<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 March 31, 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 : April 30, 1997,
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 months ended March 31, 1997 and 1996 1
Consolidated Condensed Balance Sheets (unaudited) at March
31, 1997 and December 31, 1996 2
Consolidated Condensed Statements of Cash Flows (unaudited)
for the three months ended March 31, 1997 and 1996 3
Notes to Consolidated Condensed Financial Statements
(unaudited) for the three months ended March 31, 1997 and
1996 4-15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 16-18
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 19
ITEM 2 - CHANGES 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)
-------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Amounts in thousands, except number of shares and per share data )
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1997 1997 1996
----------- ----------- -----------
US$ Rmb Rmb
<S> <C> <C> <C>
Toll revenue 1,145 9,502 7,657
General and administrative expenses (571) (4,732) (2,689)
Exchange gain 2 14 (164)
----------- ----------- -----------
Income from continuing
operations before income
taxes and minority interest 576 4,784 4,804
Provision for income taxes - - -
----------- ----------- -----------
Income from continuing
operations before minority
interest 576 4,784 4,804
Minority interests (372) (3,087) (2,557)
----------- ----------- -----------
Income from continuing
operations 204 1,697 2,247
Loss from discontinued operations - - (1,149)
----------- ----------- -----------
Net income 204 1,697 1,098
=========== =========== ===========
Earnings per common share (Primary):
- from continuing operations 0.002 0.021 0.027
- from discontinued operations - - (0.014)
----------- ----------- -----------
0.002 0.021 0.013
=========== =========== ===========
Earnings per common share (Fully diluted)):
- from continuing operations 0.0002 0.0016 0.0021
- from discontinued operations - - (0.0011)
----------- ----------- -----------
0.0002 0.0016 0.0010
=========== =========== ===========
Weighted average common
shares outstanding 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 March 31, 1997
of US$1.00 = Rmb8.30. No representation is made that the Renminbi amounts could have been, or
could be, converted into United States Dollars at that rate on March 31, 1997 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated statements of income.
-1-
</TABLE>
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------
MARCH 31, 1997 AND DECEMBER 31, 1996
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
March March December
31, 1997 31, 1997 31, 1996
----------- ---------- ----------
US$ Rmb Rmb
<S> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents 3,895 32,328 21,443
Prepayments and deferred expenses 79 655 469
Other receivables and other current assets 1,595 13,236 13,698
---------- ---------- ----------
Total current assets 5,569 46,219 35,610
Prepayments for construction-in-progress 863 7,167 9,942
Property, plant and equipment, net 74,109 615,106 611,359
---------- ---------- ----------
Total assets 80,541 668,492 656,911
========== ========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current liabilities
Short-term bank loans 1,506 12,500 -
Long-term bank loans - current portion 6,988 58,000 58,000
Accounts payable 1,695 14,065 9,767
Accrued expenses and other payables 465 3,865 56,325
Taxes other than income 14 116 114
---------- ---------- ----------
Total current liabilities 10,668 88,546 124,206
---------- ---------- ----------
Long-term loans 26,687 221,500 179,500
Convertible note payable 30,072 249,600 249,600
Due to Chinese joint venture partner 5,046 41,881 41,318
Due to China Strategic Holdings Ltd. 279 2,312 2,418
Minority interests 17,500 145,254 142,167
Shareholders' equity:
Common stock 820 6,806 6,806
Additional paid-in capital 1,900 15,773 15,773
Accumulated deficit (12,431) (103,180) (104,877)
---------- ---------- ----------
Total shareholders' equity (9,711) (80,601) (82,298)
---------- ---------- ----------
Total liabilities and shareholders' equity 80,541 668,492 656,911
========== ========== ===========
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 march 31, 1997
of US$1.00 = Rmb8.30. No representation is made that the Renminbi amounts could have been, or
could be, converted into United States Dollars at that rate on March 31, 1997 or at any other
certain rate.
The accompanying notes are an integral part of these consolidated balance sheets.
-2-
</TABLE>
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Amounts in thousands)
<CAPTION>
1997 1997 1996
---------- ---------- ----------
US$ Rmb Rmb
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income
Income from continuing operations 204 1,697 2,247
Income/(Loss) from discontinued operations - - (1,149)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Minority interests 372 3,087 2,557
Depreciation and amortization 146 1,208 1,031
(Increase)Decrease in assets:
Prepayments and deferred expenses (22) (186) (818)
Other receivables and other current assets 56 462 (14,575)
Increase (Decrease) in liabilities:
Accounts payable 518 4,298 (6,175)
Accrued expenses and other payables (6,320) (52,460) (7,663)
Taxes other than income - 2 9
---------- ---------- ----------
Net cash used in operating activities (5,046) (41,892) (24,536)
---------- ---------- ----------
Cash flows from investing activities:
Prepayments for construction-in-progress 334 2,775 3,825
Acquisition of property, plant and equipment (597) (4,955) (23,421)
Change in net assets of discontinued operations - - 21,949
---------- ---------- ----------
Net cash (used in) provided by investing activities (263) (2,180) 2,353
---------- ---------- ----------
Cash flows from financing activities:
Proceeds of bank loans 6,566 54,500 13,000
Due to related companies - - (1,500)
Due to Chinese joint venture partner 68 563 -
Due to China Strategic Holdings Limited (13) (10) 198
---------- ---------- ----------
Net cash provided by (used in) financing activities 6,621 54,957 11,698
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,312 10,885 (10,485)
Cash and cash equivalents, at beginning of period 2,583 21,443 22,172
---------- ---------- ----------
Cash and cash equivalents, at end of period 3,895 32,328 11,687
========== ========== ==========
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 March 31, 1997
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 March 31, 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 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.
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.
<PAGE>
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 US$21,000 and has been included
as part of "Loss from discontinued operations" in the Company's consolidated
statements of income for the period ended March 31, 1997.
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 March 31, 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.
<PAGE>
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.
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").
<PAGE>
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 a reorganization 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 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 March
31, 1997 given the temporary nature of the holding.
Loss from the historical historical operations of Regal for the period ended
March 31, 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.
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$67,000 (Rmb555,000) and US$67,000 (Rmb555,000) as of December 31,1996
and March 31, 1997 respectively.
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.
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.
<PAGE>
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 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 March 31, 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 8.30
Shanghai swap center rate 8.32 8.29 8.30
<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 Rmb1,928,000
and Rmb2,328,000 and net income of the Company would have been reduced by
Rmb983,000 and Rmb1,187,000 for the three months ended March 31, 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 March 31, 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 March 31, 1996 and 1997. The calculation of fully diluted earnings
per common share is based on the common shares outstanding during the
periods ended March 31, 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
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
March 31, December 31,
1997 1996
------------ ------------
Rmb '000 Rmb '000
Road and bridges 110,696 110,784
Buildings 148 148
Machinery and equipment 3,975 3,804
Motor vehicles 3,328 3,084
Furniture, fixtures and office equipment 38 38
Construction-in-progress 510,274 505,734
Less : Accumulated depreciation (13,353) (12,233)
------------ ------------
Net book value 615,106 611,359
============ ============
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 14.70% as of
March 31, 1997 and are repayable as follows:
March 31, December 31,
1997 1996
------------ ------------
Rmb '000 Rmb '000
1997 58,000 58,000
1998 25,000 25,000
1999 61,500 54,500
2000 55,000 45,000
2001 55,000 55,000
2002 25,000 -
------------ ------------
279,500 237,500
============ ============
All the long-term bank loans are denominated in Renminbi. Loans amounting
to Rmb159.5 million as of December 31,1996 and Rmb203.5 million as of
March 31, 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 March
31, 1997, the Operating Subsidiary had no available retained earnings for
distribution.
<PAGE>
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 Rmb96 million as of December 31,
1996 and March 31, 1997 respectively.
CSH has undertaken to provide continuing financial support to the Company
to the extent of CSH's interest in the Company for a period ending on
December 31, 1997.
The Company paid management fees of US$155,000 (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 March 31, 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.
<PAGE>
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 March 31 150,000 150,000
========= =========
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.
Common stock options
1997 1996
--------- ---------
Option as at January 1 - 1,000,000
Issued - -
Expired - -
--------- ---------
Shares under option as at March 31 - 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 March 31, 1997, the Operating Subsidiary had
outstanding capital commitments for construction contracts related to its
CIP projects amounting to approximately Rmb10,000,000 as of December 31,
1996 and Rmb11.2 million as of March 31, 1997 may arise. In the opinion of
management, it is unlikely that a liability will arise.
12. 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 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 Rmb10 million as of December 31, 1996 and Rmb11.2 million as
of March 31, 1997 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
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
Rmb23,000 and Rmb31,000 for the three months ended March 31, 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
("Westronix"), from China Strategic Holdings Limited, a Hong Kong company
("CSH") pursuant to the terms of the Acquisition Agreement entered into on
September 10, 1996. Westronix's sole asset is a 100% equity interest in China
Construction Holdings Limited, a Hong Kong company ("China Construction") which
owns 51% joint venture interest in Hangzhou Zhongche Huantong Development Co.,
Ltd. ("HZHD"), a Sino-foreign joint venture established in Hangzhou, Zhejiang
Province, the People's Republic of China ("China") on June 23, 1993.
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 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. On
February 19, 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 Wuxi 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 March 31, 1997, the Company had the following subsidiaries:
Westronix Limited ("WL") - a holding company incorporated in the British Virgin
Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in Hong
Kong and formally known as China Construction International Group Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. ("HZHD"), a Sino-foreign
equity joint venture located in Hangzhou, Zhejiang Province, China.
The Company holds a 100% interest in WL. WL holds a 100% interest in CCHL
which in turn holds a 51% interest in HZHD.
Business:
HZHD has been established to develop the construction project called "Hangzhou
Ring Road". The Hangzhou Ring Road is designed to direct the congested traffic
outside the city of Hangzhou. The city of Hangzhou, which covers an area of
approximately 16,000 square kilometers and has a population of approximately
5.6 million, is the capital of Zhejiang Province in China. The city is located
about 150 kilometers from Shanghai and has experienced rapid growth in its
light manufacturing industry in recent years, most notably in electronic
instruments, refined chemicals, machinery and electrical appliances.
<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, 11.3 km), which is under construction
and is expected to be completed by the end of fiscal 1997. This section
encompasses extensive bridge works including:
* river crossing bridges
* bridges for road interchanges
* underpasses and underground crossings for pedestrians and vehicles
The section of the road from Jichang Road to Xiangfuqiao is now in operation
and has been generating revenues from toll collection from the toll plazas at
Xiangfuqiao. The section from Xiangfuqiao to Liuxai was completed in 1996 and
obtained approval from the government to collect tolls. The section from
Liuxai to Lingjiaqiao is expected to be completed by the end of 1997. Upon
full completion, toll plazas are expected to operate at Xiangfuqiao (already
in operation), Liuxai and Lingjiaqiao. The toll plazas are currently
utilizing electronic surveillance systems along with computerized toll
collection systems.
The three months ended March 31, 1997 marked a significant page in the
Company's history. In February, the Zhejiang provincial government granted
approval to the Operating Subsidiary to start collecting toll fees on the
second phase of the toll road commencing March 1997. The second phase was
completed in November, 1996. Concurrently, the toll rates for the second
phase of the road proposed by the Operating Subsidiary were also approved.
Revenue contribution from the new section will further strengthen the
profitability and liquidity position of the Company.
Results of operation
Summary financial information Three months ended
- ----------------------------- ------------------
March 31,
---------
1997 1996
---- ----
Rmb '000 Rmb '000
Toll revenue 9,502 7,657
General and administrative expenses 4,732 2,689
Exchange gain / (loss) 14 (164)
Loss from discontinued operations - (1,149)
Net income 1,697 1,098
<PAGE>
Toll revenue
Toll revenue increased by 21.5% or Rmb1,679,000 in the three months ended
March 31, 1997 as compared with the same period last year. With toll fees
for the two periods under discussion remaining intact, this increase was a
direct result of increased traffic flow, which went up from 774,550 vehicles
in 1996 to 944,000 vehicles in 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 three months ended March 31, 1997, general and
administrative expenses increased by Rmb 2,043,000 or 76% as compared to Rmb
2,689,000 for the three months ended March 31, 1996. This was primarily
attributable to additional professional fees incurred and 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 increased slightly from 31.8% in the first
quarter of 1996 to 33.7% in 1997.
Exchange Gain
Exchange gain represents the favorable exchange difference arising from
re-measurement of various reporting currencies of the companies within the
Group into Renminbi, which is the Group's functional currency. At the end
of the three months ended March 31, 1997, the Renminbi appreciated by
approximately 0.03% when compared with the position at the beginning of the
period. Consequently, a marginal gain of Rmb14,000 was recorded upon
translation of foreign currency denominated assets and liabilities into
Renminbi. This contrasted with an exchange loss of Rmb164,000 for the three
months ended March 31, 1996, when the Renminbi depreciated by approximately
0.2%.
Net Income
During the three months ended March 31, 1997, net income increased 54.6% to
Rmb1,697,000 as compared to Rmb1,098,000 in the three months ended March 31,
1996. Net income increased primarily by the combined effect of
increases in toll revenue and non-recurrence of loss from discontinued
operations. Loss from discontinued operations represents the operating
loss of Regal Bell and Rubber, which had been spun-off in January, 1996.
Liquidity and Capital Resources
For the three months ended March 31, 1997, net cash used in operating
activities and investing activities was approximately Rmb41.9 million and
Rmb24.5 million respectively. Net cash provided by financing activities
amounted to Rmb55.0 million, resulting in a net increase in cash and cash
equivalents of approximately Rmb10.9 million for the three months ended
march 31, 1997.
Cash from operating activities was mainly used in settlement of accrued
expenses and other payables which were reduced by approximately Rmb52.5
million for the three months ended March 31, 1997. The remaining shortfall
in operating cash and capital expenditures of approximately Rmb2.2 million
incurred during the quarter were financed principally through bank
borrowings of Rmb54.5 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.
<PAGE>
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 March 31, 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: __________________ ___________________________
Mico Chung, President
Date: __________________ ___________________________
Jim Pang, Chief Financial Officer
- 17 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3895
<SECURITIES> 0
<RECEIVABLES> 1595
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5569
<PP&E> 74109
<DEPRECIATION> 0
<TOTAL-ASSETS> 80541
<CURRENT-LIABILITIES> 10668
<BONDS> 0
0
0
<COMMON> 820
<OTHER-SE> (10531)
<TOTAL-LIABILITY-AND-EQUITY> 80541
<SALES> 1145
<TOTAL-REVENUES> 1147
<CGS> 571
<TOTAL-COSTS> 571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 576
<INCOME-TAX> 0
<INCOME-CONTINUING> 576
<DISCONTINUED> 0
<EXTRAORDINARY> (372)
<CHANGES> 0
<NET-INCOME> 204
<EPS-PRIMARY> .002
<EPS-DILUTED> .000
</TABLE>
