<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----- to -----
Commission file number 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of small business as specified in its charter)
Delaware 75-1071589
- ---------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
52/F Bank of China Tower
1 Garden Road, Hong Kong
(Address of principal executive offices)
852-2844-2905
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
yes ----- No --X--
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date July 31, 1996, 81,806,198
shares.
Transitional Small Business disclosure Format (check one): Yes ----- No --X--
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets at June 30, 1996
and December 31,1995 1 - 2
Consolidated Condensed Statements of Operations
for the six months ended June 30, 1996
and June 30, 1995 3
Consolidated Condensed Statements of Cash Flows
for the six months ended June 30, 1996
and June 30, 1995 4
Notes to Consolidated Condensed Financial Statements 5 - 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 - 13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 14
ITEM 2 - CHANGE IN SECURITIES 14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 14
ITEM 5 - OTHER INFORMATION 14
ITEM 6 - EXHIBITS AND RFPORTS ON FORM 8-K 14
<PAGE> -1-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(Amounts expressed in United States dollars)
(Amounts in thousands, except number of shares and per share data)
June December
30, 1996 31, 1995
---------- ----------
$'000 $'000
ASSETS
Current assets
Cash and cash equivalents 6,471 11
Restricted cash - 19
Note receivable 154 -
Accounts receivable, net 2,763 1,583
Inventories 2,390 2,460
Prepayments and other current assets 1,513 235
---------- ----------
Total current assets 13,291 4,308
---------- ----------
Property, plant and equipment, net 8,592 1,836
Long-term Investment 274 -
Note receivable 1,498 -
Intangibles 110 -
Goodwill, net 5,643 -
---------- ----------
Total assets 29,408 6,144
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Short term bank loans 475 -
Long-term loans - current portion 1,622 288
Accounts payable 1,119 752
Accrued expenses
and other payables 3,339 595
Taxes other than income 357 -
Due to related parties - 577
---------- ----------
Total current liabilities 6,912 2,212
---------- ----------
The accompanying notes are an integral part of these financial statements.
<PAGE> -2-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(Cont'd)
(Amounts expressed in United States dollars)
(Amounts in thousands, except number of shares and per share data)
June December
30, 1996 31, 1995
---------- ----------
$'000 $'000
Convertible note payable 13,500 -
Long-term loans 419 675
Due to China
Strategic Holdings Ltd 101 -
Due to related parties - 619
Minority interests 5,362 -
Shareholders' equity:
Common stock 818 818
Additional paid-in capital 20,307 20,307
Dedicated capital 42 -
(Accumulated deficits)/
Retained Earnings (18,045) (18,487)
Exchange reserve/(deficit) (8) -
---------- ----------
Total shareholders'
equity 3,114 2,638
---------- ----------
Total liabilities and
shareholders' equity 29,408 6,144
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE> -3-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
-----------------------------------------------------
FOR THE SIX MONTHS ENDED AND THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Amounts expressed in United States dollars)
(Amounts in thousands, except number of shares and per share data)
Six months ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1996 1995 1996 1995
$'000 $'000 $'000 $'000
Sales 6,672 3,439 3,820 1,802
-------- -------- -------- --------
Cost of goods sold 4,008 2,340 2,275 1,227
Selling and
administrative expense 1,114 1,282 552 651
Interest expenses/
(income), net (13) 159 (33) 81
Other expenses/
(income), net 201 (348) 100 (330)
-------- -------- -------- --------
Total costs and expenses 5,310 3,433 2,894 1,629
-------- -------- -------- --------
Income before tax:
From continuing operations
1,479 - 926 173
From discontinued operations
(117) 6 - -
-------- -------- -------- --------
1,362 6 926 173
Provision for income tax 235 - 143 -
-------- -------- -------- --------
Income after tax 1,127 6 783 173
Minority interest 644 - 392 -
-------- -------- -------- --------
Net income 483 6 391 173
======== ======== ======== ========
Weighted average common
shares outstanding 81,806,198 81,806,198 81,806,198 81,806,198
Net income per
common share 0.006 0.000 0.005 0.002
The accompanying notes are an integral part of these financial statements.
<PAGE> -4-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Amounts expressed in United States dollars)
(Amounts in thousands, except number of shares and per share data)
Six Months ended June 30,
-------------------------
1996 1995
---------- ----------
$'000 $'000
Cash flows from operating activities:
Net Income (loss): 483 6
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation and amortization 320 166
Provision for losses on accounts receivable - 18
Loss on sale of subsidiary 21 -
Minority interest 644 -
Gain on sale of assets - (301)
(Increase) Decrease in Assets:
Accounts receivable (639) 375
Restricted Cash - 12
Inventories (359) (488)
Prepayments and
other current assets (7) (36)
Increase (Decrease) in Liabilities:
Accounts payable (282) 65
Accrued interest and
other current liabilities 607 93
Tax payable 259 -
---------- ----------
Net cash provided by (used in)
operating activities 1,047 (90)
---------- ----------
Cash flows from investing activities:
Purchase of subsidiaries (net of cash and
cash equivalents acquired) 5,987 -
Disposal of subsidiaries (net of cash and cash
equivalents disposed of) 906 -
Capital expenditure (560) (63)
---------- ----------
Net cash provided by (used in)
investing activities 6,333 (63)
---------- ----------
Cash flows from financing activities:
Loan from related parties 480 -
Proceeds from borrowing 1,673 208
Repayment of bank loans (3,166) (227)
Due to CSH 99 -
---------- ----------
Net cash provided by (used in)
financing activities (914) (19)
---------- ----------
Net increase (decrease) in cash 6,466 (172)
Cash at beginning of the period 11 200
Effect on foreign exchange rate changes (6) -
---------- ----------
Cash at end of the period 6,471 28
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE> -5-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(Unaudited)
1. CONTINUING OPERATIONS AND BASIS OF PRESENTATION
-----------------------------------------------
The consolidated financial statements include the accounts of Regal
International, Inc. ("Regal") and its wholly-owned subsidiaries
(collectively, the "Company") which are Acewin Profits Limited ("Acewin"),
China Machine Holdings Limited ("CMH") and Wuxi CSI Vibration Isolator Co.,
Ltd. (the "Operating Subsidiary" or "Wuxi CSI"). All significant
intercompany balances and transactions are eliminated in consolidation.
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 recorded
assets or liabilities that might be necessary should the Company be unable to
continue in existence.
On February 8, 1996 Regal acquired all the issued and outstanding shares of
Acewin, a British Virgin Islands corporation, from China Strategic Holdings
Limited, a Hong Kong company ("CSH"). Acewin's sole asset is a 100% interest
in CMH, which in turn, holds a 55% interest in Wuxi CSI. Regal paid $13.5
million for the shares of Acewin common stock. Such purchase price was paid
by delivery 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 February 8, 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
Convertible Note, if exercised by CSH would give CSH a controlling interest
of more than 80% in Regal. This Convertible Note is secured by a pledge of
Regal's interest in the shares of the Company in favor of CSH.
Immediately following the acquisition of the shares of Acewin capital stock
and as a condition thereto, Regal sold and transferred all the existing
operating assets and real property of Regal 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 Regal, other
than the Convertible Note. New Regal is a 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 delivery to
Regal of two 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
<PAGE> -6-
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements of the
Company and its majority owned and controlled subsidiaries. All material
intercompany balances and transactions have been eliminated on consolidation.
b. Sales
-----
Sales represent the invoiced value of goods, net of sales taxes, supplied to
unrelated customers. Sales are recognized upon delivery and acceptance of
goods by the customers.
c. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, demand deposits with banks
and liquid investments with an original maturity of three months or less.
d. Inventories
-----------
Inventories are stated at the lower of cost, on a first-in first-out basis,
or net realizable value. Costs of work-in-progress and finished goods
comprise direct materials, direct labor and an attributable portion of
production overheads.
e. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed
using the straight line method over the assets' estimated useful lives,
taking into account the estimated residual value of 10% of the cost of fixed
assets. The estimated useful lives are as follows:
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
<PAGE> -7-
f. Foreign Currency Translation
----------------------------
The Operating Subsidiary maintains its books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the applicable
unified rates of exchange or the applicable rates of exchange quoted by the
applicable foreign exchange adjustment center ("swap center"), prevailing at
the dates of the transactions. Monetary assets and liabilities denominated
in foreign currencies are translated into Renminbi using the applicable
unified rates of exchange or the applicable swap center rates prevailing at
the balance sheet dates. The resulting exchange differences are included in
the determination of income.
On consolidation, the results of the overseas subsidiaries are translated
into United States dollars at the average rates of exchange for the period.
The assets and liabilities of the overseas subsidiaries are translated at the
rates ruling on the balance sheet date. Exchange differences arising on
consolidation are taken directly to reserves.
g. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign equity
joint venture enterprises, the Operating Subsidiary maintains discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund and a staff welfare and incentive bonus fund. The Board of
Directors of the Operating Subsidiary will determine on an annual basis the
amount of the annual appropriations to dedicated capital.
h. Long-term investment
--------------------
Long-term investment includes Chinese government bonds and unlisted
investments held for the long-term and are stated at cost less provision for
permanent diminution in value.
Income from investments is accounted for to the extent of dividends received
and receivable.
i. Taxation: Income Taxes
----------------------
The Company's subsidiary, 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
and 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, with a joint venture term of not less than 10
years and engaged in production, will be fully exempt from the 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. Wuxi CSI will be fully exempt from the
<PAGE> -8-
Chinese local income tax of 3% for five years starting from the first profit-
making year.
Wuxi CSI has obtained approval from the Wuxi Tax Bureau to delay the
commencement of the tax holiday to January 1, 1994. Accordingly, from the
date of its incorporation to December 31, 1993, Wuxi CSI was subject to
Chinese state income tax at the rate of 24% plus Chinese local income tax at
3%.
The Company provides for deferred income taxes using the liability method, by
which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement basis of assets and
liabilities. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets or
liabilities in the financial statements.
3. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable consists of:
June 30, December 31,
1996 1995
--------- ----------
USD '000 USD '000
Trade and other receivables 2,763 1,636
Less: Allowance for doubtful accounts (-) (53)
--------- ----------
Accounts receivable, net 2,763 1,583
========= ==========
4. INVENTORIES
-----------
June 30, December 31,
1996 1995
--------- -----------
USD '000 USD '000
Raw materials 801 231
Work-in-progress 429 549
Finished goods 1,160 2,034
Less: Provision for obsolescence (-) (354)
--------- ---------
2,390 2,460
========= =========
<PAGE> -9-
5. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
June 30, December 31,
1996 1995
--------- -----------
USD '000 USD '000
Land - 101
Plant and office buildings 2,437 1,357
Machinery and equipment 5,738 7,798
Motor vehicles 338 -
Furniture fixtures and office 354 810
equipment
Construction-in-progress 597 -
Less: Accumulated depreciation (872) (8,230)
--------- ----------
Net book value 8,592 1,836
========= ==========
6. LONG-TERM INVESTMENT
--------------------
Long-term investment comprised:
June 30, December 31,
1996 1995
--------- -----------
USD '000 USD '000
Unlisted investments, at cost 251 -
Government debentures 23 -
--------- ----------
274 -
========= ==========
7. INCOME TAXES
------------
PRC income taxes were provided at a rate of 13.5% in respect of the income
earned by Wuxi CSI in 1996.
<PAGE> -10-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Following the disposal of the oil exploration equipment supply operation and
the acquisition of the anti-vibration isolator factory in Wuxi early this
year, the Company's focus had been switched from the U.S. industrial product
market to the overseas market in China.
Purchase of the Wuxi plant effectively enlarged the Company's scale of
operation. For example, the consolidated total assets increased by more than
three times. More importantly, this strategic move provided the Company with
ample opportunities to benefit from the burgeoning Chinese economy.
Results of operation
Three months ended June 30,
---------------------------
1996 1995
---------- ----------
'000 '000
Sales 6,672 3,439
Cost of Sales 4,008 2,340
Gross Profit 2,664 1,099
Gross Profit Ratio 39.9% 32.0%
Selling, General and Administrative expenses 1,114 1,282
Financial expenses (13) 159
Other expenses/ (Income), Net 201 (348)
--------- --------
Income before Taxes and Minority Interest 1,362 6
========= ========
Sales
- -----
Sales increased by $3,233,000 or 94.0% in the first half of 1996 as compared
with the first half of 1995. This was primarily attributable to the enlarged
scale of operations following the acquisition of Wuxi CSI.
Gross Profit
- ------------
The company made a gross profit of $2,664,000 in the first six months of
1996, representing a 1.4 times increase from the corresponding period last
year. The gross profit ratio for the period also improved, rising from 32.0%
in 1995 to 39.9% in 1996. This increase reflects the total change in the
Company's operating activities subsequent to the restructure in February.
Manufacture of anyi-vibration isolators in China at present
<PAGE> -11-
commands a higher gross margin than that of supplying oil exploration
equipment to the U.S. domestic market.
Selling, General and Administrative expenses
- --------------------------------------------
Selling, general and administrative expenses for the first half of 1996
decreased to $1,114,000 as compared to $1,282,000 for the same period last
year. As a percentage of sales, it dropped those expenses 16.7% from 37.3%
in 1995. Decrease in operating costs and cost ratio reflects the difference
in operating environments in the People's Republic of China as the United
States. Acquisition of the Wuxi plant enabled the Company to enjoy cost
advantages such as lower labor costs and rents in China.
Financial Expenses
- ------------------
Financial expenses improved from a net expense of $159,000 in the first half
of 1995 to a net income of $13,000 in the first half of 1996. Since the Wuxi
plant was cash rich and modestly leveraged, consolidating its result with
that of the Company did not produce upward pressure on financial expenses.
The decrease in financial expense was also a direct result of net repayment
of bank loans of approximately $1,493,000 during the period. Apart from
this, the $13.5 million convertible note issued to acquire the Wuxi plant is
interest free for six months from the date of issue. The Company therefore,
recorded minimal financial expenses during the six month grace period.
Income Before Income Taxes and Minority Interests
- -------------------------------------------------
The spin-off of the oil exploration equipment supply operation, which was
operating at a loss, and acquiring the Wuxi plant early this year, resulted
in the Company producing a profit in the first half of 1996. Income before
taxes and minority interest in the first half surged from $6,000 in 1995 to
1,362,000 in 1996.
Liquidity
During the six months ended June 30, 1996, net cash provided by operating
activities was approximately $1,047,000 as compared to net cash of $90,000
used in the first half of 1995. The increased liquidity resulted from net
income of $483,000 after adjustments for depreciation and amortization of
$320,000 and minority interest of $644,000. The non-cash adjustments were
offset by an increase in working capital. Cash provided by investing
activities resulted from the acquisition of Wuxi CSI and disposal of
operating assets to New Regal, which generated into the Company net cash and
cash equivalents of around $5,987,000 and $906,000 respectively. Cash used
in financing activities was $914,000. This was primarily attributable to net
movement of loans during the period, reflecting proceeds from new borrowing
and loans from related parties totaling $2,153,000, offset by loan repayments
of $3,166,000. As a result, the cash position of the Company was
substantially strengthened. Cash and cash equivalents increased to
$6,471,000 at June 30, 1996 from $11,000 at the beginning of the year.
<PAGE> -12-
Capital Resources
The Company's working capital mainly comes from operations. Short-term bank
loans at June 30, 1996 amounted to $475,000 and $2,041,000 respectively. All
of these loans were unsecured.
Effects of 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. Accordingly, 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. Howevever, it did not have any significant
adverse effect on the performance of the Company, as the operating
subsidiary. Wuxi CSI was able to control production costs by implementing
internal cost control measures.
Commitment for Capital Expenditure
As of December 31, 1995, the Company had outstanding capital commitments for
purchases of machinery and equipment of approximately $1,293,000. As of
December 31, 1995, the operating subsidiary, Wuxi CSI, had also entered into
a joint venture agreement with a German company for the formation of a joint
venture company in Wuxi City, Jiangsu Province in the PRC. Total capital
commitments as of March 25, 1996 (date of formation of the joint venture
company) amounted to US$1,960,000.
<PAGE> -13-
PART II - OTHER INFORMATION
ITEM I - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
During the quarter ending June 30, 1996, the company filed one
report on form 8-K/A, reporting under Item 7, on or about April 1, 1996.
<PAGE> -14-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
REGAL INTERNATIONAL, INC.
(Registrant)
/s/ Mico Chung
----------------------------
Mico Chung, President
/s/ Jim Pang
----------------------------
Jim Pang, Chief Financial Officer
<TABLE> <S> <C>
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<S> <C>
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<PERIOD-END> JUN-30-1996
<CASH> 6471
<SECURITIES> 0
<RECEIVABLES> 2763
<ALLOWANCES> 0
<INVENTORY> 2390
<CURRENT-ASSETS> 13291
<PP&E> 8592
<DEPRECIATION> 0
<TOTAL-ASSETS> 29408
<CURRENT-LIABILITIES> 6912
<BONDS> 0
0
0
<COMMON> 818
<OTHER-SE> 2296
<TOTAL-LIABILITY-AND-EQUITY> 29408
<SALES> 6672
<TOTAL-REVENUES> 6672
<CGS> 4008
<TOTAL-COSTS> 5310
<OTHER-EXPENSES> 644
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 1362
<INCOME-TAX> 1127
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