<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
( ) 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 30, 1997,
81,806,198 shares.
Transitional Small Business Disclosure Format (check one) :
Yes No X
---- ----
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the nine months and three months ended September
30, 1997 and September 30, 1996 (Unaudited) 1
Consolidated Balance Sheets at September 30, 1997
and December 31,1996 (Unaudited) 2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and September 30, 1996 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 15 - 18
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 19
ITEM 2 - CHANGE IN SECURITIES 19
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 19
ITEM 5 - OTHER INFORMATION 19
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 19
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands, except number of shares and per share data )
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
---------------------------------- ----------------------
1997 1997 1996 1997 1996
---------- ---------- ---------- ---------- ----------
US$ Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C>
Toll revenue 3,566 29,564 28,046 9,071 9,636
General and administrative expenses (2,924) (24,242) (9,890) (9,255) (4,502)
Exchange gain (0) (1) 204 (8) 134
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income
taxes and minority interest 642 5,321 18,360 (192) 5,268
Provision for income taxes - - - - -
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before minority
interest 642 5,321 18,360 (192) 5,268
Minority interests (1,138) (9,438) (9,839) (2,883) (3,273)
---------- ---------- ---------- ---------- ----------
(Loss) / Income from continuing
operations (497) (4,117) 8,521 (3,075) 1,995
Net gain on disposal of investment 0 0 3,743 0 3,743
Loss from discontinued operations - - (1,545) - (397)
---------- ---------- ---------- ---------- ----------
Net (loss) income (497) (4,117) 10,719 (3,075) 5,341
========== ========== ========== ========== ==========
Earnings per common share (Primary):
- from continuing operations (0.01) (0.05) 0.15 (0.04) 0.07
- from discontinued operations - - (0.02) - (0.01)
---------- ---------- ---------- ---------- ----------
(0.01) (0.05) 0.13 (0.04) 0.07
========== ========== ========== ========== ==========
Earnings per common share (Fully diluted):
- from continuing operations 0.00 0.01 0.01 0.00 0.01
- from discontinued operations - - (0.00) - -
---------- ---------- ---------- ---------- ----------
0.00 0.01 0.01 0.00 0.01
========== ========== ========== ========== ==========
Weighted average common
shares outstanding 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,
1997of US$1.00 = Rmb8.29. No representation is made that the Renminbi amounts
could have been, or could be, converted into United States Dollars at that rate on September 30,
1997 or at any other certain rate.
The accompanying notes are an integral part of these consolidated statements of income.
1
</TABLE>
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996 (AUDITED) AND
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
September September December
30, 1997 30, 1997 31, 1996
--------- --------- ---------
US$ Rmb Rmb
<S> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents 1,719 14,253 21,443
Prepayments and deferred expenses 148 1,226 469
Other receivables and other current assets 1,500 12,433 13,698
--------- --------- ---------
Total current assets 3,367 27,912 35,610
Prepayments for construction-in-progress 222 1,839 9,942
Property, plant and equipment, net 84,222 698,207 611,359
--------- --------- ---------
Total assets 87,811 727,958 656,911
========= ========= ==========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current liabilities
Long-term bank loans - current portion 2,171 18,000 58,000
Accounts payable 1,751 14,518 9,767
Accrued expenses and other payables 2,165 17,948 56,325
Taxes other than income 17 136 114
--------- --------- ---------
Total current liabilities 6,104 50,602 124,206
--------- --------- ---------
Long-term loans 37,577 311,516 179,500
Convertible note payable 30,108 249,600 249,600
Due to Chinese joint venture partner 5,801 48,091 41,318
Due to China Strategic Holdings Ltd. 357 2,959 2,418
Minority interests 18,288 151,605 142,167
Shareholders' equity:
Common stock 821 6,806 6,806
Additional paid-in capital 1,903 15,773 15,773
Accumulated deficit (13,148) (108,994) (104,877)
--------- --------- ---------
Total shareholders' equity (10,424) (86,415) (82,298)
--------- --------- ---------
Total liabilities and shareholders' equity 87,811 727,958 656,911
========= ========= ==========
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,
1997 of US$1.00 = Rmb8.29. No representation is made that the Renminbi amounts could have been, or
could be, converted into United States Dollars at that rate on September 30, 1997 or at any other
certain rate.
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
2
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands)
<CAPTION>
1997 1997 1996
---------- ---------- ----------
US$ Rmb Rmb
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income
(Loss) Income from continuing operations (497) (4,117) 8,521
Loss from discontinued operations - - (1,545)
Adjustments to reconcile net (loss) income to
net cash used in operations:
Minority interests 1,138 9,438 9,839
Net gain on disposal of investment - - 3,743
Depreciation and amortization 439 3,640 3,152
(Increase)Decrease in assets:
Prepayments and deferred expenses (92) (757) (1,882)
Other receivables and other current assets 153 1,265 (12,028)
Increase (Decrease) in liabilities:
Accounts payable 573 4,751 (17,339)
Accrued expenses and other payables (4,629) (38,377) (4,562)
Taxes other than income 3 22 11
---------- ---------- ----------
Net cash used in operating activities (2,912) (24,135) (12,090)
---------- ---------- ----------
Cash flows from investing activities
Prepayments for construction-in-progress 977 8,103 14,092
Acquisition of property, plant and equipment (10,915) (90,488) (127,172)
Change in net assets of discontinued operations - - 21,949
---------- ---------- ----------
Net cash used in investing activities (9,938) (82,385) (91,131)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds of bank loans 11,099 92,016 90,000
Due to related companies - - (1,500)
Due to Chinese joint venture partner 818 6,773 19,500
Due to China Strategic Holdings Limited 65 541 603
---------- ---------- ----------
Net cash provided by financing activities 11,982 99,330 108,603
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (868) (7,190) 5,382
Cash and cash equivalents, at beginning of period 2,587 21,443 22,172
---------- ---------- ----------
Cash and cash equivalents, at end of period 1,719 14,253 27,554
========== ========== ==========
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,
1997 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 September 30, 1997 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated statements of cash flows.
3
</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 each.
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 British Virgin Islands 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 date of consummation of the transaction
whereby Regal acquired all 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 was included as "Net gain on disposal
of investment" in the Company's consolidated statements of income for the
period ended September 30, 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 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
<PAGE>
31, 2001. The realized loss in connection with this transaction amounted to
approximately 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 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. 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 (name changed to
"China Construction Holdings Limited" on December 5, 1996).
As of September 30, 1997, the Company had the following subsidiaries:
Westronix Limited ("Westronix") - a holding company incorporated in the
British Virgin Islands.
China Construction Holdings 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. At the time of incorporation, one share was issued to
CSH, representing a 100% interest in Westronix. The one share issued 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 will be used to
finance the construction of second and third phases of the toll road (the
"CIP Projects"). Construction works of the second phase had been completed
at the reporting date and the third phase is 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.
<PAGE>
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 a toll rate increase will be
approved by these government authorities. If such proposals are denied,
profit margins of the Operating Subsidiary could be reduced.
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.
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 amounted to Rmb 96,419,000 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.
<PAGE>
Regal's acquisition of CSH's interests in Acewin and its subsequent disposal
have been accounted for using the purchase 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.
Loss from the historical operations of Regal for the period ended June 30,
1996 which included income from oil field, marine rubber, custom molded and
safety services, 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.
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.
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.
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 vehicle 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 the United States Dollar
and its reporting currency is the United States Dollar. 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 Foreign Exchange Adjustement Center (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.
The official exchange rates, unified exchange rates and Shanghai swap center
rates as of December 31, 1995 and 1996 and September 30, 1997 were as
follows :
1995 1996 1997
---- ---- ----
Rmb equivalents of US$1
Official exchange rate N/A N/A N/A
Unified exchange rate 8.32 8.29 8.29
Shanghai swap center rate 8.32 8.29 8.29
<PAGE>
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").
If the Operating Subsidiary had not been in the tax holiday period, the
Company would have recorded additional income tax expense of Rmb7,393,000
and Rmb7,177,000 and net income of the Company would have been reduced by
Rmb3,770,000 and Rmb3,660,000 for the nine months ended September 30, 1996
and 1997 respectively (See Note 12).
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%.
<PAGE>
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, 1997, 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 period ended
September 30, 1996 and 1997. The calculation of fully diluted earnings per
common share is based on the common shares outstanding during the three and
nine months ended September 30, 1996 and 1997 adjusted for the assumed
conversion of the Company's US$30 million convertible Note B as mentioned in
Note 1 above and exercise of the stock options mentioned in Note 10.
The number of shares used in the computation was as follows:
1996 1997
---- ----
Primary EPS computation 81,806,198 81,806,198
Fully diluted EPS computation 1,076,293,694 1,075,293,694
4. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
September December
30,1997 31,1996
--------- ---------
Rmb'000 Rmb'000
Road and bridges 110,785 110,784
Buildings 148 148
Machinery and equipment 3,998 3,804
Motor vehicles 3,328 3,084
Furniture, fixtures and office equipment 57 38
Construction-in-progress 595,764 505,734
Less : Accumulated depreciation (15,873) (12,233)
-------- --------
Net book value 698,207 611,359
======== ========
<PAGE>
5. LONG-TERM BANK LOANS
--------------------
Long-term bank loans, all of which are unsecured, bear average interest
rates of approximately 14.66% as of December 31, 1996 and 14.13% as of
September 30, 1997 and are repayable as follows:
September December
30, 1997 31, 1996
--------- ---------
Rmb'000 Rmb'000
1997 8,000 58,000
1998 25,000 25,000
1999 111,500 54,500
2000 75,500 45,000
2001 67,934 55,000
2002 41,582 -
--------- ---------
329,516 237,500
========= =========
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb159.5 million as of December 31,1996 and Rmb311.5 million as of September
30, 1997 respectively are guaranteed by a related company.
6. 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, 1997, 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.
7. PROVISION FOR INCOME TAXES
--------------------------
No provision for income taxes was provided in respect of the income derived
from Hangzhou toll road since the tax holiday has been deferred until the
CIP Projects are completed as mentioned in Note 12.
8. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
-------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of
CSH in an amount of Rmb75 million and Rmb63.5 million as of December 31,
1996 and September 30, 1997 respectively.
<PAGE>
CSH has undertaken to provide continuing financial support to the Company to
the extent of CSH's interest in the Company for the period ending on
December 31, 1997.
The Company paid management fees of US$155,000 (Rmb1,288,000) to CSH during
1996 for administrative services rendered to the Company by CSH.
9. DUE TO CHINESE JOINT VENTURE PARTNER
------------------------------------
The amount due to Chinese joint venture partner as at December 31, 1996 and
September 30, 1997 represented 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.
10. 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
1997 1996
------- -------
Shares under option as at January 1, 150,000 150,000
Issued - -
Expired - -
------- -------
Shares under option as at Sepember 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
1997 1996
--------- ---------
Shares under option as at January 1, 1,000,000 1,000,000
Expired 1,000,000 -
--------- ---------
Shares under option as at September 30, - 1,000,000
========= =========
Average exercise price of outstanding options - $0.14
========= =========
Exercisable at end of period - 1,000,000
========= =========
11. COMMITMENTS
-----------
As of December 31, 1996 and September 30, 1997, the Operating Subsidiary had
outstanding capital commitments for construction contracts related to its
CIP projects amounting to approximately Rmb91,783,000 and Rmb70,000,000
respectively.
12. CONTINGENCY
-----------
The Operating Subsidiary has obtained an approval from the local government
to offset the toll revenue collected from the first and second 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 of the 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 Rmb 5 million and Rmb 7.9 million for the year ended December
31, 1996 and for the nine months ended September 30, 1997 respectively may
arise. In the opinion of management, it is unlikely that a liability will
arise.
13. RETIREMENT PLANS
----------------
As stipulated by the regulations of the Chinese government, all of the local
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 Rmb64,000 and
Rmb91,000 for the nine months ended September 30, 1996 and 1997
respectively.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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
Holdings Limited, a Hong Kong company which owns 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.
On September 11, 1996, the Company disposed of all the issued and
outstanding shares of Acewin Profits Limited, a British Virgin Islands
corporation ("Acewin"), to 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.
On February 8, 1996, the Company had acquired all the issued and outstanding
shares of Acewin, from CSH.
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 Company'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, 1997, the Company had the following subsidiaries:
Westronix Limited ("Westronix") - 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. ("Hangzhou toll road" or
"Operating Subsidiary"), 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 CCHL which in turn holds a 51% interest in Hangzhou toll road.
Business:
Hangzhou toll road 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.
<PAGE>
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, 11.3km), 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 starting from
March 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 and manual toll collection systems.
Revenue contribution from the new section will further strengthen the
profitability and liquidity position of the Company.
<PAGE>
Results of operation:
Summary financial information
- -----------------------------
Nine months
ended September 30,
1997 1996
------- -------
Rmb'000 Rmb'000
Toll revenue 29,564 28,046
General and administrative expenses 24,242 9,890
Loss from discontinued operations - (1,545)
Net income/(loss) (4,117) 10,719
Toll revenue
Toll revenue increased by 5.4% or Rmb1,518,000 in the nine months ended
September 30, 1997 as compared with the same period in last year. Traffic
volume recorded a 27% decrease from 3,692,929 vehicles for the first nine
months ended of 1996 to 2,696,536 vehicles for the first nine months ended
of 1997. This was a expected result of the almost 100% increase in all toll
rates during the second quarter of 1997. Management is optimistic about the
future revenue generation ability of Hangzhou toll road, particularly since
the second phase of the toll road has been completed and will generate toll
revenue in full capacity very soon. In addition, the third and final phase
of the toll road is expected to be completed by the end of 1997 and should
become operative in the 1998 fiscal year.
General and Administrative Expenses
During the nine months ended September 30, 1997, general and administrative
expenses increased by 145.12% to Rmb24,242,000 from Rmb9,890,000 for the
nine months ended September 30, 1996. This was primarily attributable to the
interest payable on the US$30 million convertible note in excess of the
interest income generated from the US$ 900,000 note receivable. As far as
the Operating Subsidiary is concerned, general and administrative expenses
as a percentage of toll revenue decreased from 28.36% for the nine months
ending September 30, 1996 to 24.87% for the same period in 1997. Much of
this had come from decrease in salaries and wages, depreciation and interest
expense.
Net Income
During the nine months ended September 30, 1997, the Company recorded a loss
of Rmb4,117,000 as against a net income of Rmb10,700,000 for the
corresponding period in 1996. This was a direct result of increase in
general and administrative expenses as mentioned above. Loss from
discontinued operations represents the operating loss of Regal Bell and
Rubber, which had been disposed in January, 1996.
Liquidity and Capital Resources
For the nine months ended September 30, 1997, net cash used in operating
activities and investing activities was approximately Rmb24.1 million and
Rmb82.4 million respectively. Net cash provided by financing activities
amounted to Rmb 99.3million, resulting in a net decrease in cash and cash
equivalents of approximately Rmb7.2 million for the nine months ended
September 30, 1997.
<PAGE>
Cash from operating activities was mainly used in settlement of accrued
expenses and other payables which were reduced by approximately Rmb40.6
million for the nine months ended September 30, 1997. The remaining
shortfall in operating cash and capital expenditures incurred during the
period were financed principally through new bank borrowings of Rmb92
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 second phase has now been completed and the third phase would follow by
the end of fiscal year 1997. The Company anticipates that in 1998 the
Operating Subsidiary will generate significant toll revenue from all three
phases of the toll road, and such revenue can then be used to repay its bank
loans. The Company anticipates 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 service 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 contain 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. The Chinese government has
implemented and maintained an economic program designed to control
inflation, which has resulted in the 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 effective in controlling costs.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file reports on FORM 8-K during the quarter
ending September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
REGAL INTERNATIONAL INC.
(Registrant)
Date: November 14, 1997 /s/ Mico Chung
------------------ --------------------------------
Mico Chung, President
Date: November 14, 1997 /s/ Jim Pang
------------------ ---------------------------------
Jim Pang, Chief Financial Officer
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