<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of small business as specified in its charter)
Delaware 75-1071589
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
17/F, Printing House,
No.6 Duddell Street,
Central, Hong Kong.
(Address of principal executive offices)
(852) 2844-2988
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable dated: October 31, 1996,
81,806,198 shares.
Transitional Small Business Disclosure Format (check one) : Yes ___ No_X_
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income (unaudited)
for the three and nine months ended September 30, 1996
and September 30, 1995 1
Consolidated Condensed Balance Sheets (unaudited) at
September 30, 1996 and December 31, 1995 2
Consolidated Condensed Statements of Cash Flows
(unaudited) for the nine months ended September 30,
1996 and September 30, 1995 3
Notes to Consolidated Condensed Financial Statements 4-18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 25
ITEM 2 - CHANGES IN SECURITIES 25
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF 25
SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION 25
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 25
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Amounts in thousands, except number of shares and per
share data )
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------------------- ------------------------------------
1996 1996 1995 1996 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
US$ Rmb Rmb US$ Rmb Rmb
<S> <C> <C> <C> <C> <C> <C>
Toll revenue 3,379 28,046 27,908 1,161 9,636 8,273
General and
administrative expenses (1,192) (9,890) (7,942) (542) (4,502) (2,777)
Exchange gain 45 375 1,032 16 134 (367)
Net gain on disposal
of investment 450 3,743 - 451 3,743 -
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before
income taxes and
minority interest 2,682 22,274 20,998 1,086 9,011 5,129
Provision for income taxes - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before
minority interest 2,682 22,274 20,998 1,086 9,011 5,129
Minority interests (1,185) (9,839) (9,791) (394) (3,273) (2,696)
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations 1,497 12,435 11,207 692 5,738 2,433
Loss from discontinued
operations (186) (1,545) (695) (48) (397) (745)
----------- ----------- ----------- ----------- ----------- -----------
Net income 1,311 10,890 10,512 644 5,341 1,688
=========== =========== =========== =========== =========== ===========
Earnings per common
share (Primary):
- from continuing
operations 0.018 0.152 0.137 0.008 0.070 0.030
- from discontinued
operations (0.002) (0.019) (0.009) (0.001) (0.005) (0.009)
----------- ----------- ----------- ----------- ----------- -----------
0.016 0.133 0.128 0.007 0.065 0.021
=========== =========== =========== =========== =========== ===========
Earnings per common
share (Fully diluted):
- from continuing
operations 0.001 0.012 0.010 0.001 0.005 0.002
- from discontinued
operations (0.000) (0.001) (0.001) 0.000 (0.000) (0.001)
----------- ----------- ----------- ----------- ----------- -----------
0.001 0.010 0.010 0.001 0.005 0.002
=========== =========== =========== =========== =========== ===========
Weighted average common
shares outstanding 81,806,198 81,806,198 81,806,198 81,806,198 81,806,198 81,806,198
=========== =========== =========== =========== =========== ===========
Translations 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 September 30, 1996 of US$1.00 = Rmb8.30. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on September 30, 1996
or at any other certain rate.
The accompanying notes are an integral part of these consolidated statements
of income.
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Amounts in thousands, except number of shares and per share data)
September September December
30, 1996 30, 1996 31, 1995
----------- ----------- -----------
US$ Rmb Rmb
ASSETS
- ------
Current assets
Cash and cash equivalents 3,320 27,554 22,172
Prepayments and deferred expenses 281 2,333 452
Other receivables and other
current assets 1,485 12,329 300
Net assets of discontinued
operations - - 21,949
----------- ----------- -----------
Total current assets 5,086 42,216 44,873
----------- ----------- -----------
Prepayments for construction-
in-progress 1,891 15,697 29,789
Property, plant and equipment, net 57,214 474,881 350,861
----------- ----------- -----------
Total assets 64,191 532,794 425,523
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current liabilities
Short-term bank loans 3,614 30,000 -
Long-term bank loans - current
portion 6,988 58,000 -
Accounts payable 466 3,856 21,195
Accrued expenses and other payables 678 5,631 10,193
Taxes other than income 14 118 107
Due to related companies - - 1,500
----------- ----------- -----------
Total current liabilities 11,760 97,605 32,995
----------- ----------- -----------
Long-term loans 11,988 99,500 97,500
Convertible note payable 30,072 249,600 249,600
Due to Chinese joint venture partner 3,614 30,000 10,500
Due to China Strategic Holdings Ltd. 103 853 96,840
Minority interests 16,689 138,520 128,681
Shareholders' equity:
Common stock 820 6,806 6,806
Additional paid-in capital 1,900 15,773 (80,646)
Accumulated deficit (12,755) (105,863) (116,753)
----------- ----------- -----------
Total shareholders' equity (10,035) (83,284) (190,593)
----------- ----------- -----------
Total liabilities and
shareholders' equity 64,191 532,794 425,523
=========== =========== ===========
Translations 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 September 30, 1996 of US$1.00 = Rmb8.30.
No representation is made that the Renminbi amounts could have been, or
could be, converted into United States Dollars at that rate on September 30,
1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheet.
<PAGE>
</TABLE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Amounts in thousands)
<CAPTION>
Nine Months
Ended September 30,
----------------------------------------
1996 1996 1995
----------- ----------- -----------
US$ RMB RMB
<C> <C> <C> <C>
Cash flows from operating activities:
Net Income
Income from continuing operations 1,497 12,435 11,207
Loss from discontinued operations (186) (1,545) (695)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Minority interests 1,185 9,839 9,791
Depreciation and amortization 380 3,152 3,402
(Increase)Decrease in assets:
Prepayments and deferred expenses (227) (1,882) (1,495)
Other receivables and other current assets (1,448) (12,028) (202)
Increase (Decrease) in liabilities:
Accounts payable (2,089) (17,339) 6,183
Accrued expenses and other payables (549) (4,562) (679)
Taxes other than income 1 11 (17)
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,436) (11,919) 27,495
----------- ----------- -----------
Cash flows from investing activities
Prepayments for construction-in-progress 1,698 14,092 (5,909)
Acquisition of property, plant and equipment (15,322) (127,172) (81,197)
Change in net assets of discontinued operations 2,645 21,949 1,008
----------- ----------- -----------
Net cash used in (provided by) investing activities (10,979) (91,131) (86,098)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds of bank loans 10,843 90,000 44,000
Repayment of bank loans - - (8,000)
Due to related companies (181) (1,500) (2,500)
Due to Chinese joint venture partner 2,350 19,500 5,500
Due to China Strategic Holdings Limited 52 432 (1,342)
----------- ----------- -----------
Net cash provided by (used in) financing activities 13,064 108,432 37,658
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 649 5,382 (20,945)
Cash and cash equivalents, at beginning of period 2,671 22,172 71,015
----------- ----------- -----------
Cash and cash equivalents, at end of period 3,320 27,554 50,070
=========== =========== ===========
Translations 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 September 30, 1996 of US$1.00 = Rmb8.30. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on September 30, 1996
or at any other certain rate.
The accompanying notes are an integral part of these consolidated statements
of cash flows.
</TABLE>
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ("NASD") over-the-counter market
with an authorized share capital of US$1.5 million or 150 million shares of
US$0.01 par value per share.
Pursuant to an acquisition agreement dated February 8, 1996 between Regal,
Acewin Profits Limited ("Acewin"), a British Virgin Islands corporation and
China Strategic Holdings Limited ("CSH"), a company incorporated in Hong
Kong and listed on the Stock Exchange of Hong Kong Limited, Regal acquired
all the issued and outstanding shares of Acewin 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% per annum after an initial 6-month interest-free
period. Acewin was a wholly-owned subsidiary of CSH before the transfer and
Acewin's sole asset was a 55% equity interest in Wuxi CSI Vibration Isolator
Co. Ltd., a Sino-foreign equity joint venture incorporated in the People's
Republic of China, held through an intermediate Hong Kong Company, China
Machine (Holdings) Limited.
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 consummation of the transaction whereby
Regal acquired all of the outstanding share capital of Acewin. 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 Acewin 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$450,000 on the disposal of Acewin has been included as "Net gain on
disposal of investment" in the Company's consolidated statements of income
for the period ended September 30, 1996.
<PAGE>
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 at January 31, 1996 to New Regal in exchange
for US$2.5 million and New Regal's assumption of all liabilities of Regal,
other than the Convertible Note A.
Pursuant to the Agreement, the US$2.5 million portion of the purchase price
was paid as follows: US$800,000 in cash and the balance by delivery of two
promissory notes, one in the principal amount of US$900,000 (the "US$900,000
Note") and the second in the principal amount of US$800,000 (the "US$800,000
Note"). The US$900,000 Note bears interest at 9% per annum and is payable in
sixty equal monthly installments of principal and interest. The US$800,000
Note bears no interest and is due and payable in one installment on January
31, 2001. The realized loss in connection with this transaction amounted to
approximately Rmb573,000 (US$69,000) and has been included as part of "Loss
from discontinued operations" in the Company's consolidated statements of
income for the period ended September 30, 1996.
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal,
Westronix Limited ("Westronix"), a wholly owned subsidiary of CSH, and CSH,
Regal acquired all the issued and outstanding shares of Westronix at a
consideration of US$30 million 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 terms of the Convertible Note B provide for the conversion of
the principal and any unpaid interest on the Convertible Note B into shares
of the Common Stock of Regal ("Common Stock") at a conversion price of
US$0.0302 per share. Upon conversion, CSH would hold approximately 96.16% of
the outstanding shares of the Company. Westronix's sole asset is a 51%
equity interest in Hangzhou Zhongche Huantong Development Co. Ltd., a Sino-
foreign equity joint venture incorporated in the People's Republic of China,
held through an intermediate Hong Kong company, China Construction
International Group Limited.
The amount of consideration paid for Westronix was based upon a
recommendation from an independent corporate and investment advisor (the
"Advisor") which the Company engaged for the purpose of obtaining the
fairness opinion with respect to its acquisition of Westronix. Such
fairness opinion was based on the Advisor's independent assessment of an
internal appraisal report provided by China Strategic Holdings Limited,
which determined the valuation of Westronix by applying the discounted cash
flow model to the projected cash flow of the Hangzhou Toll Road over the
remaining life of the joint venture.
<PAGE>
As of September 30, 1996, the Company had the following subsidiaries:
Westronix Limited ("Westronix") - a holding company incorporated in the
British Virgin Island.
China Construction International Group Limited ("CCIG") - a company
incorporated in Hong Kong.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary"
or "Hangzhou toll road"), a Sino-foreign equity joint venture located in
Hangzhou, Zhejiang Province, the People's Republic of China "the PRC".
The Company holds a 100% interest in Westronix, which was incorporated on
July 3, 1996 with an authorized share capital of 50,000 shares with a par
value of US$1 each. The one Westronix share issued at par value to CSH was
subsequently transferred to Regal pursuant to a shareholder's resolution
dated September 10, 1996. Westronix holds a 100% interest in CCIG which in
turn holds a 51% interest in Hangzhou toll road. Westronix's interest in
CCIG and Hangzhou toll road was transferred from CSH pursuant to a
shareholders' resolution dated August 28, 1996.
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 the City of Hangzhou, Zhejiang Province in the People's
Republic of China (the "PRC"). The total cash consideration paid by CCIG
for its interest in Hangzhou toll road amounted to Rmb102 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 would be used
to finance the construction of 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 tolls from all three phases of the
toll road after the CIP Projects are completed.
Any increase in toll rates proposed by the Operating Subsidiary is subject
to approval by the Hangzhou Municipal Government, Hangzhou City
Transportation Department and the Zhejiang Provincial Government. However,
there is no assurance that any proposal for increase will be approved by
these government authorities. If such proposals are denied, profit margins
of the Operating Subsidiary could be affected.
<PAGE>
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 CCIG and 3
designated by Hangzhou City Transportation Development Company.
The acquisition of the Operating Subsidiary by CCIG 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.
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.
<PAGE>
The transfer of CSH's equity interests in CCIG to Westronix and the transfer
of CSH's equity interests in Westronix 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
CCIG to Westronix and in Westronix 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 Rmb147.6
million 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 Acewin and its subsequent disposal
have been accounted for using the equity method of accounting. The results
of operations of Acewin and its subsidiaries have not been consolidated into
the financial statements for the period ended September 30, 1996 given the
temporary nature of the holding.
Income from the historical operations of Regal for the period ended
September 30, 1995 and 1996 has been reclassified as "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,
1995 have also been reclassified as "Net assets of discontinued operations"
in the accompanying financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements of
the Company and its majority owned and controlled subsidiaries. All material
inter company balances and transactions have been eliminated on
consolidation.
<PAGE>
b. Toll Revenue
-------------
Toll revenue represents the gross receipts at the toll stations, net of
business tax calculated at 3% 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 three months or less.
Cash and cash equivalents included United States Dollar deposits of
US$1,078,000 (Rmb8,967,000) and US$64,000 (Rmb531,000) as of December
31,1995 and September 30, 1996 respectively. Deposits of US$700,000
(Rmb5,824,000) 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 fixed 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 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.
<PAGE>
e. 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 the PRC are subject to the availability of foreign
currency which is dependent on the foreign currency denominated earnings of
the entity or must be arranged through a swap center 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.
<PAGE>
The official exchange rates, unified exchange rates and Shanghai swap center
rates as of December 31, 1994 and 1995 and September 30, 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 8.30
Shanghai swap center rate 8.44 8.32 8.30
f. 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.
Westronix was incorporated under the laws of the British Virgin Islands, and
under current British Virgin Islands laws, Westronix 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 not less than 10 years and is engaged in infrastructure
construction, Hangzhou toll road will be fully exempt 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").
<PAGE>
If the Operating Subsidiary had not been in the tax holiday period, the
Company would have recorded additional income tax expense of Rmb7,503,000
(US$904,000) and Rmb7,393,000 (US$891,000) and net income of the Company
would have been reduced by Rmb 3,826,000 (US$461,000) and Rmb3,770,000
(US$454,000) for the nine months ended September 30, 1995 and 1996
respectively (See Note 13).
The Company provides for deferred income taxes using the liability method,
by which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets
or liabilities in the financial statements.
g. Taxation : 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 a 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%.
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 the dedicated capital. For the period
from January 1, 1994 to September 30, 1996, the Operating Subsidiary did not
report any profits in the statutory financial statements, and accordingly,
no appropriation to dedicated capital has been made.
<PAGE>
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 nine months
ended September 30, 1995 and 1996.
The number of shares used in the computation was as follows:
1995 1996
------------- -------------
Primary EPS computation 81,806,198 81,806,198
Fully diluted EPS computation 1,076,293,694 1,076,293,694
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
September 30, December 31,
1996 1995
-------------- -------------
US$'000 Rmb '000 US$'000 Rmb '000
Road and bridges 13,191 109,485 13,135 109,020
Buildings 18 148 18 148
Machinery and equipment 458 3,804 57 475
Motor vehicles 371 3,084 255 2,121
Furniture, fixtures and office
equipment 4 38 4 38
Construction-in-progress 44,518 369,497 29,801 247,346
Less : Accumulated depreciation (1,346) (11,175) (998) (8,287)
-------- -------- -------- --------
Net book value 57,214 474,881 42,272 350,861
======== ======== ======== ========
5. LONG-TERM BANK LOANS
Long-term bank loans, all of which are unsecured, bear average interest
rates of approximately 14.87% as of December 31, 1995 and 14.60% as of
September 30, 1996 and are repayable as follows:
Year September 30, December 31,
1996 1995
---------------------- ----------------------
US$ '000 Rmb '000 US$ '000 Rmb '000
1997 6,988 58,000 6,988 58,000
1998 3,012 25,000 2,410 20,000
1999 6,567 54,500 2,349 19,500
2000 1,807 15,000 - -
2001 602 5,000 - -
--------- --------- --------- ---------
18,976 157,500 11,747 97,500
========= ========= ========= =========
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb19.5 million (US$2.3 million) as of December 31,1995 and Rmb109.5 million
(US$13.2 million) as of September 30,1996 respectively are guaranteed by a
related company.
<PAGE>
6. DUE TO CHINESE JOINT VENTURE PARTNER
The amount due to Chinese joint venture partner as at December 31, 1995 and
September 30, 1996 represents money borrowed from the Chinese joint venture
partner to finance the CIP Projects. These amounts are unsecured, bear
interest at commercial rate and have no fixed repayment date.
7. RECONCILIATION ON THE MINORITY INTEREST BALANCE FOR THE PERIOD ENDED
SEPTEMBER 30, 1996
US$'000 Rmb '000
Income from continuing operations before
minority interest 2,682 22,274
Less: Gain / Income not attributable to
minority interest
Gain in disposal of subsidiaries 186 1,546
Gain in foreign exchange 45 375
Income from Regal Int'l (Holdings Co.) 35 290
Income from Westronix (wholly-owned subsidiary) (1) (7)
Income from CCIG (wholly-owned subsidiary) (1) (9)
-------- ----------
264 2,195
-------- ----------
Income from Hangzhou Toll Road 2,418 20,079
49% Minority Interest 1,185 9,839
<PAGE>
8. SUPPLEMENTAL DISCLOSURE - ACQUISITION AND DISPOSAL OF INVESTMENTS
AND OPERATIONS
Acquisition of Investment Assets
- --------------------------------
In February 1996, the Company acquired Acewin Profits companies for a
consideration of US$13.5 million. There were no outlay of cash as the vendor
has taken back a convertible note of the same amount. Such convertible note
has been repaid in full amount upon complete disposition of Acewin Profits
in September 1996. This acquisition had no effect onto the shareholders'
equity since no new capital shares were issued.
In September 1996, the Company acquired the Westronix companies form the
same vendor for a consideration of US$30 million. Again, there were no
outlay of cash as the vendor took back a convertible note of the same
amount. The acquisition also had no effect onto the shareholders' equity.
Disposal of Acewin US$'000 Rmb '000
- ------------------
Cash Proceeds from disposition 13,950 115,790
Less: Net book value / Cost of investment (13,500) (112,047)
---------- ---------
Net gain reported (in Consolidated Statements
of Income) 450 3,743
========== =========
The Company generated a net gain of Rmb3,743,000 (US$450,000) from the
disposition of its investments in Acewin. The majority of the gross proceeds
of US$13.95 million has been used to repay the outstanding note payable of
US$13.5 million owing to China Strategic Holdings Limited. This resulted
with a net cash proceeds of approximately US$450,000 equivalent to the net
gain as per above computation. This gain also provided an increment of
US$450,000 to the shareholders' equity.
<PAGE>
Disposal of the oil field / marine / rubber mold operations
- -----------------------------------------------------------
US$'000 Rmb '000
Cash proceeds from disposition 2,500 20,750
Less: Net assets value disposed (2,521) (20,925)
Related professional fees (48) (398)
--------- --------
Net loss reported ( in Consolidated Statements of (69) (573)
========= ========
Income grouped under "Loss from discontinued operation")
In this disposition, the Company generated a net loss of Rmb573,000
(US$69,000) and an immediate cashflow of US$800,000 since the proceeds
comprised of a cash consideration of US$800,000, a US$800,000 interest free
note due on January 31, 2001 and a US$900,000 note bearing interest at 9%
amortized over sixty equal monthly installments. This loss had an effect of
reducing US$69,000 from the shareholders' equity.
9. PROVISION FOR INCOME TAXES
The reconciliation of the effective income tax 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, the PRC 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 consist of:
1994 1995 1996
-------- -------- ---------
Rmb '000 Rmb '000 Rmb '000
Current - - -
Deferred - - 1,562
Adjustment of valuation allowance - - (1,562)
-------- -------- ---------
- - -
======== ======== =========
<PAGE>
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 the years
of 1994 and 1995, and the nine months ending September 30, 1996.
10. 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 September
30,1996, 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.
11. 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
1996 1995
-------- --------
Shares under option as at January 1 150,000 150,000
Issued - -
Expired - -
-------- --------
Shares under option as at September 30 150,000 150,000
======== ========
Average exercise price of outstanding options $ 0.156 $ 0.156
======== ========
Exercisable at end of period 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.
<PAGE>
COMMON STOCK OPTIONS
1996 1995
---------- ----------
Option as at January 1 1,000,000 1,000,000
Issued - -
Expired - -
---------- ----------
Shares under option as at September 30 1,000,000 1,000,000
========== ==========
Average exercise price of outstanding options $ 0.14 $ 0.14
========== ==========
Exercisable at end of period 1,000,000 1,000,000
========== ==========
12. 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 approximately
Rmb52,000 (US$6,000) and Rmb64,000 (US$8,000) for the nine months ended
September 30, 1995 and 1996 respectively.
13. 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 in 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
exemption years of the tax holiday). The 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 as of
December 31, 1996 and Rmb8.7 million as of September 30, 1996 may arise. In
the opinion of management, it is not probable that a liability will arise.
<PAGE>
14. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
The Operating Subsidiary guaranteed bank borrowings of a related company of
CSH in an amount of Rmb10 million (US$1.2 million) and Rmb51.5 million
(US$6.2 million) as of December 31,1995 and September 30,1996 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.
15. COMMITMENTS
As of December 31, 1995 and September 30, 1996, the Operating Subsidiary had
outstanding capital commitments for construction contracts related to its
CIP projects amounting to approximately Rmb228.3 million (US$27.5 million)
and Rmb68.8 million (US$8.3 million) respectively.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW OF RECENT TRANSACTIONS :
On September 10, 1996, the Company acquired all the issued and outstanding
shares of Westronix Limited, a British Virgin Islands corporation from China
Strategic Holdings Limited ("CSH"), a Hong Kong company 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
International Group Limited ("CCIG"), a Hong Kong company which in turn owns
a 51% joint venture interest in Hangzhou Zhongche Huantong Development Co.,
Ltd, a Sino-foreign joint venture established in Hangzhou Zhejiang Province,
the People's Republic of China ("China") on June 23, 1993.
The amount of consideration being US$30 million (Rmb249 million) paid for
Westronix was based upon a recommendation from an independent corporate and
investment advisor (the "Advisor") which the Company engaged for the purpose
of obtaining the fairness opinion with respect to its acquisition of
Westronix. Such recommendation was based on the Advisor's independent
assessment of an internal appraisal report provided by China Strategic
Holdings Limited, which determined the valuation of Westronix by applying
the discounted cash flow model to the projected cash flow of the Hangzhou
toll road over the remaining life of the joint venture.
On September 11, 1996, the Company disposed of all the issued and
outstanding shares of Acewin Profits Limited ("Acewin"), a British Virgin
Islands corporation , 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 entered into on
September 11, 1996. The Company's interest in Acewin was acquired from CSH
on February 8, 1996.
The Board of Directors of the Company determined that disposal of Acewin was
in the best interest of the Company and was advantageous to the Registrant's
plans to concentrate the resources of the Company in infrastructure projects
in China in connection with the Company's recent acquisition.
As of September 30, 1996, the Company had the following subsidiaries:
Westronix Limited ("Westronix") - a holding company incorporated in the
British Virgin Islands.
<PAGE>
China Construction International Limited ("CCIG") - a company incorporated
in Hong Kong.
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 Westronix. Westronix holds a 100%
interest in CCIG which in turn holds a 51% interest in Hangzhou toll road.
BUSINESS
The Operating Subsidiary was established for the construction of a ring road
which was 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.
When the toll road is fully completed, it will be 38.2 km long and comprise
of:
- - 13.2 km of existing Class 2 wide single carriage way 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 carriage
way 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 is expected to be
completed at end of 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 Company anticipates the section from Xiangfuqiao to
Liuxai will become operative in the first half of 1997. 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.
<PAGE>
RESULTS OF OPERATION
SUMMARY OF FINANCIAL INFORMATION Nine months ended
- ----------------------------------- -----------------
September 30,
-----------------
1996 1996 1996 1995
----- ---- ---- ----
USD '000 Rmb '000 USD '000 Rmb '000
Toll revenue 3,379 28,046 3,362 27,908
General and administrative expenses 1,192 9,890 957 7,942
Exchange gain 45 375 124 1,032
Gain on disposal of investment 450 3,743 - -
Net income 1,311 10,890 1,267 10,512
TOLL REVENUE
Toll revenue increased marginally by Rmb138,000 (US$17,000) or 0.5% in the
nine months to September 30, 1996 as compared with the corresponding period
in 1995. Traffic volume was adversely affected by the opening of the
Hangzhou section of the Shanghai - Ningbo Expressway, which led to a certain
degree of diversion of traffic. However the adverse effect was fully offset
by an average increase in toll fees by approximately 50% in 1996. Management
believes that further decrease in vehicle flows is unlikely and is
optimistic about the future revenue generation ability of Hangzhou toll road
as the second phase of the toll road would become operative in early 1997.
In addition, the third and final phase of the toll road is expected to be
completed by the end of 1997 and would generate revenue commencing 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
As compared with the same period in 1995, general and administrative
expenses for the nine months ended September 30, 1996 went up 24.5% from
Rmb9.9 million (US$1.2 million) to Rmb 7.9 million (US$1.0 million). This
was primarily attributable to additional professional fees incurred and the
interest payable on the US$ 13.5 million convertible note in excess of the
interest income generated from the US$ 900,000 note receivable. As far as
the Operating Subsidiary is concerned, general and administrative expenses
as a percentage of toll revenue was kept at around 28% for the two periods
under discussion.
<PAGE>
EXCHANGE GAIN
Exchange gain represents the favorable exchange difference arising from re-
measurement of various reporting currencies of the different companies
within the Group into Renminbi, which is the Group's functional currency.
Upon period end revaluation of the amount payable to CSH, which was in terms
of foreign currency, exchange gains were recorded in the past three years
due to continual strengthening of Renminbi. However slow down in
appreciation of Renminbi during the first nine months of 1996 had sent
exchange gain down to Rmb375,000 (US$45,000) from Rmb1,032,000 (US$124,000)
of the corresponding period in 1995.
NET GAIN ON DISPOSAL OF INVESTMENT
The gain represents the profit on disposal of investment in Acewin. As
mentioned above, Acewin was acquired in February 1996 at a cost of US$13.5
million (Rmb112.1 million) and disposed of in September 1996 at a cash price
of US$13.95 million (Rmb115.8 million) to an unrelated Netherlands company.
LOSS FROM DISCONTINUED OPERATION
This loss represents two sources of loss from the discontinued operation of
the oil field / marine / rubber mold businesses. A net loss of Rmb573,000
(US$69,000) was arised from the accounting of the actual disposition. An
operating loss of Rmb971,000 (US$117,000) was attributed to the operation of
such disposed businesses. The two losses have resulted with the loss of
Rmb1,546,000 (US$186,000) as reported.
NET INCOME
Net income for the nine months ended September 30, 1996 increased slightly
by 3.6% to Rmb10.9 million (US$1.3 million) from Rmb10.5 million (US$1.3
million) of the same period in 1995. This was attributable to the combined
effect of increase in general and administrative expenses and loss from
discontinued operations and decrease in exchange gain, compensated by the
gain on disposal of investment.
Loss from discontinued operations represents the operating loss of Regal
Bell and Rubber which were spun-off during the period.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996, net cash used in operating
activities and investing activities was approximately Rmb11.9 million
(US$1.4 million) and Rmb91.1 million (US$11.0 million) respectively. Net
cash provided by financing activities amounted to Rmb108.4 million (US$13.1
million), resulting in a net decrease in cash and cash equivalents of
approximately Rmb5.4 million (US$0.7 million) for the nine months ended
September 30, 1996.
The net cash outflow position in operating activities resulted mainly from
increase in other receivable by approximately Rmb12.0 million (US$1.5
million) accompanied with decrease in accounts payable by approximately
Rmb17.3 million (US$2.1 million) during the nine months ended September 30,
1996. Increase in other receivables was primarily due to receipt of two
receivable notes, totaling Rmb14.1 million (US$1.7 million), issued by New
Regal in relation to the disposal of Regal Bell and Rubber.
During the nine months ended September 30, 1996, the Company incurred
capital expenditures of approximately Rmb113.1 million (US$13.6 million)
which were financed principally through bank borrowings of Rmb90.0 million
(US$10.8 million) and loans from the Chinese joint venture partner of
Rmb19.5 million (US$2.3 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
(the "CIP Projects"). Construction of the second phase was close to
completion and the third phase is expected to be completed by the end of
fiscal year 1997. The Company anticipates that in 1998 the Operating
Subsidiary will generate substantial toll revenue from all three phases of
the toll road. The Company expects that its cash flows from operations,
combined with cash and cash equivalents, bank lines of credit and other
external sources of financing, are adequate to finance the Company's
operating and debt services requirements for the foreseeable future.
EFFECTS OF INFLATION
In recent years, the Chinese economy has experienced periods of rapid growth
and high rates of inflation, which have, from time to time, led to the
adoption by the PRC government of various corrective measures designed to
regulate growth and control inflation.
The general inflation rate in terms of the Retail Price Index in China was
approximately 13.2%, 21.7% and 14.8% for 1993, 1994 and 1995 respectively.
The Chinese government has implemented and maintained an economic program
designed to control inflation, which has resulted in tightening of working
capital available to Chinese business enterprises. The success of the
Company depends in substantial part on the continued growth and development
of the Chinese economy.
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 the Operating Subsidiary has been
very effective in controlling costs.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
SEE ATTACHED
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAL INTERNATIONAL INC.
(Registrant)
Date: ___________________ __________________________
Mico Chung, President
Date: ___________________ __________________________
Jim Pang, Chief Financial Officer
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