FORM 10-KSB
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, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-1071589
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization Identification No.)
52/F Bank of China Tower
1 Garden Road
Hong Kong
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (852) 2514-0300
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 Act during the past 12 months
(or for such shorter period that the Registrant was required to file such
report) and (2) has been subject to such filing requirements for the past 90
days.
yes [x] no [ ]
Check if there is no disclosure of delinquent filers 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
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
Revenues for the year ended December 31, 1996 were $4,640,000
The aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant on March 31, 1997 was $413,000.
The aggregate market value was computed by reference to the average bid and
asked prices for the Common Stock on March 31, 1997. Solely for the
purposes of this response, executive officers and directors are considered
the affiliates of the Company at that date.
As of March 31, 1997, 81,806,198 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I.
ITEM 1 - DESCRIPTION OF BUSINESS
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BUSINESS DEVELOPMENT
A. General
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In September, 1996, Regal International, Inc. (the "Registrant" or the
"Company"), which term shall include, when the context so requires, its
subsidiaries, completed a series of transactions which resulted in the
Registrant's acquisition of a new business and disposition of its existing
business assets and liabilities. The information set herein discloses
information required by Form 10-KSB with respect to business of the
Registrant (i) prior to the acquisition of the new business and (ii) after
the sale of the existing business and acquisition of the new assets.
B. Formation and Development of Registrant
---------------------------------------
On May 10, 1982 the Registrant became a separately publicly held
corporation as a result of a spin-off from Texas International Company.
Shareholders of Texas International Company were issued one share of the
Registrant's common stock for each two shares of Texas International's
Common Stock.
The Company changed its state of incorporation to Delaware in March 1982
through a 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 per preferred stock, par value $.10 per share,
("Preferred Stock"). At the November 17, 1987 Annual Meeting, shareholders
voted to increase the authorized number of shares 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 trading
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
registration on the NYSE effective February 9, 1995. The Company's Common
Stock began trading on the NASD Electronic Bulletin Board in August, 1995.
C. Background of Recent Transactions
---------------------------------
On February 19, 1996, the Registrant acquired all the issued and
outstanding shares of Capital Stock of Acewin Profits Limited, a British
Virgin Islands corporation ("Acewin"), from China Strategic Holdings
Limited, a Hong Kong company ("CSH") listed on The Hong Kong Stock Exchange
Limited. Acewin's sole asset is all the issued and outstanding shares of
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 was 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 were 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 Convertible Note was
secured by a Pledge Agreement granting CSH a security interest in the Acewin
Stock. The Convertible Note was fully repaid upon the sale of Acewin Stock,
as described below.
<PAGE>
Immediately following the acquisition of the Acewin Stock and as a
condition thereto, the Registrant sold and transferred the existing
operating assets and real property of the Registrant to a newly formed
corporation, Regal (New) International, Inc. ("New Regal") in exchange for
New Regal's assumption 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 between Registrant and New Regal.
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 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. All the issued and outstanding shares of New Regal were owned by
Harlequin Investment Holdings Limited ("Harlequin"). Harlequin was at the
time of this transaction the beneficial owner of approximately fifty-five
percent (55%) of then currently outstanding shares of the Registrant's
Common Stock. Subsequent to this transaction, Harlequin reduced its
beneficial ownership of the Registrant to less than one percent. See Item
11 - Security Ownership of Certain Beneficial Owners and Item 13 - Certain
Relationships and Related Transactions.
In connection with the above-described transactions, Janak Desai, Nils
Ollquist and Girish 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.
On March 8, 1996, Horler Holdings Limited ("Horler") purchased 40,500,000
shares of common stock representing 49.51% of the then issued and
outstanding share capital of Regal from a major shareholder of the Company
for $1,223,000, thus becoming its major shareholder.
On September 10, 1996, the Registrant acquired all the issued and
outstanding shares of Westronix Limited, a British Virgin Islands
corporation ("Westronix"), from China Strategic Holdings Limited, a Hong
Kong company ("CSH") pursuant to the terms of the Acquisition Agreement
entered into on September 10, 1996. Westronix's sole asset is a 100%
equity interest in China Construction Holdings Limited, a Hong Kong company
("China Construction") which owns 51% joint venture interest in Hangzhou
Zhongche Huantong Development Co., Ltd. ("HZHD"), a Sino-foreign joint
venture established in Hangzhou, Zhejiang Province, the People's Republic of
China ("China") on June 23, 1993. The consideration paid by the Registrant
is a $30 million Convertible Note bearing interest at the rate of nine
percent (9%) per annum after an initial six (6) month interest-free period
(the "Note").
The Note is payable interest only on an annual basis, with all
principal being due and payable on September 10, 1999. The principal and
any unpaid interest due on the Note are convertible into shares of Common
Stock, $0.01 par value, of the Registrant ("Common Stock") at a conversion
price of $0.0302 per share. The consideration for the acquisition of
Westronix was deemed fair pursuant to the fairness report issued by the
independent third party engaged by the Registrant.
CSH from whom the Registrant acquired HZHD, is an affiliate of the
Registrant and the major shareholder of the Registrant's common stock. Three
directors of the Registrant are also the directors of CSH.
On September 11, 1996, the Registrant disposed of all the issued and
outstanding shares of Acewin Profits Limited, a British Virgin Islands
corporation ("Acewin"), to BTR China Holdings B.V., a Netherlands company
(the "Purchaser") pursuant to the terms of the Agreement relating to the
sale and purchase of the entire issued share capital of Acewin (the
"Agreement") entered into on September 11, 1996. Acewin's sole asset was a
100% equity interest in, China Machine Holdings Limited ("China Machine"), a
Hong Kong company, which owned 55% joint venture interest in Wuxi CSI
Vibration Isolator Co., Ltd. ("Wuxi"), a Sino-foreign joint venture
established in September, 1993.
<PAGE>
The consideration paid by the Purchaser consisted of $13,950,000 (the
"Purchase Price"). The major portion of the proceeds were then used to
repay the $13,500,000 Convertible Note payable to Horler Holdings Limited
("Horler"), a wholly-owned subsidiary of CSH, and issued by the Registrant
in connection with the acquisition of Wuxi in February of 1996.
The Board of Directors of the Registrant determined that disposal of
Wuxi was in the best interest of the Registrant and was advantageous to the
Registrant's plans to concentrate the resources of the Registrant in
infrastructure projects in China in connection with the Registrant's recent
acquisition.
As of December 31, 1996, the Company had the following subsidiaries:
Westronix Limited ("WL") - a holding company incorporated in the British
Virgin Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in
Hong Kong and formally known as China Construction International Group
Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. ("HZHD"), a Sino-foreign
equity joint venture located in Hangzhou, Zhejiang Province, China.
The Company holds a 100% interest in WL. WL holds a 100% interest in CCHL
which in turn holds a 51% interest in HZHD.
REGAL INTERNATIONAL, INC.
ORGANIZATION CHART
-----------------------------
| Regal International Inc. |
| (Delaware) |
-----------------------------
| 100%
|
-----------------------------
| Westronix Limited |
| (BVI) |
-----------------------------
| 100%
|
-----------------------------
| China Construction |
| Holdings Limited |
| (Hong Kong) |
-----------------------------
|
| 51%
-----------------------------
| Hangzhou Zhongche |
| Huantong Development Co.|
| Ltd. (PRC) |
-----------------------------
<PAGE>
BUSINESS OF REGISTRANT PRIOR TO SEPTEMBER 10, 1996
- --------------------------------------------------
After February 19, 1996 the Registrant owned, as its sole asset, all the
issued and outstanding capital stock of Acewin, a company which owned all
the outstanding capital stock of CMHL. CMHL was the holder of a 55% interest
in Wuxi CSI. Wuxi CSI was the only operating subsidiary of the Registrant
prior to September 10, 1996. Wuxi CSI, established in September 21, 1993,
was a Sino-foreign joint venture in China between CMHL and Wuxi Vibration
Isolator Factory. Wuxi Vibration Isolator Factory, built in 1960, was 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
Wuxi CSI was the largest vibration isolator producer in China. Wuxi CSI, was
a primary supplier to domestically produced Volkswagens, Peugeots and Audis
developed close ties to China's burgeoning automobile industry.
Wuxi CSI, with registered capital of $8.0 million, occupied 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 was situated in Wuxi City which is located in Southern
Jiangsu 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
international open-port city at the mouth of the Yangtze River.
<PAGE>
Business Of Wuxi CSI Vibration Isolator
- ---------------------------------------
Wuxi CSI was engaged in the manufacture and sale of vibration
isolators, rubber damping materials, stainless steel bellows expansion joint
and similar products, primarily for sale within China. Its primary
customer base was in Shanghai, although the distribution of its sales was
regional. Being located only 128 km. from Shanghai where three (3) of the
largest automobile manufacturers in China produce over 50% of the entire
automobile market of China, Wuxi CSI sold over 70% of its output to Shanghai
Volkswagon.
Wuxi CSI Sales For The Years Ended December 31, 1995 And 1994
- -------------------------------------------------------------
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 produced 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
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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
automobiles, 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
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
Distribution).
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
The complete information of the Company's business prior to September 10,
1996 has been provided in the Company's report on Form 10-KSB for the fiscal
year ending December 31, 1995, which has been filed with the SEC.
<PAGE>
BUSINESS OF REGISTRANT AFTER SEPTEMBER 10, 1996
On September 10, 1996 the Registrant acquired, as its sole asset, all
the issued and outstanding capital stock of Westronix Limited, a company
which owns all the outstanding capital stock of China Construction Holdings
Limited ("CCHL"). CCHL is a holder of a 51% interest in Hangzhou Zhongche
Huantong Development Co., Ltd. ("HZHD"). HZHD is the only operating
subsidiary of the Registrant. HZHD established on June 23, 1993, is a Sino-
foreign joint venture in China between CCHL and its Chinese partner,
Hangzhou City Transportation Development Company.
HZHD has been established to develop the construction project called
"Hangzhou Ring Road". The Hangzhou Ring Road is designed to direct the
congested traffic outside the city of Hangzhou. The city of Hangzhou,
which covers an area of approximately 16,000 square kilometers and has a
population of approximately 5.6 million, is the capital of Zhejiang
Province in China. The city is located about 150 kilometers from Shanghai
and has experienced rapid growth in its light manufacturing industry in
recent years, most notably in electronic instruments, refined chemicals,
machinery and electrical appliances.
Infrastructure projects, like Hangzhou Ring Road, became a priority to the
government of China in recent years. According to directives of the
10-year program (1991 - 2000) of the government of China, one of its key
national goals is to build more basic industry and infrastructure projects
during the 1990s. Preference is given to the construction of the principal
national trunk highways. In addition, highway construction in coastal
regions is prioritized.
The Hangzhou Ring Road was approved as a priority project by the Hangzhou
Municipal Planning Committee in 1992. HZHD has registered capital of RMB200
million and total investment of RMB600 million. China party contributed
RMB98 million by injecting the existing Class 2 toll road, and CCHL
contributed RMB102 million in cash. The principal asset of HZHD is its
100% interest in a 30-year joint venture consisting of the Hangzhou Ring
Road, a three-section toll road surrounding the city of Hangzhou, which is
expected to be fully completed by the end of 1997. Two of the three sections
of the road were already completed by the end of 1996.
When the toll road is fully completed, it will be 38.2 km long and
comprised of:
- -13.2 km of existing Class 2 wide single carriageway linking Jichang
(Airport) Road to Xiangfuqiao. The traffic capacity is estimated at about
20,000 vehicles per day (two way flow).
- -25.0 km of Class 1 construction (6km of four-lane wide single carriageway
with slow lanes and 19km of dual two-lanes with hard shoulders for
emergency) including 21 bridges and three grade-separated junctions. The
implementation of this section of the toll road consists of two phases:
Northwest section (Xiangfuqiao to Liuxai, 13.7 km) which was completed in
December, 1996 and West section (Liuxai to Lingjiaqiao, 11.3 km), which is
under construction and is expected to be completed by the end of fiscal
1997. This section encompasses extensive bridge works including:
* river crossing bridges
* bridges for road interchanges
* underpasses and underground crossings for pedestrians and vehicles
The section of the road from Jichang Road to Xiangfuqiao is now in
operation and has been generating revenues from toll collection from the
toll plazas at Xiangfuqiao. The section from Xiangfuqiao to Liuxai was
completed in 1996 and obtained approval from the government to collect
tolls. The section from Liuxai to Lingjiaqiao is expected to be
completed by the end of 1997. Upon full completion, toll plazas are
expected to operate at Xiangfuqiao (already in operation), Liuxai and
Lingjiaqiao.
The toll plazas are currently utilizing electronic surveillance systems
along with computerized toll collection systems.
The government of Zhejiang Province has approved a toll increase of
100% for the Hangzhou Ring Road, effective from March 1, 1997.
Overview of Transportation Infrastructure in China
- -------------------------------------------------
History
The earliest highway appeared in China at the beginning of this century. Up
to the founding of China in 1949, the country had merely 75,000 kilometers
of highways, most of them cobblestone roads. During the second half of the
century, however, highway construction in China experienced rapid
development. By the end of 1995, total highway mileage had reached 1.14
million kilometers. So far, highways have extended to all counties
throughout the country, and 98 percent of China's townships and 80 percent
of villages have bus service.
China's highway construction after 1949 can be divided into three periods.
The first period was between 1959 and 1957, when emphasis was put on filling
in the main arteries of the country. The second period, 1958-1980,
experienced a rapid popularization of highways throughout the country.
During this period highway mileage increased from 254,600 kilometers to
888,000 kilometers, and 90 percent of all counties and townships were made
accessible by roads.
In the third period, which started in 1981, China is seeking the
popularization of highways with improvements in road quality. Priority is
now given to the latter. With high grade highways and expressways being
built in the remotest areas, highway construction in China entered a period
of rapid development.
Recent Developments
Since the implementation of "reform and opening", along with the transition
from a planned economy to a "socialist market economy", traffic between
different cities and between urban and rural areas in China has increased.
This has resulted in a sharp increase in demand for medium- and short-
distance small-scale freight transport, a large increase in passenger flow
and a steep rise in highway traffic. Many highways have actual volumes of
four to five times more than their designed capacity. Traffic has become an
outstanding bottleneck hindering economic development.
To meet the need of rapid economic development, China's communication
bureaus have shifted emphasis onto the economically developed regions where
there are urgent traffic problems, constructing and renovating roads
radiating from economic centers and coastal areas to neighboring and
hinterland areas. At the same time, in line with the increase in traffic,
highways connecting energy bases, harbors and large and medium-sized cities,
tributary roads to railways, arteries connecting economic zones and
important townships, and tourist highways and roads for poor areas, are to
be built or renovated. In addition, a certain number of expressways will be
constructed according to necessity and possibility.
The construction of the Shenyang-Dalian Expressway in 1987, the first of its
kind in China, has ushered in a new era. So far, more than 20 expressways,
totaling 2,100 kilometers, have been built through China. Completed and
opened on September 1, 1990, it has greatly shortened the time and distance
between the two largest cities in north-eastern China, producing
considerable economic benefit. The Shenyang-Dalian Expressway, the first of
its kind in China, has greatly promoted and accelerated highway and
expressway construction throughout the country, especially in the
economically developed areas. So far China has a total of 33 major
highways, including those still under construction.
Highways in China are no longer the cart roads of the old. They have become
fully facilitated, with smooth surfaces and clear and neat traffic markings.
Sichuan Province, which had very poor transportation, now has a complete
communications network. The expressway connecting Chengdu and Chongqing has
reduced the time between the two cities to a little over three hours.
Compared with the sharp increase in transportation volume, however, highway
construction still lags. To solve this problem, the Chinese government has
mapped out a long-term plan for enhancing the country's communication
network. The plan covers the construction of highways, waterway
transportation and relevant safety systems. According to the key projects
for highway construction in the plan, starting in 1990, a highway network of
12 national arteries totaling 35,000 kilometers has started to be
constructed between Beijing and the provincial capitals, major cities,
important communication hubs and key ports throughout the country to form a
nationwide passageway for rapid transportation.
The 12 arteries that make up the national highway network will include five
north-south highways from Tongjiang to Sanya, Beijing to Fuzhou, Erenhot to
Hekou and Chongqing to Zhanjiang, and seven east-west arteries from Suifenhe
to Manzhouli, Dandong to Lhasa, Qingdao to Yinchuan, Lianyungang to Korgas,
Shanghai to Chengdu, Shanghai to Ruili and Hengyang to Kunming. These
highway arteries will link up more than 200 cities, covering a population of
600 million. They will be able to shoulder more than 20 percent of the
country's total traffic.
These highway arteries will be composed mainly of expressways and grade-1
and grade-2 special roads, well-equipped with complete safety,
telecommunications and administration systems. Many new technologies, with
micro-electronic technologies at the core, will be applied to these
highways. With the help of these instruments, all the necessary information
on the way, including the traffic situation, accidents, road surface
conditions and weather, will be fed back in time to a computer system in the
traffic control center. The information, after being processed, will then
be transmitted back and displayed on the information panels erected along
the roads.
<PAGE>
Raw Materials
- -------------
The raw materials utilized by the Company in construction of the Hangzhou
Ring Road consist mainly of cement, gravel and steel rebar. The third and
final section of the Hangzhou Ring Road, currently under construction, is
being built by a general construction firm hired by the Company. The
general contractor is responsible for procuring all raw materials necessary
for completion of the project, and has not experienced shortages of any raw
materials.
In general, the cement industry in China is competitive and supply shortages
are rare. Since there is a lack of obvious product differentiation,
manufacturers compete based primarily on price and timely delivery.
Currently, there are approximately 7,700 cement plants in China, of which 67
are state-owned enterprises and are capable of producing high grade cement.
The average annual output of these plants is approximately 660,000 tons.
The production cost of cement in China varies with regions, ranging from
RMB150 to RMB250 per ton. Fuel and electricity account for 40% of the total
production cost, while labor accounts for only about 5% of the total
production cost. Since 1993, the government has relaxed state control of
cement prices and allowed cement prices to fluctuate according to market
condition determined by demand and supply. The uneven distribution of
resources and differences in the pace of economic development in different
regions of China, creates the movement of cement prices. In the southeast
coastal provinces and the Yangtze river valley, the average price is
comparatively higher than the national level.
Since 1978 the Chinese steel industry has grown rapidly. At the end of 1992
there were 1,744 iron and steel enterprises in China (including mining
companies) and 3.8 million iron and steel workers as compared with 1,322
companies and 2.4 million workers in 1980. From 1980 through 1992, steel
production increased at a compound annual growth rate of 6.7% with growth of
13.9% in 1992 and 16.2% in 1993. In 1994, with total steel production of
91.5 million tons, China became the world's second largest steel producer
behind Japan.
The rate of growth in steel production in China also increased. This
accelerated growth is primarily due to the fact that, under China's new
economic policies, demand for steel as a raw material for various industries
and to build and rebuild China's infrastructure has increased substantially.
Furthermore, with changes in the pricing system, profitability has improved
and production capacity has increased accordingly.
Since 1980, steel-making technology in China has experienced significant
improvements. Measures have been taken to modernize steel enterprises by
merging and expanding existing facilities and improving and upgrading
technologies.
Although in the past three years the steel industry has grown rapidly with
an annual average increase in production of 16%, domestic supply
is still far from meeting demand. Therefore China must continue to import a
certain amount of steel from foreign sources. During periods when
importation is permitted the steel products producers in China generally
experience decreased sales, as currently the Chinese steel industry cannot
compete with producers of imported steel products with respect to price and,
in some cases, quality.
Management and Employees
- ------------------------
The Board of Directors of HZHD consists of seven members; three directors
appointed by China partner and four directors appointed by the Hong Kong
partner, CCHL. The General Manager, who reports directly to the Board of
Directors of HZHD, is responsible for the day-to-day operations of the joint
venture. HZHD employs approximately 140 employees on a full time basis.
<PAGE>
Competition
- -----------
The Company's potential depends on its ability to identify and implement
attractive transportation infrastructure development opportunities in
China and to negotiate successfully to enter into joint ventures to develop or
operate such projects. In this regard, the Company faces competition from
infrastructure development businesses currently operating in China, and in
addition from foreign investors who may wish to invest in infrastructure
projects, thereby competing with the Company.
With respect to transportation infrastructure projects such as toll roads,
there is no assurance that alternate routes which avoid toll charges or a
charge lower toll will not be built.
In late 1995, the Hangzhou section of the Shanghai-Hangzhou Expressway was
opened. The Company expects, based on the report from its traffic
consultant, that this would cause diversion of traffic from the Hangzhou
Ring Road and would reduce the flow through the southern toll plaza of the
Hangzhou Ring Road by approximately 30%. On the other hand, the opening of
the north-western and western sections of the Hangzhou Ring Road would
provide new traffic sources. Furthermore, the Hangzhou Ring Road will also
be used by local traffic and as the city of Hangzhou develops, this
component of traffic is expected to grow. In addition, on the opening of
the north-western and western sections of the Hangzhou Ring Road, heavy
vehicles will be discouraged from proceeding on the road going through the
city, and thus diversion to the Hangzhou Ring Road can be expected to be
high, since about half of the vehicles will be affected by the restrictions
on entering Hangzhou.
The Company is also facing competition from the Hangzhou section of the
Shanghai - Ningbo Expressway, which was opened in 1996. The diversion of
traffic from the Hangzhou Ring Road resulted in reduction of traffic
volume from 6.1 million vehicles in 1995 to 5.2 million vehicles in 1996.
The Company believes that, despite competition, the need of China for
further transportation infrastructure projects will continue to provide
opportunities for the Company to participate in that will yield a
satisfactory return.
Research and Development
- ------------------------
The Company did not engage in any research and development activities with
respect to its infrastructure project in fiscal 1996.
Distributions From HZHD
- -----------------------
Applicable Chinese laws and regulations require that, before a Sino-
foreign equity joint venture enterprise (such as each Operating Subsidiary)
distributes profits to investors, it must: (1) satisfy all tax liabilities;
(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. Since the establishment of HZHD joint venture, each
year the Company generated profits. However, each year both joint venture
partners have agreed to retain the profits within the joint venture.
Operating In China
- ------------------
ECONOMIC POLICIES. General economic conditions in China could have a
significant impact on the Company's Hangzhou Ring Road project. 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 involvement, resource allocation, rate
of inflation and balance of payments position. 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 policies have increased
emphasis on the utilization of market forces and rapid growth of the Chinese
economy. The success of the Company's infrastructure project depends in part
on the continued economic growth of China.
<PAGE>
INFLATION. The general inflation rate in China was approximately
21.7%, 14.8% and 6.3% per annum in 1994, 1995 and 1996 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. 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 various 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.
FOREIGN CURRENCY EXCHANGE. Prior to January 1, 1994, all foreign
exchange transactions involving Renminbi ("Rmb") in China had to take
place either through authorized financial institutions at the official
exchange rate set by the State Administration of Exchange Control ("SAEC"),
the department of the government of China responsible for foreign exchange
administration or at local swap centers at exchange rates largely determined
by supply and demand. However, transactions effected through swap centers
still required the prior approval of the SAEC.
On January 1, 1994, the government of China implemented a controlled
floating exchange rate system based on market supply and demand and
established a managed 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 furtherance 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 China (including
Sino-foreign equity and cooperative 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 China Regarding Foreign Exchange Control (the "Regulations") which came
into effect on April 1, 1996. Pursuant to the Regulations, conversion of RMB
into foreign exchange for the use of recurring items, including the
distribution of dividends and profits to foreign investors of joint
ventures, is permissible. FIEs are permitted to remit its foreign exchange
from its foreign exchange bank account in China 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
investment 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 8.33 and Rmb 8.29 to $1.00 in 1996.
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese Constitution, adopted in 1989, authorizes
foreign 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
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
<PAGE>
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
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced 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 jurisdiction. As the Chinese legal system develops, the
promulgation of new laws, changes to existing laws and the preemption of
local regulations by national laws may adversely affect foreign investors,
such as the Registrant.
HZHD's activities in China may be subject, in some cases, to
administrative review and approval by various national, provincial and
municipal authorities of the Chinese government. While China has promulgated
an administrative 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 HZHD
- -----------------------
Hangzhou Zhongche Huantong Development Company, Ltd. 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 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
returns of the joint venture in proportion to the joint venture interests
that they hold. The operations of equity joint ventures are subject to an
extensive 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
government 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. HZHD will be fully
exempted from Chinese state unified income tax of 30% as well as the local
income tax of 3% 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.
Governance, Operations And Dissolution
- --------------------------------------
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
association. Pursuant to the joint venture contracts and articles of
association of HZHD, it has a 30-year term and is governed by a Board of
Directors consisting of seven members appointed for 4-year terms. CCHL
appoints four directors, including the chairman, to HZHD, while the Chinese
joint venture partner appoints the remaining three directors, including the
Vice Chairman.
The Board of Directors of HZHD exercises authority by majority vote
over major corporate decisions, including the appointment of officers,
strategic planning, budgeting, employee compensation and welfare and
distribution of after-tax profits. Management of HZHD is conducted by a
management committee headed by a General Manager and one or two Deputy
General Managers, who act on behalf of HZHD pursuant to the direction and
guidance of its Board of Directors.
Pursuant to relevant Chinese Law, certain major actions of HZHD require
unanimous approval by all the directors present at the meeting called to
decide upon the following actions: amendments to it's 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
dissolution of the enterprise.
<PAGE>
HZHD is subject to the Sino-foreign Equity Joint Venture Enterprise
Labor Management Regulations. In compliance with these regulations, the
management may hire and discharge employees and make other determinations
with respect to wages, welfare, insurance and discipline of its employees.
Pursuant to the Equity Joint Venture Law, Sino-foreign equity joint
venture enterprises may be terminated in certain limited circumstances,
including 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 enterprise's assets by the government. Upon termination, the Board of
Directors establishes a liquidating committee to dissolve the enterprise,
which dissolution is subject to government review and approval.
Resort to Chinese courts to enforce a joint venture contract or to
resolve disputes between the parties over the terms of the contracts is
permissible. In practice, however, disputes between the parties are
resolved by negotiation. The Company believes that it has a good working
relationship with its joint venture partner and that it will be able to
reach agreements with it on business policies and decisions for HZHD.
Government Regulations
- ----------------------
Any increase in toll rates proposed by HZHD is subject to approval by the
Hangzhou Municipal Government and City of Hangzhou Transportation
Department. There are no assurances that such proposals will be approved by
these government authorities. If such proposals are denied, toll revenues
of HZHD will be reduced.
The government of Zhejiang Province has approved a toll increase of
100% for the Hangzhou Ring Road, effective from March 1, 1997.
Compliance with Environmental Laws
- ----------------------------------
HZHD is not aware of any Chinese government environmental regulations which
would have an adverse impact on the Company's operations.
ITEM 2 - DESCRIPTION OF PROPERTIES
- ----------------------------------
As of March 31, 1997, the Company had no office or facility for U.S.
operations. The Company shares the office space at 52/F, Bank of China
Tower, 1 Garden Road, Hong Kong and administrative support, with China
Strategic Holdings Limited, a major shareholder of the Company ("CSH"). In
fiscal 1996, the Company was charged RMB 1.29 million by CSH as a management
fee for the use of the office space and staff support.
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, 1996.
<PAGE>
PART II.
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------
The registrant's Common stock was listed on the New York Exchange
("NYSE") (symbol : RGL) until December 7, 1994, at which time the NYSE
suspended trading since the Registrant did not meet the continued listing
requirements. On February 9, 1995, the Common Stock was removed from
registration and listing on the NYSE. The Registrant's Common Stock
began trading on the NASD Electronic Bulletin Board since August 1995. The
following table sets forth the high and low prices of the Common Stock as
reported in the consolidated transaction reporting system during the
periods indicated :
Quarter Ended High Low*
- ------------------- ------- ------
March 31,1996 0.0499 0.01
June 30, 1996 0.1 0.01
September 30, 1996 0.03 0.01
December 31, 1996 0.03 0.001
* The low price reflects the average of the bid and asked prices.
As of March 31, 1997, there were approximately 9,000 holders of record of
the shares of the Registrant's Common Stock.
Dividend Policy
- ---------------
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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
- ------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- -----------------------
The following table presents the selected financial information of the
Registrant as of and for the years ended December 31, 1994, 1995 and 1996
assuming that the Registrant had owned the shares of Westronix Limited in
1994 and 1995. The information was extracted from the audited consolidated
financial statements of Regal International, Inc. and subsidiaries prepared
under US GAAP.
Summary of Financial Results - 1994, 1995 & 1996
Income Statement 1994 1995 1996
- ----------------------- ---- ---- ----
(Amount in thousands) RMB USD RMB USD RMB USD
--- --- --- --- --- ---
Toll revenue 37,614 4,457 37,206 4,472 38,463 4,640
Income from continuing
operations 17,376 2,059 14,704 1,767 13,411 1,618
Net income 12,790 1,515 14,939 1,796 11,876 1,433
Balance Sheet 1995 1996
- ---------------------- ---- ----
(Amount in thousands) RMB USD RMB USD
--- --- --- ---
Current assets 44,873 5,393 35,610 4,296
Total assets 425,523 51,145 656,911 79,242
Current liabilities 32,995 3,966 124,206 14,985
Long-term bank loans 97,500 11,719 179,500 21,652
Shareholders' equity (190,593) (22,908) (82,298) (9,927)
____________________
(a) The U.S. dollar conversion translation amount have been translated
using the unified exchange rate quoted by the Bank of China on December 31,
1994, 1995 and 1996 of $1.00 =Rmb 8.44, $1.00 = Rmb 8.32 and $1.00 = Rmb
8.29 respectively. No representation is made that the Renminbi amounts could
have been, or could be, converted into United States Dollars at those rate
on December 31, 1994, 1995 and 1996 or at any other certain rate.
Overview
- --------
The year 1996 marked a substantial change in the business of the Company. In
an effort to benefit from the growing Chinese economy, management decided to
dispose of the oil exploration equipment supply operation and acquire the
Hangzhou toll road in September of 1996. The Company had thereby redirected
its focus from the US industrial product market to the infrastructure
project investment in China.
As of December 31, 1996, Regal International Inc. (the "Company") had the
following subsidiaries (the Company together with its subsidiaries shall be
collectively referred to as the "Group").
Westronix Limited ("WL") - A holding company incorporated in the British
Virgin Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in
Hong Kong, formally known as China Construction International Group
Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary"
or "Hangzhou Toll Road"), a Sino-foreign equity joint venture located in
Hangzhou, Zhejiang province.
Results of Operation - 1996 compared to 1995
- --------------------------------------------
Summary Financial Information
- -----------------------------
% change
(Rmb in thousands) 1995 1996 from prior year
--------- --------- ---------------
Toll revenue 37,206 38,463 3.4%
General and administrative expenses 10,516 15,646 48.8%
Exchange gain 1,101 350 (68.2%)
Net income 14,939 11,876 (20.5%)
Toll Revenue
- ------------
Toll revenue increased 3.4% to Rmb 38.5 million in 1996 from Rmb 37.2
million in 1995. This was primarily attributable to an average increase of
toll fees by approximately 50%, partially offset by a decrease in traffic
flows. Competition from the Hangzhou section of the Shanghai - Ningbao
Expressway, which was opened this year, resulted in reduction of traffic
volume from 6.1 million vehicles in 1995 to 5.2 million vehicles in 1996.
The management believes the impact has already been reflected in 1996.
Further decrease of vehicle flows is unlikely. Management is also
optimistic about the future revenue generation ability of Hangzhou Toll Road
as the second phase of the toll road had been completed and started to
collect toll revenue from March, 1997. The toll rates for the second phase
is about double the toll rates for the first phase. In addition, the third
and final phase of the toll road is expected to be completed by the end of
1997 and should start to generate revenues in the 1998 fiscal year.
General and Administrative Expenses
- -----------------------------------
As compared with last year, general and administrative expenses went up
48.8% to Rmb 15.6 million. This is due to the fact that additional
professional fees were incurred in 1996 and additional interest expenses
incurred by the US$ 13.5 million convertible note in excess of the interest
income generated from the US$900,000 note receivable. Also, a management
fee of approximately US$155,000 has been charged by China Strategic Holdings
Limited for the year. As far as the Operating Subsidiary is concerned,
general and administrative expenses as a percentage of toll revenue remained
flat and has remained around 28% for the past two years.
Exchange Gain
- -------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year
end revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past three years due to
continual strengthening of Renminbi.
The exchange rates for Renminbi against U.S. Dollars were 8.44, 8.32 and
8.29 for 1994, 1995 and 1996 respectively, representing an appreciation of
Renminbi by 1.4% and 0.4% in 1995 and 1996 respectively, when comparing the
exchange rate at the end of the year with the position at the beginning of
the year. As a consequence, exchange gain dropped substantially from Rmb 1.1
million of a year earlier to Rmb 0.35 million this year.
Net Income
- ----------
Net income fell 20.5% to Rmb 11.9 million in 1996 from Rmb 14.9 million in
1995. This was attributable to the combined effect of increased general
and administrative expenses, a decrease in exchange gain and a loss from
discontinued operations.
Loss from discontinued operations represents the operating loss of Regal
Bell and Rubber up to the date of disposal which amounted to approximately
Rmb972,000. Net income in 1996 included a net gain on disposal of
investment of approximately Rmb3,730,000.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
In 1996, net cash provided by operating activities and financing activities
was approximately Rmb 3.1 million and Rmb 171.3 million respectively. Net
cash used in investing activities amounted to Rmb 175.1 million, resulting
in a net decrease in cash and cash equivalents of Rmb 0.7 million.
For the past three years, the Company had been able to generate sufficient
cash for its working capital needs. Net cash provided by operating
activities dropped substantially from Rmb 48.9 million in 1995 to Rmb 3.1
million in 1996 principally due to the combination of increases in other
receivables by approximately Rmb 13.4 million and a decrease in accounts
payable by Rmb 11.4 million in 1996. The major contributor to the increase
in other receivables was the notes receivable arising from the disposal of
Regal Bell and Rubber to New Regal.
During the year, the Company incurred capital expenditures of Rmb 216.9
million which was financed through bank borrowings and loans from the
Chinese joint venture partner amounting to Rmb 140.0 million and Rmb 30.8
million respectively.
As of December 31 1996, the Operating Subsidiary had outstanding capital
commitments for construction contracts of approximately Rmb 91.8 million.
The Operating Subsidiary has been able to raise funds from banks for
financing the construction of the second and third phases of the toll road
which are expected to be completed by the end of fiscal year 1997. Hangzhou
Toll Road will collect toll revenue from all three phases of the toll road.
Given its sound credit history and good banking relationships, management
believes that the Operating Subsidiary will have access to adequate
borrowingfacilities to meet its cash requirements in the foreseeable future.
Effects of Inflation
- --------------------
The general inflation rate in terms of the Retail Price Index in China was
approximately 21.7%, 14.8%, and 6.3% for 1994, 1995 and 1996 respectively.
Management believes that inflation has not had significant impact on the
Operating Subsidiary. Inflation has resulted in upward pressure on wages and
salaries for employees and other operating expenses at the Operating
Subsidiary. However, management does not expect inflation to have a material
effect on profit margins and income, since it has been able to pass on such
cost increments to toll road users by increasing toll rates.
<PAGE>
Results of Operation - 1995 compared to 1994
- --------------------------------------------
Summary Financial Information
- ------------------------------
% change
(Rmb in thousands) 1994 1995 from prior year
-------- --------- ----------------
Toll Revenue 37,614 37,206 (1.1%)
General and administrative expenses 9,616 10,516 9.4%
Exchange gain 3,154 1,101 (65.1%)
Net Income 12,790 14,939 16.8%
Toll Revenue
- ------------
Toll revenue decreased slightly by 1.1% to Rmb 37.2 million in 1995 from Rmb
37.6 million in 1994. There was no material change in toll fees and traffic
volume during the year.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses went up 9.4% to Rmb 10.5 million. As a
percentage of toll revenue, these costs also increased from 25.6% in 1994 to
28.3% in 1995 which was caused by the slight increase of the operation of
Hangzhou Toll Road during 1995.
Exchange Gain
- --------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year
end revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past two years due to
continual strengthening of Renminbi.
The appreciation of the Renminbi in 1995 had slowed down as compared with
the magnitude of upward movement in 1994. As a result, exchange gains in
1995 fell to Rmb 1.1 million from Rmb 3.2 million in 1994.
Net Income
- ----------
Net income increased 16.8% to Rmb 14.9 million in 1995 from Rmb 12.8 million
in 1994. This was mainly due to income of approximately Rmb 235,000 from the
discontinued operations as recorded in 1995, versus a loss of approximately
Rmb 4.6 million from discontinued operations recorded in 1994.
Liquidity and Capital Resources
- -------------------------------
In 1995, net cash provided by operating activities and financing activities
was approximately Rmb 48.9 million and Rmb 69.4 million respectively. Net
cash used in investing activities amounted to Rmb 167.1 million, resulting
in a net decrease in cash and cash equivalents of Rmb 48.8 million.
The Company was able to generate sufficient cash for its working capital
needs. Net cash provided by operating activities increased substantially
from approximately Rmb 36.1 million in 1994 to approximately Rmb 48.9
million in 1995, principally due to an increase in accounts payable of Rmb
20.4 million and partially offset by the reduction in operating income of
Rmb 2.7 million in 1995.
During 1995, the Company incurred capital expenditures of Rmb 166.2 million.
Funds for capital expenditure primarily came from bank borrowings and cash
provided by operating activities.
As of December 31, 1995, the Operating Subsidiary had outstanding capital
commitments for construction contracts of approximately Rmb 228.3 million.
The Operating Subsidiary was able to raise sufficient funds from banks to
finance its projects. Given its sound credit history, future cash generating
ability and superior banking relationships, management believes that the
Operating Subsidiary will have access to adequate borrowing facilities to
meet its cash requirements in the foreseeable future.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Financial Statements and Supplementary Data for the Registrant for
the period ended December 31, 1996, 1995 and 1994 are set forth hereto and
made a part hereof.
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
============================================
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AS OF DECEMBER 31, 1995 AND 1996
--------------------------------
TOGETHER WITH AUDITORS' REPORTS
-------------------------------
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Regal International, Inc.:
We have audited the accompanying consolidated balance sheets of Regal
International, Inc. and its subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of income, cash flows and changes
in shareholders' equity for the years ended December 31, 1994, 1995 and
1996, expressed in Chinese Renminbi. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. We
did not, however, audit the financial statements of Regal International,
Inc., Regal Rubber Products, Inc., and Bell Petroleum Services, Inc.
("Regal Inc., Regal Rubber and Bell" respectively), as of and for the
years ended December 31, 1994 and 1995. Regal Inc., acquired Westronix
Limited in 1996 in a transaction accounted for as a transfer of assets
between companies under common control and also disposed of Regal Rubber
and Bell, as discussed in more detail in Note 1 to the accompanying
consolidated financial statements. The financial statements
of Regal Inc., Regal Rubber and Bell are included in the consolidated
financial statements of Regal Inc., as of and for the years ended December
31, 1994 and 1995 and reflect total assets and total income of
approximately 5.2 percent and 1.6 percent, respectively of the related
consolidated totals for 1995, and approximately 26.4 percent of the
related consolidated income for 1994. Those statements were audited by
other auditors whose reports have been furnished to us and our opinion on
the consolidated financial statements of the respective years, insofar as
it relates to the amounts included for those entities, is based solely on
the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the reports of other auditors
provide a reasonable basis for our opinion.
The reports of the other auditors referred to above on the financial
statements of Regal Inc., Regal Rubber and Bell for the year ended
December 31, 1995, dated February 9, 1996, included an explanatory
paragraph on the ability of these companies to continue to operate as a
going concern. However, in our opinion, this matter has been resolved by
developments at the Company subsequent to the report issuance date which
are explained in Note 1 to the accompanying consolidated financial
statements.
In our opinion, based on our audit and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Regal International, Inc.
and its subsidiaries as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for the years ended December 31,
1994, 1995 and 1996 in conformity with generally accepted accounting
principles in the United States of America.
Hong Kong,
March 6, 1997.
1
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
(Amounts in thousands, except number of shares and earnings per common share)
<CAPTION>
Years ended December 31,
--------------------------------------------------
1994 1995 1996 1996
----------- ----------- ----------- -----------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Toll revenue 37,614 37,206 38,463 4,640
General and administrative expenses (9,616) (10,516) (15,646) (1,887)
Exchange gain 3,154 1,101 350 42
Net gain on disposal of investment - - 3,730 450
----------- ----------- ----------- -----------
Income from continuing
operations before income taxes
and minority interests 31,152 27,791 26,897 3,245
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Income from continuing
operations before minority
interests 31,152 27,791 26,897 3,245
Minority interests (13,776) (13,087) (13,486) (1,627)
----------- ----------- ----------- -----------
Income from continuing
operations 17,376 14,704 13,411 1,618
Income/(Loss) from discontinued
operations (4,586) 235 (1,535) (185)
----------- ----------- ----------- -----------
Net income 12,790 14,939 11,876 1,433
=========== =========== =========== ===========
Earnings per common share (Primary):
-from continuing operations 0.33 0.18 0.16 0.02
-from discontinued operations (0.09) - (0.01) -
----------- ----------- ----------- -----------
0.24 0.18 0.15 0.02
=========== =========== =========== ===========
Earnings per common share (Fully
diluted):
-from continuing operations 0.017 0.014 0.012 0.001
-from discontinued operations (0.005) - (0.001) -
----------- ----------- ----------- -----------
0.012 0.014 0.011 0.001
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 53,330,164 81,806,198 81,806,198 81,806,198
=========== =========== =========== ===========
</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 December 31, 1996 of US$1.00
= Rmb8.29. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States Dollars at that rate on
December 31, 1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated
statements of income.
2
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF
---------------------------------
DECEMBER 31, 1995 AND 1996
--------------------------
(Amounts in thousands, except number of shares and share data)
<CAPTION>
Years ended December 31,
-------------------------------------
1995 1996 1996
----------- ----------- -----------
ASSETS Rmb Rmb US$
- -------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 22,172 21,443 2,587
Prepayments and deferred expenses 452 469 57
Other receivables and other current assets 300 13,698 1,652
Net assets of discontinued operations 21,949 - -
----------- ----------- -----------
Total current assets 44,873 35,610 4,296
----------- ----------- -----------
Prepayments for construction-in-progress 29,789 9,942 1,199
Property, plant and equipment, net 350,861 611,359 73,747
----------- ----------- -----------
Total assets 425,523 656,911 79,242
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Current liabilities
Long-term bank loans - current portion - 58,000 6,996
Accounts payable 21,195 9,767 1,178
Accrued expenses and other payables 10,193 56,325 6,794
Taxes other than income 107 114 17
Due to related companies 1,500 - -
----------- ----------- -----------
Total current liabilities 32,995 124,206 14,985
----------- ----------- -----------
Long-term bank loans 97,500 179,500 21,652
Convertible note payable 249,600 249,600 30,108
Due to Chinese joint venture partner 10,500 41,318 4,984
Due to China Strategic Holdings Limited 96,840 2,418 291
Minority interests 128,681 142,167 17,149
Commitments and contingency (Notes 6 & 14)
Shareholders' equity:
Common stock, par value US$0.01 each;
150,000,000 shares authorized; 81,806,198
shares outstanding 6,806 6,806 821
Additional paid-in capital (80,646) 15,773 1,903
Accumulated deficits (116,753) (104,877) (12,651)
----------- ----------- -----------
Total shareholders' equity (190,593) (82,298) (9,927)
----------- ----------- -----------
Total liabilities and shareholders' equity 425,523 656,911 79,242
=========== =========== ===========
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1996 of US$1.00 = Rmb8.29. No representation
is made that the Renminbi amounts could have been, or could be, converted into United States Dollars
at that rate on December 31, 1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated balance sheets.
3
</TABLE>
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
(Amounts in thousands)
<CAPTION>
Years ended December 31,
--------------------------------------------------
1994 1995 1996 1996
----------- ----------- ----------- -----------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income
Income from continuing operations 17,376 14,704 13,411 1,618
Income/(Loss) from discontinued operations (4,586) 235 (1,535) (185)
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 13,776 13,087 13,486 1,627
Depreciation and amortization 3,740 4,298 4,117 497
Loss on disposal of fixed assets - 19 - -
(Increase) Decrease in assets:
Prepayments and deferred expenses 65 146 (18) (2)
Other receivables and other current assets 3,255 (239) (13,397) (1,616)
Increase (Decrease) in liabilities:
Accounts payable 840 20,355 (11,428) (1,379)
Accrued expenses and other payables 1,648 (3,708) (1,570) (189)
Taxes other than income 17 (7) 7 1
----------- ----------- ----------- -----------
Net cash provided by operating activities 36,131 48,890 3,073 372
----------- ----------- ----------- -----------
Cash flows from investing activities:
Prepayments for construction-in-progress (28,240) (982) 19,846 2,394
Acquisition of property, plant and equipment (41,681) (166,230) (216,912) (26,166)
Changes in net assets of discontinued operations (3,411) 80 21,949 2,648
----------- ----------- ----------- -----------
Net cash used in investing activities (73,332) (167,132) (175,117) (21,124)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds of bank loans 35,500 117,445 140,000 16,888
Repayment of bank loans (9,500) (55,945) - -
Due to related companies 2,500 (1,000) (1,500) (181)
Due to Chinese joint venture partner (25,248) 10,500 30,818 3,717
Due to China Strategic Holdings Limited 68,252 (1,601) 1,997 240
Proceeds from issuance of capital stock 184 - - -
Conversion of preferred stock to common stock 1,490 - - -
Conversion of debt to common stock 6,665 - - -
----------- ----------- ----------- -----------
Net cash provided by financing activities 79,843 69,399 171,315 20,664
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 42,642 (48,843) (729) (88)
Cash and cash equivalents, at beginning of year 28,373 71,015 22,172 2,675
----------- ----------- ----------- -----------
Cash and cash equivalents, at end of year 71,015 22,172 21,443 2,587
=========== =========== =========== ===========
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 December 31, 1996 of US$1.00 = Rmb8.29. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1996 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated statements
of cash flows.
4
</TABLE>
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
(Amounts in thousands, except number of shares)
<CAPTION>
Shares of
Convertible Shares of
Preferred Common
Stock Stock Additional
(US$0.1 par (US$0.01 par Preferred and Paid-in Accumulated
value) value) Common Stock Capital Deficits Total
----------- ----------- ----------- ----------- ----------- -----------
Number Number Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 2,630,134 53,330,164 6,625 (88,801) (144,482) (226,658)
Conversion of
preferred stock to
common stock (2,630,134) 8,423,952 (1,487) 1,490 - 3
Conversion of debt to
common stock - 20,052,082 1,668 6,665 - 8,333
Net income - - - - 12,790 12,790
----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1994 - 81,806,198 6,806 (80,646) (131,692) (205,532)
Net income - - - - 14,939 14,939
----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1995 - 81,806,198 6,806 (80,646) (116,753) (190,593)
Contribution by China
Strategic Holdings
Limited ("CSH") - - - 96,419 - 96,419
Net income - - - - 11,876 11,876
----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1996 - 81,806,198 6,806 15,773 (104,877) (82,298)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements
of changes in shareholders' equity.
5
</TABLE>
<PAGE>
REGAL INTERNATIONAL, INC. 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
- -----------------------------------------
Regal International, Inc. ("Regal" or the "Company") was incorporated in the
State of Delaware, the United States of America and is listed on the
National Association of Securities Dealers Electronic Bulletin Board ("NASD")
with an authorized share capital of US$1.5 million or 150 million shares of
US$0.01 each.
Pursuant to an Acquisition Agreement dated February 8, 1996 between Regal,
Acewin Profits Limited ("AP"), a British Virgin Islands corporation and
China Strategic Holdings Limited ("CSH"), a company incorporated in Hong
Kong and is listed on The Stock Exchange of Hong Kong Limited, Regal
acquired all the issued and outstanding shares of AP at a consideration of
US$13.5 million satisfied through the issuance of a US$13.5 million
Convertible Note (the "Convertible Note A") by Regal to Horler Holdings
Limited ("Horler"), a Hong Kong company and a wholly-owned subsidiary of
CSH, bearing interest at 9% perannum after an initial 6-month interest-free
period. AP was a wholly-owned subsidiary of CSH before the transfer and
AP's sole asset was a 55% equity interest in Wuxi CSI Vibration Isolator Co.
Ltd., a Sino-foreign equity joint venture incorporated in China, held
through an intermediate Hong Kong company, China Machine (Holdings) Limited.
On February 15, 1996, CSH appointed three directors to fill vacancies on the
Board of Directors created by the resignation of three out of the five
directors of Regal effective on the date of consummation of the transaction
whereby Regal acquired all the outstanding share capital of AP. On March 8,
1996, Horler purchased 40,500,000 shares of common stock representing 49.51%
of the then issued and outstanding share capital of Regal from a major
shareholder of the Company thus becoming its major and controlling
shareholder.
Pursuant to a Purchase Agreement dated September 11, 1996 between Regal, an
unrelated company incorporated in the Netherlands and CSH, Regal sold all
the issued and outstanding shares of AP at a consideration of US$13.95
million. The proceeds were then used to repay the Convertible Note A
principal of US$13.5 million, on September 13, 1996. The realized gain of
US$450 on the disposal of AP has been included as part of "Net gain on
disposal of investment" in the Company's consolidated statements of income
for the year ended December 31, 1996.
Pursuant to another Asset Purchase Agreement ("the Agreement") dated
February 8, 1996 between Regal and Regal (New) International, Inc. ("New
Regal"), the Company sold and transferred the operating assets and real
property of Regal existing as of January 31, 1996 to New Regal in exchange
for US$2.5 million and New Regal's assumption of all liabilities incurred,
accrued or arising from the Operations of Regal, prior to the closing date
of this transaction, other than the Convertible Note A.
6
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Pursuant to the Agreement, the US$2.5 million portion of the purchase price
was paid as follows: US$800 in cash and the balance by delivery of two
promissory notes, one in the principal amount of US$900 (the "US$900 Note")
and the second in the principal amount of US$800 (the "US$800 Note"). The
US$900 Note bears interest at 9% per annum and is payable in sixty equal
monthly installments of principal and interest. The US$800 Note bears no
interest and is due and payable in one installment on January 31, 2001. The
realized loss in connection with this transaction amounted to approximately
US$69 and has been included as part of "Income/(Loss) from discontinued
operations" in the Company's consolidated statements of income for the year
ended December 31, 1996.
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal,
Westronix Limited ("WL"), a wholly owned subsidiary of CSH, Regal acquired
all the issued and outstanding shares of WL at a consideration of US$30
million to be satisfied through the issuance of a US$30 million Convertible
Note (the "Convertible Note B") by Regal to Horler 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 B can be converted into
shares of the Common Stock of Regal ("Common Stock") at a conversion price
of US$0.0302 per share. On conversion, CSH would hold approximately 96.16%
of the outstanding shares of the Company. WL's sole asset is a 51% equity
interest in Hangzhou Zhongche Huantong Development Co. Ltd., a Sino-foreign
equity joint venture incorporated in China, held through an intermediate
Hong Kong company, China Construction Holdings Limited.
As of December 31, 1996, the Company had the following subsidiaries:
Westronix Limited ("WL") - a holding company incorporated in the British
Virgin Islands).
China Construction Holdings Limited ("CCHL") - a company incorporated in
Hong Kong and was formally known as China Construction International Group
Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary"
or "Hangzhou toll road"), a Sino-foreign equity joint venture located in
Hangzhou, Zhejiang Province, China).
The Company holds a 100% interest in WL. WL was incorporated on July 3,
1996 with an authorized share capital of 50,000 shares with a par value of
US$1 each. One share was issued at par value to CSH which was subsequently
transferred to Regal pursuant to a shareholder's resolution dated September
10, 1996. WL, holds a 100% interest in CCHL which in turn holds a 51%
interest in Hangzhou toll road. WL's interest in CCHL and Hangzhou toll
road was transferred from CSH pursuant to a shareholders' resolution dated
August 28, 1996.
7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Hangzhou toll road is a Sino-foreign equity joint venture enterprise
established on June 23, 1993, which formally began business operations in
September 1993 in China. The total cash consideration paid by CCHL for
its interest in Hangzhou toll road amounted to Rmb 102 million. Tolls
collected from the existing portion of the toll road ("the first phase"),
which was injected by the Chinese joint venture partner, Hangzhou City
Transportation Development Company, and cash injected by CSH will be used to
finance the construction of the second and third phases of the toll road
(the "CIP Projects") which are expected to be completed by the end of fiscal
year 1997. Hangzhou toll road will collect toll from all three phases of
the toll road after the CIP Projects are completed.
Key provisions of the joint venture agreement of Hangzhou toll road include:
* the joint venture period is 30 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 CCHL and 3
designated by Hangzhou City Transportation Development Company.
The acquisition of the Operating Subsidiary by CCHL was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Operating Subsidiary are included
in the consolidated statements of income from the effective date of the
joint venture, June 23, 1993. No revenue was generated from the toll road
before the formation of the joint venture.
Hangzhou toll road operates in China and accordingly is subject to special
considerations and significant risks not typically associated with
investments in equity securities of United States and Western European
companies. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
These are described further in the following paragraphs:
Political Environment
The value of the Company's interests in the Operating Subsidiary may be
adversely affected by changes in policies by the Chinese government
including, among others: changes in laws, regulations or the interpretation
thereof; confiscatory taxation; restrictions on foreign currency conversion,
imports or sources of suppliers; or the expropriation or nationalization of
private enterprises.
8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Economic Environment
The economy of China differs significantly from the economies of the
United States and Western Europe in such respects as structure, level of
development, gross national product, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation and balance of
payments position, among others. Only recently has the Chinese government
encouraged substantial private economic activities.
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 China in the future could
have a significant adverse effect on economic conditions in China and the
economic prospects for the Operating Subsidiary and the Company.
Foreign Currency Exchange
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result,
the Renminbi is not freely convertible into foreign currencies.
The Operating Subsidiary conducts substantially all of its business in
China, and its financial performance and condition are measured in terms of
Renminbi. The Operating Subsidiary's source of income, toll revenue, is
denominated in Renminbi. Revenues and profits have to be converted to United
States Dollars or Hong Kong Dollars to pay dividends to the Company. Should
the Renminbi devalue against the United States Dollar, such devaluation
would have a material adverse effect on the Company's profits measured in
foreign currency and reduce the foreign currency that could be repatriated
by the Operating Subsidiary to the Company. The Company currently is not
able to hedge its Renminbi - United States Dollars exchange rate exposure in
China because neither the banks in China nor any other financial
institutions authorized to engage in foreign exchange transactions offer
forward exchange contracts.
Legal System
Since 1979, many laws and regulations dealing with economic matters in
general and foreign investment in particular have been enacted in China.
However, China still does not have a comprehensive system of laws and
enforcement of existing laws may be uncertain and sporadic.
Toll Revenue
Any increase in toll rates proposed by the Operating Subsidiary is subject
to approval by the Hangzhou Municipal Government and Hangzhou City
Transportation Department. However, there is no assurance that proposed
increases will be approved by these government authorities. If such
proposals are denied, profit margins of the Operating Subsidiary could be
reduced.
9
<PAGE>
2. BASIS OF PRESENTATION
- -------------------------
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United
States of America ("U.S. GAAP"). This basis of accounting differs from that
used in the statutory financial statements of the Operating Subsidiary,
which were prepared in accordance with the accounting principles and the
relevant financial regulations applicable to joint venture enterprises as
established by the Ministry of Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory financial statements
of the Operating Subsidiary to U.S. GAAP included the following:
* Provision of depreciation on roads and bridges.
* Recognition of toll revenue on the accrual basis and upon the
commencement of operations.
The transfer of CSH's equity interests in CCHL to WL and the transfer of CSH
equity interests in WL to Regal were accounted for as reorganizations of
companies under common control similar to a pooling of interests. The
accompanying consolidated financial statements of the Company have been
restated to present the transfers of CSH's interests in CCHL to WL and in WL
to Regal as if they had occurred on the date of formation of the Operating
Subsidiary, June 23, 1993. The acquisition of the Operating Subsidiary was
financed by advances from CSH. In 1996, the advances payable to CSH in
relation to the above acquisition was capitalized and treated as an increase
in additional paid-in capital. In addition, due to the specific
requirements of the U.S. GAAP for transfers of assets between entities under
common control, the difference of Rmb147,600 between the historical cost of
the investment of CSH in Hangzhou toll road and the Company's acquisition
cost was treated as a deemed dividend paid to CSH in 1993.
Regal's acquisition of CSH's interests in AP and its subsequent disposal
have been accounted for using the purchase method of accounting. The
results of operations of AP and its subsidiaries have not been consolidated
into the financial statements for the year ended December 31, 1996 given the
temporary nature of the holding.
Income from the historical operations of Regal for the years ended December
31, 1994, 1995 and 1996 has been reclassified as "Income/(Loss) from
discontinued operations" in the consolidated statements of income as a
result of the disposal of the related net assets to New Regal in 1996.
Accordingly, net assets related to the discontinued operations of Regal as
of December 31, 1994, and 1995 have also been reclassified as "Net assets of
discontinued operations" in the accompanying financial statements.
10
<PAGE>
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 subsidiaries. All material intercompany
balances and transactions have been eliminated on consolidation.
b. Toll revenue
------------
Toll revenue represents the gross receipts at the toll stations, net of
business tax calculated at 3.0% of the gross toll receipts.
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 one year or less. Cash
and cash equivalents included United States Dollar deposits of US$1,078
(Rmb8,967) and US$67 (Rmb555) as of December 31, 1995 and 1996 respectively.
Deposits of US$700 (Rmb5,824) as of December 31, 1995 were used to guarantee
bank loans of a related company.
d. 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% (except for roads
and bridges which have no residual value) of the cost of the assets. The
estimated useful lives are as follows:
Roads and bridges 30 years
Buildings 20 years
Machinery and equipment 5 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress ("CIP" see also Note 4) represents new roads and
bridges under construction and plant and machinery pending installation.
This includes the costs of construction, the costs of plant and machinery
and interest charges (net of interest income), arising from borrowings used
to finance these assets during the period of construction or installation.
Interest capitalized amounted to Rmb6,778 and Rmb25,035 for the years ended
December 31, 1995 and 1996.
11
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
e. Taxation: Income Taxes
----------------------
No provision for withholding or U.S. federal income taxes or tax benefits on
the undistributed earnings of the subsidiaries and/or losses of the
Operating Subsidiary has been provided as the earnings of the subsidiaries
have been reinvested and, in the opinion of management, will continue to be
reinvested indefinitely.
WL was incorporated under the laws of the British Virgin Islands, and under
current British Virgin Islands laws, WL 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 their income for financial reporting purposes, adjusted for income
and expense items which are not assessable or deductible for profits tax
purposes. The Company and its subsidiaries have had no profits assessable
for Hong Kong profits tax purposes.
Hangzhou toll road is subject to Chinese income taxes at the applicable tax
rate for Sino-foreign equity joint venture enterprises (currently 33%) on
the taxable income as reported in its statutory accounts adjusted in
accordance with the relevant income tax laws. Since it has a joint venture
term of more than 10 years and is engaged in infrastructure construction,
Hangzhou toll road will be fully exempted from Chinese state unified income
tax of 30% as well as the local income tax of 3% 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").
If the Operating Subsidiary had not been in the tax holiday period, the
Company would have recorded additional income tax expense of Rmb10,000,
Rmb9,901 and Rmb10,176 and net income of the Company would have been reduced
by Rmb5,100, Rmb5,050 and Rmb5,190 for the years ended December 31, 1994,
1995 and 1996 respectively (See Note 14).
The Company provides for deferred income taxes using the liability method,
by which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets
or liabilities in the financial statements.
f. Taxation: Business Tax
----------------------
In December 1993, the Chinese government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax
regulations replaced a number of former tax laws and regulations including
the Consolidated Industrial and Commercial Tax ("CICT"). Under these new
tax regulations, the Operating Subsidiary is subject to business tax which
replaced the CICT and is now the principal direct tax on the toll revenue
generated. The business tax rate applicable to the Operating Subsidiary is
3.0%.
12
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
g. Foreign Currency Translation
----------------------------
The functional currency of the group and the Company is Renminbi.
The Operating Subsidiary maintains its books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the applicable
unified rates of exchange or the applicable rates of exchange quoted by the
applicable foreign exchange adjustment center ("swap center"), prevailing at
the dates of the transactions. Monetary assets and liabilities denominated
in foreign currencies are translated into Renminbi using the applicable
unified rates of exchange or the applicable swap center rates prevailing at
the balance sheet dates. The resulting exchange differences are included in
the determination of income.
The Company's registered capital is denominated in and its reporting
currency is the United States Dollars. For financial reporting purposes,
the United States Dollars capital injection amounts have been translated
into Renminbi at the unified exchange rate as of December 31, 1995.
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place either through the
Bank of China or other institutions authorized to buy and sell foreign
currencies, or at a swap center. Before January 1, 1994, the exchange rates
used for transactions through the Bank of China and other authorized
institutions were set by the government (the "official exchange rate") from
time to time whereas the exchange rates available at the swap centers (the
"swap center rates") were determined largely by supply and demand. The
Chinese government announced the unification of the two-tier exchange rate
systems in December 1993 effective January 1, 1994. The unification brought
the official exchange rate of the Renminbi in line with the swap center
rate. The unification did not have a major impact on the consolidated
financial statements of the Company under U.S. GAAP.
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and remittance
of earnings outside of 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 or designated foreign
exchange banks. Approval for exchange at the swap center is granted to
joint venture enterprises for valid reasons such as the purchase of imported
materials and remittance of earnings.
The official exchange rates, unified exchange rates and Shanghai swap center
rates as of December 31, 1994, 1995 and 1996 were as follows:
1994 1995 1996
---------- ---------- ----------
Rmb equivalents of US$1
Official exchange rate N/A N/A N/A
Unified exchange rate 8.44 8.32 8.29
Shanghai swap center rate 8.44 8.32 8.29
13
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
h. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign equity
joint venture enterprises, the Operating Subsidiary maintains discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund and a staff welfare and incentive bonus fund. The Board of
Directors of the Operating Subsidiary will determine on an annual basis the
amount of the annual appropriations to dedicated capital. For the period
from January 1, 1994 to December 31, 1996, the Operating Subsidiary did not
report any profits in the statutory financial statements, and accordingly,
no appropriation to dedicated capital has been made.
i. Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
j. Earnings per common share
-------------------------
The calculation of primary earnings per common share is based on the
weighted average number of common shares outstanding during the year ended
December 31, 1994, 1995 and 1996. The calculation of fully diluted earnings
per common share is based on the common shares outstanding during the years
ended December 31, 1994, 1995 and 1996 adjusted for the assumed conversion
of the Company's US$30 million convertible Note B as mentioned in Note 1
above and exercise of stock options mentioned in Note 12.
The number of shares used in the computation was as follows:
1994 1995 1996
--------------- --------------- ---------------
Primary EPS computation 53,330,164 81,806,198 81,806,198
Fully diluted EPS
computation 1,047,817,647 1,076,293,694 1,075,293,694
4. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------
December 31, December 31,
1995 1996
--------------- ---------------
Rmb Rmb
Roads and bridges 109,020 110,784
Buildings 148 148
Machinery and equipment 475 3,804
Motor vehicles 2,121 3,084
Furniture, fixtures and office equipment 38 38
Construction-in-progress 247,346 505,734
Less: Accumulated depreciation (8,287) (12,233)
--------------- ---------------
Net book value 350,861 611,359
=============== ===============
14
<PAGE>
5. LONG-TERM BANK LOANS
- ------------------------
Long-term bank loans, all of which are unsecured, bear average interest
rates of approximately 14.87% and 14.66% as of December 31, 1995 and 1996
respectively and are repayable as follows:
December 31, December 31,
1995 1996
--------------- ---------------
Rmb Rmb
1997 58,000 58,000
1998 20,000 25,000
1999 19,500 54,500
2000 - 45,000
2001 - 55,000
--------------- ----------------
Total 97,500 237,500
=============== ================
All the long-term bank loans are denominated in Renminbi. Loans amounting
to Rmb19,500 and Rmb159,500 as of December 31, 1995 and 1996 respectively
are guaranteed by a related company.
6. COMMITMENTS
- ---------------
As of December 31, 1995 and 1996, the Operating Subsidiary had outstanding
capital commitments for construction contracts related to its CIP projects
amounting to approximately Rmb228,270 and Rmb91,783 respectively.
7. DISTRIBUTION OF PROFITS
- ---------------------------
Dividends from the Operating Subsidiary will be declared based on the
profits as reported in the statutory financial statements. Such profits
will be different from the amounts reported under U.S. GAAP. As of December
31, 1996, the Operating Subsidiary had no available retained earnings for
distribution.
In the opinion of management, any undistributed earnings and/or losses of
the Operating Subsidiary have been reinvested and will continue to be
reinvested indefinitely.
15
<PAGE>
8. PROVISION FOR INCOME TAXES
- ------------------------------
The reconciliation of the effective income tax rate based on income before
provision for income taxes and minority interests stated in the consolidated
statements of income to the statutory income tax rate in Hong Kong, the
British Virgin Islands, China and the U.S. is as follows:
1994 1995 1996
-------- -------- --------
Weighted average statutory tax rate 34.8% 31.6% 35.5%
Effect of tax holiday (34.8%) (31.6%) (35.5%)
-------- -------- --------
Effective tax rate - - -
======== ======== ========
Provision for income taxes consists of:
1994 1995 1996
-------- -------- --------
Rmb Rmb Rmb
Current - - -
Deferred - - 2,082
Adjustment of valuation allowance - - (2,082)
-------- -------- --------
- - -
======== ======== ========
The valuation allowance refers to the portion of the deferred tax assets
that are not currently realizable. The realization of these benefits
depends upon the ability of the Company to generate income in future years.
No provision or benefit for deferred income taxes was recognized in 1994,
1995 and 1996.
9. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
- -----------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of
CSH in an amount of Rmb10,000 and Rmb75,000 as of December 31, 1995 and 1996
respectively.
CSH has undertaken to provide continuing financial support to the Company to
the extent of CSH's interest in the Company for a period ending on December
31, 1997.
The Company paid management fees of US$155 (RMB1,288) to CSH during 1996 for
administrative services rendered on behalf of the Company by CSH.
10. DUE TO CHINESE JOINT VENTURE PARTNER
- -----------------------------------------
Balances due to the Chinese joint venture partner as of December 31, 1995
and 1996 represented amounts borrowed from the Chinese joint venture partner
to finance the CIP Projects.
These amounts are unsecured, non-interest bearing and have no fixed
repayment date.
16
<PAGE>
11. RETIREMENT PLANS
- ---------------------
As stipulated by the regulations of the Chinese government, all of the
Chinese staff of the Operating Subsidiary are entitled to an annual pension
on retirement, which is equal to their basic salaries at their retirement
dates. The Chinese government is responsible for the pension liability to
retired staff. The Operating Subsidiary is only required to make specified
contributions to the state-sponsored retirement plan calculated at 23% of
the basic salary of the staff. The expense reported in the consolidated
financial statements related to these arrangements was Rmb34, Rmb64 and
Rmb99 for the years ended December 31, 1994, 1995 and 1996 respectively.
12. STOCK OPTIONS
--------------
The following tables summarize the movement of share options of the Company.
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 1996
---------- ----------
Shares under option beginning of year 150,000 150,000
Expired - -
---------- ----------
Shares under option at end of year 150,000 150,000
========== ==========
Average exercise price of outstanding options $ 0.156 $ 0.156
========== ==========
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 1996
---------- ----------
Options at beginning of year 1,000,000 1,000,000
Issued 300,000 -
Expired (300,000) (1,000,000)
---------- ----------
Shares under option at end of year 1,000,000 -
========== ==========
Average exercise price of outstanding options $ 0.14 $ -
========== ==========
Exercisable at end of year 1,000,000 -
========== ==========
<PAGE>
13. OTHER SUPPLEMENTAL INFORMATION
- -----------------------------------
a) The following items are included in the consolidated statements of
income:
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ ------------
Rmb Rmb Rmb
Business tax 1,163 1,171 1,211
b) Non-cash investing and
financing activities:
Capitalization of advances
payable to CSH as
additional paid-in capital - - 96,419
14. CONTINGENCY
- ----------------
The Operating Subsidiary has obtained an approval from the local government
to offset the toll revenue collected from the first phase of the toll road
against the construction-in-progress balances until the CIP Projects are
completed by the end of 1997. Thus, the tax holiday has been deferred until
the CIP Projects are completed. As such, the Operating Subsidiary reported
zero net profits in its statutory financial statements starting from the
commencement of operations in 1993 and will continue to do so until the CIP
Projects are completed at the end of 1997. The Company plans to record the
net profits offset against the construction-in-progress account during 1993
to 1997 into income of the statutory financial statements of the Operating
Subsidiary during 1998 and/or 1999 fiscal years (i.e. the first two tax
exemption years of the tax holiday). This plan is subject to the approval of
the local tax bureau. Should such approval not be obtained from the local
tax bureau, a tax liability amounting to approximately Rmb5 million and Rmb5
million for the years ended December 31, 1995 and 1996 respectively may
arise. In the opinion of the directors, it is not probable that a liability
will arise.
17
<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
independent accountants from Pannell Kerr Forster of Texas P.C. ("Pannell
Kerr") to Arthur Anderson & Co. The decision resulted from the fact that
after February 19, 1996 the Registrant's sole operating subsidiary is
located in China, a location where Pannell Kerr does not have offices.
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.
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------
Listed below are the names, ages and positions as of March 31, 1997 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 stockholders at any annual meeting. At
present, the Company's Board of Directors consists of six directors who
serve during the term of their class, or until their class is assigned,
and until their successor is appointed :
Name Age Position & Office
- ---------------------- --- ---------------------------
Oei Hong Leong 49 Director, Chairman
Chung Cho Yee, Mico 36 Director, President
Ma Wai Man, Catherine 31 Director, Secretary
Richard N Gray 50 Director
Martin Furner 43 Director
Pang, Jim 36 Chief Financial Officer
Mr. Oei was elected a director on February 19, 1996 and serves as Chairman
of the Board of Directors. Mr. Oei Hong Leong is a prominent businessman
in China, Hong Kong, Singapore and Indonesia. He was educated in Beijing
and has gained extensive knowledge and experience of business operations
in China. He has been the Chairman and Chief Executive Officer of
publicly traded companies in Hong Kong, Indonesia, Malaysia and
Singapore. He is currently Chairman and Chief Executive Officer of China
Strategic Holdings Limited ("CSH"), a substantial shareholder of the Company
and the Chairman of China Tire Holdings Limited ("CTHL"), MRI Holdings
Limited ("MRI") and Bolton Group (International) Limited ("Bolton"), both
are listed on the Stock Exchange of Hong Kong (the "SEHK"), the New York
Stock Exchange, the Australia Stock Exchange and the London Stock Exchange
respectively. Mr. Oei is also a director of Sum Cheong International
Limited ("Sum Cheong") and Tricom Holdings Limited ("Tricom"), both are
companies listed on the SEHK.
Mr. Chung Cho Yee, Mico, was elected a director on February 19, 1996.
Mr. Chung is a solicitor by profession and has extensive experience in
the finance industry. Mr. Chung is a director of CSH, Sum Cheong, Tricom,
Star Telecom International Holding Limited ("Star"), all listed on the SEHK.
He is also a director and a Senior Vice President of CTHL, and a director of
MRI and Bolton.
<PAGE>
Ms. Ma Wai Man, Catherine, was elected a director on February 19, 1996.
Ms. Ma is a chartered secretary and has over 9 years of working
experience in the company secretarial profession. Ms. Ma is a director
of CSH, Allan International Holdings Limited, Star and South Sea Development
Company Limited and an alternate director of Tricom, all of which are
companies listed on the SEHK. She is also a director of MRI and the
Secretary of CTHL and Bolton.
Mr. Richard Gray, Director, 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, Mr. Gray
has concentrated on establishing new business's, particularly international
trading companies. He 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 Consultants in
the world. Mr. Gray is a Fellow of the Institute of Chartered Accounts
in England and Wales, a Fellow of the British Institute of Directors and
a graduate of the Advanced Management Program of the Harvard Business
School.
Mr. Martin Furner, Director, is the Chairman of the Board of Tapestry
Holidays, a specialist tour operator in the UK. Prior to joining Touche
Ross Management Consultants in 1986, he held several positions including
legal and fiscal coordinator (Europe and Africa) for Flopetrol, Inc., a
division of the Schlumberger 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 the prestigious 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.
Mr. Jim Pang, the Chief Financial Officer of the Company, is a Chartered
Accountant. He practiced public accountancy prior to joining China
Strategic Holdings Limited. In addition, Mr. Pang has significant
experience in banking operations and international project consultancy. He
received his MBA degree in Canada and is currently a member of the Institute
of Chartered Accountants of Ontario and the Canadian Institute of Chartered
Accountants.
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
- --------------------------------
No executive received compensation during 1996.
Stock Options
- --------------
No stock options or stock appreciation rights were granted to any directors
or officers of the Company during 1996.
Directors Fees
- ---------------
Directors are reimbursed for travel and other expenses relating to Board
and committee meetings. Mr. Gray and Mr. Furner received $10,000 each in
fiscal 1996 for serving as directors of the Company.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table shows, as of March 31, 1997, 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.
Number of Shares of
Common Stock Percentage
Name Beneficially Owned of Class
- --------------------------------------------------------------------------
China Strategic Holdings Ltd.(1)
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 1,033,877,483 96.16%
Harlequin Investment Holdings
Ltd.(2)(3)
Creque Building, Tortola,
British Virgin Islands 4,452,082 0.41%
Richard N Gray(2)(3)
Director
Noble House, Queens Road
St. Peter Fort, Guernsey
Channel Islands 4,452,082 0.41%
Oei Hong Leong(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 1,033,877,483 96.16%
Chung Cho Yee, Mico(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Ma Wai Man, Catherine(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Pang, Jim(1)
Chief Financial Officer
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Martin J Furner
Director
24 Chiswick High Road, Chiswick
London W4 1TE 0 0%
All Directors and Officers as
a Group (6 persons) 1,038,329,565 96.57%
As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to a security (i.e., the power to
dispose of, or to direct the disposition of a security).
(1) China Strategic Holdings Limited has indirect voting and investment
power with respect to 925,333,681 shares issuable upon the conversion of
a $30,000,000 Convertible Note held by Horler Holdings Limited, P.O. Box
71, Craigmuer Chamber, Road Town, Tortola, British Virgin Islands, a
wholly owned subsidiary of China Strategic Holdings Limited. China
Strategic Holdings Limited has direct voting and investment power with
respect to 68,043,802 shares of common stock issued to its upon
conversion of approximately $2,054,922 of the total principal amount of
the Convertible Note.
(2) Harlequin Investment Holdings Limited has sole voting and investment
power with respect to the shares of common stock. The beneficial
ownership set forth herein does not include 8,000,000 shares of common
stock which can be acquired upon an exercise of a Stock Purchase Option
granted by China Strategic Holdings Limited to Harlequin Investment
Holdings Limited. The percentage of beneficial ownership is based upon
81,806,198 shares of common stock outstanding as of March 31, 1997.
(3) 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 as 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.
As of March 31, 1997, there were approximately 9,000 shareholders of record.
The percentage of beneficial ownership is based upon 81,806,198 shares of
common stock outstanding as of March 31, 1997 and 925,333,681 shares of
common stock issuable upon conversion of the remaining portion of the
Convertible Note.
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Acquisition of Wuxi, CSI
- ------------------------
On February 19, 1996, Regal International, Inc. (the "Registrant")
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 CSI"), a Sino-foreign joint venture. Registrant 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 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 purchase 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 earnings. The Convertible Note is secured by a Pledge Agreement
granting CSH a security interest in the shares of Acewin capital stock.
In connection with above-described transactions, Janak Desai, Nils
Ollquist and Garish Sharma resigned as directors of Regal, 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. As a
result of this transaction, CSH became a principal stockholder of the
Company. Oei Hong Leong, Chairman of the Board, Chung Cho Yee, Mico and
Ma Wai Man, Catherine, are also directors and officers 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 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 to the
Registrant of all the issued and outstanding shares of capital stock of
New Regal.
<PAGE>
Harlequin Investment Holdings, Inc., a principal stockholder of the
Company ("Harlequin"), owns all the outstanding capital stock of New
Regal. Harlequin 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) Pension Fund.
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.
Acquisition of Hangzhou Huantong
- --------------------------------
On September 10, 1996, the Registrant has consummated a transaction
whereby the Registrant acquired all the issued and outstanding shares of
Westronix Limited, a British Virgin Islands corporation ("Westronix"),
from CSH pursuant to the terms of the Acquisition Agreement entered into
on September 10, 1996. Westronix's sole asset is a 100% equity interest
in China Construction Holdings Limited, a Hong Kong Limited ("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, China on June 23,
1993. The consideration paid by the registrant is a $30 million Convertible
Note bearing interest at the rate of nine percent (9%) per annum after an
initial six (6) month interest-free period (the "Note").
The Note is payable interest only on an annual basis, with all principal
being due and payable on September 10, 1999. The principal and any unpaid
interest due on the Note are convertible into shares of Common Stock,
$0.01 par value, of the registrant ("Common stock") at a conversion price
of $0.0302 per share. The Note is secured by all assets of
Westronix and its related subsidiaries.
Hangzhou Huantong is a joint venture between China Construction (51%) and
Hangzhou Transportation Development Corporation (49%). CSH from whom the
Registrant acquired Hangzhou Huantong, is an affiliate of the Registrant and
the major shareholder of the Registrant's common stock. Three directors of
the Registrant are also the directors of CSH.
The Company shares the office space and administrative support, with CSH, a
major shareholder of the Company. In fiscal 1996, the Company was charged
RMB 1.29 million by CSH as a management fee for the use of the office space
and staff support.
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) EXHIBITS
Exhibit 21 - Subsidiaries of the Registrant
(b) REPORTS ON FORM 8-K
Registrant filed Form 8-K/A on December 2, 1996.
<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.
Date: April 15, 1997 By: /s/ Chung Cho Yee, Mico
---------------------------------
Chung Cho Yee, Mico
President
Date: April 15, 1997 By: /s/ Jim Pang
---------------------------------
Jim Pang
Chief Financial Officer
Pursuant to the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Date: April 14, 1997 By: /s/ Oei Hong Leong
----------------------------------
Oei Hong Leong
Chairman of the Board of Directors
Date: April 15, 1997 By: /s/ Chung Cho Yee, Mico
----------------------------------
Chung Cho Yee, Mico
Director
Date: April 14, 1997 By: /s/ Ma Wai Man, Catherine
----------------------------------
Ma Wai Man, Catherine
Director
Date: April 14, 1997 By: /s/ Richard N. Gray
----------------------------------
Richard N Gray
Director
Date: April 14, 1997 By: /s/ Martin Furner
----------------------------------
Martin Furner
Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Prior to September 10, 1996
Acewin Profits Limited, a British Virgin Islands corporation
China Machine Holdings Limited, a Hong Kong corporation
Wuxi CSI Vibration Isolator Co., Ltd. (55%), a Sino-foreign joint venture
After September 10, 1996
Westronix Limited, a British Virgin Islands corporation
China Construction Holdings Limited, a Hong Kong corporation
Hangzhou Zhongche Huatong Development Co., Ltd. (51%), a Sino-foreign joint
venture
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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