<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT SFCTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----- to -----
Commission file number 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of small business as specified in its charter)
Delaware 75-1071589
- ---------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
52/F Bank of China Tower
1 Garden Road
Hong Kong
(Address Of principal executive offices)
852-2844-2905
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such sooner period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes ----- No--X--
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date September 30, 1996, 81,806,198
shares.
Transitional Small Business disclosure format (check one):
Yes ----- No --X--
<PAGE>
TABLE OF CONTENTS
PART 1: - FINANCIAL INFORMATION
PAGE
----
ITEM I - FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 1-2
Consolidated Statements of Operations
for the three and nine month period
ended September 30, 1996 and
September 30, 1995 3
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1996 and
September 30, 1995 4
Notes to Consolidated Financial Statements 5-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION 12-14
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 15
ITEM 2 - CHANGE IN SECURITIES 15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 15
ITEM 5 - OTHER INFORMATION 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 15
<PAGE> -1-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(Amounts expressed in United States dollars)
(Amounts in thousands, except number of shares and per share data)
September December
30, 1996 31, 1995
---------- ----------
$'000 $'000
ASSETS
- ------
Current assets
Cash and cash equivalents 3,319 11
Restricted cash - 19
Note Receivable 172 -
Accounts receivable, net - 1,583
Inventories - 2,460
Prepayments and other current assets 309 235
---------- ----------
Total current assets 3,800 4,308
---------- ----------
Property, plant and equipment, net 57,209 1,836
Prepayments for Construction
in Progress 1,891 -
Note receivable 1,285 -
Goodwill, net 12,752 -
---------- ----------
Total assets 76,937 6,144
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current liabilities
Short term bank loans 3,614 -
Long-term loans - current portion - 288
Accounts payable 464 752
Accrued expenses
and other payables 678 595
Taxes other than income 14 -
Due to related parties - 577
---------- ----------
Total current liabilities 4,770 2,212
The accompanying notes are an integral part of these financial statements.
<PAGE> -2-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(Amounts expressed in United States dollars)
(Amounts in thousands, except number of shares and per share data)
September December
30, 1996 31, 1995
---------- ----------
$'000 $'000
Convertible note payable 30,000 -
Long-term loans 18,972 675
Due to China Strategic Holdings Ltd. 103 -
Due to Chinese joint venture partner 3,614 -
Due to related parties - 619
Minority interests 16,689 -
Shareholders' equity:
Common stock 818 818
Additional paid-in capital 20,307 20,307
(Accumulated deficits)/
Retained Earnings (18,348) (18,487)
Exchange reserve/(deficit) 12 -
--------- ---------
Total shareholders' equity 2,789 2,638
--------- ---------
Total liabilities and
shareholders' equity 76,937 6,144
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE> -3-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30 1996 AND 1995
(Amounts expressed in United States dollars)
(Amounts in thousands, except for number of shares and per share data)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
$'000 $'000 $'000 $'000
Revenues 449 5,356 449 1,917
-------- -------- -------- --------
Cost of goods sold - 3,699 - 1,359
Selling and administrative
expenses 248 1,925 229 641
Interest expenses/
(income), net 60 250 92 91
Other expenses/
(income), net 115 (435) 57 (85)
-------- -------- -------- --------
Total costs and expenses 423 5,439 378 2,006
-------- -------- -------- --------
Income from continuing
operations before
income tax 26 (83) 71 (89)
Provision for income tax - - - -
-------- -------- -------- --------
Income from continuing
operations 26 (83) 71 (89)
Income from discontinued
operations:
Income from operations 1,768 - 575 -
Loss on disposal (580) - (559) -
-------- -------- -------- --------
1,188 - 16 -
Income before minority
interest 1,214 (83) 87 (89)
Minority interest 1,075 - 431 -
-------- -------- -------- --------
Net income 139 (83) (344) (89)
======== ======== ======== ========
Weighted average common
shares outstanding 81,806,198 81,806,198 81,806,198 81,806,198
Net income per
common share 0.002 (0.001) (0.004) (0.001)
The accompanying notes are an integral part of these financial statements.
<PAGE> -4-
REGAL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Amounts expressed in United States dollars)
Nine Months ended September 30,
-------------------------------
1996 1995
---------- ----------
$'000 $'000
Cash flows from operating activities:
Net Income(loss): 139 (83)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation and amortization 557 249
Provision for losses on accounts receivable - (27)
Loss on disposal of subsidiaries 580 -
Minority interests 1,075 -
Gain on disposal of fixed assets (2) (368)
(Increase) Decrease in Assets:
Accounts receivable (567) (27)
Restricted Cash - 12
Inventories (289) 31
Prepayments and
other current assets 155 23
Increase (Decrease) in Liabilities:
Accounts payable (720) (107)
Accrued expenses and
other current liabilities 357 131
Income and other taxes payable 303 -
--------- ---------
Net cash provided by (used in)
operating activities 1,588 (166)
========= =========
Cash flows from investing activities:
Purchase of subsidiaries (net of cash and
cash equivalents acquired) 10,449 -
Disposal of subsidiaries (net of cash and cash
equivalents disposed of) 9,553 -
Proceeds from disposal of fixed assets 21 126
Capital expenditure (2,937) (72)
--------- ---------
Net cash provided by (used in)
investing activities 17,086 54
========= =========
Cash flows from financing activities:
Loan from related parties 480 -
Proceeds from note receivable 243 -
Proceeds from borrowing 1,886 214
Repayment of bank loans (4,585) (299)
Repayment of note payable (13,500) -
Due to CSH 103 -
--------- ---------
Net cash provided by (used in)
financing activities (15,373) (85)
--------- ---------
Net increase (decrease) in cash 3,301 (197)
Cash at beginning of the period 11 200
Effect on foreign exchange rate changes 7 -
--------- ---------
Cash at end of the period 3,319 3
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE> -5-
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCLAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(Unaudited)
1. CONTINUING OPERATIONS AND BASIS OF PRESENTATION
-----------------------------------------------
The consolidated financial statements include the accounts of Regal
International, Inc. ("Regal") and its wholly-owned subsidiaries
(collectively, the "Company") which are Westronix Limited ("Westronix"),
China Construction International Group Limited ("CCIG") and Hangzhou Zhongche
Huantong Development Co., Ltd. (the "Operating Subsidiary" or "HZ Toll
Road".) The operating results of Regal's former subsidiaries, namely Acewin
Profits Limited ("Acewin"), China Machine Holdings Limited ("CMH") and Wuxi
CSI Vibration Isolator Co., Ltd. ("Wuxi CSI"), up to the date of disposal,
are included in the consolidated statement of income. All significant
intercompany balances and transactions are eliminated in consolidation.
The Company's consolidated financial statements have been prepared using
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the ordinary course
of business. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets or liabilities that might be necessary should the Company be unable to
continue in existence.
On February 8, 1996 Regal acquired all the issued and outstanding shares of
Acewin, a British Virgin Islands corporation, from China Strategic Holdings
Limited, a Hong Kong company ("CSH"). Acewin's sole asset is a 100% interest
in CMH, which in turn, holds a 55% interest in Wuxi CSI. Regal paid $13.5
million for the shares of Acewin common stock. Such purchase price was paid
by delivery of a $13.5 million Convertible Note (the "Convertible Note A")
bearing interest at 9% per annum after an initial 6-month interest free
period.
Regal subsequently sold all of its interest in Acewin at a consideration of
$13.95 million, pursuant to a Purchase Agreement dated September 11, 1996
between Regal, BTR China Holdings B.V. ("BTR"), a company incorporated in the
Netherlands, and CSH. The proceeds were then used to repay the Convertible
Note A of $13.5 million on September 13, 1996.
Immediately following the acquisition of the shares of Acewin capital stock
and as a condition thereto, Regal sold and transferred all the existing
operating assets and real property of Regal to a newly formed corporation,
Regal (New) International, Inc. ("New Regal") in exchange for $2.5 million
and New Regal's assumption of all outstanding liabilities of Regal, other
than the Convertible Note. New Regal is a wholly-owned subsidiary of
Harlequin Investment Holdings Limited ("Harlequin"). The $2.5 million
portion of the purchase price was paid as follows: $800,000 in cash and the
balance by delivery to Regal of two promissory notes, one in the principal
amount of $900,000 (the "900,000 Note") and the second in the principal
amount of $800,000 (the "$800,000 Note"). The $900,000 Note bears interest
at 9% per annum and is payable in sixty (60) equal monthly installments of
principal and interest. The $800,000 Note bears no interest and is due and
payable in one installment on January 31, 2001. New Regal's obligations
under the $900,000 Note and the $800,000 Note are secured by a pledge of all
of the issued and outstanding shares of capital stock of New Regal.
<PAGE> -6-
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal,
Westonix and CSH, Regal acquired all the issued and outstanding shares of
Westonix at a consideration of $30 million, resulting in the issuance of a
$30 million Convertible Note (the "Convertible Note B") by Regal to CSH
bearing interest at 9% per annum after an initial 6-month interest free
period. The principal and any unpaid interest owing on Convertible Note B
can be converted into shares of the common stock, US$0.01 par value, of Regal
at a conversion price of US$0.0302 per share. Westronix's sole asset is a
51% joint venture interest in HZ Toll Road, a Sino-foreign equity joint
venture incorporated in the People's Republic of China, held through an
intermediate Hong Kong company, CCIG.
HZ Toll Road, established on June 23, 1993, 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 HZ Toll Road amounted to Rmb102 million
(US$12,259,615) at the date of acquisition. 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") which are
expected to be completed by the end of fiscal year 1997. HZ Toll Road will
collect tolls from all three phases of the toll road after the CIP Projects
are completed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements of the
Company and its majority owned and controlled subsidiaries. All material
intercompany balances and transactions have been eliminated on consolidation.
b. Revenue
-------
Revenues represent toll revenue, reflecting gross receipts of 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
<PAGE> -7-
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.
e. Foreign Currency Translation
----------------------------
The Operating Subsidiary maintains its books and records in Renminbi. Foreign
currency transactions are translated into Renminbi at the applicable unified
rates of exchange or the applicable rates of exchange quoted by the
applicable foreign exchange adjustment center ("swap center"), prevailing at
the dates of the transactions. Monetary assets and liabilities denominated
in foreign currencies are translated into Renminbi using the applicable
unified rates of exchange or the applicable swap center rates prevailing at
the balance sheet dates. The resulting exchange differences are included in
the determination of income.
On consolidation, the results, assets and liabilities of the overseas
subsidiaries are translated into United States dollars at the rates ruling on
the balance sheet date. Exchange differences arising on consolidation are
taken directly to reserves.
f. Taxation: Income Taxes
----------------------
The Company's subsidiary, HZ Toll Road, and former subsidiary Wuxi CSI, are
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 for taxation in accordance with
the relevant income tax laws applicable to Sino-foreign equity joint venture
enterprises. Pursuant to the same income tax laws, HZ Toll Road and Wuxi
CSI, with a joint venture term of not less than 10 years and engaged in
infrastructure and production respectively, will be fully exempt from the
Chinese state unified income tax of 30% as well as the local income tax of 3%
(Wuxi CSI will be fully exempt from the Chinese local income tax of 3% for
five years starting from the first profit-making year) for two years starting
from the first profit-making year followed by a 50% reduction of the Chinese
state unified income tax for the next three years.
Wuxi CSI has obtained approval from the Wuxi Tax Bureau to delay the
commencement of the tax holiday to January 1, 1994. Accordingly, from the
date of its incorporation to December 31, 1993, Wuxi CSI was subject to
Chinese state income tax at the rate of 24% plus Chinese local income tax at
3%.
The Company provides for deferred income taxes using the liability method, by
which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement basis of assets and
liabilities. The tax consequences of those difference are classified as
current or non-current based upon the classification of the related assets or
liabilities in the financial statements.
<PAGE> -8-
g. Taxation: Business Tax
----------------------
Prior to December 31, 1993, the Operating Subsidiary was subject to
Consolidated Industrial and Commercial Tax ("CICT") at a rate of 3.03% on the
gross toll revenue.
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 CICT. Under these new tax regulations, the Operating Subsidiary is
subject to business tax which replaced the CICT and is now the principal
direct tax on the 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 June 23, 1993 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.
3. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
September 30, December 31,
1996 1995
------------- ------------
USD '000 USD'000
Land - 101
Road and bridges 13,693 -
Buildings 18 1,357
Machinery and equipment 64 7,798
Motor vehicles 260 -
Furniture, fixtures and office equipment 5 810
Construction-in-progress 44,508 -
Less: Accumulated depreciation (1,339) (8,230)
--------- ---------
Net book value 57,209 1,836
========= =========
<PAGE> -9-
4. LONG-TERM BANK LOANS
--------------------
Long-term bank loans, all of which are unsecured, bear average interest rates
of approximately 15.08% as September 30, 1996 and are repayable as follows:
September 30, December 31,
1996 1995
------------- ------------
USD '000 USD '000
1997 6,986 -
1998 3,011 -
1999 6,565 -
2000 1,807 -
2001 602 -
5. INCOME TAXES
------------
PRC income taxes were provided at a rate of 13.5% in respect to income earned
by Wuxi CSI prior to its disposal. No income taxes was provided on the
income of HZ Toll Road for the nine months ended September 30, 1996 owing to
the reason as stated in Note 7.
6. DUE TO CHINESE JOINT VENTURE PARTNER
------------------------------------
The amount due to Chinese joint venture partner as at September 30, 1996
represented money borrowed from the Chinese joint venture partner to finance
the CIP Projects. The loan is unsecured, non-interest bearing and has no
fixed repayment date.
7. 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 in the statutory income statements of the 1998 and 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 $600,000 as of December 31, 1995 may arise. In the opinion of
management, it is not probable that a liability will arise.
<PAGE> -10-
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Disposal of subsidiaries
- ------------------------
Net assets disposed of: 1996
USD '000
Property, plant and equipment (net) 10,875
Long-term investment 260
Intangibles 107
Accounts receivable (net) 4,448
Inventories 4,865
Prepayments and other current assets 1,402
Bank balances and cash 5,149
Accounts payable (1,378)
Income taxes payable (399)
Accrued expenses and other current liabilities (2,542)
Dividend payable (1,610)
Bank loans and other borrowings (4,136)
Minority Interests (5,650)
Goodwill realized 5,595
Exchange gain realized (4)
---------
16,982
Loss on disposal of subsidiaries (580)
---------
16,402
=========
Satisfied by:
Cash (net of expense) 14,702
Note receivable 1,700
---------
16,402
=========
Analysis of the net inflow of cash and cash equivalents in
connection with the disposal of subsidiaries:
Cash consideration received (net) 14,702
Bank balances and cash disposed of (5,149)
---------
9,553
=========
<PAGE> -11-
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Cont'd)
---------------------------------------------------------
Acquisition of subsidiaries
- ---------------------------
Net assets acquired: 1996
USD '000
Property, plant and equipment (net) 63,592
Prepayments for CIP 1,894
Long-term investment 274
Intangibles 119
Accounts receivable (net) 2,296
Inventories 2,115
Prepayments and other current assets 1,612
Bank balances and cash 10,449
Accounts payable (1,808)
Income and other taxes payable (110)
Accrued expenses and other current liabilities (2,267)
Dividend payable (1,609)
Bank loans and other borrowings (30,376)
Minority interests (21,249)
---------
24,932
Goodwill arising on acquisition of subsidiaries 18,568
---------
43,500
=========
Satisfied by:
Convertible Note 43,500
=========
Analysis of the net inflow of cash and cash equivalents in
connection with the disposal of subsidiaries:
Cash consideration -
Bank balances and cash acquired 10,449
---------
10,449
=========
<PAGE> -12-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In view of the strong demand for infrastructure facilities in China,
management decided to invest in the HZ Toll Road thereby positioning the
Company to benefit from the burgeoning Chinese economy. Investment in HZ
Toll Road effectively enlarged the Company's scale of operation. Consolidated
total assets increased by more than twelve times when compared with the
Company's position at the beginning of the year. In addition, it is expected
that the Company will derive a steady income stream from toll revenues.
Results of operation
Nine months ended
-----------------
September 30,
1996 1995
--------- ---------
'000 '000
Revenues 449 5,356
--------- ---------
Cost of sales - 3,699
Selling, general and administrative expenses 248 1,925
Financial expenses 60 250
Other expenses (income), net 115 (435)
--------- ---------
Total costs and expenses 423 5,439
--------- ---------
Income from continuing operations before taxes 26 (83)
Provision for income taxes - -
--------- ---------
Income from continuing operations 26 (83)
Income from discontinued operations 1,768 -
Loss on disposal of subsidiaries (580) -
--------- ---------
Income before minority interest 1,214 (83)
Revenues
- --------
Revenues decreased by $4,907,000 or 91.6% in the first nine months of 1996 as
compared with the same period in 1995. Revenues in 1996 were minimal because
only the post-acquisition toll revenues were recognized in the consolidated
income statement. Therefore, the figure comprised barely one month's results.
It was naturally dwarfed by the nine-month comparative figure in 1995. Apart
from this, sales of Wuxi CSI and that of the oil equipment supply operations
which had been spun off were excluded from the item but were included in
"Income from discontinued operations".
Selling, general and administrative expenses
- --------------------------------------------
Selling, general, and administrative expenses for the nine months ended
September 30, l996 dropped 87.1% to $248,000 from $1,925,000 during the same
period last year. However, as a percentage of sales, it rose to 55.2% from
35.9% in 1995. This was principally attributable to the absence of
sufficient sales (owing to the reason mentioned above) to dissolve the
corporate expenses incurred by Regal, where a majority of expenses were fixed
in nature, in the computation of the cost ratio. Nevertheless improvement is
expected in the future reports as more post-acquisition toll revenues will be
taken up in the consolidated income statement.
<PAGE> -13-
Financial expenses
- ------------------
Financial expenses for the period decreased 76.0% from $250,000 of a year ago
to $60,000 in 1996. Acquisition of the HZ Toll Road was made through the
issuance of a $30 million convertible note, which is interest-free for six
months from the date of issue. As a result, no interest expense was accrued
on the convertible note during the period. In addition, most of the interest
expenses incurred by the HZ Toll Road were capitalized into CIP Projects.
Interest expense during the period arose mainly from the interest on the
$13.5 million convertible note issued to acquire Wuxi CSI, offset by the
interest income received from the note receivable issued by New Regal. The
six-month interest-free period of the former convertible note expired on
August 8, 1996. Regal by using the proceeds received upon disposal of Wuxi
CSI, repaid the $13.5 million convertible note on September 13, 1996.
Interest charges reflect for the period from August 8 to September 13, 1996.
Income from continuing operations before income taxes
- -----------------------------------------------------
The spin-off of the oil exploration equipment supply operations early this
year, which operated at a loss, and acquiring the HZ Toll Road which yields a
steady income stream, improved the Company's profitability. Income from
continuing operations before taxes improved from a loss of $83,000 in first
nine months of 1995 to an income of $26,000 for the same period this year.
Management is confident that the Company will see earnings further improve in
future reports when the financial contribution from the HZ Toll Road becomes
fully reflected in the consolidated statement of income.
Income from discontinued operations
- -----------------------------------
This item represents the operating results of Wuxi CSI and that of the oil
equipment supply operation up to the date of disposal. The minority interest
share amounted to $961,000. The income from discontinued operations
contributed a net amount of approximately $807,000 to the Company's bottom
line.
Loss on disposal of subsidiaries
- --------------------------------
Regal made a gross gain of $450,000 upon disposal of Wuxi CSI, reflecting
gross disposal proceeds of $13.95 million, net of the purchase cost of $13.5
million. Upon consolidation, a loss was recorded because the post-
acquisition profit of Wuxi CSI was brought into the calculation.
Liquidity
During the nine months ended September 30, 1996, net cash provided by
operating activities was approximately $1,588,000 as compared to net cash
used of $166,000 during the same period in 1995. The increased liquidity
resulted from net income of $139,000 after adjustments for depreciation and
amortization of $557,000, loss on disposal of subsidiaries of $580,000 and
minority interest of $1,075,000. These non-cash adjustments were offset by
an increase in working capital of $761,000. Cash provided by investing
activities resulted from the net cash effect of acquiring the HZ Toll Road
and disposal of Wuxi CSI, which generated into the Company net cash and cash
equivalents of approximately $10,449,000 and $9,553,000 respectively. Cash
used in financing activities was $15,373,000, primarily attributable to the
repayment of the $13.5 million convertible
<page. -14-
note and bank loans of $4,585,000 during the period. As a result, the cash
position of the company was substantially strengthened. Cash and cash
equivalents increased to $3,319,000 at September 30, 1996 from $11,000 at the
beginning of the year.
Capital Resources
The Company's working capital mainly comes from operations. Short-term and
long-term bank loans at September 30, 1996 amounted to $3,614,000 and
$18,792,000 respectively. All of short-term loans and $9,576,000 were
secured by a related company of CSH. Apart form these, the Company at
September 30, l996 had $30 million convertible note in issue. The note can
be converted into shares of Regal Common Stock, $0.01 par value, a conversion
price of $0.0302 per share (Note 1).
Effects of Inflation
- --------------------
The general inflation rate in the PRC was approximately 13.2%, 21.7% and
14.8% per annum in 1993, 1994 and 1995 respectively. Accordingly, the
Chinese government has taken steps to control inflation by means of credit
restrictions and an increase in interest rates which, in turn, may lead to a
slowdown of the Chinese economy. However, the management believe that
inflation in China would not pose a significant adverse effect on the
performance of the Company, as the Operating Subsidiary may apply to the
provincial price bureau for increase in toll rates.
<PAGE> -15-
PART II - OTHER INFORMATION
ITEM I - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
On September 10, 1996, the Company issued a $30 million convertible
note (the "Note") as payment for the Company's acquisition of all of the
issued and outstanding shares of Westronix Limited. The Note, if fully
converted to common stock by the holder thereof, would give it a controlling
interest of approximately 96% of the Company. See Note 1 to Consolidated
(Unaudited) Financial Statements and Report on Form 8-K dated as of September
10, 1996.
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
Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ending September 30, 1996, however, the Company filed
reports on Form 8-K on or about October 7, 1996, reporting events under Item
2, which occurred on September 10 and September 11, respectively. The
information required to be filed for such reports under Item 7, was filed by
the Company on Form 8-K/A on December 2, 1996.
<PAGE> -16-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
REGAL INTERNATIONAL, INC.
(Registrant)
/s/ Mico Chung
-----------------------------
Mico Chung, President
/s/ Jim Pang
-----------------------------
Jim Pang, Chief Financial Officer
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