroleum Services, Inc. ("Bell"). All sig-
nificant intercompany balances and transactions are eliminated in con-
solidation.
The Company is primarily engaged in manufacturing and selling various ex-
pendable rubber products and providing oilfield safety services. The Com-
pany's products are used to support drilling, completion and workover of
oil and gas wells as well as production from completed wells. The Com-
pany also produces rubber products for industrial, construction and other
uses.
The Company's consolidated financial statements have been prepared using
accounting principles applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the ordinary
course of business. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of re-
corded assets or liabilities that might be necessary should the Company
be unable to continue in existence.
Management of the Company is pursuing several alternatives to return the
Company to consistent profitability. During 1995 the Company success-
fully secured an asset-based lending arrangement to allow for more flexi-
ble and less costly working capital financing. In addition, increased
sales efforts are being made to further penetrate international markets.
The Company's certification by the International Standards Organization
(ISO 9001) for its quality program will assist in the marketing of its
rubber products internationally. See also Note (13) Subsequent Events,
for further discussion regarding the Company's future operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
- -------------------
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventories
- -------------
Inventories are valued at the lower of cost or market determined on a
first-in, first-out basis. The company periodically evaluates its inven-
tory to determine if any unsalable or obsolete inventory exists and ad-
justs its reserves as necessary. These evaluations are performed, at a
minimum. on an annual basis.
<PAGE>
- 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMJENTS
DECEMBER 31, 1995
Property, Plant and Equipment
- ---------------------------------
Property, plant and equipment are carried at cost. Depreciation is com-
puted using the straight-line method over the estimated useful lives for
financial reporting purposes and by accelerated methods for income tax
reporting purposes. As assets are retired or otherwise disposed of, the
cost and related accumulated depreciation arc removed from the accounts
and the resulting gain or loss is reflected in operations. The cost of
maintenance and repairs is charged to operations as incurred; significant
renewals and betterments are capitalized.
Financial Instruments and Concentrations of Credit Risk
- --------------------------------------------------------
Financial instruments that potentially subject the Company to concentra-
tions of credit risk consist principally of cash and accounts receivable.
The Company maintains its cash with major domestic banks. The terms of
these deposits are on demand to minimize risk. The Company also has cer-
tificates of deposit totaling $28,000 an $46,000 at December 31, 1995 and
1994, respectively, The Company has $19,000 and $15,000 classified as re-
stricted cash and $9,000 and $31,000 classified as other assets in 1995
and 1994, respectively. The Certificates of Deposit mature on various
dates through 1998. These certificates of deposit represent collateral
for outstanding letters of credit. The Company has not incurred losses
related to these cash deposits.
Accounts receivable consist of uncollateralizcd receivables from domestic
and international customers in the oil and gas drilling industry, To
minimize risk associated with international transactions, all sales are
in U.S. currency. The Company routinely assesses the financial strength
of its customers. The Company establishes an allowance for doubtful ac-
counts based upon factors surrounding the credit risk of specific custom-
ers, historical trends and other information.
The carrying value of the Company's financial instruments approximates
their fair value at December 31, 1995 and 1994.
Estimates
- ----------
The preparation of financial statements in conformity with generally ac-
cepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those es-
timates.
Concentrations
- ----------------
Approximately 60% of the Company's labor force is covered by a collective
bargaining agreement which expires in May 1996.
<PAGE>
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Income Taxes
- ----------------
Statement of Financial Accounting Standards No. 109 requires the use of
an asset and liability approach for financial accounting and reporting
purposes. The statement also requires deferred tax balances to be ad-
justed to reflect the tax rates in effect when those amounts are expected
to be payable or refundable.
Deferred income taxes are provided for differences in timing of reporting
certain expenses for financial statement and tax purposes. Deferred tax
liabilities result primarily from the use of accelerated depreciation for
tax reporting and straight-line depreciation for financial statement re-
porting. Deferred tax assets relate to (i) expenses recorded for finan-
cial statement purposes that are not currently deductible for tax pur-
poses and (ii) net operating loss carryforwards and tax credits remaining
at December 31, 1995. If it is likely that some portion or all of a de-
ferred tax asset will not be realized, a valuation allowance is recog-
nized (See Note 7).
Net Income(Loss) Per Sbare
- --------------------------
The net income or net loss per share calculation is based on the weighted
average number of shares of Common Stork and Common Stock equivalents
outstanding during the year.
(3) ACCOUNTS RECEIVABLE
On September 23, 1992 the Company entered into a renewable financing
agreement with a third party lender. The agreement provides for advances
on selected accounts receivable of Regal not to exceed an aggregate out-
standing balance of $1,200,000. (Total cumulative advances for the years
ended December 31, 1995 and December 31, 1994 were $2,061,000 and
$2,176,000, respectively.) Advances are limited to 80% of the selected
account balances and are recorded as a reduction of accounts receivable
and the related fees are included in interest expense. The fees charged
range from 2.25% to 6.25% of the face value of such invoices and is
calculated based on the period outstanding, The minimum fee is $2,500 per
month. This agreement is collateralized by all Regal and Bell accounts
receivable, inventory, machinery and equipment, and intangibles.
On December 21, 1995, the Company entered into a new two-year asset-based
lending agreement with another third-party lender. On January 16, 1996 a
portion of the proceeds were used to retire the outstanding balance of
the above prior receivable financing agreement. The maximum outstanding
balance of $1,500,000 is also subject to limits of 80% of eligible ac-
counts receivable and 50% of eligible inventory. It is secured by liens
on the Company's accounts receivable, inventory, equipment and intangi-
bles. The Agreement is subject to certain positive and negative cove-
nants.
<PAGE>
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(4) INVENTORIES
Inventories consist of:
December 31,
------------------
1995 1994
-------- --------
(in thousands)
Raw materials, net of allowance for
obsolescence of $24 and $25,
respectively $ 207 $ 188
Work in process, not of allowance for
obsolescence of $24 and $25,
respectively 525 626
Finished goods, not of allowance
for obsolescence of $306 and
$423, respectively 1,728 1,612
------- -------
$ 2,460 $ 2,426
======= ========
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
Estimated December 31,
Useful Life 1995 1994
----------------- ------------------
(in thousands)
Land $ 101 $ 216
Building and improvements 5-25 years 1,357 1,520
Manufacturing equipment 4-10 years 7,798 8,074
Other property & equipment 3-5 years 810 865
------- -------
10,066 10,675
Less: Accumulated depreciation (8,230) (8,446)
------- -------
$ 1,836 $ 2,229
======= =======
During 1995 Regal disposed of certain manufacturing equipment and related
materials in exchange for $50,000 cash and a merchandise credit of $250,000
to be used for the purchase of rubber goods from the purchaser of the equip-
ment. In connection with this transaction Regal has committed to purchase
inventory through October 1998. The Company recognized a gain of $280,000
from this disposition.
<PAGE>
- 11 -
NOTES TO CONSOLIDATFD FINANCIAL STATEMENTS
DECEMBER 31, 1995
(6) LONG-TERM DEBT:
Long-term debt is summarized as follows:
December 31,
-----------------
1995 1994
------- -------
(in thousands)
Secured Promissory Notes (a) $ 2,058 $ 2,100
Secured Promissory Notes (b) 54 125
Capitalized Leases and Transportation
Equipment Notes (c) 47 89
------- --------
2,159 2,314
Less current maturities (865) (541)
-------- --------
Total long-term debt $ 1,294 $ 1,773
======== =======
Annual maturities of long-term debt are $865,000, $548,000. $694,000 and
$52,000 for the years ended December 31, 1996, 1997, 1998, and 1999, respec-
tively.
(a) The Company restructured a total of $2,081,000 of its debt in 1994. In
the restructuring, new notes were issued for the full principal amount
of the old notes. Noteholders were given the option of restructuring
the note over 48 months or the purchase of the note by the Company's ma-
jority shareholder. The restructuring incorporated both secured promis-
sory notes and unsecured promissory notes. The new notes called for a
principal reduction of 5%, paid in January 1995, interest only for six
months and 42 equal monthly installments of the remaining principal and
interest until maturity. Notes of approximately $19,000 were paid in
full as part of the restructuring. Notes payable to related parties of
$1,396,000 and $1,284,000 are included in the December 31, 1995 and 1994
balances outstanding, respectively. Several of the noteholders did not
accept the restructuring. See (b) below.
(b) These notes are in default at December 31, 1995. The holders of the
notes were given the opportunity to restructure their notes or to accept
Harlequin's offer to buy their notes in December 1994 but did not accept ei-
ther offer.
(c) These notes are payable in monthly installments through various dates
in 1997 and bear interest at varying rates.
<PAGE>
- 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMFNTS
DECEMBER 31, 1995
(7) INCOME TAXES:
The Company files a consolidated federal income tax return. At December 31,
1995 the Company had available unused operating loss carryforwards and tax
credit carryforwards that expire as follows:
<TABLE>
<CAPTION>
Net operating Percentage
Expiring Loss Depletion Contribution combined
December 31, Carryforwards C&rcygforwards Carryforwards Carryforwards
- -------------- ----------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
1906 $ $ $ 2,000 $ 2,000
1997 12,000 12,000
1998 802,000 11,000 813,000
1999 3,671,000 8,000 3,679,000
2000 2,609,000 6,000 2,615,000
2001 6,392,000 4,000 6,396,000
2003 4,039,000 4,039,000
2004 2,423,000 2,423,000
2005 2,050,000 2,050,000
2006 3,430,000 3,430,000
2007 562,000 562,000
2009 413,000 413,000
--------------- ----------------- -------------- --------------
TOTALS 26,391,000 $ 41,000 $ 2,000 26,434,000
=============== ================== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Research and
Development Employee Stock Investment Combined
Expiring Tax credit Ownership Plan Tax Credit Tax Credit
December 31, Carzvforwards Tax Credit Carryforwards Carryforwards
- ------------- ------------- --------------- ------------- -------------
<C> <C> <C> <C> <C>
1996 $ 3,000 $ $ 179,000 $ 182,000
1997 5,000 28,000 76,000 109,000
1998 8,000 13,000 99,000 120,000
1999 4,000 16,000 74,000 94,000
2000 16,000 16,000
2001 10,000 10,000
------------- --------------- ------------ --------------
TOTALS $ 20,000 $ 83,000 $ 428,000 $ 531,000
============= =============== ============ ===============
</TABLE>
The utilization of these credits and carryforwards is subject to certain
limitations imposed by the 1986 Tax Reform Act and is significantly re-
stricted by Section 382 of the Internal Revenue Code due to ownership
changes. The above amounts may be subject to separate return limitation
rules.
<PAGE>
- 13 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Deferred tax assets and liabilities total $9,259,000 and $375,000, respec-
tively, at December 31, 1995 and $9,668,000 and $257,000, respectively, at
December 31, 1994.
The current and noncurrent deferred tax assets and liabilities are comprised
of the following:
Current Non-Current
------- -----------
Deferred tax liability:
Depreciation $ (375,000)
Deferred tax assets:
Loss Carryforwards 8,973,000
Other Tax Credits 195,000
Accruals $ 73,000
Allowance for Doubtful Accounts 18,000 -
--------- -------------
91,000 8,793,000
Less Valuation Allowance (91,000) (8,793,000)
--------- --------------
Net Deferred Tax Assets -0- -0-
========= ==============
The valuation allowance decreased by approximately $528,000 from January 1,
1995 to December 31, 1995 primarily as a result of the expiration of net op-
erating loss carryforwards.
The following reconciles the expected tax provision by applying statutory
rates to 1995 pre-tax income:
Expected tax provision $ 9,923
Excess book depreciation 35,487
Additional bad debt expense (7,364)
Additional warranty expense (1,650)
Gain on Sale of Assets 12,754
Nondeductible Interest Expense 64,667
Nondeductible Vacation Expense 6,326
Other Nondeductible Expenses 2,509
Tax Benefit of NOL Carryforwards (122,652)
----------
$ -0-
==========
<PAGE>
- 14 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(8) STOCKHOLDERS' EQUITY
As part of the 1994 restructuring described in Note (6), the holders of
Series A Preferred Stock and 50,000 shares of Series B Preferred Stock
voted to convert their shares. The terms of both Preferred Stock Series
A and B state that if a majority of shareholders vote as a single class
to convert their shares, then all shares shall be deemed converted. As a
result, all of the Preferred Stock was converted to Common Stock. Addi-
tionally, the accumulated Preferred Stock dividends and liquidation pref-
erence were eliminated. The effects of the restructuring are reflected
in the accompanying financial statements as of December 31, 1994.
The following tables summarize the activity of warrants and options:
During 1987 and 1988, the Company issued five-year Common Stock options
in conjunction with its financing activities to various promissory note
holders and other selected creditors. During 1989, the Company issued
five and ten-year stock options in an additional financing and extension
of debt.
COMMON STOCK OPTIONS
1995 1994
---- ----
Shares under option beginning of year 150,000 328,000
Expired - (178,000)
------- ---------
Shares under option end of year 150,000 150,000
======== =========
Average exercise price of outstanding
options $.156 $.156
Exercisable at end of year 150,000 150,000
======== =========
In December 1991 the Board of Directors approved the issuance of Common
Stock options to members of the Board of Directors. The options were to
expire in five years and be issued at 110% of market value on the date
of grant.
COMMON STOCK OPTIONS
1995 1994
---- ----
Options at beginning of year 1,000,000 1,000,000
Issued 300,000 -
Restated - 50,000
Expired (300,000) (50,000)
---------- ----------
Shares under option end of year 1,000,000 1,000,000
========== ==========
Average exercise price of
outstanding options $ .14 $ .14
---------- ----------
Exercisable at end of year 1,000,000 1,000,000
========== ==========
<PAGE>
- 15 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
The Company has never paid a cash dividend. It is the current policy of the
Board to retain earnings, if any, to provide funds for the Company's opera-
tions. The payment of dividends is at the discretion of the Board, and
dividends may be paid only out of current earnings and profits or retained
earnings. The Company had an accumulated deficit of $18,487,000. No funds
have been legally available for the payment of dividends since 1983.
(9) EXPORT SALES:
The Company is represented worldwide in all oil and gas producing areas.
Export sales totaled $2,074,000 in 1995 and $1,500,000 in 1994.
(10) COMMITMENTS AND CONTINGENCIES:
Leases
- ------
The Company has operating leases covering equipment and various warehouse
and office locations. No contingent rentals are involved and management ex-
pects that most of these will be renewed or replaced by other leases in the
normal course of business.
Future minimum payments under operating leases at December 31, 1995 are ap-
proximately $72,000 in 1996, $74,000 in 1997, $59,000 in 1998 and $23,000 in
1999. Total rent expense under operating leases was $69,000, and $67,000 in
1995 and 1994, respectively.
Legal Proceedings
- -----------------
The Company is involved in lawsuits arising in the ordinary course of busi-
ness. Management is unable to predict the ultimate outcome of these suits,
but intends to contest them vigorously and believes that the disposition of
all the suits individually and in the aggregate, after taking into account
the available insurance coverages, should not have a material adverse affect
on the Company's operations or financial condition.
Insurance
- ---------
The Company maintains public liability, product liability, property damage,
workers' compensation insurance. The public and product liability policies
cover losses which occur during the respective policy periods.
Insurance companies provide coverage over specified individual and group re-
tention levels for employee health insurance costs. The Company self in-
sures claims under those retention levels. The self funded claims arc ac-
crued based on actuarial estimates of the Company's exposure for the plan
year. These claims are paid as incurred.
<PAGE>
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Letters of Credit
- -----------------
Regal has restricted cash in interest bearing Certificates of Deposit which
are pledged against outstanding letters of Credit that mature at various
dates through 1998. At December 31, 1995, Regal had $28,000 in restricted
cash of which $9,000 was included in Other Assets and $19,000 was classified
as Restricted Cash. At December 31, 1994, Regal had $46,000 in restricted
cash of which $31,000 was included in Other Assets and $15,000 was classi-
fied as Restricted Cash. These Letters of Credit are required as perform-
ance guarantees by certain foreign customers.
(11) EMPLOYEE BENEFIT PLAN:
In October 1991, the Company adopted an Internal Revenue Code (Section 401K)
Plan for all of its eligible employees. The plan has a 6 year vesting
schedule and allows a discretionary employer match of contributions made by
employees.
(12) RELATED PARTY TRANSACTIONS:
As a part of the Company's restructuring, Harlequin converted $1,002,604 of
debt into 20,052,082 shares of Common Stock in 1994. In addition, notes to-
taling $1,366,000 were purchased by Harlequin pursuant to an offer to the
noteholders to buy their notes.
During 1995, Harlequin advanced $100,000 to the Company. Notes to Harlequin
accrue interest at rates ranging from 9% to 10%. Interest expense for the
year was $131,000, Accrued interest at December 31, 1995 was $190,000 and is
included in Other Accrued Expenses.
During 1995, directors fees of $9,500, $6,000 and $11,000 were paid to
Messrs. Sharma, Furner and Ollquist. respectively and $60,000 payable to
Mr. Richard Gray was accrued.
During 1994, Directors' Fees of $30,000, $30,000, $12,000 and $6,500 were
paid to Messrs. Plunkett, Beinhocker, Ollquist and Sharma, respectively and
$60,000 payable to Mr. Richard Gray was accrued.
Amounts due Richard Gray, or companies affiliated with Mr. Gray, at December
31, 1995 and 1994 were $92,000 and $34,000, respectively, and are included
in Other Accrued Expenses.
During 1994, the following interest payments were made to related parties:
Whistling, Ltd; (a company wholly owned by the children of a Regal Direc-
tor), $18,000, Bermuda Holding Company (a company wholly owned by the wife
of a Regal Director), $29,000; The Plunkett Family (relatives of a Direc-
tor), $28,000; and Gary Sherman Investments, Inc. ("GSI") (a company wholly
owned by a Director), $25,000. Interest expense payable to Harlequin was
$75,000 of which $25,000 was paid and $50,000 was classified as Other Ac-
crued Expenses at December 31, 1994.
<PAGE>
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995
(13) SUBSEQUENT EVENTS:
On January 31, 1996 Regal acquired all the issued and outstanding shares of
Acewin Profits Limited, a British Virgin Islands corporation ("Acewin"),
from China Strategic Holdings Limited, a Hong Kong company ("CSH"). Acewin's
sole asset is a 55% joint venture interest in Wuxi CSI Vibration Isolator
Co., Ltd. ("Wuxi"), a Sino-foreign joint venture. Regal paid $13.5 million
for the shares of Acewin common stock. Such purchase price was paid by de-
livery of a $13.5 million Convertible Note bearing interest at the rate of
nine percent (9%) per annum (the "Convertible Note"').
The Convertible Note is payable interest only on an annual basis, with all
principal being due and payable on January 31, 1999, The principal and any
unpaid interest owing on the Convertible Note are convertible into shares of
Regal Common Stock at a conversion price of $0.0302 per share. The princi-
pal amount of the Convertible Note will be reduced if the audited financial
statements of Wuxi for the year ended December 31, 1995 reflect all after-
tax profit of less than $3.0 million. The adjustment is a formula designed
to assure the purchase price paid by the Regal for the Wuxi interest does
not exceed eight (8) times Wuxi's 1995 after-tax earnings. Assuming no ad-
justment, the Convertible Note is convertible into 84.5% of Regal's current
outstanding shares of Common Stock. The Convertible Note is secured by a
Pledge Agreement granting CSH a security interest in the shares of Acewin
capital stock.
Immediately following the acquisition of the shares of Acewin capital stock
and as a condition thereto, Regal sold and transferred all the existing op-
erating assets and real property of Regal to a newly formed corporation, Re-
gal (New) International, Inc. ("New Regal") in exchange for $2.5 million and
New Regal's assumption of all outstanding liabilities of Regal, other than
tile Convertible Note, New Regal is a wholly-owned subsidiary of Harlequin
Investment Holdings Limited ("Harlequin"). The $2.5 million portion of the
purchase price was paid as follows: $800,000 in cash and the balance by de-
livery to Regal of two promissory notes, one in the principal amount of
$900,000 (tile "$900,000 Note") and the second in the principal amount of
$800,000 (tile "$800,000 Note"). The $900,000 Note bears interest at 9% per
annum and is payable in sixty (60) equal monthly installments of principal
and interest. The $800,000 Note bears no interest and is due and payable
in one installment on January 31, 2001. New Regal's obligations under the
$900,000 Note and the $800,000 Note are secured by a pledge of all of the
issued and outstanding shares of capital stock of New Regal.
In connection with the above-described transactions, Janak Desai, Nils
Ollquist and Girish Sharma resigned as Directors of Regal, and Oei Hong
Leong, the Chairman of CSH, Chung Cho Yee Mico, and Ma Wai Man were elected
to fill the vacancies created by such resignations. See Note (1) Continuing
Operations and Basis of Presentation.
<PAGE>
PART III
ITEM 5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COM-
PLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Listed below are the names, ages and positions as of December 31, 1995
of the executive officers and directors of the Company. Effective February
19, 1996, all executive offices and directors, except Richard N. Guy and Nils
Ollquist, resigned their positions.
Name Age Position & Office
- ---- --- -----------------
Janak N. Desai (1)(c) 40 President, Chief Executive Officer & Director
Gary M. Kohlschmidt (1) 36 Chief Financial Officer
Girish K. Sharma (1) 47 Director
Richard N. Gray (a)(b)(c) 50 Chairman of Board of Directors
Nils Ollquist (1)(b) 39 Director
Martin Furner 43 Director
_________________________________
(a) Member of Audit Committee
(b) Member of Compensation Committee
(c) Member of Executive Committee
(1) Resigned on February 19, 1996
Mr. Desai joined the Company's Board of Directors in February 1992, was
appointed Executive Vice President in April 1992 and subsequently was elected
as President and Chief Executive Officer in October 192. Mr. Desai was pre-
viously the Vice President and Controller of Atlas Bradford Corporation, a
Baroid company, from June 1990 to April 1992. Prior to Atlas Bradford, he
served for ten years in various financial management capacities at other di-
visions of Baroid Corporation, a Fortune 500 oilfield products and services
company. Mr. Desai is a graduate of the University of South Florida and is a
Certified Public Accountant.
Mr. Kohlschmidt served as the Vice President of Finance for Composite
Technology, Inc. where he was employed from 1985 to 1990. He was a senior
accountant with the public accounting firm now known as Deloitte & Touche
prior to his jointing Composite Technology. Mr. Kohlschmidt is a graduate of
the University of Texas at Austin and is a Certified Public Accountant.
Girish Sharma was elected to the Regal's Board of Directors in December
1990 and served as Chairman of the Board from February 1991 until October
1993. Mr. Sharma also served on the Company's Executive Committee until
January 1994 at which time he resigned his position. Since 1986 Mr. Sharma
has been engaged as an independent businessman in purchasing, refurbishing
and reselling hotels and residential real estate through a number of con-
trolled corporations. A graduate of the University of Texas at Austin, Mr.
Sharma also has a M.B.A. from the University of Texas at San Antonio.
<PAGE>
Mr. Richard Gray, a Trustee of the GHL (Senior) Pension Fund that has as
its wholly-owned subsidiary Harlequin Investment Holdings Limited, a British
Virgin Islands company, was elected to the Board of Directors on September
24, 1993 and as Chairman of the Board of Directors on October 14, 1993 suc-
ceeding Girish Sharma. Richard Gray is a practicing Chartered Accountant and
Business Consultant with offices in Guernsey and London as well as associated
offices around the world. For the last ten years Richard Gray is an officer
of a number of investment companies, including Guernsey Holdings Limited.
Prior to his association with Guernsey Holdings Limited, Mr. Gray was Group
Finance Director of the Noble Denton Group where he played a key role in its
development internationally. Noble Denton is one of the leading Marine Con-
sultants in the world. Mr. Gray is a Fellow of the Institution of Chartered
Accountants in England and Wales, a Fellow of the British Institute of Direc-
tors and a graduate of the Advanced Management Program of the Harvard Busi-
ness School.
Mr. Nils Ollquist joined Regal's Board of Directors on January 26, 1994,
and also serves on the Compensation Committee. Mr. Ollquist is the principal
of Orient Financial Services, Ltd., a regional corporate finance boutique lo-
cated in Hong Kong and established in June, 1993. From June 1990 to June
1993, he served with Bank of America as Director of Corporate Finance and as
executive Director/Head of Mergers and Acquisitions, Asia. Mr. Ollquist held
various management positions in corporate finance with Security Pacific Aus-
tralia, Ltd. from March 1985 to April 1990. Prior to 1985, he served in
various capacities with the Australian Treasury, Barclays Australia, Ltd. and
Amsterdam Rotterdam Bank. Mr. Ollquist has a Bachelor of Economics and a
Bachelor of Law degree from the Australian National University-Canberra.
Mr. Martin Furner was elected to the Company's Board on February 1,
1995. Mr. Furner is the Chairman of the Board of Tapestry Holidays, a spe-
cialist tour operator in the UK. Prior to joining Touche Ross Management
Consultants in 1986, he held several positions including legal and fiscal co-
ordinator (Europe and Africa) for Flopetrol, Inc., a division of the Schlum-
berger Group. In 1989, Mr. Furner joined a newly restructured group, Noble
Raredon, PLC. He initially worked in the London head office before moving to
Bremen, Germany as Finance Director of the European Tour Operations Division.
Mr. Furner holds a BA in physics from Oxford University, is a member of the
Association of Certified Management Accountants and the Institute of Travel
and Tourism, and holds a Wine & Spirits Education Trust Higher Certificate.
ITEM 6 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table shows, as of February 19, 1996, all shares of Common
Stock, held beneficially, directly, or indirectly, by (i) each Director, (ii)
each owner who is known by the Company to own beneficially more than 5% of
either class of stock and (iii) all directors and officers as a group.
<PAGE>
COMMON STOCK
Number of Shares
of Common Stock Percentage
Beneficially of
Name Owned Class
---- ----------------- ---------
Richard N. Gray (A)(1) 44,952,082 54.19%
Harlequin Investment Holdings Limited (B)(1) 44,952,082 54.19%
GHL (Senior) Pension Fund (C)(1) 44,952,082 54.19%
Overseas Trust Company, Limited (D)(1) 44,952,082 54.19%
Guernsey Holdings Limited (E)(1) 44,952,082 54.19%
Janak N. Desai (F) 150,000 (2)
Gary Sherman Investments, Inc. (G) 6,400,000 7.71%
Girish K. Sharma (H) 6,650,000 8.02%
All Directors and Officers as a Group
(8 persons) 51,752,082 62.38%
__________________________
(1) This interest was reduced to 15.22% on April 15, 1995.
(2) Owns less than 1% of Common Stock outstanding.
Percentages are computed on a fully diluted basis, based on 81,806,198
Common shares issued and outstanding on February 19, 1996, and 1,150,000 Com-
mon Stock options, totaling 82,956,198 shares of Common Stock after giving
effect to all conversion rights.
(A) Address: Noble House, Queen's Road, St. Peter Port, Guernsey, Channel
Islands. Common Stock shown includes shares which Mr. Gray may be
deemed to own beneficially as to which Mr. Gray disclaims beneficial
ownership including:
(1) 44,952,082 shares of Common Stock owned by Harlequin Investment
Holdings Limited, a British Virgin Island company that is a wholly
owned subsidiary of GHL (Senior) Pension Fund, of which Mr. Gray is
a trustee.
(B) Address: Creque Building, Tortola, British Virgin Islands. Common
Stock shown includes shares which Harlequin Investment Holdings Limited
owns directly including:
(1) 44,952,082 shares of Common Stock.
(C) Address: Noble House, Queen's Road, St. Peter Port, Guernsey, Channel
Islands. Common Stock shown includes shares which the GHL (Senior) Pen-
sion Fund may be deemed to own beneficially including:
(1) 44,952,082 shares of Common Stock owned by Harlequin Investment
Holdings Limited, a British Virgin Islands Company that is a wholly
owned subsidiary of GHL (Senior) Pension Fund of which Mr. Gray is
a trustee.
<PAGE>
(D) Address: Creque Building, Tortola, British Virgin Islands. Common
Stock shown includes shares Overseas Trust Company Limited may be deemed
to own beneficially as to which Overseas disclaims beneficially owner-
ship, including:
(1) 44,952,082 shares of Common Stock owned by Harlequin Investment
Holdings Limited, a British Virgin Island Company that is a wholly
owned subsidiary of GHL (Senior) Pension Fund, of which Overseas
Trust Company Limited is a trustee.
(E) Address: Noble House, Queen's Road, St. Peter Port, Guernsey, Channel
Islands. Common Stock shown includes shares which Guernsey Holdings
Limited may be deemed to own beneficiary as to which Guernsey disclaims
beneficiary ownership, including:
(1) 44,952,082 shares of Common Stock owned by Harlequin Investment
Holdings Limited, a British Virgin Islands Company that is a wholly
owned subsidiary of GHL (Senior) Pension Fund of which Overseas
Trust Company Limited, a wholly owned subsidiary of Guernsey Hold-
ings Limited, is a trustee.
(F) Address: Highway 31 East, Corsicana, Texas 75151. Represents options
granted to Mr. Desai to purchase 150,000 shares of Common Stock.
(G) Address: 315 Wheeler Executive Center, Augusta, Georgia 30909. Common
Stock total shown includes the following shares owned directly by Gary
Sherman Investments, Inc.:
(1) 6,400,000 shares of Common Stock owned directly by Gary Sherman In-
vestments, Inc.
(H) Address: 315 Wheeler Executive Center, Augusta, Georgia 30909. Common
Stock total shown includes the following shares which Mr. Sharma owns
directly or may be deemed to own beneficially, including:
(1) options to purchase 250,000 shares of Common Stock;
(2) 6,400,000 shares of Common Stock owned directly by Gary Sherman In-
vestments, Inc., a corporation wholly owned by Mr. Sharma.
ITEM 7 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
See Part II, Item 7(13) Related Party Transactions
<PAGE>
EXHIBIT 99-II
CORPORATE DATA
Board of Directors Stock Transfer Agent and Registrar:
Cei Hong Loong American Stock Transfer & Trust Co.
Richard N. Gray 40 Wall Street
Martin Furner New York, New York 10005
Chung Cho Yee Mico
Ma Wai Mah (Catherine)
Officers Shareholder Relations
Auditors Form 10K SB
Until March 31, 1996 Copies of Form 10-K SB as filed with
Pannell Kerr Forster the Securities & Exchange Commission
of Texas P.C. may be obtained without charge by
contacting Regal International, Inc.'s
After April 1, 1996 Corporate Office.
Authur Anderson & Co.
Corporate Office
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30
<SECURITIES> 0
<RECEIVABLES> 1636
<ALLOWANCES> 53
<INVENTORY> 2460
<CURRENT-ASSETS> 4292
<PP&E> 10066
<DEPRECIATION> 8230
<TOTAL-ASSETS> 6144
<CURRENT-LIABILITIES> 2212
<BONDS> 0
0
0
<COMMON> 818
<OTHER-SE> 20307
<TOTAL-LIABILITY-AND-EQUITY> 6144
<SALES> 7591
<TOTAL-REVENUES> 7591
<CGS> 5022
<TOTAL-COSTS> 7682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 328
<INCOME-PRETAX> 28
<INCOME-TAX> 28
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
