<PAGE>
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
Filed by the Registrant [x]
Filed by the Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
REGAL INTERNATIONAL, INC.
- ----------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
REGAL INTERNATIONAL, INC.
- ----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-
6(i)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-
11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
APPOINTMENT OF PROXY
REGAL INTERNATIONAL, INC.
Special Meeting of Stockholders -- October___, 1997
The undersigned hereby appoints_____________ and ____________and each of
them (with full power to act without the other), the true and lawful proxies
of the undersigned, each having full power to substitute, to represent the
undersigned and to vote all shares of stock of REGAL INTERNATIONAL, INC.
(the "Company") which the undersigned would be entitled to vote if
personally present at the Special Meeting of Stockholders (the "Meeting") of
REGAL INTERNATIONAL, INC., to be held at ___________________________, on
October__, 1997, at the hour of 10:00 a.m., local time.
1. FOR [ ] WITHHOLD [ ] ratification of the acquisition of Westronix
Limited by the Company.
2. FOR [ ] WITHHOLD [ ] one or more amendments to the Certificates of
Incorporation to increase the authorized number of shares of Common stock up
to 1,100,000,000.
3. FOR [ ] WITHHOLD [ ] amendments to the Article Fourth, Fifth,
Sixth, Seventh and Tenth of the Company's Certificate of Incorporation.
4. FOR [ ] WITHHOLD [ ] reverse split of common stock of the Company.
5. FOR [ ] WITHHOLD [ ] adoption of restated and amended Bylaws of
the Company.
6. FOR [ ] WITHHOLD [ ] change of the Company's name to "Asia
Resources Holdings Ltd.".
7. FOR [ ] WITHHOLD [ ] adoption of 1997 Incentive Stock Option Plan.
8. Upon all such other matters that may promptly be brought before such
Meeting, as to which the undersigned hereby confers discretionary authority
upon said proxies.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR (1) [ ] THE
RATIFICATION OF THE ACQUISITION OF WESTRONIX LIMITED (2) [ ] ONE OR MORE
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION (3) [ ] AMENDMENTS TO
ARTICLE FOURTH, FIFTH, SIXTH, SEVENTH AND TENTH OF THE CERTIFICATE OF
INCORPORATION (4) [ ] THE REVERSE SPLIT OF COMMON STOCK, (5) [ ], ADOPTION
OF RESTATED AND AMENDED BYLAWS, (6) [ ],CHANGE OF THE COMPANY'S NAME TO
"ASIA RESOURCES HOLDINGS, LTD.", (7) [ ], ADOPTION OF 1997 INCENTIVE STOCK
OPTION PLAN , OR, IF A CONTRARY INSTRUCTION IS INDICATED IN ACCORDANCE WITH
SUCH INSTRUCTIONS.
All other proxies heretofore given by the undersigned to vote shares of
stock of REGAL INTERNATIONAL, INC. which the undersigned would be entitled
to vote if personally present at said Meeting or any adjournment thereof are
hereby expressly revoked. This proxy may be revoked at any time prior to
the voting hereof.
NOTE: Please date this proxy and sign it exactly as your name or names
appear on your shares. If signing as an attorney, executor, administrator,
guardian or trustee, please give full title as such. If a corporation,
please sign full corporate name by duly authorized officer or officers,
affix corporate seal and attach a certified copy of resolution or bylaws
evidencing authority.
_________________________
(Date)
_________________________
(Signature)
_________________________
(Signature)
<PAGE>
REGAL INTERNATIONAL, INC.
52/F Bank of China Tower
1 Garden Road, Hong Kong
---------------------------
NOTICE OF SPECIAL MEETING
---------------------------
To Be Held
October, 1997
NOTICE IS HEREBY GIVEN, in accordance with the provisions of Section 222
of the General Corporation Law of the State of Delaware, that a special
meeting of the stockholders (the "Meeting") of REGAL INTERNATIONAL, INC., a
Delaware corporation (the "Company"), whose principal executive offices are
located at 52/F Bank of China Tower, 1 Garden Road, Hong Kong, will be held
as follows:
Place: _________________, Los Angeles, California
Date: October, 1997
Time: 10:00 a.m.
The purpose of the Meeting is as follows:
1. To ratify the acquisition of Westronix Limited by the Company.
2. To amend the Company's Certificate of Incorporation to increase the
authorized number of shares of Common Stock up to 1,100,000,000 shares, of
par value $0.01 per share.
3. To amend the Company's Certificate of Incorporation (Ii) Article Fourth
(D)(7), to provide that the Company may remove directors or adopt, repeal
or amend bylaws by a meeting of the shareholders or a written consent by
shareholders holding a majority of the voting shares; (ii) Article Fifth to
provide that the number of directors shall not be less than three, and to
remove the classification of the board of directors; (iii) Article Sixth to
provide that the affirmative vote of the majority of voting shares is
sufficient for the amendment or adoption of bylaws; (iv) Article Seventh to
remove the requirement of 80% shareholders' vote for certain transactions
and to provide that the affirmative vote of the majority of voting shares is
sufficient to approve those certain transactions listed in Article Seventh;
and Article Tenth to remove the requirement of 80% shareholders' vote to
amend Article Fourth, Paragraph D (7) and (8), Article Fifth, Sixth,
Seventh and Tenth, and to provide that the affirmative vote of the majority
of voting shares is sufficient to approve amendments to those provisions of
the Company's Certificate of Incorporation.
4. To undertake a 138 to 1 reverse split of the Company's Common Stock
5. To adopt restated and amended Bylaws of the Company.
6. To change the Company's name to "Asia Resources Holdings Ltd."
7. To adopt a 1997 Incentive Stock Option Plan.
8. All such other matters as may be brought before such Meeting.
The Board of Directors has fixed the close of business on June 27, 1997
as the record date for determination of stockholders entitled to notice of,
and to vote at, the Meeting.
Shares can be voted at the Meeting only if the record holder thereof is
present at the Meeting or represented by proxy. To ensure the presence of a
quorum at the Meeting, you are requested to sign and date the accompanying
Appointment of Proxy and return it promptly in the enclosed return envelope.
The giving of such Appointment of Proxy will not affect your rights to vote
in person in the event you attend the Meeting.
September___, 1997 By Order of The Board of Directors
1
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REGAL INTERNATIONAL, INC.
52/F Bank of China Tower
1 Garden Road, Hong Kong
PROXY STATEMENT
Mailing Date: September___, 1997
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SPECIAL MEETING OF STOCKHOLDERS
- ----------------------------------------------------------------------------
To Be Held October___, 1997
GENERAL
This Proxy Statement is furnished to the holders of Common Stock, $0.01
par value per share (the "Common Stock"), of REGAL INTERNATIONAL, INC. (the
"Company" or the "Registrant"), on behalf of the Company, in connection with
its solicitation of Appointments of Proxy in the form enclosed herewith for
use at a special meeting of stockholders (the "Meeting") to be held on
October___, 1997, and at any adjournments thereof. The Meeting will be held
at 10:00 a.m. local time, on the above date, at ____________________________
The matters to be acted upon at the Meeting are set forth in the
accompanying Notice of Meeting and are described herein.
The cost of this solicitation of Appointments of Proxy will be borne by
the Company. In addition to the solicitation of Appointments of Proxy by
mail, certain officers, directors and regular employees of the Company,
without additional remuneration, may solicit Appointments of Proxy,
personally or by telephone, telegraph or cable. Arrangements will also be
made with brokerage firms and other nominee holders for forwarding proxy
materials to the beneficial owners of shares of the Common Stock, and the
Company will reimburse such persons for reasonable out-of-pocket expenses
incurred by them in connection therewith.
VOTING OF APPOINTMENTS OF PROXY
The persons named in the enclosed Appointment of Proxy, as proxies to
represent stockholders at the Meeting, are __________and ______________. An
Appointment of Proxy which is properly executed and returned, and not
revoked, will be voted in accordance with the directions contained therein.
If no directions are given, that Appointment of Proxy will be voted FOR the
ratification of the acquisition of Westronix Limited by the Company as
further described in Proposal 1, FOR the amendment to the Company's
Certificate of Incorporation increasing the authorized number of Common
Stock to 1,100,000,000, as further described in Proposal 2 herein, FOR
amendment to the Company's Certificate of Incorporation to amend Articles
Fourth, Fifth, Sixth, Seventh and Tenth, as further described in Proposal 3
herein, FOR the amendment to the Company's Certificate of Incorporation to
effect a 1-for-138 reverse stock split approved by the Board of Directors on
January 17, 1997, as further described in Proposal 4 herein, FOR adoption of
the amended and restated Bylaws of the Company, as further described in
Proposal 5 herein, FOR the name change, as further described in Proposal 6
herein and FOR adoption of 1997 Incentive Stock Option Plan, as further
described in Proposal 7 herein. On any other matters that may come before
the Meeting, each Appointment of Proxy will be voted in accordance with the
best judgment of the proxies.
REVOCABILITY OF APPOINTMENTS OF PROXY
An Appointment of Proxy may be revoked by the stockholder at any time
before it is exercised by filing with the Secretary of the Company a written
revocation or a duly executed Appointment of Proxy bearing a later date, or
by attending the Meeting and announcing his intention to vote in person.
2
<PAGE>
RECORD DATE AND VOTING RIGHTS
The close of business on June 27, 1997 has been fixed as the record date
for the determination of stockholders entitled to notice of, and to vote at,
the Meeting. Only those stockholders of record, on that date, will be
entitled to vote on the proposals described herein.
The voting securities of the Company are the shares of its Common Stock,
of which shares were issued and outstanding as of June 27, 1997. All
outstanding shares of Common Stock are entitled to one vote on each matter
submitted for voting at the meeting.
Horler Holdings Limited, a wholly-owned subsidiary of China Strategic
Holdings Limited has indicated its intention to vote for the proposals to be
presented at the Meeting.
BENEFICIAL OWNERSHIP OF COMMON STOCK
PRINCIPAL STOCKHOLDERS, DIRECTORS AND OFFICERS. The following table sets
forth the beneficial ownership of the Company's Common Stock, as of June 27,
1997, by each person known to the Company to own more than five percent
(5%) of the Company's Common Stock and by each of the Company's current
directors, and by all directors and officers of the Company as a group. The
table has been prepared based on information provided to the Company by each
stockholder.
Amount of
Name and Beneficial Percent of
Address Ownership Class
- -------- --------- -----
China Strategic Holdings Ltd.(1) 1,033,877,483 96.16%
Harlequin Investment Holdings Ltd.(2)(3) 4,452,082 0.41%
Richard N. Gray (2)(3) 4,452,082 0.41%
Director
Noble House, Queens Road
St. Peter Fort, Guernsey, Channel Islands
Oei Hong Leong(1) 1,033,877,483 96.16%
Director
52/F Bank of China Tower
1 Garden Road, Hong Kong
Chung Cho Yee Mico(1) 0 0%
President and Director
52/F Bank of China Tower
1 Garden Road, Hong Kong
Ma Wai Man Catherine(1) 0 0%
Director
52/F Bank of China Tower
1 Garden Road, Hong Kong
Jim G.K. Pang 0 0%
Chief Financial Officer
52/F Bank of China Tower
1 Garden Road, Hong Kong
Martin J. Furner 0 0%
Director
24 Chiswick High Road
Chiswick, London W4 1TE
All Directors and Officers 1,038,329,565 96.57%
as a Group (6 persons)
_______________________________
As used in this table, "beneficial ownership" means the sole or shared power
to vote, or to direct the voting of, a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose of,
or to direct the disposition of a security).
(1) China Strategic Holdings Limited has direct voting and investment
power with respect to 40,500,00 shares and indirect voting and investment
power with respect to 993,377,483 shares issuable upon the conversion of a
$30,000,000 Convertible Note held by Horler Holdings Limited, P.O. Box 71,
Craigmuer Chamber, Road Town, Tortola, British Virgin Islands, a wholly
owned subsidiary of China Strategic Holdings Limited. Mr. Oei Hong Leong is
a majority shareholder of China Strategic Holdings Limited.
3
<PAGE>
(2) Harlequin Investment Holdings Limited has sole voting and investment
power with respect to 4,452,082 shares of Common Stock. The beneficial
ownership set forth herein does not include 8,000,000 shares of Common Stock
to be acquired upon an exercise of a Stock Purchase Option granted by China
Strategic Holdings Limited to Harlequin Investment Holdings Limited.
(3) Harlequin Investment Holdings Limited is a wholly owned subsidiary of
GHL (Senior) Pension Fund (the "Fund"), Noble House, Queens Road, St. Peter
Port, Guernsey, Channel Islands. Richard N. Gray is a director of the Fund
and Overseas Trust Company Limited is a trustee of GHL (Senior) Pension Fund
and have the same address. Mr. Gray and Overseas Trust Company Limited each
disclaim beneficial ownership of the shares of Common Stock.
As of June 27, 1997, there were approximately 9,000 shareholders of record.
The percentage of beneficial ownership is based upon 81,806,198 shares of
Common Stock outstanding as of June 27, 1997 and 993,377,483 shares of
Common Stock issuable upon conversion of $30,000,000 Convertible Note.
PROPOSAL NO. 1
RATIFICATION OF THE ACQUISITION OF WESTRONIX LIMITED
DESCRIPTION OF TRANSACTION
On September 10, 1996, the Board of Directors of the Company approved the
acquisition of 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,
formerly known as China Construction International Group Limited, a Hong
Kong company ("China Construction") which owns 51% joint venture interest in
Hangzhou Zhongche Huantong Development Co., Ltd. ("HZHD"), a Sino-foreign
joint venture established in Hangzhou, Zhejiang Province, the People's
Republic of China ("China") on June 23, 1993. The Company's principal
executive offices are located at 52/F Bank of China Tower, 1 Garden Road,
Hong Kong, tel. (852) 2514-0300.
The consideration paid for Westronix by the Company consisted of a $30
million Convertible Note bearing interest at the rate of nine percent (9%)
per annum after an initial six (6) month interest-free period (the "Note").
The Note is payable interest only on an annual basis, with all principal
being due and payable on September 10, 1999. The principal and any unpaid
interest due on the Note are convertible at any time from the date of
issuance of the Note, into shares of Common Stock, $0.01 par value, of the
Company ("Common Stock") at a conversion price of $0.0302 per share. The
terms of the Agreement and the Note provided for a downward adjustment of
the principal amount of the Note, if an opinion issued by an independent
third party on the amount of consideration paid by the Company, stated an
amount which is 10% less than the consideration paid by the Company. The
adjustment formula was designed to ensure fairness of the transaction. The
Note is secured by all assets of Westronix and its related subsidiaries.
The Board of Directors of the Registrant determined that acquisition of
Westronix was in the best interest of the Registrant and was advantageous to
the Company's plans to concentrate the resources of the Company in
infrastructure projects in China.
Based upon the audited consolidated financial statements of the Company
as of December 31, 1995 ( which reflect the financial condition of the
Company before its acquisition of Acewin Profits Limited in February of
1996), the total stockholders' equity amounted to approximately $2.6
million, whereas the net income of the Company for the same period was only
$28,000. With 81,806,198 shares of common stock outstanding, the net income
per share was negligible, and thus the conversion of the Note will not
result in any meaningful dilution to earnings per share.
Acquisition of Westronix through the transfer of CSH's equity interest in
Westronix to the Company was accounted for as a reorganization of companies
under common control similar to pooling of interests. The management of the
Company believes that the transaction was exempt from any federal income
taxes and there are no federal tax consequences to the Company.
4
<PAGE>
The Board of Directors obtained a fairness opinion (the "Fairness
Opinion") from The New China Hong Kong Corporate Finance Limited ("New China
Hong Kong"), an independent third party, with respect to the acquisition of
Westronix by the Company at a consideration of $30 million, to be satisfied
by way of the issuance of the Note. The Fairness Opinion was addressed to
the Board of Directors of the Company and should not be relied upon by any
parties other than the directors of the Company. Any reference herein to
the Fairness Opinion is made for reference purposes only. In the Fairness
Opinion, New China Hong Kong was of the opinion that the terms of the
proposed acquisition of Westronix were fair and reasonable to the Company.
New China Hong Kong is a company incorporated in Hong Kong and is a
registered investment advisor under the Hong Kong Securities Ordinance. New
China Hong Kong has a broad experience in providing financial/advisory
services to Hong Kong-listed companies with China-based businesses and/or
assets. New China Hong Kong often acts as an independent financial advisor
to minority shareholders and independent directors of listed companies in
Hong Kong. In selecting New China Hong Kong to provide the Fairness Opinion
with respect to the acquisition of Westronix, the Board of Directors took
into consideration the above factors and New China Hong Kong's vast
knowledge of companies based in China. The Board of Directors also took
under advisement the fees charged by New China Hong Kong for its
professional services, which it found reasonable.
There had been no material relationship between New China Hong Kong and
the Company or between New China Hong Kong and CSH, or any compensation
received by New China Hong Kong from either of those parties as a result of
any such relationship during the two years prior to selecting New China Hong
Kong. Furthermore, no such material relationship was mutually understood to
be contemplated by New China Hong Kong, the Company and CSH at the time New
China Hong Kong was selected and no compensation was received thereof as a
result of such contemplated material relationship.
The terms of the proposed acquisition of Westronix were confirmed by New
China Hong Kong as fair and reasonable. New China Hong Kong's findings were
based on its independent assessment of an internal appraisal report prepared
and provided by CSH, which determined the valuation of Westronix by applying
the discounted cash flow model to the projected cash flow of the Hangzhou
Toll Road over the remaining life of the joint venture.
Summary of New China Hong Kong's Fairness Opinion
- -------------------------------------------------
The Fairness Opinion was prepared by New China Hong Kong at the request
of the Board of Directors. In rendering its recommendation with respect to
the fairness of the transaction, New China Hong Kong relied on the
information and representations provided to it by CSH that such information
was complete and relevant in all material respects. New China Hong Kong has
not conducted an independent in-depth investigation of the business of the
joint venture and Hangzhou Toll Road.
The Fairness Opinion found that based on CSH's internal report, the net
present value of the Hangzhou joint venture would have values ranging from
US$27.2 to US$44.1 million, at the range of discount rates of 18%-24%. The
valuation was calculated by using the discount cash flow method which was
based on the free income streams available for distribution and on a
predetermined rate of return ("discount rate"). Considering other
comparable projects in the area, New China Hong Kong concluded that a
required rate of return of 18% was appropriate for projects in the same
locality. At that discount rate, the valuation of the Hangzhou Toll Road
would be approximately US$44.1 million. If a discount rate of 20% were
used, accounting for the additional risk involving the fact that the
western section of the Toll Road will become fully operational only in early
1998, the valuation would be approximately US$37.1 million. Even at a
discount rate of 24% the joint venture would have a value exceeding US$27
million and the joint venture acquisition by the Company is expected to
contribute profit to the Company commencing in 1997. The Fairness Opinion
also addressed the form of consideration, i.e. the Note, and the terms
thereon, and went on to conclude that the conversion price of $0.0302 per
share was substantially above the current price of the Company's Common
Stock ($0.01 on November, 1996). The Fairness Opinion further concluded
that the conversion of the Note would not result in any dilution to earnings
per share of the Common Stock, since based on the consolidated financial
statements of the Company as of December 31, 1995 (which reflect the
financial condition of the Company before the acquisition of Acewin Profits
Limited in February, 1996), total stockholders' equity amounted to
approximately US$2.6 million, and based on the statements of operations of
the Company for the same period, its net income was only US$28,000. Based
on 81,806,198 shares of Common Stock outstanding, the net income per share
was negligible and thus the conversion of the Note will not result in any
meaningful dilution to earnings per share.
The Fairness Opinion concluded that the terms of the proposed acquisition
of Westronix by the Company were fair and reasonable.
5
<PAGE>
DESCRIPTION OF BUSINESS OF HANGZHOU ZHONGCHE HUANTONG DEVELOPMENT CO., LTD.
Hangzhou Zhongche Huantong Development Co., Ltd. ("HZHD"), is the only
operating subsidiary of the Company. Set forth below is the Company's
organizational chart following the acquisition of Westronix.
-------------------------------
| Regal International Inc. |
| (Delaware) |
-------------------------------
| 100%
|
-------------------------------
| Westronix Limited |
| (BVI) |
-------------------------------
| 100%
|
-------------------------------
| China Construction |
| Holdings Limited |
| (Hong Kong) |
-------------------------------
|
| 51%
-------------------------------
| Hangzhou Zhongche |
| Huantong Development Co. |
| Ltd. (PRC) |
-------------------------------
HZHD has been established to develop the construction project called
"Hangzhou Ring Road". The Hangzhou Ring Road is designed to direct the
congested traffic both inside and outside the city of Hangzhou. The city of
Hangzhou, which covers an area of approximately 16,000 square kilometers and
has a population of approximately 5.6 million, is the capital of Zhejiang
Province in China. The city is located about 150 kilometers from Shanghai
and has experienced rapid growth in its light manufacturing industry in
recent years, most notably in electronic instruments, refined chemicals,
machinery and electrical appliances.
Infrastructure projects, like Hangzhou Ring Road, became a priority to
the government of China in recent years. According to directives of the 10-
year program (1991 - 2000) of the government of China, one of its key
national goals is to build more basic industry and infrastructure projects
during the 1990s. Preference is given to the construction of the principal
national trunk highways. In addition, highway construction in coastal
regions is prioritized.
The Hangzhou Ring Road was approved as a priority project by the Hangzhou
Municipal Planning Committee in 1992. HZHD has registered capital of RMB200
million and total investment of RMB600 million. The Chinese partner
contributed RMB98 million by injecting the existing Class 2 toll road, and
CCHL contributed RMB102 million in cash. The principal asset of HZHD is its
100% interest in a 30-year joint venture consisting of the Hangzhou Ring
Road, a three-section toll road surrounding the city of Hangzhou, which is
expected to be fully completed by the end of 1997. Two of the three sections
of the road were already completed by the end of 1996.
When Hangzhou Ring 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:
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* 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 toll collection systems and the manual collection of
tolls. The government of Zhejiang Province approved a toll increase of 100%
for the newly completed second phase of the Hangzhou Ring Road, effective
from March 1, 1997.
Overview of Transportation Infrastructure in China
- --------------------------------------------------
The earliest highway appeared in China at the beginning of this century.
Up to the founding of the People's Republic of China in 1949, the country
had merely 75,000 kilometers of highways, most of them cobblestone roads.
During the second half of the century, however, highway construction in
China experienced rapid development. By the end of 1995, total highway
mileage had reached 1.14 million kilometers. So far, highways have extended
to all provinces throughout the country, and 98 percent of China's townships
and 80 percent of villages have bus service.
China's highway construction after 1949 can be divided into three
periods. The first period was between 1949 and 1957, when emphasis was put
on filling in the main arteries of the country. The second period, 1958-
1980, experienced a rapid popularization of highways throughout the country.
During this period highway mileage increased from 254,600 kilometers to
888,000 kilometers, and 90 percent of all counties and townships were made
accessible by roads. In the third period, which started in 1981, China is
seeking the popularization of highways with improvements in road quality.
Priority is now given to the latter. With high grade highways and
expressways being built in the remotest areas, highway construction in China
entered a period of rapid development.
Since the implementation of "reform and opening", along with the
transition from a planned economy to a "socialist market economy", traffic
between different cities and between urban and rural areas in China has
increased. This has resulted in a sharp increase in demand for medium- and
short-distance small-scale freight transport, a large increase in passenger
flow and a steep rise in highway traffic. Many highways have actual traffic
volumes of four to five times more than their designed capacity. Traffic
congestion has become an outstanding bottleneck hindering economic
development. To meet the need of rapid economic development, China's
communication bureaus have shifted emphasis onto the economically developed
regions where there are urgent traffic problems, constructing and renovating
roads radiating from economic centers and coastal areas to neighboring and
hinterland areas. At the same time, in line with the increase in traffic,
highways connecting energy bases, harbors and large and medium-sized cities,
tributary roads to railways, arteries connecting economic zones and
important townships, tourist highways, and roads for poor areas
transportation, are to be built or renovated. In addition, a certain number
of expressways will be constructed according to necessity.
Highways in China are no longer the cart roads of the old. They have
become fully facilitated, with smooth surfaces and clear and neat traffic
markings. Sichuan Province, which had very poor transportation, now has a
complete transportation network. The expressway connecting Chengdu and
Chongqing has reduced the time between the two cities to a little over three
hours.
Compared with the sharp increase in transportation volume, however,
highway construction is still lagging behind. To solve this problem, the
Chinese government has mapped out a long-term plan to improve the country's
transportation network. The plan covers the construction of highways,
waterway transportation network and related safety systems. According to
the key highway construction projects in the plan, since 1990, construction
has begun for 35,000 kilometers of highway network of 12 national arteries
connecting Beijing and the provincial capitals, major cities, important
communication hubs and key ports throughout the country to form a nationwide
passageway for rapid transportation.
7
<PAGE>
These highway arteries will be composed mainly of expressways and grade-1
and grade-2 special roads, and will be well-equipped with complete safety,
telecommunications and administration systems. With the help of modern
traffic monitoring, all information relating to the traffic situation,
accidents, road surface conditions and weather, will be fed back to a
computer system in the traffic control center. Processed information will
then be transmitted back and displayed on information panels erected along
the roads.
Raw Materials
- -------------
The raw materials utilized by the Company in construction of the Hangzhou
Ring Road consist mainly of cement, gravel and steel rebar. The third and
final section of the Hangzhou Ring Road, currently under construction, is
being built by a general construction firm hired by the Company. The
general contractor is responsible for procuring all raw materials necessary
for completion of the project, and has not experienced shortages of any raw
materials.
In general, the cement industry in China is competitive and supply
shortages are rare. Since there is a lack of obvious product
differentiation, manufacturers compete based primarily on price and timely
delivery. Currently, there are approximately 7,700 cement plants in China,
of which 67 are state-owned enterprises and are capable of producing high
grade cement. The average annual output of these plants is approximately
660,000 tons. The production cost of cement in China varies with regions,
ranging from RMB150 to RMB250 per ton. Fuel and electricity account for 40%
of the total production cost, while labor accounts for only about 5% of the
total production cost. Since 1993, the government has relaxed state control
of cement prices and allowed cement prices to fluctuate according to market
condition determined by demand and supply. The uneven distribution of
resources and differences in the pace of economic development in different
regions of China, result in the movement of cement prices. In the southeast
coastal provinces and the Yangtze river valley, the average price is
comparatively higher than the national level.
Since 1978 the Chinese steel industry has grown rapidly. At the end of
1992 there were 1,744 iron and steel enterprises in China (including mining
companies) and 3.8 million iron and steel workers as compared with 1,322
companies and 2.4 million workers in 1980. From 1980 through 1992, steel
production increased at a compound annual growth rate of 6.7% with growth of
13.9% in 1992 and 16.2% in 1993. In 1994, with total steel production of
91.5 million tons, China became the world's second largest steel producer
behind Japan.
The rate of growth in steel production in China also increased. This
accelerated growth is primarily due to the fact that, under China's new
economic policies, demand for steel as a raw material for various industries
for the building and rebuilding China's infrastructure has increased
substantially. Furthermore, with changes in the pricing system,
profitability has improved and production capacity has increased
accordingly.
Since 1980, steel-making technology in China has experienced significant
improvements. Measures have been taken to modernize steel enterprises by
merging and expanding existing facilities and improving and upgrading
technologies. Although in the past three years the steel industry has grown
rapidly with an annual average increase in production of 16%, domestic
supply is still far from meeting demand. Therefore China must continue to
import a certain amount of steel from foreign sources. During periods when
importation is permitted the steel products producers in China generally
experience decreased sales, as currently the Chinese steel industry cannot
compete with producers of imported steel products with respect to price and,
in some cases, quality.
Management and Employees
- ------------------------
The Board of Directors of HZHD consists of seven members; three directors
appointed by the Chinese partner and four directors appointed by the Hong
Kong joint venture partner, CCHL. The General Manager, who reports directly
to the Board of Directors of HZHD, is responsible for the day-to-day
operations of the joint venture. HZHD employs approximately 140 employees
on a full time basis.
Competition
- -----------
The Company's potential depends on its ability to identify and implement
attractive transportation infrastructure development opportunities in China
and to negotiate successfully to enter into joint ventures to develop or
operate such projects. In this regard, the Company faces competition from
infrastructure development businesses currently operating in China, and in
addition from foreign investors who may wish to invest in infrastructure
projects, thereby competing with the Company. With respect to transportation
infrastructure projects such as toll roads, there is no assurance that
alternate routes which avoid toll charges or charge lower toll will not be
built.
8
<PAGE>
In late 1995, the Hangzhou section of the Shanghai-Hangzhou Expressway
was opened. The Company expects, based on the report from its traffic
consultant, that this would cause diversion of traffic from the Hangzhou
Ring Road and would reduce the flow through the southern toll plaza of the
Hangzhou Ring Road by approximately 30%. On the other hand, the opening of
the north-western and western sections of the Hangzhou Ring Road would
provide new traffic sources. Furthermore, the Hangzhou Ring Road will also
be used by local traffic and as the city of Hangzhou develops, this
component of traffic is expected to grow. In addition, on the opening of
the north-western and western sections of the Hangzhou Ring Road, heavy
vehicles will be discouraged from proceeding on the road going through the
city, and thus diversion to the Hangzhou Ring Road can be expected to be
high, since about half of the vehicles will be affected by the restrictions
on entering Hangzhou.
The Company is also facing competition from the Hangzhou section of the
Shanghai - Ningbo Expressway, which was opened in 1996. The diversion of
traffic from the Hangzhou Ring Road resulted in reduction of traffic volume
from 6.1 million vehicles in 1995 to 5.2 million vehicles in 1996.
The Company believes that, despite competition, the need of China for
further transportation infrastructure projects will continue to provide
development opportunities for the Company that will yield satisfactory
return.
Research and Development
- ------------------------
The Company did not engage in any research and development activities
with respect to its infrastructure project in fiscal 1996.
Distributions From HZHD
- -----------------------
Applicable Chinese laws and regulations require that, before a Sino-
foreign equity joint venture enterprise (such as the Operating Subsidiary)
distributes profits to investors, it must: (1) satisfy all tax liabilities;
(2) provide for losses in previous years; and (3) make statutory
appropriations, in proportions determined at the sole discretion of the
Board of Directors, to a general reserve fund, an enterprise expansion fund
and a staff welfare and employee bonus fund. Since the establishment of
HZHD joint venture, each year the Company has generated profits. However,
each year both joint venture partners have agreed to retain the profits
within the joint venture.
Operating In China
- ------------------
ECONOMIC POLICIES. General economic conditions in China could have a
significant impact on the Company's Hangzhou Ring Road project. The economy
of China differs in certain material respects from that of the United
States, including its structure, level of development, capital
reinvestment, growth rate, government involvement, resource allocation, rate
of inflation and balance of payments position. Although the majority of
China's productive assets are still owned by the State, the adoption of
economic reform policies since 1978 has resulted in its' gradual reduction
in the role of state economic plans, allocation of resources, pricing and
management of such assets. The economic reform policies have increased
emphasis on the utilization of market forces and rapid growth of the Chinese
economy. The success of the Company's infrastructure project depends in part
on the continued economic growth of China.
INFLATION. The general inflation rate in China was approximately 21.7%,
14.8% and 6.3% per annum in 1994, 1995 and 1996 respectively. Accordingly,
the Chinese government has taken steps to control inflation by means of
credit restrictions and an increase in interest rates which, in turn, may
lead to a slow down of the Chinese economy. In recent years, the Chinese
economy has experienced periods of rapid economic growth as well as high
rates of inflation, which in turn, has resulted in the adoption by the
Chinese government from time to time of various corrective measures
designated to regulate growth and contain inflation. Since 1993, the Chinese
government has implemented an economic program to control inflation which
has resulted in the tightening of credit available to Chinese state-owned
enterprises.
FOREIGN CURRENCY EXCHANGE. Prior to January 1, 1994, all foreign exchange
transactions involving Renminbi ("Rmb") in China had to take place either
through authorized financial institutions at the official exchange rate set
by the State Administration of Exchange Control ("SAEC"), the department of
the government of China responsible for foreign exchange administration or
at local swap centers at exchange rates largely determined by supply and
demand. However, transactions effected through swap centers still required
the prior approval of the SAEC.
9
<PAGE>
On January 1, 1994, the government of China implemented a controlled
floating exchange rate system based on market supply and demand and
established a managed foreign exchange system. In place of the official rate
and swap center rate, the People's Bank of China ("PBOC") now publishes a
daily exchange rate (the "PBOC Exchange Rate") for Renminbi based on the
previous day's dealings. The financial institutions authorized to deal in
foreign currency may enter into foreign exchange transactions at exchange
rates within a set range above or below the PBOC Exchange Rate, according to
market conditions. In furtherance of these currency reforms, the China
Foreign Exchange Trading Center ("CFETC") was formally established in
Shanghai and came into operation in April 1994. The establishment of CFETC
was originally intended to coincide with the phasing out of the swap
centers. However, the swap centers have been retained as an interim measure
and it is envisaged that the local centers will be phased out gradually.
Currently, foreign investment enterprises ("FIE") in China (including
Sino-foreign equity and cooperative joint ventures) are required to apply to
the local bureau of the SAEC for "foreign exchange registration certificates
for foreign investment enterprises". With such foreign exchange registration
certificates (which are annually reviewed by the local bureau of the SAEC)or
with the foreign exchange sales notice from the local bureau of the SAEC,
FIEs may enter into foreign exchange transactions at the swap center, or in
the future, through the unified market when all swap centers are connected
to CFETC. On January 29, 1996, the State Council promulgated the regulations
of China Regarding Foreign Exchange Control (the "Regulations") which came
into effect on April 1, 1996. Pursuant to the Regulations, conversion of RMB
into foreign exchange for the use of recurring items, including the
distribution of dividends and profits to foreign investors of joint
ventures, is permissible. FIEs are permitted to remit its foreign exchange
from its foreign exchange bank account in China on the basis of the relevant
joint venture contracts and the board resolution declaring the distribution
of payment of the dividend, etc. Conversion of RMB into foreign exchange for
capital items, such as direct investment, loans, security investment are
still under control.
The exchange rate between the Renminbi and the U.S. Dollar as quoted by
the People's Bank of China ranged between Rmb 8.33 and Rmb 8.29 to $1.00 in
1996.
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese Constitution, adopted in 1989, authorizes
foreign investment, and guarantees the "lawful rights and interests" of
foreign investors in China. The trend of legislation over the past twelve
years has significantly enhanced the protection afforded foreign investment
and allowed for more active control by foreign parties of foreign investment
enterprises in China.
There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
Despite some progress in developing a legal system, China does not have a
comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement
of existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contracts, leading to a
higher than usual degree of uncertainty in the outcome of litigation. Even
where adequate laws exist in China, it may be impossible to obtain swift and
equitable law enforcement, or to obtain enforcement of a judgment by a court
of another jurisdiction. As the Chinese legal system develops, the
promulgation of new laws, changes to existing laws and the preemption of
local regulations by national laws may adversely affect foreign investors,
such as the Registrant.
HZHD's activities in China may be subject, in some cases, to
administrative review and approval by various national, provincial and
municipal authorities of the Chinese government. While China has promulgated
an administrative procedural law permitting redress to the courts with
respect to certain administrative actions, this law appears to be largely
untested in its context.
Legal Structure of HZHD
- ------------------------
Hangzhou Zhongche Huantong Development Company, Ltd. was organized under
Chinese law as a Sino-foreign equity joint venture enterprise, which is a
distinct legal entity with limited liability. The term of HZHD joint venture
is 30 years, after which time Hangzhou Ring Road, the only asset of the
joint venture, will revert back to HZHD's Chinese partner. Such entities
are governed by the Law of China on Joint Ventures Using Chinese and Foreign
Investments and implementing regulations related thereto (the "Equity Joint
Venture Law"). The parties to an equity joint venture have rights in the
returns of the joint venture in proportion to the joint venture interests
that they hold. The operations of equity joint ventures are subject to an
extensive body of law governing such matters as formation, registration,
capital contribution, capital distributions, accounting, taxation, foreign
exchange, labor and liquidation. The transfer or increase of an interest in
a Sino-foreign equity joint venture enterprise requires agreement among the
parties to the venture and is effective upon the approval of relevant
government agencies.
10
<PAGE>
Taxation
- --------
A Sino-foreign equity joint venture with a term of 10 years or more, such
as HZHD, and engaged in infrastructure construction is exempt from state
income tax for the first two years after it attains profitability, and for
three years thereafter it is eligible for a 50% reduction in the state
income tax. HZHD will be fully exempted from Chinese state unified income
tax of 30% as well as the local income tax of 3% for two years starting from
the first profit-making year followed by a 50% reduction of the Chinese
state unified income tax for the next three years.
Governance, Operations And Dissolution
- --------------------------------------
Governance, operations and dissolution of a Sino-foreign equity joint
venture enterprise are governed by the Equity Joint Venture Law and by the
parties' joint venture contract and the joint venture's articles of
association. Pursuant to the joint venture contracts and articles of
association of HZHD, it has a 30-year term and is governed by a Board of
Directors consisting of seven members appointed for 4-year terms. CCHL
appoints four directors, including the chairman, to HZHD, while the Chinese
joint venture partner appoints the remaining three directors, including the
Vice Chairman.
The Board of Directors of HZHD exercises authority by majority vote over
major corporate decisions, including the appointment of officers, strategic
planning, budgeting, employee compensation and welfare and distribution of
after-tax profits. Management of HZHD is conducted by a management committee
headed by a General Manager and one or two Deputy General Managers, who act
on behalf of HZHD pursuant to the direction and guidance of its Board of
Directors.
Pursuant to relevant Chinese Law, certain major actions of HZHD require
unanimous approval by all the directors present at a meeting called to
decide upon the following actions: amendments to its contract and articles
of association; increases in, or assignment of, the registered capital of
the joint venture; a merger of the joint venture with another entity; or
dissolution of the enterprise.
HZHD is subject to the Sino-foreign Equity Joint Venture Enterprise Labor
Management Regulations. In compliance with these regulations, the management
may hire and discharge employees and make other determinations with respect
to wages, welfare, insurance and discipline of its employees.
Pursuant to the Equity Joint Venture Law, Sino-foreign equity joint
venture enterprises may be terminated in certain limited circumstances,
including the inability of the enterprise to conduct its business owing to a
breach by one of its parties, insolvency, force majeure, or confiscation of
the enterprise's assets by the government. Upon termination, the Board of
Directors establishes a liquidating committee to dissolve the enterprise,
which dissolution is subject to government review and approval.
Resort to Chinese courts to enforce a joint venture contract or to
resolve disputes between the parties over the terms of the contracts is
permissible. In practice, however, disputes between the parties are often
resolved by negotiation. The Company believes that it has a good working
relationship with its joint venture partner and that it will be able to
reach agreements with it on business policies and decisions for HZHD.
Government Regulations
- ----------------------
Any increase in toll rates proposed by HZHD is subject to approval by the
Zhejiang Provincial Government and Hangzhou Municipal Government and City of
Hangzhou Transportation Department. There are no assurances that such
proposals will be approved by these government authorities. If such
proposals are denied, toll revenues of HZHD may be affected.
The government of Zhejiang Province has approved a toll increase of 100%
for the newly completed second phase of Hangzhou Ring Road, effective from
March 1, 1997.
11
<PAGE>
Compliance with Environmental Laws
- ----------------------------------
HZHD is not aware of any Chinese government environmental regulations
which would have an adverse impact on the Company's operations.
Description of Properties
- -------------------------
As of March 31, 1997, the Company had no office or facility for U.S.
operations. The Company shares the office space at 52/F, Bank of China
Tower, 1 Garden Road, Hong Kong and administrative support, with China
Strategic Holdings Limited, a major shareholder of the Company ("CSH").
During fiscal year 1996, the Company was charged RMB 1.29 million by CSH as
a management fee for the use of the office space and staff support.
Legal Proceedings
- -----------------
Neither the Registrant nor its subsidiaries are a party to any material
pending legal proceedings.
Material Contracts
- ------------------
Other than the Acquisition Agreement, there were no other material
contracts entered into by the Company and Westronix Limited, or their
respective affiliates.
Market for Company's Common Stock
- ---------------------------------
The Registrant's Common Stock was listed on the New York Stock
Exchange("NYSE") (symbol : RGL) until December 7, 1994, at which time the
NYSE suspended its trading since the Registrant did not meet the continued
listing requirements. On February 9, 1995, the Common Stock was removed
from registration and listing on the NYSE. The Registrant's Common Stock
began trading on the NASD Electronic Bulletin Board since August 1995. The
following table sets forth the high and low prices of the Common Stock as
reported in the consolidated transaction reporting system during the periods
indicated :
Quarter Ended High Low
- ------------- ---- ---
March 31,1996 0.0499 0.01
June 30, 1996 0.1 0.01
September 30, 1996 0.03 0.01
December 31, 1996 0.03 0.001
* The low price reflects the average of the bid and asked prices.
As of March 31, 1997, there were approximately 9,000 beneficial holders
of the shares of the Registrant's Common Stock.
Dividend Policy
- ---------------
The Registrant has never paid a cash dividend. It is the current policy
of the Board to retain earnings, if any, to provide funds for the Company's
operations. The payment of dividends is at the discretion of the Board, and
dividends may be paid only out of current earnings and profits or retained
earnings.
Statement re Accountants
- ------------------------
The Company's accountants, Arthur Andersen & Co., are not expected to be
present at the stockholders' meeting, although they will be presented an
opportunity to attend such meeting and to make a statement, if they desire
to do so. They are expected to be available to respond to any appropriate
questions raised at the meeting via telephone at (852) 2852-0222 .
12
<PAGE>
Selected Financial Data of the Company
- --------------------------------------
The following table presents the selected financial information of the
Regal International, Inc. as of and for the years ended December 31, 1994,
1995 and 1996 assuming that the Company had owned the shares of Westronix
Limited in 1994 and 1995. The information was extracted from the audited
consolidated financial statements of Regal International, Inc. and
subsidiaries prepared under US GAAP.
<TABLE>
Summary of Financial Results - 1994, 1995 & 1996
<CAPTION>
Income Statement 1994 1995
1996
(Amount in thousands) RMB USD RMB USD
RMB USD
--- --- --- ---
- --- ---
<S> <C> <C> <C> <C>
<C> <C>
Toll revenue 37,614 4,457 37,206 4,472
38,463 4,640
Income from continuing
operations 17,376 2,059 14,704 1,767
13,411 1,618
Net income 12,790 1,515 14,939 1,796
11,876 1,433
Balance Sheet 1995 1996
(Amount in thousands) RMB USD RMB USD
--- --- --- ---
Current assets 44,873 5,393 35,610 4,296
Total assets 425,523 51,145 656,911 79,242
Current liabilities 32,995 3,966 124,206 14,985
Long-term bank loans 97,500 11,719 179,500 21,652
Shareholders' equity (190,593) (22,908) (82,298) (9,927)
</TABLE>
____________________
(a) The U.S. dollar convenience translation amount have been translated
using the unified exchange rate quoted by the People's Bank of China on
December 31, 1994, 1995 and 1996 of $1.00 =Rmb 8.44, $1.00 = Rmb 8.32 and
$1.00 = Rmb 8.29 respectively. No representation is made that the Renminbi
amounts could have been, or could be, converted into United States Dollars
at those rate on December 31, 1994, 1995 and 1996 or at any other certain
rate.
Dividends
Neither Westronix Limited nor the Company paid any cash dividends during the
last three fiscal years.
13
<PAGE>
Earnings Per Share
Regal International, Inc.(1) Westronix Limited (2)
--------------------------- ---------------------
12/31/94 0.012 Rmb 17,717,000 Rmb
12/31/95 0.014 Rmb 15,019,000 Rmb
12/31/96* 0.011 Rmb (US $0.001) 6,861,000 (3)
3/31/97 0.002 Rmb (US $0.000) Not applicable
*See footnote (3) below
Book Value Per Share
Regal International, Inc.(1) Westronix Limited(2)
---------------------------- --------------------
12/31/96 (1.01) Rmb (US $ (0.12)) 43,921,000 Rmb (3)
3/31/97 (0.99) Rmb (US $ (0.12)) not applicable
(1) Based on 81,806,198 shares outstanding.
(2) Based on 1 share issued and outstanding
(3) With respect to Westronix Limited, earnings per share are provided for
the six months period ended June 30, 1996. Westronix Limited was acquired
by the Company in September, 1996.
Management Discussion and Analysis of Financial Condition and Results of
Operation
- -------------------------------------------------------------------------
Overview
The year 1996 marked a substantial change in the business of the Company.
In an effort to benefit from the growing Chinese economy, management decided
to dispose of the oil exploration equipment supply operation and acquire the
Hangzhou toll road in September of 1996. The Company thereby redirected its
focus from the US industrial product market to infrastructure project
investment in China.
As of December 31, 1996, the Company had the following subsidiaries (the
Company together with its subsidiaries shall be collectively referred to as
the "Group").
Westronix Limited ("Westronix") - A holding company incorporated in the
British Virgin Islands.
China Construction Holdings Limited ("China Construction") - a company
incorporated in Hong Kong, formally known as China Construction
International Group Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating
Subsidiary" or "HZHD"), a Sino-foreign equity joint venture located in
Hangzhou, Zhejiang province.
Results of Operation - 1996 compared to 1995
- ---------------------------------------------
Summary Financial Information 1995 1996 % change
(Rmb in thousands) from prior year
- ------------------ -----------------
Toll revenue 37,206 38,463 3.4%
General and administrative
expenses 10,516 15,646 48.8%
Exchange gain 1,101 350 (68.2%)
Net income 14,939 11,876 (20.5%)
14
<PAGE>
Toll Revenue
- ------------
Toll revenue increased 3.4% to Rmb 38.5 million in 1996 from Rmb 37.2
million in 1995. This was primarily attributable to an average increase of
toll fees by approximately 50%, partially offset by a decrease in traffic
flows. Competition from the Hangzhou section of the Shanghai - Ningbo
Expressway, which was opened this year, resulted in reduction of traffic
volume from 6.1 million vehicles in 1995 to 5.2 million vehicles in 1996.
The management believes the impact has already been reflected in 1996.
Further decrease of vehicle flows is unlikely. Management is also
optimistic about the future revenue generation ability of HZHD as the second
phase of the toll road had been completed and started to collect toll
revenue since March, 1997. The toll rates for the second phase is
approximately double the toll rates for the first phase. In addition, the
third and final phase of the toll road is expected to be completed by the
end of 1997 and should start to generate revenues in the 1998 fiscal year.
General and Administrative Expenses
- -----------------------------------
As compared with last year, general and administrative expenses went up
48.8% to Rmb 15.6 million. This is due to the fact that additional
professional fees were incurred in 1996 and additional interest expenses
incurred by the US$ 13.5 million convertible note in excess of the interest
income generated from the US$900,000 note receivable. Also, a management
fee of approximately US$155,000 has been charged by China Strategic Holdings
Limited for the year. As far as the Operating Subsidiary is concerned,
general and administrative expenses as a percentage of toll revenue remained
flat and has remained around 28% for the past two years.
Exchange Gain
- -------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year
end revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past three years due to the
continual strengthening of the Renminbi.
The exchange rates for Renminbi against U.S. Dollars were 8.44, 8.32 and
8.29 of 1994, 1995 and 1996 respectively, representing an appreciation of
Renminbi by 1.4% and 0.4% in 1995 and 1996 respectively, when comparing the
exchange rate at the end of the year with the position at the beginning of
the year. As a consequence, the exchange gain dropped substantially from Rmb
1.1 million a year earlier to Rmb 0.35 million this year.
Net Income
- ----------
Net income fell 20.5% to Rmb 11.9 million in 1996 from Rmb 14.9 million
in 1995. This was attributable to the combined effect of increased general
and administrative expenses, a decrease in exchange gain and a loss from
discontinued operations.
Loss from discontinued operations represents the operating loss of Regal
Rubber and Bell Petroleum up to the date of disposal which amounted to
approximately Rmb972,000. Net income in 1996 included a net gain on
disposal of investment of approximately Rmb3,730,000.
Liquidity and Capital Resources
- -------------------------------
In 1996, net cash provided by operating activities and financing
activities was approximately Rmb 3.1 million and Rmb 171.3 million
respectively. Net cash used in investing activities amounted to Rmb 175.1
million, resulting in a net decrease in cash and cash equivalents of Rmb 0.7
million.
15
<PAGE>
For the past three years, the Company had been able to generate
sufficient cash for its working capital needs. Net cash provided by
operating activities dropped substantially from Rmb 48.9 million in 1995 to
Rmb 3.1million in 1996 principally due to the combination of increases in
other receivables by approximately Rmb 13.4 million and a decrease in
accounts payable by Rmb 11.4 million in 1996. The major contributor to the
increase in other receivables was the notes receivable arising from the
disposal of Regal Bell and Rubber to New Regal.
During the year, the Company incurred capital expenditures of Rmb 216.9
million which was financed through bank borrowings and loans from the
Chinese joint venture partner amounting to Rmb 140.0 million and Rmb
30.8million respectively.
As of December 31 1996, the Operating Subsidiary had outstanding capital
commitments for construction contracts of approximately Rmb 91.8 million.
The Operating Subsidiary has been able to raise funds from banks to finance
the construction of the second and third phases of the toll road , which are
expected to be completed by the end of fiscal year 1997. Hangzhou Toll Road
will collect toll revenue from all three phases of the toll road. Given its
sound credit history and good banking relationships, management believes
that the Operating Subsidiary will have access to adequate borrowing
facilities to meet its cash requirements in the foreseeable future.
Effects of Inflation
- --------------------
The general inflation rate in terms of the Retail Price Index in China
was approximately 21.7%, 14.8%, and 6.3% for 1994, 1995 and 1996
respectively. Management believes that inflation has not had a significant
impact on the Operating Subsidiary. Inflation has resulted in upward
pressure on wages and salaries for employees and other operating expenses at
the Operating Subsidiary. However, management does not expect inflation to
have a material effect on profit margins and income, since it has been able
to pass on such cost increments to toll road users by increasing toll rates.
Results of Operation - 1995 compared to 1994
- --------------------------------------------
Summary Financial Information % change
(Rmb in thousands) 1994 1995 from prior year
- ------------------- ---- ---- ---------------
Toll revenue 37,614 37,206 (1.1%)
General and administrative expenses 9,616 10,516 9.4%
Exchange gain 3,154 1,101 (65.1%)
Net income 12,790 14,939 16.8%
Toll Revenue
- ------------
Toll revenue decreased slightly by 1.1% to Rmb 37.2 million in 1995 from
Rmb 37.6 million in 1994. There was no material change in toll fees and
traffic volume during the year.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses went up 9.4% to Rmb 10.5 million. As
a percentage of toll revenue, these costs also increased from 25.6% in 1994
to 28.3% in 1995 which was caused by the slight increase of the operation of
Hangzhou Toll Road during 1995.
Exchange Gain
- -------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year
end revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past two years due to the
continual strengthening of the Renminbi.
The appreciation of the Renminbi in 1995 had slowed down as compared with
the magnitude of upward movement in 1994. As a result, exchange gains in
1995 fell to Rmb 1.1 million from Rmb 3.2 million in 1994.
16
<PAGE>
Net Income
- ----------
Net income increased 16.8% to Rmb 14.9 million in 1995 from Rmb 12.8
million in 1994. This was mainly due to income of approximately Rmb 235,000
from the discontinued operations as recorded in 1995, versus a loss of
approximately Rmb 4.6 million from discontinued operations recorded in 1994.
Liquidity and Capital Resources
- -------------------------------
In 1995, net cash provided by operating activities and financing
activities was approximately Rmb 48.9 million and Rmb 69.4 million
respectively. Net cash used in investing activities amounted to Rmb 167.1
million, resulting in a net decrease in cash and cash equivalents of Rmb
48.8 million.
The Company was able to generate sufficient cash for its working capital
needs. Net cash provided by operating activities increased substantially
from approximately Rmb 36.1 million in 1994 to approximately Rmb 48.9
million in 1995, principally due to an increase in accounts payable of Rmb
20.4 million and partially offset by the reduction in operating income of
Rmb 2.7 million in 1995.
During 1995, the Company incurred capital expenditures of Rmb 166.2
million. Funds for capital expenditure primarily came from bank borrowings
and cash provided by operating activities.
As of December 31, 1995, the Operating Subsidiary had outstanding
capital commitments for construction contracts of approximately Rmb 228.3
million. The Operating Subsidiary was able to raise sufficient funds from
banks to finance its projects. Given its sound credit history, future cash
generating ability and superior banking relationships, management believes
that the Operating Subsidiary will have access to adequate borrowing
facilities to meet its cash requirements in the foreseeable future.
Financial Statements and Supplementary Data
- -------------------------------------------
The Financial Statements and Supplementary Data for the Company for the
years ended December 31, 1996, 1995 and 1994 and the interim period ending
March 31, 1997 are set forth hereto and made a part hereof.
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
============================================
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AS OF DECEMBER 31, 1995 AND 1996
--------------------------------
TOGETHER WITH AUDITORS' REPORTS
-------------------------------
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Regal International, Inc.:
We have audited the accompanying consolidated balance sheets of Regal
International, Inc. and its subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of income, cash flows and changes
in shareholders' equity for the years ended December 31, 1994, 1995 and
1996, expressed in Chinese Renminbi. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. We
did not, however, audit the financial statements of Regal International,
Inc., Regal Rubber Products, Inc., and Bell Petroleum Services, Inc.
("Regal Inc., Regal Rubber and Bell" respectively), as of and for the
years ended December 31, 1994 and 1995. Regal Inc., acquired Westronix
Limited in 1996 in a transaction accounted for as a transfer of assets
between companies under common control and also disposed of Regal Rubber
and Bell, as discussed in more detail in Note 1 to the accompanying
consolidated financial statements. The financial statements
of Regal Inc., Regal Rubber and Bell are included in the consolidated
financial statements of Regal Inc., as of and for the years ended December
31, 1994 and 1995 and reflect total assets and total income of
approximately 5.2 percent and 1.6 percent, respectively of the related
consolidated totals for 1995, and approximately 26.4 percent of the
related consolidated income for 1994. Those statements were audited by
other auditors whose reports have been furnished to us and our opinion on
the consolidated financial statements of the respective years, insofar as
it relates to the amounts included for those entities, is based solely on
the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the reports of other auditors
provide a reasonable basis for our opinion.
The reports of the other auditors referred to above on the financial
statements of Regal Inc., Regal Rubber and Bell for the year ended
December 31, 1995, dated February 9, 1996, included an explanatory
paragraph on the ability of these companies to continue to operate as a
going concern. However, in our opinion, this matter has been resolved by
developments at the Company subsequent to the report issuance date which
are explained in Note 1 to the accompanying consolidated financial
statements.
In our opinion, based on our audit and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Regal International, Inc.
and its subsidiaries as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for the years ended December 31,
1994, 1995 and 1996 in conformity with generally accepted accounting
principles in the United States of America.
Hong Kong,
March 6, 1997.
1
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
----------------------------------------------------
(Amounts in thousands, except number of shares and earnings per
common share)
<CAPTION>
Years ended December
31,
----------------------------------
- ----------------
1994 1995 1996
1996
----------- ----------- --------
- --- -----------
Rmb Rmb Rmb
US$
<S> <C> <C> <C>
<C>
Toll revenue 37,614 37,206
38,463 4,640
General and administrative expenses (9,616) (10,516)
(15,646) (1,887)
Exchange gain 3,154 1,101
350 42
Net gain on disposal of investment - -
3,730 450
----------- ----------- --------
- --- -----------
Income from continuing
operations before income taxes
and minority interests 31,152 27,791
26,897 3,245
Provision for income taxes - - -
- -
----------- ----------- --------
- --- -----------
Income from continuing
operations before minority
interests 31,152 27,791
26,897 3,245
Minority interests (13,776) (13,087)
(13,486) (1,627)
----------- ----------- --------
- --- -----------
Income from continuing
operations 17,376 14,704
13,411 1,618
Income/(Loss) from discontinued
operations (4,586) 235
(1,535) (185)
----------- ----------- --------
- --- -----------
Net income 12,790 14,939
11,876 1,433
=========== ===========
=========== ===========
Earnings per common share (Primary):
-from continuing operations 0.33 0.18
0.16 0.02
-from discontinued operations (0.09) -
(0.01) -
----------- ----------- --------
- --- -----------
0.24 0.18
0.15 0.02
=========== ===========
=========== ===========
Earnings per common share (Fully
diluted):
-from continuing operations 0.017 0.014
0.012 0.001
-from discontinued operations (0.005) -
(0.001) -
----------- ----------- --------
- --- -----------
0.012 0.014
0.011 0.001
=========== ===========
=========== ===========
Weighted average number of common
shares outstanding 53,330,164 81,806,198
81,806,198 81,806,198
=========== ===========
=========== ===========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars
(US$) for the convenience of the reader has been made at the unified
exchange rate quoted by the Bank of China on December 31, 1996 of US$1.00
= Rmb8.29. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States Dollars at that rate on
December 31, 1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated
statements of income.
2
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF
---------------------------------
DECEMBER 31, 1995 AND 1996
--------------------------
(Amounts in thousands, except number of shares and share data)
<CAPTION>
Years ended December
31,
------------------------------
- -------
1995 1996
1996
----------- ----------- ----
- -------
ASSETS Rmb Rmb
US$
- -------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 22,172 21,443
2,587
Prepayments and deferred expenses 452 469
57
Other receivables and other current assets 300 13,698
1,652
Net assets of discontinued operations 21,949 -
- -
----------- ----------- ----
- -------
Total current assets 44,873 35,610
4,296
----------- ----------- ----
- -------
Prepayments for construction-in-progress 29,789 9,942
1,199
Property, plant and equipment, net 350,861 611,359
73,747
----------- ----------- ----
- -------
Total assets 425,523 656,911
79,242
=========== ===========
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Current liabilities
Long-term bank loans - current portion - 58,000
6,996
Accounts payable 21,195 9,767
1,178
Accrued expenses and other payables 10,193 56,325
6,794
Taxes other than income 107 114
17
Due to related companies 1,500 -
- -
----------- ----------- ----
- -------
Total current liabilities 32,995 124,206
14,985
----------- ----------- ----
- -------
Long-term bank loans 97,500 179,500
21,652
Convertible note payable 249,600 249,600
30,108
Due to Chinese joint venture partner 10,500 41,318
4,984
Due to China Strategic Holdings Limited 96,840 2,418
291
Minority interests 128,681 142,167
17,149
Commitments and contingency (Notes 6 & 14)
Shareholders' equity:
Common stock, par value US$0.01 each;
150,000,000 shares authorized; 81,806,198
shares outstanding 6,806 6,806
821
Additional paid-in capital (80,646) 15,773
1,903
Accumulated deficits (116,753) (104,877)
(12,651)
----------- ----------- ----
- -------
Total shareholders' equity (190,593) (82,298)
(9,927)
----------- ----------- ----
- -------
Total liabilities and shareholders' equity 425,523 656,911
79,242
=========== ===========
===========
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate
quoted
by the Bank of China on December 31, 1996 of US$1.00 = Rmb8.29. No
representation
is made that the Renminbi amounts could have been, or could be, converted
into United States Dollars
at that rate on December 31, 1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
3
</TABLE>
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND
1996
-------------------------------------------------
- ---
(Amounts in thousands)
<CAPTION>
Years ended
December 31,
--------------------------
- ------------------------
1994 1995
1996 1996
----------- -----------
- ----------- -----------
Rmb Rmb
Rmb US$
<S> <C> <C>
<C> <C>
Cash flows from operating activities:
Net income
Income from continuing operations 17,376 14,704
13,411 1,618
Income/(Loss) from discontinued operations (4,586) 235
(1,535) (185)
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 13,776 13,087
13,486 1,627
Depreciation and amortization 3,740 4,298
4,117 497
Loss on disposal of fixed assets - 19
- - -
(Increase) Decrease in assets:
Prepayments and deferred expenses 65 146
(18) (2)
Other receivables and other current assets 3,255 (239)
(13,397) (1,616)
Increase (Decrease) in liabilities:
Accounts payable 840 20,355
(11,428) (1,379)
Accrued expenses and other payables 1,648 (3,708)
(1,570) (189)
Taxes other than income 17 (7)
7 1
----------- -----------
- ----------- -----------
Net cash provided by operating activities 36,131 48,890
3,073 372
----------- -----------
- ----------- -----------
Cash flows from investing activities:
Prepayments for construction-in-progress (28,240) (982)
19,846 2,394
Acquisition of property, plant and equipment (41,681) (166,230)
(216,912) (26,166)
Changes in net assets of discontinued operations (3,411) 80
21,949 2,648
----------- -----------
- ----------- -----------
Net cash used in investing activities (73,332) (167,132)
(175,117) (21,124)
----------- -----------
- ----------- -----------
Cash flows from financing activities:
Proceeds of bank loans 35,500 117,445
140,000 16,888
Repayment of bank loans (9,500) (55,945)
- - -
Due to related companies 2,500 (1,000)
(1,500) (181)
Due to Chinese joint venture partner (25,248) 10,500
30,818 3,717
Due to China Strategic Holdings Limited 68,252 (1,601)
1,997 240
Proceeds from issuance of capital stock 184 -
- - -
Conversion of preferred stock to common stock 1,490 -
- - -
Conversion of debt to common stock 6,665 -
- - -
----------- -----------
- ----------- -----------
Net cash provided by financing activities 79,843 69,399
171,315 20,664
----------- -----------
- ----------- -----------
Net increase (decrease) in cash and cash equivalents 42,642 (48,843)
(729) (88)
Cash and cash equivalents, at beginning of year 28,373 71,015
22,172 2,675
----------- -----------
- ----------- -----------
Cash and cash equivalents, at end of year 71,015 22,172
21,443 2,587
=========== ===========
=========== ===========
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate
quoted by the Bank of China on December 31, 1996 of US$1.00 = Rmb8.29. No
representation is made that the Renminbi amounts could have been, or could
be,
converted into United States Dollars at that rate on December 31, 1996 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated statements
of cash flows.
4
</TABLE>
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
---------------------------------------------------
- -------
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995
AND 1996
----------------------------------------------
- ------
(Amounts in thousands, except number of
shares)
<CAPTION>
Shares of
Convertible Shares of
Preferred Common
Stock Stock Additional
(US$0.1 par (US$0.01 par Preferred and Paid-in
Accumulated
value) value) Common Stock Capital
Deficits Total
----------- ----------- ----------- -----------
- ----------- -----------
Number Number Rmb Rmb
Rmb Rmb
<S> <C> <C> <C> <C>
<C> <C>
Balance at
December 31, 1993 2,630,134 53,330,164 6,625 (88,801)
(144,482) (226,658)
Conversion of
preferred stock to
common stock (2,630,134) 8,423,952 (1,487) 1,490
- - 3
Conversion of debt to
common stock - 20,052,082 1,668 6,665
- - 8,333
Net income - - - -
12,790 12,790
----------- ----------- ----------- -----------
- ----------- ----------
Balance at
December 31, 1994 - 81,806,198 6,806 (80,646)
(131,692) (205,532)
Net income - - - -
14,939 14,939
----------- ----------- ----------- -----------
- ----------- ----------
Balance at
December 31, 1995 - 81,806,198 6,806 (80,646)
(116,753) (190,593)
Contribution by China
Strategic Holdings
Limited ("CSH") - - - 96,419
- - 96,419
Net income - - - -
11,876 11,876
----------- ----------- ----------- -----------
- ----------- ----------
Balance at
December 31, 1996 - 81,806,198 6,806 15,773
(104,877) (82,298)
=========== =========== =========== ===========
=========== ==========
The accompanying notes are an integral part of these consolidated statements
of changes in shareholders' equity.
5
</TABLE>
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
- -----------------------------------------
Regal International, Inc. ("Regal" or the "Company") was incorporated in the
State of Delaware, the United States of America and is listed on the
National Association of Securities Dealers Electronic Bulletin Board
("NASD") with an authorized share capital of US$1.5 million or 150 million
shares of US$0.01 each.
Pursuant to an Acquisition Agreement dated February 8, 1996 between Regal,
Acewin Profits Limited ("AP"), a British Virgin Islands corporation and
China Strategic Holdings Limited ("CSH"), a company incorporated in Hong
Kong and is listed on The Stock Exchange of Hong Kong Limited, Regal
acquired all the issued and outstanding shares of AP at a consideration of
US$13.5 million satisfied through the issuance of a US$13.5 million
Convertible Note (the "Convertible Note A") by Regal to Horler Holdings
Limited ("Horler"), a Hong Kong company and a wholly-owned subsidiary of
CSH, bearing interest at 9% per annum after an initial 6-month interest-free
period. AP was a wholly-owned subsidiary of CSH before the transfer and
AP's sole asset was a 55% equity interest in Wuxi CSI Vibration Isolator Co.
Ltd., a Sino-foreign equity joint venture incorporated in China, held
through an intermediate Hong Kong company, China Machine (Holdings) Limited.
On February 15, 1996, CSH appointed three directors to fill vacancies on the
Board of Directors created by the resignation of three out of the five
directors of Regal effective on the date of consummation of the transaction
whereby Regal acquired all the outstanding share capital of AP. On March 8,
1996, Horler purchased 40,500,000 shares of common stock representing 49.51%
of the then issued and outstanding share capital of Regal from a major
shareholder of the Company thus becoming its major and controlling
shareholder.
Pursuant to a Purchase Agreement dated September 11, 1996 between Regal, an
unrelated company incorporated in the Netherlands and CSH, Regal sold all
the issued and outstanding shares of AP at a consideration of US$13.95
million. The proceeds were then used to repay the Convertible Note A
principal of US$13.5 million, on September 13, 1996. The realized gain of
US$450 on the disposal of AP has been included as part of "Net gain on
disposal of investment" in the Company's consolidated statements of income
for the year ended December 31, 1996.
Pursuant to another Asset Purchase Agreement ("the Agreement") dated
February 8, 1996 between Regal and Regal (New) International, Inc. ("New
Regal"), the Company sold and transferred the operating assets and real
property of Regal existing as of January 31, 1996 to New Regal in exchange
for US$2.5 million and New Regal's assumption of all liabilities incurred,
accrued or arising from the Operations of Regal, prior to the closing date
of this transaction, other than the Convertible Note A.
6
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Pursuant to the Agreement, the US$2.5 million portion of the purchase price
was paid as follows: US$800 in cash and the balance by delivery of two
promissory notes, one in the principal amount of US$900 (the "US$900 Note")
and the second in the principal amount of US$800 (the "US$800 Note"). The
US$900 Note bears interest at 9% per annum and is payable in sixty equal
monthly installments of principal and interest. The US$800 Note bears no
interest and is due and payable in one installment on January 31, 2001. The
realized loss in connection with this transaction amounted to approximately
US$69 and has been included as part of "Income/(Loss) from discontinued
operations" in the Company's consolidated statements of income for the year
ended December 31, 1996.
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal,
Westronix Limited ("WL"), a wholly owned subsidiary of CSH, Regal acquired
all the issued and outstanding shares of WL at a consideration of US$30
million to be satisfied through the issuance of a US$30 million Convertible
Note (the "Convertible Note B") by Regal to Horler bearing interest at 9%
per annum after an initial 6-month interest-free period. The principal and
any unpaid interest owing on the Convertible Note B can be converted into
shares of the Common Stock of Regal ("Common Stock") at a conversion price
of US$0.0302 per share. On conversion, CSH would hold approximately 96.16%
of the outstanding shares of the Company. WL's sole asset is a 51% equity
interest in Hangzhou Zhongche Huantong Development Co. Ltd., a Sino-foreign
equity joint venture incorporated in China, held through an intermediate
Hong Kong company, China Construction Holdings Limited.
As of December 31, 1996, the Company had the following subsidiaries:
Westronix Limited ("WL") - a holding company incorporated in the British
Virgin Islands).
China Construction Holdings Limited ("CCHL") - a company incorporated in
Hong Kong and was formally known as China Construction International Group
Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary"
or "Hangzhou toll road"), a Sino-foreign equity joint venture located in
Hangzhou, Zhejiang Province, China).
The Company holds a 100% interest in WL. WL was incorporated on July 3,
1996 with an authorized share capital of 50,000 shares with a par value of
US$1 each. One share was issued at par value to CSH which was subsequently
transferred to Regal pursuant to a shareholder's resolution dated September
10, 1996. WL, holds a 100% interest in CCHL which in turn holds a 51%
interest in Hangzhou toll road. WL's interest in CCHL and Hangzhou toll
road was transferred from CSH pursuant to a shareholders' resolution dated
August 28, 1996.
7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Hangzhou toll road is a Sino-foreign equity joint venture enterprise
established on June 23, 1993, which formally began business operations in
September 1993 in China. The total cash consideration paid by CCHL for
its interest in Hangzhou toll road amounted to Rmb 102 million. Tolls
collected from the existing portion of the toll road ("the first phase"),
which was injected by the Chinese joint venture partner, Hangzhou City
Transportation Development Company, and cash injected by CSH will be used to
finance the construction of the second and third phases of the toll road
(the "CIP Projects") which are expected to be completed by the end of fiscal
year 1997. Hangzhou toll road will collect toll from all three phases of
the toll road after the CIP Projects are completed.
Key provisions of the joint venture agreement of Hangzhou toll road include:
* the joint venture period is 30 years from the date of formation;
* the profit and loss sharing ratio is the same as the percentage of equity
interest; and
* the Board of Directors consists of 7 members : 4 designated by CCHL and 3
designated by Hangzhou City Transportation Development Company.
The acquisition of the Operating Subsidiary by CCHL was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Operating Subsidiary are included
in the consolidated statements of income from the effective date of the
joint venture, June 23, 1993. No revenue was generated from the toll road
before the formation of the joint venture.
Hangzhou toll road operates in China and accordingly is subject to special
considerations and significant risks not typically associated with
investments in equity securities of United States and Western European
companies. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
These are described further in the following paragraphs:
Political Environment
The value of the Company's interests in the Operating Subsidiary may be
adversely affected by changes in policies by the Chinese government
including, among others: changes in laws, regulations or the interpretation
thereof; confiscatory taxation; restrictions on foreign currency conversion,
imports or sources of suppliers; or the expropriation or nationalization of
private enterprises.
8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Economic Environment
The economy of China differs significantly from the economies of the
United States and Western Europe in such respects as structure, level of
development, gross national product, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation and balance of
payments position, among others. Only recently has the Chinese government
encouraged substantial private economic activities.
The Chinese economy has experienced significant growth in the past five
years, but such growth has been uneven among various sectors of the economy
and geographic regions. Actions by the Chinese central government to
control inflation have significantly restrained economic expansion recently.
Similar actions by the central government of China in the future could
have a significant adverse effect on economic conditions in China and the
economic prospects for the Operating Subsidiary and the Company.
Foreign Currency Exchange
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result,
the Renminbi is not freely convertible into foreign currencies.
The Operating Subsidiary conducts substantially all of its business in
China, and its financial performance and condition are measured in terms of
Renminbi. The Operating Subsidiary's source of income, toll revenue, is
denominated in Renminbi. Revenues and profits have to be converted to United
States Dollars or Hong Kong Dollars to pay dividends to the Company. Should
the Renminbi devalue against the United States Dollar, such devaluation
would have a material adverse effect on the Company's profits measured in
foreign currency and reduce the foreign currency that could be repatriated
by the Operating Subsidiary to the Company. The Company currently is not
able to hedge its Renminbi - United States Dollars exchange rate exposure in
China because neither the banks in China nor any other financial
institutions authorized to engage in foreign exchange transactions offer
forward exchange contracts.
Legal System
Since 1979, many laws and regulations dealing with economic matters in
general and foreign investment in particular have been enacted in China.
However, China still does not have a comprehensive system of laws and
enforcement of existing laws may be uncertain and sporadic.
Toll Revenue
Any increase in toll rates proposed by the Operating Subsidiary is subject
to approval by the Hangzhou Municipal Government and Hangzhou City
Transportation Department. However, there is no assurance that proposed
increases will be approved by these government authorities. If such
proposals are denied, profit margins of the Operating Subsidiary could be
reduced.
9
<PAGE>
2. BASIS OF PRESENTATION
- -------------------------
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United
States of America ("U.S. GAAP"). This basis of accounting differs from that
used in the statutory financial statements of the Operating Subsidiary,
which were prepared in accordance with the accounting principles and the
relevant financial regulations applicable to joint venture enterprises as
established by the Ministry of Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory financial statements
of the Operating Subsidiary to U.S. GAAP included the following:
* Provision of depreciation on roads and bridges.
* Recognition of toll revenue on the accrual basis and upon the
commencement of operations.
The transfer of CSH's equity interests in CCHL to WL and the transfer of CSH
equity interests in WL to Regal were accounted for as reorganizations of
companies under common control similar to a pooling of interests. The
accompanying consolidated financial statements of the Company have been
restated to present the transfers of CSH's interests in CCHL to WL and in WL
to Regal as if they had occurred on the date of formation of the Operating
Subsidiary, June 23, 1993. The acquisition of the Operating Subsidiary was
financed by advances from CSH. In 1996, the advances payable to CSH in
relation to the above acquisition was capitalized and treated as an increase
in additional paid-in capital. In addition, due to the specific
requirements of the U.S. GAAP for transfers of assets between entities under
common control, the difference of Rmb147,600 between the historical cost of
the investment of CSH in Hangzhou toll road and the Company's acquisition
cost was treated as a deemed dividend paid to CSH in 1993.
Regal's acquisition of CSH's interests in AP and its subsequent disposal
have been accounted for using the purchase method of accounting. The
results of operations of AP and its subsidiaries have not been consolidated
into the financial statements for the year ended December 31, 1996 given the
temporary nature of the holding.
Income from the historical operations of Regal for the years ended December
31, 1994, 1995 and 1996 has been reclassified as "Income/(Loss) from
discontinued operations" in the consolidated statements of income as a
result of the disposal of the related net assets to New Regal in 1996.
Accordingly, net assets related to the discontinued operations of Regal as
of December 31, 1994, and 1995 have also been reclassified as "Net assets of
discontinued operations" in the accompanying financial statements.
10
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements of
the Company and its majority-owned subsidiaries. All material intercompany
balances and transactions have been eliminated on consolidation.
b. Toll revenue
------------
Toll revenue represents the gross receipts at the toll stations, net of
business tax calculated at 3.0% of the gross toll receipts.
c. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, demand deposits with banks
and liquid investments with an original maturity of one year or less. Cash
and cash equivalents included United States Dollar deposits of US$1,078
(Rmb8,967) and US$67 (Rmb555) as of December 31, 1995 and 1996 respectively.
Deposits of US$700 (Rmb5,824) as of December 31, 1995 were used to guarantee
bank loans of a related company.
d. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed
using the straight-line method over the assets' estimated useful lives,
taking into account the estimated residual value of 10% (except for roads
and bridges which have no residual value) of the cost of the assets. The
estimated useful lives are as follows:
Roads and bridges 30 years
Buildings 20 years
Machinery and equipment 5 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress ("CIP" see also Note 4) represents new roads and
bridges under construction and plant and machinery pending installation.
This includes the costs of construction, the costs of plant and machinery
and interest charges (net of interest income), arising from borrowings used
to finance these assets during the period of construction or installation.
Interest capitalized amounted to Rmb6,778 and Rmb25,035 for the years ended
December 31, 1995 and 1996.
11
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
e. Taxation: Income Taxes
----------------------
No provision for withholding or U.S. federal income taxes or tax benefits on
the undistributed earnings of the subsidiaries and/or losses of the
Operating Subsidiary has been provided as the earnings of the subsidiaries
have been reinvested and, in the opinion of management, will continue to be
reinvested indefinitely.
WL was incorporated under the laws of the British Virgin Islands, and under
current British Virgin Islands laws, WL is not subject to tax on income or
on capital gains.
The Company and its subsidiaries provide for Hong Kong profits tax on the
basis of their income for financial reporting purposes, adjusted for income
and expense items which are not assessable or deductible for profits tax
purposes. The Company and its subsidiaries have had no profits assessable
for Hong Kong profits tax purposes.
Hangzhou toll road is subject to Chinese income taxes at the applicable tax
rate for Sino-foreign equity joint venture enterprises (currently 33%) on
the taxable income as reported in its statutory accounts adjusted in
accordance with the relevant income tax laws. Since it has a joint venture
term of more than 10 years and is engaged in infrastructure construction,
Hangzhou toll road will be fully exempted from Chinese state unified income
tax of 30% as well as the local income tax of 3% for two years starting from
the first profit-making year followed by a 50% reduction of the Chinese
state unified income tax for the next three years ("tax holiday").
If the Operating Subsidiary had not been in the tax holiday period, the
Company would have recorded additional income tax expense of Rmb10,000,
Rmb9,901 and Rmb10,176 and net income of the Company would have been reduced
by Rmb5,100, Rmb5,050 and Rmb5,190 for the years ended December 31, 1994,
1995 and 1996 respectively (See Note 14).
The Company provides for deferred income taxes using the liability method,
by which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets
or liabilities in the financial statements.
f. Taxation: Business Tax
----------------------
In December 1993, the Chinese government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax
regulations replaced a number of former tax laws and regulations including
the Consolidated Industrial and Commercial Tax ("CICT"). Under these new
tax regulations, the Operating Subsidiary is subject to business tax which
replaced the CICT and is now the principal direct tax on the toll revenue
generated. The business tax rate applicable to the Operating Subsidiary is
3.0%.
12
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
g. Foreign Currency Translation
----------------------------
The functional currency of the group and the Company is Renminbi.
The Operating Subsidiary maintains its books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the applicable
unified rates of exchange or the applicable rates of exchange quoted by the
applicable foreign exchange adjustment center ("swap center"), prevailing at
the dates of the transactions. Monetary assets and liabilities denominated
in foreign currencies are translated into Renminbi using the applicable
unified rates of exchange or the applicable swap center rates prevailing at
the balance sheet dates. The resulting exchange differences are included in
the determination of income.
The Company's registered capital is denominated in and its reporting
currency is the United States Dollars. For financial reporting purposes,
the United States Dollars capital injection amounts have been translated
into Renminbi at the unified exchange rate as of December 31, 1995.
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place either through the
Bank of China or other institutions authorized to buy and sell foreign
currencies, or at a swap center. Before January 1, 1994, the exchange rates
used for transactions through the Bank of China and other authorized
institutions were set by the government (the "official exchange rate") from
time to time whereas the exchange rates available at the swap centers (the
"swap center rates") were determined largely by supply and demand. The
Chinese government announced the unification of the two-tier exchange rate
systems in December 1993 effective January 1, 1994. The unification brought
the official exchange rate of the Renminbi in line with the swap center
rate. The unification did not have a major impact on the consolidated
financial statements of the Company under U.S. GAAP.
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and remittance
of earnings outside of China are subject to the availability of foreign
currency which is dependent on the foreign currency denominated earnings of
the entity or must be arranged through a swap center or designated foreign
exchange banks. Approval for exchange at the swap center is granted to
joint venture enterprises for valid reasons such as the purchase of imported
materials and remittance of earnings.
The official exchange rates, unified exchange rates and Shanghai swap center
rates as of December 31, 1994, 1995 and 1996 were as follows:
1994 1995 1996
---------- ---------- ----------
Rmb equivalents of US$1
Official exchange rate N/A N/A N/A
Unified exchange rate 8.44 8.32 8.29
Shanghai swap center rate 8.44 8.32 8.29
13
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
h. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign equity
joint venture enterprises, the Operating Subsidiary maintains discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund and a staff welfare and incentive bonus fund. The Board of
Directors of the Operating Subsidiary will determine on an annual basis the
amount of the annual appropriations to dedicated capital. For the period
from January 1, 1994 to December 31, 1996, the Operating Subsidiary did not
report any profits in the statutory financial statements, and accordingly,
no appropriation to dedicated capital has been made.
i. Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
j. Earnings per common share
-------------------------
The calculation of primary earnings per common share is based on the
weighted average number of common shares outstanding during the year ended
December 31, 1994, 1995 and 1996. The calculation of fully diluted earnings
per common share is based on the common shares outstanding during the years
ended December 31, 1994, 1995 and 1996 adjusted for the assumed conversion
of the Company's US$30 million convertible Note B as mentioned in Note 1
above and exercise of stock options mentioned in Note 12.
The number of shares used in the computation was as follows:
1994 1995 1996
--------------- --------------- ---------------
Primary EPS computation 53,330,164 81,806,198 81,806,198
Fully diluted EPS
computation 1,047,817,647 1,076,293,694 1,075,293,694
4. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------
December 31, December 31,
1995 1996
--------------- ---------------
Rmb Rmb
Roads and bridges 109,020 110,784
Buildings 148 148
Machinery and equipment 475 3,804
Motor vehicles 2,121 3,084
Furniture, fixtures and office equipment 38 38
Construction-in-progress 247,346 505,734
Less: Accumulated depreciation (8,287) (12,233)
--------------- ---------------
Net book value 350,861 611,359
=============== ===============
14
<PAGE>
5. LONG-TERM BANK LOANS
- ------------------------
Long-term bank loans, all of which are unsecured, bear average interest
rates of approximately 14.87% and 14.66% as of December 31, 1995 and 1996
respectively and are repayable as follows:
December 31, December 31,
1995 1996
--------------- ---------------
Rmb Rmb
1997 58,000 58,000
1998 20,000 25,000
1999 19,500 54,500
2000 - 45,000
2001 - 55,000
--------------- ----------------
Total 97,500 237,500
=============== ================
All the long-term bank loans are denominated in Renminbi. Loans amounting
to Rmb19,500 and Rmb159,500 as of December 31, 1995 and 1996 respectively
are guaranteed by a related company.
6. COMMITMENTS
- ---------------
As of December 31, 1995 and 1996, the Operating Subsidiary had outstanding
capital commitments for construction contracts related to its CIP projects
amounting to approximately Rmb228,270 and Rmb91,783 respectively.
7. DISTRIBUTION OF PROFITS
- ---------------------------
Dividends from the Operating Subsidiary will be declared based on the
profits as reported in the statutory financial statements. Such profits
will be different from the amounts reported under U.S. GAAP. As of December
31, 1996, the Operating Subsidiary had no available retained earnings for
distribution.
In the opinion of management, any undistributed earnings and/or losses of
the Operating Subsidiary have been reinvested and will continue to be
reinvested indefinitely.
15
<PAGE>
8. PROVISION FOR INCOME TAXES
- ------------------------------
The reconciliation of the effective income tax rate based on income before
provision for income taxes and minority interests stated in the consolidated
statements of income to the statutory income tax rate in Hong Kong, the
British Virgin Islands, China and the U.S. is as follows:
1994 1995 1996
-------- -------- --------
Weighted average statutory tax rate 34.8% 31.6% 35.5%
Effect of tax holiday (34.8%) (31.6%) (35.5%)
-------- -------- --------
Effective tax rate - - -
======== ======== ========
Provision for income taxes consists of:
1994 1995 1996
-------- -------- --------
Rmb Rmb Rmb
Current - - -
Deferred - - 2,082
Adjustment of valuation allowance - - (2,082)
-------- -------- --------
- - -
======== ======== ========
The valuation allowance refers to the portion of the deferred tax assets
that are not currently realizable. The realization of these benefits
depends upon the ability of the Company to generate income in future years.
No provision or benefit for deferred income taxes was recognized in 1994,
1995 and 1996.
9. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
- -----------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of
CSH in an amount of Rmb10,000 and Rmb75,000 as of December 31, 1995 and 1996
respectively.
CSH has undertaken to provide continuing financial support to the Company to
the extent of CSH's interest in the Company for a period ending on December
31, 1997.
The Company paid management fees of US$155 (RMB1,288) to CSH during 1996 for
administrative services rendered on behalf of the Company by CSH.
10. DUE TO CHINESE JOINT VENTURE PARTNER
- -----------------------------------------
Balances due to the Chinese joint venture partner as of December 31, 1995
and 1996 represented amounts borrowed from the Chinese joint venture partner
to finance the CIP Projects.
These amounts are unsecured, non-interest bearing and have no fixed
repayment date.
16
<PAGE>
11. RETIREMENT PLANS
- ---------------------
As stipulated by the regulations of the Chinese government, all of the
Chinese staff of the Operating Subsidiary are entitled to an annual pension
on retirement, which is equal to their basic salaries at their retirement
dates. The Chinese government is responsible for the pension liability to
retired staff. The Operating Subsidiary is only required to make specified
contributions to the state-sponsored retirement plan calculated at 23% of
the basic salary of the staff. The expense reported in the consolidated
financial statements related to these arrangements was Rmb34, Rmb64 and
Rmb99 for the years ended December 31, 1994, 1995 and 1996 respectively.
12. STOCK OPTIONS
--------------
The following tables summarize the movement of share options of the Company.
During 1987 and 1988, the Company issued five-year Common Stock options in
conjunction with its financing activities to various promissory note holders
and other selected creditors. During 1989, the Company issued five and ten-
year stock options in an additional financing and extension of debt.
Common stock options
1995 1996
---------- ----------
Shares under option beginning of year 150,000 150,000
Expired - -
---------- ----------
Shares under option at end of year 150,000 150,000
========== ==========
Average exercise price of outstanding options $ 0.156 $ 0.156
========== ==========
Exercisable at end of year 150,000 150,000
========== ===========
In December 1991 the Board of Directors approved the issuance of Common
Stock options to members of the Board of Directors. The options were to
expire in five years and be issued at 110% of market value on the date of
grant.
Common stock options
1995 1996
---------- ----------
Options at beginning of year 1,000,000 1,000,000
Issued 300,000 -
Expired (300,000) (1,000,000)
---------- ----------
Shares under option at end of year 1,000,000 -
========== ==========
Average exercise price of outstanding options $ 0.14 $ -
========== ==========
Exercisable at end of year 1,000,000 -
========== ==========
<PAGE>
13. OTHER SUPPLEMENTAL INFORMATION
- -----------------------------------
a) The following items are included in the consolidated statements of
income:
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ ------------
Rmb Rmb Rmb
Business tax 1,163 1,171 1,211
b) Non-cash investing and
financing activities:
Capitalization of advances
payable to CSH as
additional paid-in capital - - 96,419
14. CONTINGENCY
- ----------------
The Operating Subsidiary has obtained an approval from the local government
to offset the toll revenue collected from the first phase of the toll road
against the construction-in-progress balances until the CIP Projects are
completed by the end of 1997. Thus, the tax holiday has been deferred until
the CIP Projects are completed. As such, the Operating Subsidiary reported
zero net profits in its statutory financial statements starting from the
commencement of operations in 1993 and will continue to do so until the CIP
Projects are completed at the end of 1997. The Company plans to record the
net profits offset against the construction-in-progress account during 1993
to 1997 into income of the statutory financial statements of the Operating
Subsidiary during 1998 and/or 1999 fiscal years (i.e. the first two tax
exemption years of the tax holiday). This plan is subject to the approval of
the local tax bureau. Should such approval not be obtained from the local
tax bureau, a tax liability amounting to approximately Rmb5 million and Rmb5
million for the years ended December 31, 1995 and 1996 respectively may
arise. In the opinion of the directors, it is not probable that a liability
will arise.
17
<PAGE>
UNAUDITED FINANCIAL STATEMENTS OF REGAL INTERNATIONAL, INC. FOR THE THREE
MONTHS ENDED MARCH 31, 1997
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
<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 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>
Financial Statements of Westronix Limited
- -----------------------------------------
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
AS OF DECEMBER 31,1994 AND 1995
-------------------------------
TOGETHER WITH AUDITORS' REPORTS
-------------------------------
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Westronix Limited:
We have audited the accompanying consolidated balance sheets of Westronix
Limited (incorporated in the British Virgin Islands) and its subsidiaries
as of December 31, 1994 and 1995, and the related consolidated statements
of income, cash flows and changes in shareholders' equity for the period
from June 23, 1993 to December 31, 1993 and the years ended December 31,
1994 and 1995, expressed in Chinese Renminbi.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred above
present fairly, in all material respects, the financial position of
Westronix Limited and its subsidiaries as of December 31, 1994 and 1995,
and the results of their operations and their cash flows for the period
from June 23, 1993 to December 31, 1993 and the years ended December 31,
1994 and 1995 in conformity with generally accepted accounting principles
in the United States of America.
Hong Kong,
November 5,1996.
1
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
--------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,1995 AND 1996 (UNAUDITED)
----------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Period from
June 23,1993
to Year ended December 31, Period
ended June 30,
December 31,
------------- ---------------------------- ---------
- -------------------
1993 1994 1995 1995 1995
1996 1996
------------- -------- -------- -------- --------
- -------- -------
Rmb Rmb Rmb US$ Rmb
Rmb US$
(unaudited)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
<C> <C>
Toll revenue 10,462 37,614 37,206 4,472 19,635
18,410 2,213
General and administrative
expenses (2,687) (9,615) (10,517) (1,264) (5,165)
(5,020) (603)
Exchange gain 378 3,494 1,417 170 1,417
37 4
------------- -------- -------- -------- --------
- -------- -------
Income before income
taxes and minority
interests 8,153 31,493 28,106 3,378 15,887
13,427 1,614
Provision for income taxes - - - - -
- - -
------------- -------- -------- -------- --------
- -------- -------
Income before minority
interests 8,153 31,493 28,106 3,378 15,887
13,427 1,614
Minority interests (3,817) (13,776) (13,087) (1,573) (7,095)
(6,566) (789)
------------- -------- -------- -------- --------
- -------- -------
Net income 4,336 17,717 15,019 1,805 8,792
6,861 825
============= ======== ======== ======== ========
======== ========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange
rate quoted by the Bank of China on June 30,1996 of US$1.00 = Rmb8.32. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on December 31, 1995
and June 30, 1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated
statements of income.
2
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
CONSOLIDATED BALANCE SHEETS AS OF
----------------------------------
DECEMBER 31, 1994, 1995 (AUDITED) AND
-------------------------------------
AS OF JUNE 30, 1996 (UNAUDITED)
(Amounts in thousands, except number of shares and share data)
<CAPTION>
December 31,
June 30,
-------------------------------------------
- -------------------
1994 1995 1995
1996 1996
---------- ---------- ---------- ----
- ------ ----------
Rmb Rmb US$
Rmb US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
<C>
ASSETS
- ------
Current assets
Cash and cash equivalents 71,015 22,172 2,665
7,613 915
Prepayments and deferred expenses 598 452 54
1,258 151
Other receivables and
other current assets 60 300 36
247 30
---------- ---------- ---------- ----
- ------ ----------
Total current assets 71,673 22,924 2,755
9,118 1,096
---------- ---------- ---------- ----
- ------ ----------
Prepayments for
construction-in- progress 28,807 29,789 3,580
17,894 2,151
Property, plant and equipment, net 179,883 350,861 42,171
422,352 50,763
---------- ---------- ---------- ----
- ------ ----------
Total assets 280,363 403,574 48,506
449,364 54,010
========== ========== ==========
========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
Current liabilities
Short-term bank loans 8,000 - -
10,000 1,202
Accounts payable 840 21,195 2,547
16,879 2,029
Accrued expenses and
other payables 4,832 10,191 1,225
3,909 468
Taxes other than income 115 107 13
101 12
Due to related companies 2,500 1,300 180
- - -
---------- ---------- ---------- ----
- ------ ----------
Total current liabilities 16,287 32,993 3,965
30,889 3,711
---------- ---------- ---------- ----
- ------ ----------
Long-term bank loans 28,000 97,500 11,719
127,500 15,325
Due to Chinese joint
venture partner - 10,500 1,262
15,000 1,803
Due to China Strategic
Holdings Limited 98,441 96,940 11,639
96,806 11,635
Minority interests 115,594 128,691 15,466
135,248 16,256
Commitments and contingency (Notes 6 & 13)
Shareholders' equity:
Common stock, par value
US$1 each; 50,000
shares authorized;
1 share outstanding 1 1 1
1 1
Retained earnings 22,040 37,059 4,454
43,920 5,279
---------- ---------- ---------- ----
- ------ ----------
Total shareholders' equity 22,041 37,060 4,455
43,921 5,280
---------- ---------- ---------- ----
- ------ ----------
Total liabilities and
shareholders' equity 280,363 403,574 48,506
449,364 54,010
========== ========== ==========
========== ==========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange
rate quoted by the Bank of China on June 30, 1996 of US$1.00 = Rmb8.32. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on December 31, 1995
and June 30, 1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
-----------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Period from
June 23,1993
to
December 3l, Year ended December 31,
Period ended June 30,
----------- ------------------------------ ------
- ------------------------
1993 1994 1995 1995 1995
1996 1996
----------- -------- -------- -------- ------
- -- -------- --------
Rmb Rmb Rmb US$ Rmb
Rmb US$
(unaudited)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
<C> <C>
Cash flows from operating
activities:
Net income 4,336 17,717 15,019 1,805
8,792 6,861 825
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Minority interests 3,817 13,776 13,087 1,573
7,095 6,566 789
Depreciation and
amortization 963 3,847 4,173 502
2,160 2,102 253
Loss on disposal of
fixed assets - - 19 2
- - - -
(Increase) decrease in
assets:
Prepayments and
deferred expenses (581) (42) 91 11
(90) (843) (101)
Other receivables and
other current assets (1,816) 1,755 (239) (29)
(208) 53 6
Increase (decrease:) in
liabilities:
Accounts payable - 840 20,355 2,447
3,536 (4,316) (519)
Accrued expenses and
other payables 205 1,649 (3,526) (424)
787 (8,874) (1,067)
Taxes other than
income 98 17 (9) (1)
(23) (5) (1)
----------- -------- --------- ------- -----
- --- -------- -------
Net cash provided by
operating activities 7,022 39,559 48,970 5,886
22,049 1,544 185
---------- -------- --------- -------- -----
- --- -------- -------
Cash flows from investing
activities!
Prepayments for
construction-in-
progress (567) (28,240) (982) (118)
(6,302) 11,895 1,430
----------- -------- -------- -------- -----
- --- -------- -------
Acquisition of property,
plant and equipment (39,569) (41,681) (166,230) (19,980)
(43,550) (70,964) (8,530)
---------- -------- -------- -------- -----
- --- -------- -------
Net cash used in investing
activities (40,136) (69,921) (167,212) (20,098)
(49,852) (59,069) (7,100)
---------- -------- -------- -------- -----
- --- -------- -------
4
</TABLE>
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
------------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Period from
June 23, 1996
to Year ended December 31,
Period ended June 30,
December 31,
---------------------------------------------------
- ------------------------
1993 1994 1995 1995
1995 1996 1996
-------- -------- -------- -------- ----
- ---- -------- --------
Rmb Rmb Rmb US$
Rmb Rmb US$
(unaudited)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
<C> <C>
Cash flows from financing
activities:
Proceeds of bank loans 10,000 35,500 114,945 13,816
9,000 40,000 ,808
Repayment of bank loans - (9,500) (33,445) (6,424)
(8,000) - -
Due to related companies - 2,500 (1,000) (120)
(2,500) (1,500) (180)
Due to Chinese joint
venture partner 23,748 (23,748) 10,500 1,262
5,500 4,500 541
Due to China Strategic
Holdings Limited (373) 68,252 (1,601) (192)
(1,414) (34) (4)
-------- -------- -------- -------- ----
- ---- -------- --------
Net cash provided by
financing activities 33,375 73,004 69,399 8,342
2,586 42,966 5,165
-------- -------- -------- -------- ----
- ---- -------- --------
Net increase (decrease) in
cash and cash equivalents 261 42,642 (48,843) 5,870)
(25,217) (14,559) (1,750)
Cash and cash equivalents, at
beginning of period/year 28,112 28,373 71,015 8,535
71,015 22,172 2,665
-------- -------- -------- -------- ----
- ---- -------- --------
Cash and cash equivalents, at
end of period/year 28,373 71,015 22,172 2,665
45,798 7,613 915
======== ======== ======== ========
======== ======== ========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars
(US$) for the convenience of the reader has been made at the unified
exchange rate quoted by the Bank of China on June 30, 1996 of US$1.00 =
Rmb8.32. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States Dollars at that rate on
December 31, 1995 and June 30, 1996 or at any other certain rate.
The accompanying notes are an integral part of these consolidated
statements of cash flows.
5
<PAGE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
(Amounts in thousands, except number of shares)
Shares of
Common Common Retained
Stock Stock Earnings Total
-------- -------- -------- --------
Number Rmb Rmb Rmb
Balance at June 23, 1993 1 1 (13) (12)
Net income - - 4,336 4,336
-------- -------- -------- --------
Balance at December 31, 1993 1 1 4,323 4,324
-------- -------- -------- --------
Net income - - 17,717 17,717
-------- -------- -------- --------
Balance at December 31, 1994 1 1 22,040 22,041
-------- -------- -------- --------
Net income - - 15,019 15,019
-------- -------- -------- --------
Balance at December 31, 1995 1 1 37,059 37,060
Net income (unaudited) - - 6,861 6,861
-------- -------- -------- --------
Balance at June 30,1996
(unaudited) 1 1 43,920 43,921
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
statements of changes in shareholders equity.
6
<PAGE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
- --------------------------------------------
Westronix Limited ("the Company") was incorporated in the British Virgin
Islands on July 3, 1996 with an authorized share capital of 50,000 common
shares with a par value of US$1 each. One share was issued at par value
to China Strategic Holdings Limited ("CSH") (formerly known as China
Strategic Investment Limited), a company incorporated in Hong Kong whose
shares are listed on the Stock Exchange of Hong Kong.
The Company is a holding company established to hold a 100% interest in
China Construction International Group Limited ("CCIG" - formally known as
China Construction International Limited and Cassia Taste Limited), a
company incorporated in Hong Kong. CCIG, in turn, holds a 51% interest in
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating
Subsidiary" or "Hangzhou toll road"). The Company's interest in 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 operation 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 Rmb102,000 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. Hangzhou toll road will
collect toll from all three phases of the toll road after the CIP Projects
are completed.
Key provisions of the joint venture agreement of Hangzhou toll road
include:
the joint venture period is 30 years from the date of formation;
the profit and loss sharing ratio is the same as the percentage of
equity interest; and
the Board of Directors consists of 7 members: 4 designated by CCIG and 3
designated by Hangzhou City Transportation Development Company, the
Chinese joint venture partner of Hangzhou toll road.
7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -------------------------------------------------
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.
The transfer of CSH's interest in CCIG to the Company was accounted for as
a reorganization of companies under common control and similar to a pooling
of interests. The accompanying consolidated financial statements of the
Company have been restated to present the transfer of CSH's interest in
CCIG to the Company as if it had occurred on June 23, 1993.
Hangzhou toll road operates in the PRC and accordingly is subject to
special considerations and significant risks not typically associated with
investments in equity securities of United States and Western European
companies. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
These are described further in the following paragraphs:
Political Environment
The value of the Company's interests in the Operating Subsidiary may be
adversely affected by changes in policies by the Chinese government
including, among others: changes in laws, regulations or the interpretation
thereof; confiscatory taxation; restrictions on foreign currency
conversion, imports or sources of suppliers; or the expropriation or
nationalization of private enterprises.
Economic Environment
The economy of the PRC differs significantly from the economies of the
United States and Western Europe in such respects as structure, level of
development, gross national product, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation and balance of
payments position, among others. Only recently has the Chinese government
encouraged substantial private economic activities.
The Chinese economy has experienced significant growth in the past five
years, but such growth has been uneven among various sectors of the
economy and geographic regions. Actions by the Chinese central government
to control inflation have significantly restrained economic expansion
recently. Similar actions by the central government of the PRC in the
future could have a significant adverse effect on economic conditions in
the PRC and the economic prospects for the Operating Subsidiary and the
Company.
8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- ---------------------------------------------------
Foreign Currency Exchange
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result,
the Renminbi is not freely convertible into foreign currencies.
The Operating Subsidiary conducts substantially all of its business in the
PRC, and its financial performance and condition are measured in terms of
Renminbi. The Operating Subsidiary's source of income, toll revenue, is
denominated in Renminbi. Revenues and profits have to be converted to
United States Dollars or Hong Kong Dollars to pay dividends to the
Company. Should the Renminbi devalue against the United States Dollar,
such devaluation would have a material adverse effect on the Company's
profits measured in foreign currency and reduce the foreign currency that
could be repatriated by the Operating Subsidiary to the Company. The
Company currently is not able to hedge its Renminbi - United States
Dollars exchange rate exposure in the PRC because neither the banks in the
PRC nor any other financial institution authorized to engage in foreign
exchange transactions offer forward exchange contracts.
Legal System
Since 1979, many laws and regulations dealing with economic matters in
general and foreign investment in particular have been enacted in the PRC.
However, the PRC still does not have a comprehensive system of laws and
enforcement of existing laws may be uncertain and sporadic.
Toll Revenue
Any increase in toll rates proposed by the Operating Subsidiary is subject
to approval by the Hangzhou Municipal Government and Hangzhou City
Transportation Department. However, there are no assurances that such
proposal will be approved by these government authorities. If such
approvals proposals are denied, profit margins of the operating subsidiary
will be reduced.
9
<PAGE>
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United
States of America ("U.S. GAAP"). This basis of accounting differs from
that used in the statutory financial statements of the Operating
Subsidiary, which were prepared in accordance with the accounting
principles and the relevant financial regulations applicable to joint
venture enterprises as established by the Ministry of Finance of China
("PRC GAAP").
The principal adjustments made to conform the statutory financial
statements of the Operating Subsidiary to U.S. GAAP included the following:
Restatement of monetary assets and liabilities denominated in foreign
currencies to reflect the exchange rates prevailing at the balance
sheet dates; and
Recognition of toll revenue on the accrual basis and upon the
commencement of operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements of
the Company and its majority-owned subsidiaries. All material intercompany
balances and transactions have been eliminated on consolidation.
b. Toll revenue
------------
Toll revenue represents the gross receipts at the toll stations, net of
business tax calculated at 3.0% of the gross toll receipts
10
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
c. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, demand deposits with banks
and liquid investments with an original maturity of one year or less. Cash
and cash equivalents included United States Dollar deposits of US$8,280
(Rmb69,733), US$1,078 (Rmb8,967) and US$128 (Rmbl,071) (unaudited) as of
December 31, 1993, 1994, 1995 and June 30, 1996 respectively. Deposits of
US$700 (Rmb5,824) as of December 31, 1995 were used to guarantee bank loans
of a related company.
d. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed
using the straight line method over the assets' estimated useful lives,
taking into account the estimated residual value of 10% (except for roads
and bridges which have no residual value) of the cost of the assets. The
estimated useful lives are as follows:
Roads and bridges 30 years
Buildings 20 years
Machinery and equipment 5 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress ("CIP" see Note 4) represents new roads and
bridges under construction and plant and machinery pending installation.
This includes the costs of construction, the costs of plant and machinery
and interest charges (net of interest income), arising from borrowings used
to finance these assets during the period of construction or installation.
Interest capitalized amounted to Rmb1,752, Rmb6,778, Rmb2,566 (unaudited)
and Rmb9,148 (unaudited) respectively for the period ended December 31,
1993 and for the years/periods ended December 31, 1994, 1995 and June 30,
1996 respectively.
11
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
e. Taxation: Income Taxes
----------------------
The Company was incorporated under the laws of the British Virgin Islands,
and under current British Virgin Islands law, the Company 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 its 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 has 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 Rmb3,236,
Rmb10,000, Rmb9,901, Rmb5,322 (unaudited) and Rmb4,966 (unaudited) and net
income of the Company would have been reduced by Rmb1,651, Rmb,5,100,
Rmb5,050, Rmb2,714 and Rmb2,533 (unaudited) for the period/years ended
December 31, 1993, 1994, 1995 and for the six months ended June 30, 1996
respectively (See Note 13)
The Company provides for deferred income taxes using the liability method,
by which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets
or liabilities in the financial statements.
12
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
f. 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 Consolidated Industrial and Commercial Tax. Under these new tax
regulations, the Operating Subsidiary is subject to business tax which
replaced the CICT and is now the principal direct tax on the toll revenue
generated. The business tax rate applicable to the Operating Subsidiary is
3.0%.
g. 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.
The Company's registered capital and reporting currency are denominated in
United States Dollars. For financial reporting purposes, the United States
Dollars capital injection amounts have been translated into Renminbi at the
swap centre rates prevailing at the capital injection date.
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.
13
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
g. Foreign Currency Translation (Cont'd)
--------------------------------------
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, 1993, December 31, 1994 and December 31,
1995 were as follows:
December 31,
----------------------------------------
1993 1994 1995
------------ ------------ ------------
Rmb equivalents of US$1
Official exchange rate 5.80 N/A N/A
Unified exchange rate N/A 8.44 8.32
Shanghai swap center rate 8.70 8.44 8.32
h. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign
equity joint venture enterprises, the Operating Subsidiary maintains
discretionary dedicated capital, which includes a general reserve fund, an
enterprise expansion fund and a staff welfare and incentive bonus fund.
The Board of Directors of the Operating Subsidiary will determine on an
annual basis the amount of the annual appropriations to dedicated capital.
For the period from June 23, 1993 to June 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.
14
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
- -----------------------------------
December 31, June 30,
------------------------------------
1994 1995 1996
---------- ---------- ----------
Rmb Rmb Rmb
(unaudited)
Roads and bridges 108,372 109,020 112,216
Buildings 146 148 148
Machinery and equipment 370 475 529
Motor vehicles 2,121 2,121 2,162
Furniture, fixtures and office
equipment 36 38 38
Construction-in-progress 73,365 247,346 317,435
Less: Accumulated depreciation (4,527) (8,287) (10,176)
---------- --------- ----------
Net book value 179,883 350,861 422,352
========== ========= ==========
5. LONG-TERM BANK LOANS
- ---------------------------
Long-term bank loans, all of which were unsecured, bear average interest
rates of approximately 14.87% as of December 31,1995. December 31,1993 and
1994 - 13.86%, June 30,1996 - 14.54% (unaudited) and are repayable as
follows:
December 31, June 30,
1995 1996
------------- ------------
Rmb Rmb
(Unaudited)
1997 58,000 58,000
1998 20,000 25,000
1999 19,500 39,500
2001 - 5,000
----------- ----------
Total 97,500 127,500
=========== ==========
All the long-term bank loans are denominated in Renminbi. Loans amounting
to Rmb19,500 and Rmb49,500 (unaudited) as of December 31, 1995 and June
30, 1996 respectively, are guaranteed by a related company.
6. COMMITMENTS
- ------------------
As of December 31, 1995, the Operating Subsidiary had outstanding capital
commitments for construction contracts contracted for its CIP projects
amounting to approximately Rmb228,270.
15
<PAGE>
7. DISTRIBUTION OF PROFIT
- ----------------------------
Dividends from the Operating Subsidiary will be declared based on the
profits as reported in the statutory financial statements. Such profits
will be different from the amounts reported under U.S. GAAP. As of
December 31, 1995, and June 30, 1996 (unaudited), the Operating Subsidiary
had no available retained earnings for distribution.
8. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
- -------------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related
company of CSH of Rmbl0,000, and Rmb5l,000 (unaudited), as of December
31, 1995 and June 30,1996 respectively.
9. DUE TO CHINESE JOINT VENTURE PARTNER
- ------------------------------------------
The amounts due to Chinese joint venture partner as at December 31, 1993
represented the excess of the book value of the net assets contributed
by the Chinese joint venture partner upon the formation of the
Operating Subsidiary over its share of the registered capital of the
joint venture enterprise. This was repaid in 1994. Balances due to
the Chinese joint venture as at December 31, 1995 and June 30, 1996
(unaudited) represented amounts borrowed from the Chinese joint venture
partner to finance the CIP Projects.
These amounts are unsecured, non-interest bearing and have no fixed
repayment date.
10. 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% (for
1994, 1995 and 1996) of the basic salary of the staff. The expenses
reported in the consolidated financial statements related to these
arrangements were Rmb34, Rmb64, Rmb32 (unaudited) and Rmb30 (unaudited) for
the years/periods ended December 31, 1994 and 1995 and six months ended
June 30, 1995, 1996 respectively.
16
<PAGE>
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
- ---------------------------------------------------------
Period from June Six months
23, 1993 to ended
December 3l, Year ended December 31, June 30,
----------------------- -----------
1993 1994 1995 1996
----------- --------- ----------- -----------
Rmb Rmb Rmb Rmb
(Unaudited)
Non-cash investing and
financing activities:
Paid-in capital from the
Chinese joint
venture partner
contributed through
the injection of
fixed assets 98,000 - - -
12. OTHER SUPPLEMENTAL INFORMATION
- -------------------------------------
The following items are included in the consolidated statements of income:
Period from June Six months
23, 1993 to ended
December 3l, Year ended December 31, June 30,
------------------------- ------------
1993 1994 1995 1996
------------- ----------- ----------- ------------
Rmb Rmb Rmb Rmb
(Unaudited)
Foreign exchange gain 378 3,494 1,417 37
Business tax 327 1,163 1,171 579
17
<PAGE>
13. CONTINGENCY
- ------------------
The Operating Subsidiary has obtained an approval from the local government
to offset the toll revenue collected from the first phase of the toll road
against the construction-in-progress balances until the CIP Projects are
completed by the end of 1997. Thus, the tax holiday has been deferred
until the CIP Projects are completed. As such, the Operating Subsidiary
reported zero net profits in its statutory financial statements starting
from the commencement of operations in 1993 and will continue to do so
until the CIP Projects are completed at the end of 1997. The Company plans
to record the net profits offset in the construction-in-progress account
during 1993 to 1997 in the statutory income statements of the 1998 and 1999
fiscal years (i.e. the first two tax exemption years of the tax holiday).
This plan is subject to the approval of the local tax bureau. Should such
approval not be obtained from the local tax bureau, a tax liability
amounting to approximately Rmb5 million as of December 31, 1995 may arise.
In the opinion of management, it is not probable that a liability will
arise.
14. SUBSEQUENT EVENTS
- ------------------------
Pursuant to an acquisition agreement dated September 10, 1996 between Regal
International, Inc., ("Regal"), a Delaware Corporation whose shares are
listed on the National Association of Securities Dealers Automated
Quotations ("NASDAQ"), the Company and China Strategic Holdings Limited
("CSH"), Regal acquired all the issued and outstanding shares of the
Company for a consideration of US$30 million (Rmb250 million) to be
satisfied through the issuance of a US$30 million Convertible Note (the
"Convertible Note") 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 the Convertible Note can be converted into shares of
Common Stock, US$0.01 par value, of Regal ("Common Stock") at a conversion
price of US$0.0302 per share. The Convertible Note, if exercised by CSH,
would give CSH a controlling interest of more than 90% in Regal. This
Convertible Note is secured by a pledge of Regal's interest in the shares
of the Company in favour of CSH.
Pursuant to an agreement signed between CSH and the Company dated September
1, 1996, the payable balance of Rmb96,806 (unaudited) due to CSH as of June
30, 1996 will be contributed by CSH into the Company as additional paid-in
capital.
19
<PAGE>
ARTHUR
ANDERSEN
July 4, 1997 Arthur Andersen & Co.
Certified Public Accountants
The Board of Directors
Regal International, Inc. & 25/F Wing On Centre
Westronix Limited, 111 Connaught Road Central
c/o 52/F Bank of China Tower Hong Kong
1 Garden Road 852 2852 0222
Hong Kong 852 2815 0548 fax
Dear Sirs,
Regal International, Inc. and Westronix Limited
We hereby consent to the inclusion in the draft proxy statement dated
1997 for the special shareholders' meeting of Regal International, Inc. to
be held on a date to be determined, of uor name and of our reports dated
March 6, 1997, and November 5, 1996 of Regal International, Inc. and
Westronix Limited in thr form and context in which they respectively
appear.
/s Arthur Andersen & Co.
<PAGE>
Pro-Forma Financial Statements
- ------------------------------
<PAGE>
REGAL INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
AS OF DECEMBER 31, 1995 AND JUNE 30,1996
-----------------------------------------
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA
------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS OF
------------------------------------
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
The unaudited pro forma consolidated financial statements as of and for the
six months ended June 30, 1996 and as of and for the year ended December 31,
1995 have been prepared to give effect to:
(i) the sale and transfer of certain operating assets and real property by
Regal International, Inc. ("Regal") to Regal (New) International, Inc.
("New Regal"), pursuant to an Asset Purchase Agreement dated February
8,1996;
(ii) the acquisition by Regal International, Inc. ("Regal") of China
Strategic Holdings Limited's ("CSH") entire interests in Westronix
Limited and its subsidiaries, pursuant to an Acquisition Agreement
dated September 10, 1996.
The unaudited pro forma consolidated financial statements are based upon the
historical consolidated financial statements of Regal International, Inc. as
of and for the six months ended June 30, 1996 and as of and for the year
ended December 31, 1995 after giving effect to the pro forma adjustments
described in the notes thereto as if the events described in (i) and (ii)
above had occurred on January 1, 1995.
The unaudited pro forma consolidated financial statements do not purport to
represent what the financial positions and results of operations of Regal
would actually have been if the events described above had in fact occurred
on January 1, 1995, or to project the financial position and results of
operations of Regal for any future date or period.
The unaudited pro forma consolidated financial statements should be read in
conjunction with the consolidated financial statements of Regal
International, Inc., and Westronix Limited and its subsidiaries, including
the notes thereto.
1
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
(Amounts expressed in thousands)
<CAPTION>
Historical As adjusted
Historical
----------- ------------- --------
- ----
Notes to
unaudited
pro forma
Regal Regal
Westronix consolidated
International, International, Limited
and financial
Inc. Inc.
Subsidiaries statements
------------ ------------ ------
- ----- ----------
Rmb Rmb
Rmb
(Note 2) (Notes 1 & 2)
<S> <C> <C> <C>
Sales/Revenue 63,157 -
37,206
------------ ------------ ------
- -----
Cost of goods sold 41,783 -
- -
Selling and
administrative
expenses 22,131 -
10,517
Interest expenses, net 2,729 -
- -
Other (income), net (3,719) -
- -
Exchange gain - -
(1,417)
------------ ------------- -----
- ------
Total costs and
expenses 62,924 -
9,100
------------ ------------- -----
- ------
Income from
continuing
operations before
income tax 233 -
28,106
Provision for income
tax - -
- -
------------ ------------ -----
- ------
Income from
continuing
operations 233 -
28,106
Income from
discontinued
operations - 233
- -
------------- ------------ ----
- ------
Income before
minority interests 233 233
28,106
Minority interests - -
(13,087)
------------- ------------ ----
- ------
Net income 233 233
15,019
============= ============
==========
<CAPTION>
Unaudited Pro
forma
consolidated
statement of
Pro forma income of Regal
adjustments International,
US$
Inc.
------------- ------------ ----
- ------
Rmb Rmb
<S> <C>
<C>
Sales/Revenue 37,206
4,472
------------ ----
- ------
Cost of goods sold -
- -
Selling and
administrative
expenses 10,517
1,264
Interest expenses, net -
- -
Other (income), net -
- -
Exchange gain (1,417)
(170)
------------- ---
- -------
Total costs and
expenses 9,100
1,094
------------- ---
- -------
Income from
continuing
operations before
income tax 28,106
3,378
Provision for income
tax -
- -
------------- ---
- -------
Income from
continuing
operations 28,106
3,378
Income from
discontinued
operations 233
28
------------- ---
- -------
Income before
minority interests 28,339
3,406
Minority interests (13,087)
(1,573)
------------- ---
- -------
Net income 15,252
1,833
=============
==========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate
quoted by the Bank of China on June 30, 1996 of US$1.00 = Rmb8.32. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on December 31, 1995
and June 30, 1996 or at any other certain rate.
The accompanying notes are an integral part of this unaudited pro forma
consolidated statement of income.
2
<PAGE>
<TABLE>
REGAL INTERNATIONAL INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
---------------------------------------------
AS OF DECEMBER 31, 1995
-----------------------
(Amounts expressed in thousands)
<CAPTION>
Historical As adjusted
Historical
----------- ------------- --------
- ----
Regal Regal
Westronix
International, International, Limited
and
Inc. Inc.
Subsidiaries
------------ ------------ ------
- -----
Rmb Rmb
Rmb
(Note 2) (Notes 1 & 2)
<S> <C> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents 92 6,656
22,172
Restricted cash 158 -
- -
Note receivable - 1,240
- -
Accounts receivable, net 13,171 -
- -
Inventories 20,467 -
- -
Prepayments and deferred expenses 1,822 -
452
Other receivables and other
current assets - -
300
------------ ------------ -----
- ------
Total current assets 35,710 7,896
22,924
------------ ------------ -----
- ------
Prepayments for
construction-in-progress - -
29,789
Property, plant and equipment, net 15,275 -
350,861
Long-term investment 133 249,600
- -
Note receivable - 12,904
- -
------------ ------------ -----
- ------
Total assets 51,118 270,400
403,574
============ ============
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Long-term loans - current portion 7,197 -
- -
Accounts payable 6,257 -
21,195
Accrued expenses and other payables 4,950 -
10,191
Taxes other than income - -
107
Due to related companies - -
1,500
------------ ------------ -----
- ------
Total current liabilities 18,404 -
32,993
------------ ------------ -----
- ------
<CAPTION>
Notes to
Unaudited Pro
unaudited
forma
pro forma
consolidated
consolidated balance
sheet of
financial Pro forma
Regal
statements adjustments
International,
Inc. US$
------------- ------------ -----
- ----- -----------
Rmb
Rmb
(Note 3)
<S> <C> <C>
<C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents
28,828 3,465
Restricted cash
- - -
Note receivable
1,240 149
Accounts receivable, net
- - -
Inventories
- - -
Prepayments and deferred expenses
452 54
Other receivables and other
current assets
300 36
----
- -------- -----------
Total current assets
30,820 3,704
----
- -------- -----------
Prepayments for
construction-in-progress
29,789 3,580
Property, plant and equipment, net
350,861 42,171
Long-term investment (c) (249,600)
- - -
Note receivable
12,904 1,551
----
- -------- -----------
Total assets
424,374 51,006
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Long-term loans - current portion
- - -
Accounts payable
21,195 2,547
Accrued expenses and other payables
10,191 1,225
Taxes other than income
107 13
Due to related companies
1,500 180
----
- -------- -----------
Total current liabilities
32,993 3,965
----
- -------- -----------
</TABLE>
3
<PAGE>
<TABLE>
REGAL INTERNATIONAL INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
---------------------------------------------
AS OF DECEMBER 31, 1995
-----------------------
(Amounts expressed in thousands)
<CAPTION>
Historical As adjusted
Historical
----------- ------------- --------
- ----
Regal Regal
Westronix
International, International, Limited
and
Inc. Inc.
Subsidiaries
------------ ------------ ------
- -----
Rmb Rmb
Rmb
(Note 2) (Notes 1 & 2)
<S> <C> <C> <C>
Convertible Note Payable - 249,600
- -
Long-term loans 3,952 -
97,500
Loans from related parties 6,814 -
- -
Due to Chinese joint
venture partner - -
10,500
Due to China Strategic
Holdings Limited - -
96,840
Minority interests - -
128,681
Shareholders' equity:
Common stock 6,806 6,806
1
Additional paid-in capital 168,954 167,806
- -
(Accumulated deficits)
Retained earnings (153,812) (153,812)
37,059
------------ -------------- -----
- ------
Total shareholders' equity 21,948 20,800
37,060
------------ -------------- -----
- ------
Total liabilities and
shareholders' equity 51,118 270,400
403,574
============ ==============
===========
<CAPTION>
Unaudited Pro
Notes to
forma
unaudited pro
consolidated
forma
balance sheet of
consolidated Pro forma
Regal
financial adjustments
International,
statements
Inc. US$
------------- ------------ ----
- -------- -----------
Rmb
Rmb
(Note 3)
<S> <C> <C>
<C> <C>
Convertible Note Payable (b) (249,600)
- - -
Long-term loans
97,500 11,719
Loans from related parties
- - -
Due to Chinese joint
venture partner
10,500 1,262
Due to China Strategic
Holdings Limited (a) (96,840)
- - -
Minority interests
128,681 15,466
Shareholders' equity:
Common stock (b) 82,651
89,457 10,752
(c) (1)
Additional paid-in capital (b) 166,949
181,996 21,875
(a) 96,840
(c) (249,599)
(Accumulated deficits)
Retained earnings
(116,753) (14,033)
---
- --------- -----------
Total shareholders' equity
154,700 18,594
--
- --------- -----------
Total liabilities and
shareholders' equity
424,374 51,006
=========== ===========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate
quoted by the Bank of China on June 30, 1996 of US$1.00 = Rmb8.32. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on December 31, 1995
and June 30, 1996 or at any other certain rate.
The accompanying notes are an integral part of this unaudited consolidated
balance sheet.
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
----------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------
(Amounts expressed in thousands)
<CAPTION>
Historical and
adjusted Historical
--------------- ---------------
Notes to
Unaudited Pro
unaudited
forma
pro forma income
of Regal
Regal Westronix consolidated
statement of
International, Limited and financial Pro forma income
of Regal
Inc. Subsidiaries statements adjustments
International, US$
Inc.
------------- ------------- ------------ ----------- ------
- -------- ------------
$0'000 $'000 Rmb
Rmb
Rmb Rmb
(Note 2)
<S> <S> <C>
<C> <C>
Sales/Revenue - 18,410
18,410 2,213
------------- ------------- ------
- -------- ------------
Selling and
administrative
expenses - 5,020
5,020 603
Interest (income),
net (266) -
(266) (32)
Other expenses, net 632 -
632 76
Exchange gain - (37)
(37) (4)
-------------- ------------- ------
- -------- ------------
Total costs and
expenses 366 4,983
5,349 643
-------------- ------------- ------
- -------- ------------
Income/(loss) from
continuing
operations before
income tax (366) 13,427
13,061 1,570
Provision for income
tax - -
- - -
-------------- -------------- ------
- -------- ------------
Income/(loss) from
continuing
operations (366) 13,427
13,061 1,570
Income from
discontinued
operations - -
- - -
-------------- -------------- ------
- -------- ------------
Income/(loss) before
minority interests(366) 13,427
13,061 1,570
Minority interests - (6,566)
(6,566) (789)
-------------- -------------- ------
- -------- ------------
Net income/(loss) (366) 6,861
6,495 781
============== ==============
============== ============
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate
quoted by the Bank of China on June 30, 1996 of US$1.00=Rmb8.32. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on December 31, 1995
and June 30, 1996 or at any other certain rate.
The accompanying notes are an integral part of this unaudited pro forma
consolidated statement of income.
5
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
----------------------------------------------
AS OF JUNE 30, 1996
--------------------
<CAPTION>
Historical and
adjusted Historical
--------------- ---------------
Notes to
Unaudited Pro
unaudited
forma
pro forma
consolidated
Regal Westronix consolidated balance
sheet of
International, Limited and financial Pro forma
Regal
Inc. Subsidiaries statements adjustments
International, US$
Inc.
------------- ------------- ------------ ----------- ------
- -------- ------------
$0'000 $'000 Rmb
Rmb
Rmb Rmb
(Notes 1 & 2) (Note 3)
<S> <C> <C> <C> <C>
<C> <C>
ASSETS
- ------
Current assets
Cash and cash
equivalents 7,326 7,613
14,939 1,796
Note receivable 1,280 -
1,280 154
Prepayments and
deferred
expenses 478 1,258
1,736 209
Other receivables
and other
current assets - 247
247 30
------------- ------------- ------
- -------- ------------
Total current assets 9,084 9,118
18,202 2,189
------------- ------------- ------
- -------- ------------
Prepayments for
construction-in-
progress - 17,894
17,894 2,151
Property, plant and
equipment, net - 422,352
422,352 50,763
Long-term
investment 361,920 - (c) (249,600)
122,320 13,500
Note receivable 12,464 -
12,464 1,497
------------- ------------- ------
- -------- ------------
Total assets 383,468 449,364
583,232 70,100
============= =============
============== ============
LIABILITIES AND
SHAREHOLDERS'
EQUITY
- ----------------
Current liabilities
Short-term bank
loans - 10,000
10,000 1,202
Accounts payable - 16,879
16,879 2,029
Accrued expenses
and other
payables 265 3,909
4,174 502
Taxes other than
income - 101
101 12
------------- ------------- ------
- -------- ------------
Total current
liabilities 265 30,889
31,154 3,745
------------- ------------- ------
- -------- ------------
</TABLE>
6
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
----------------------------------------------
AS OF JUNE 30, 1996
--------------------
<CAPTION>
Historical and
adjusted Historical
--------------- ---------------
Notes to
Unaudited Pro
unaudited
forma
pro forma
consolidated
Regal Westronix consolidated balance
sheet of
International, Limited and financial Pro forma
Regal
Inc. Subsidiaries statements adjustments
International, US$
Inc.
------------- ------------- ------------ ----------- ------
- -------- ------------
$0'000 $'000 Rmb
Rmb
Rmb Rmb
(Notes 1 & 2) (Note 3)
<S> <C> <C> <C> <C> <C>
<C>
Convertible Note
Payable 361,920 - (b) (249,600)
112,320 13,500
Long-term loans - 127,500
127,500 15,324
Due to Chinese joint
venture partner - 15,000
15,000 1,803
Due to China
Strategic Holdings
Limited 849 96,806 (a) (96,806)
849 102
Minority interests - 135,248
135,248 16,256
Shareholders' equity:
Common stock 6,806 1 (b) 82,651
89,457 10,752
(c) (1)
Additional paid-in
capital 167,806 - (b) 166,949
181,962 21,870
(a) 96,806
(c) (249,599)
(Accumulated
deficits) Retained
earnings (154,178) 43,920
(110,258) (13,252)
------------- ------------- ------
- -------- ------------
Total shareholders'
equity 20,434 43,921
161,161 19,370
------------- ------------- ------
- -------- ------------
Total liabilities and
shareholders'
equity 383,468 449,364
583,232 70,100
============= =============
============== ============
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$)
for the convenience of the reader has been made at the unified exchange rate
quoted by the Bank of China on June 30, 1996 of US$1.00=Rmb8.32. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States Dollars at that rate on December 31, 1995
and June 30, 1996 or at any other certain rate.
The accompanying notes are an integral part of this unaudited consolidated
balance sheet.
7
<PAGE>
REGAL INTERNATIONAL INC. AND SUBSIDIARIES
-----------------------------------------
NOTES TO UNAUDITED PRO FORMA
----------------------------
CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ADJUSTMENTS TO REGAL INTERNATIONAL, INC.'S HISTORICAL
FINANCIAL STATEMENTS
- ----------------------------------------------------------
Pursuant to an Acquisition Agreement dated February 8, 1996 between Regal
International, Inc. ("Regal"), Acewin Profits Limited ("AP"), a British
Virgin Islands corporation and China Strategic Holdings Limited ("CSH"), a
Hong Kong company, Regal acquired all the issued and outstanding shares of
AP at a consideration of US$13.5 million satisfied through the issuance of a
US$13.5 million Convertible Note (the "Convertible Note A") by Regal to CSH
bearing interest at 9% per annum after an initial 6-month interest-free
period. Acewin's sole asset is a 55% joint venture 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.
Pursuant to a Purchase Agreement dated September 11, 1996 between Regal
International, Inc. ("Regal"), BTR China Holdings B.V. ("BTR"), a company
incorporated in the Netherlands, and China Strategic Holdings Limited
("CSH"), a Hong Kong company, Regal sold all the issued and outstanding
shares of AP at a consideration of US$13.95 million. The proceeds were then
used to repay the Convertible Note A principal of US$13.5 million, on
September 13, 1996. The realized gain was US$450. As of June 30, 1996, the
Company's interest in AP was reflected as an investment.
Pursuant to another Asset Purchase Agreement ("the agreement") dated
February 8, 1996 between Regal International, Inc. ("Regal") and Regal (New)
International, Inc. ("New Regal"), Regal sold and transferred the existing
operating assets and real property of Regal 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 in cash and the
balance by delivery of two promissory notes, one in the principal amount of
US$900 (the "US$900 Note") and the second in the principal amount of US$800
(the "US$800 Note"). The US$900 Note bears interest at 9% per annum and is
payable in sixty equal monthly installments of principal and interest. The
US$800 Note bears no interest and is due and payable in one installment on
January 31, 2001.
8
<PAGE>
1. ADJUSTMENTS TO REGAL INTERNATIONAL, INC.'S HISTORICAL
FINANCIAL STATEMENTS (Cont'd)
- -----------------------------------------------------------
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal
International, Inc. ("Regal"), Westronix Limited ("WL"), a British Virgin
Islands corporation and China Strategic Holdings Limited ("CSH"), a Hong
Kong company, Regal acquired all the issued and outstanding shares of WL at
a consideration of US$30 million to be satisfied through the issuance of a
US$30 million Convertible Note (the "Convertible Note B") by Regal to CSH
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, US$0.01 par value, of
Regal ("Common Stock") at a conversion price of US$0.0302 per share. WL's
sole asset is a 51% joint venture 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.
Adjustments have been made to reflect the financial positions of Regal as if
the net operating assets had been sold and transferred to new Regal as of
December 31, 1995 and the acquisition of the interests in WL had occurred as
of January 1, 1995. Income from historical continuing operations of Regal
for the year ended December 31, 1995 has been reclassified as "Income from
discontinued operations" as a result of the disposal of the net operating
assets to New Regal.
The transfer of CSH's equity interest in WL to Regal has been accounted for
as a purchase in the accompanying unaudited pro forma consolidated financial
statements.
2. FOREIGN CURRENCY TRANSLATION
- ---------------------------------
The financial statements of Regal are translated into Renminbi using the
closing rate method, whereby the balance sheet items are translated into
Renminbi using the exchange rate prevailing at year end. Profit and loss
items are translated at the average rate for the year.
9
<PAGE>
3. DESCRIPTION OF PRO FORMA ADJUSTMENTS
- -----------------------------------------
a) To reflect the contribution by CSH to additional paid-in capital of WL,
originally recorded as a payable to CSH, pursuant to an agreement signed
between CSH and WL dated September 1, 1996.
b) To adjust the share capital and additional paid-in capital as if the
Convertible Note B of Regal had been exercised by CSH as of December 31,
1995.
c) To eliminate the investment in WL on consolidation. The difference
between CSH's historical cost of investment in WL and the acquisition cost
to Regal has been treated as a reduction of additional paid-in capital as
the transfer is considered a transfer of assets between entities under
common control.
4. INCOME TAXES
- -----------------
No provision for United States federal income taxes or tax benefits on the
undistributed earnings and/or losses of the PRC Operating Subsidiary has
been provided as the earnings have been reinvested and, in the opinion of
management, will continue to be reinvested indefinitely.
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BUSINESS OF THE COMPANY PRIOR TO ACQUISITION OF WESTRONIX
After February 19, 1996 the Registrant owned, as its sole asset, all the
issued and outstanding capital stock of Acewin, a company which owned all
the outstanding capital stock of China Machine Holdings Limited ("CMHL").
CMHL was the holder of a 55% interest in Wuxi CSI. Wuxi CSI was the only
operating subsidiary of the Registrant prior to September 10, 1996. Wuxi
CSI, established in September 21, 1993, was a Sino-foreign joint venture in
China between CMHL and Wuxi Vibration Isolator Factory. Wuxi Vibration
Isolator Factory, built in 1960, is a National Grade II Enterprise (The
National Grade System grades all factories in terms of size, profitability,
sales, productivity and excellence in products. There are only a few Grade I
Enterprises in each province) and Wuxi CSI was the largest vibration
isolator producer in China. Wuxi CSI, was a primary supplier to domestically
produced Volkswagens, Peugeots and Audis developed close ties to China's
burgeoning automobile industry.
Wuxi CSI, with registered capital of $8.0 million, occupied 39,540 square
meters of land, including a building area of 45,504 square meters and a
workshop area of 37,232 square meters.
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The factory was situated in Wuxi City which is located in Southern
Jiangsu Province, at the center of the "golden delta" of the Yangtze River,
bordering Suzhou in the East and the Hangzhou in the West. It is 128 km.
apart from Shanghai; 183 km. from Nangjing and 40 km. away from the natural
port of Zhangjiagang. The urban area around Wuxi City covers 397 square km.
with a population of 0.928 million. Wuxi City has become a major
international open-port city at the mouth of the Yangtze River.
Business Of Wuxi CSI Vibration Isolator
- ---------------------------------------
Wuxi CSI was engaged in the manufacture and sale of vibration isolators,
rubber damping materials, stainless steel bellows expansion joint and
similar products, primarily for sale within China. Its primary customer
base was in Shanghai, although the distribution of its sales was regional.
Being located only 128 km. from Shanghai where three (3) of the largest
automobile manufacturers in China produce over 50% of the entire automobile
market of China, Wuxi CSI sold over 70% of its output to Shanghai
Volkswagon.
Wuxi CSI Sales For The Years Ended December 31, 1995 And 1994
- -------------------------------------------------------------
Table 1 Sales Analysis
(Rmb in thousands)
1994 1995 % Change
------ ------ ---------
Sales 72,570 43,623 49%
Gross Profit 26,357 27,981 66%
Operating income (1) 12,184 16,871 130%
Net income 7,531 124%
________________________
(1) Operating income means income before minority interest, income tax, net
interest expense and other income.
Products And Markets
- --------------------
Wuxi CSI produced a complete range of the following products under the
brand name "Xizhen" (See Table 2 - Sales by Units).
(1) Rubber-Metal Vibration Isolators
Minimizes harmful vibrations and noise. Widely utilized in automobiles,
ships, trains and heavy machinery.
(2) Metal Bellows
Widely used in the shipbuilding, petroleum, chemical, industry, railway,
construction, electric power and nuclear industries.
(3) Bitumen Damping Materials
Reduces vibration and noise from mechanical equipment installed in
automobiles, refrigerators, fans and machinery.
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Table 2 Sales by Units
Type of Vibration Isolator 1994 1995 % Change Market
- -------------------------- ---- ---- -------- ------
- -General Vehicle Vibration
Isolator 388,007 353,774 -8.8% Auto
- -Santana (Volkswagen) 1,795,260 3,133,754 74.6% Auto
- -Audi 97,833 161,992 65.6% Auto
- -Damping Materials and Damp-
ing Materials with fabrics 1,511,007 4,691,384 210% Auto
Others 285,032 253,631 -11.0% Auto
Approximately 74% of Wuxi CSI's total sales in 1995 were made to Shanghai
Volkswagen. Shanghai Volkswagen manufactures the "Santana". Compared to the
Shanghai region, sales to other regions were relatively small. Sales to
Jilin and Jiangsu come in second and third place but only accounted for 5.4%
and 3.5% of total sales, respectively. (See Table 3 Geographical Sales
Distribution).
Table 3 Geographical Sales Distribution - 1995
Region % of total sales
- ------------------------------------
Shanghai 74.1
Jilin 5.4
Jiangsu 3.5
Guangdong 0.2
Sichuan 0.1
Jiangxi 0.8
Shandong 1.3
Others(1) 14.6
- ---------------------------
Total 100%
(1) Others refer to regions which are not listed above in the table
The complete information of the Company's business prior to September 10,
1996 has been provided in the Company's report on Form 10-KSB for the fiscal
year ending December 31, 1995, which has been filed with the SEC.
The acquisition of Westronix Limited was approved by the consent in writing
of the majority of the Company's shareholders on September 10, 1996. The
Board of Directors recommends that stockholders ratify the acquisition of
Westronix Limited and approve the terms of the acquisition. This proposal
requires the affirmative vote of 80% of the outstanding shares of Common
Stock entitled to vote at the Meeting
PROPOSAL NO. 2
AMENDMENT OF CERTIFICATE OF INCORPORATION
INCREASE IN AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK
The Company is soliciting the approval of stockholders for one or more
amendments to the Fourth Article of the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock from 150,000,000 to 1,100,000,000 shares. The number of
authorized shares of the Company's Preferred Stock, $0.10 par value per
share, shall remain unchanged. There are currently no issued and
outstanding shares of the Company's Preferred Stock.
The Company's Certificate of Incorporation currently authorizes the
issuance of a total of 150,000,000 shares of Common Stock. There were
81,806,198 shares of Common Stock outstanding at the close of business on
June 27, 1997.
The Board of Directors has proposed the increase in authorized Common
Stock to provide the Board of Directors with greater flexibility in the
event the Board of Directors determines that it is in the best interest of
the Company to issue additional shares. In connection with the acquisition
of Westronix Limited, the Company has issued a $30,000,000 convertible note
to Horler Holdings Limited, a wholly owned subsidiary of China Strategic
Holdings Limited. The principal and any unpaid interest due on the Note are
convertible into shares of Common Stock, $0.01 par value, of the Company
("Common Stock") at a conversion price of $0.0302 per share. If the holder
of the Note exercise its conversion rights and converts the full amount of
the Note, the number of shares issued to Noteholder would exceed the total
authorized amount of common stock of the Company.
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Under the laws of the State of Delaware, authorized, but unissued and
unreserved, shares may be issued for such consideration (not less than par
value) and purposes as the Board of Directors may determine without further
action by the stockholders. The issuance of such additional shares may,
under certain circumstances, result in the dilution of the equity or
earnings per share of the existing stockholders.
The additional shares of Common Stock authorized by this proposed
amendment will, if and when issued, have the same rights and privileges as
the shares of Common Stock currently authorized. Holders of shares of
Common Stock have no preemptive rights.
The above amendment to the Certificate of Incorporation requires the
affirmative vote of a majority of the outstanding shares of Common Stock
entitled to vote at the Meeting. The Board of Directors recommends that the
stockholders vote FOR this proposal.
PROPOSAL NO. 3
AMENDMENT OF ARTICLES FOURTH, FIFTH, SIXTH, SEVENTH AND TENTH OF CERTIFICATE
OF INCORPORATION
The Company is soliciting the approval of stockholders for one or more
amendments to the Company's Certificate of Incorporation (i) Article Fourth
(D)(7), to provide that a meeting of shareholders or a written consent by
shareholders holding a majority of the voting shares shall be required to
remove directors or adopt, repeal or amend bylaws; (ii) Article Fifth to
provide that the number of directors shall not be less than three, and to
remove the classification of the board of directors; (iii) Article Sixth
to provide that the affirmative vote of the majority of voting shares rather
than 80% of such vote, is sufficient for the amendment or adoption of
bylaws; (iv) Article Seventh to remove the requirement of 80% shareholders'
vote for certain transactions with shareholders that have a 5% or more
holdings with the Company and to provide that the affirmative vote of the
majority of voting shares is sufficient to approve those certain
transactions listed in Article Seventh; and Article Tenth to remove the
requirement of 80% shareholders' vote to amend Article Fourth, Paragraph D
(7) and (8), Article Fifth, Sixth, Seventh and Tenth, and to provide that
the affirmative vote of the majority of voting shares is sufficient to
approve amendments to those provisions of the Company's Certificate of
Incorporation.
The Board of Directors of the Company submitted the amendments to the
Articles Fourth, Fifth, Sixth, Seventh and Tenth of the Company's
Certificate of Incorporation to the vote of the shareholders, because it
believes that that such amendments would be beneficial to the Company and
its shareholders. The Company seeks to amend Article Fourth (D)(7)to
provide that a removal of directors and adoption, repeal or amendment of
bylaws may also be approved by a written consent in writing of the
shareholders holding not less than a majority of the outstanding shares, in
addition to the Company having an option of voting at the shareholders'
meeting. The Board believes that the current requirement of approving the
above actions only at the shareholders meeting, without the Company having
an alternative of an approval of such actions by a written consent of
majority shareholders, is unduly cumbersome, in administrative and other
costs, for the Company which has approximately 9,000 shareholders. The
Company seeks to amend Article Fifth to change the required number of
directors from the minimum of five and the maximum of twelve to the minimum
of three and the maximum as provided by the Delaware General Corporation Law
(the "Delaware Law"), to be determined by the Board. The Company also seeks
to remove the classification of the Board of Directors to which it does not
see any benefit at this time. The classified board was adopted under the
circumstances where the Board of directors felt it was necessary to take
strong measures to add stability to the leadership and policies of the
Company and to discourage certain types of tactics which could involve
actual or threatened changes of control of the Company. Although the Board
of Directors still believes continuity and stability are desirable, it
believes that the current constitution of the Board provides those features
without the necessity of a classified format. The Company believes that the
changes to Article Fifth will not have any significant negative effet on
the management of the Company and its shareholders.
20
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The Company proposes to amend Article Sixth and Seventh to provide that
the affirmative vote of the majority of the voting shares shall be
sufficient for the amendment or adoption of the bylaws (Article Sixth) and
to approve certain transactions (such as mergers, sales or leases) involving
shareholders of 5% or more of the Company's common stock (Article Seventh).
Currently, Articles Sixth and Seventh require the affirmative vote of 80%
of the voting shares to take such actions. The effect of Article Sixth and
Seventh currently is that the amendments to the Bylaws or approval of the
transactions set forth in Article Seventh, may presently be made by the
affirmative vote of 80% of voting shares, which find it in the best interest
of the Company to adopt such actions. The purpose of the amendments is to
provide that such actions can be taken by the majority vote of the
stockholders in accordance with the provisions of section 109 of the
Delaware Law. The Company believes that such requirement is too restraining
and that the majority vote of the shareholders should constitute sufficient
approval of the shareholders, as prescribed by the Delaware Law. The
Company does not believe that having more restrictive governing provisions
in its Certificate of Incorporation than those provided in the Delaware Law
would serve its shareholders better in making corporate decisions for the
Company.
For the same reasons as stated above, the Company seeks to amend Article
Tenth to remove the requirement of 80% shareholders' vote to amend Article
Fourth (D)(7) and (8) (which requires that the special meeting of the
shareholders may only be called by the Board of Directors), Article Fifth,
Sixth, Seventh and Tenth (discussed above) and to provide that the
affirmative vote of the majority of voting shares shall be sufficient to
take those corporate actions.
The above amendment to the Certificate of Incorporation requires the
affirmative vote of 80% of the outstanding shares of Common Stock entitled
to vote at the Meeting. The Board of Directors recommends that the
stockholders vote FOR this proposal.
PROPOSAL NO. 4
AMENDMENT OF CERTIFICATE OF INCORPORATION
1-FOR-138 REVERSE STOCK SPLIT
The Board of Directors has proposed to amend the Company's Certificate of
Incorporation to effect a 1-for-138 reverse stock split of its Common Stock
under which each outstanding 138 shares of Common Stock, par value $0.01 per
share, registered in the name of each shareholder as of the record date,
will be exchanged for 1 share of Common Stock. The effective date of the
reverse split shall be immediately upon approval of the shareholders. The
Board of Directors believes that the reverse split is necessary in order to
cause the Common Stock to be tradable at such a price per share as is
required by NASDAQ initial admission rules and that the reverse split will
raise earnings per share to acceptable levels, in connection with the
Company's future plans to apply to NASDAQ for inclusion of the Company's
Common Stock. In addition, the Board of Directors believes that the
proposed reverse split will make the management of shareholding more
efficient and cost effective. Fractional shares will be rounded up to the
nearest whole share. Because of the high ratio of the reverse split, there
will be a negative effect of the proposed reverse split on certain holders,
in that many holders will be left with odd lots which are more expensive to
trade.
The above amendment to the Certificate of Incorporation requires the
affirmative vote of 80% of the outstanding shares of Common Stock entitled
to vote at the Meeting. The Board of Directors recommends that the
stockholders vote FOR this proposal.
PROPOSAL NO. 5
ADOPTION OF AMENDED AND RESTATED BYLAWS
Pursuant to the Company's Certificate of Incorporation, the adoption of
amended or restated bylaws may only be approved at the annual or special
meeting of stockholders of the Company. The Board of Directors proposes to
adopt the amended and restated Bylaws. The main amended provisions in the
Company's bylaws are to delete the classified Board requirement, the change
in the number of required directors (as discussed above in Proposal No. 3)
and to dispense with the meeting requirement for the shareholders' approval
of any amendments to the bylaws.
The Board of Directors, by unanimous vote at a meeting on January 27,
1997, adopted new amended and restated Bylaws. The new Bylaws are "standard
form" bylaws for a Delaware corporation and provide for maximum corporate
management operating flexibility as permitted under Delaware Law. The
above proposal requires 80% of the affirmative vote of a majority of the
outstanding shares of Common Stock entitled to vote at the Meeting. The
Board of Directors recommends that the stockholders vote FOR this proposal.
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PROPOSAL NO. 6
NAME CHANGE
The Board of Directors has proposed to amend the Company's Certificate of
Incorporation to change the name of the Company to "Asia Resources Holdings
Ltd." The Board of Directors believes that the new name reflects better the
current business of the Company. The above proposal requires the
affirmative vote of a majority of the outstanding shares of Common Stock
entitled to vote at the Meeting. The Board of Directors recommends that the
stockholders vote FOR this proposal.
PROPOSAL NO. 7
ADOPTION OF 1997 INCENTIVE STOCK OPTION PLAN
The Company's proposed 1997 Incentive Stock Option Plan (the "Plan")
provides for the grant of incentive stock options ("ISO's") qualifying under
the Internal Revenue Code, the grant of nonqualifying stock options
("NSO's"), and the grant of awards of stock appreciation rights, stock
options, restricted stock or performance units ("Awards") to officers,
employees and consultants of the Company and its affiliates. 750,000 post-
reverse split shares of the Company's Common Stock will be reserved for
issuance pursuant to the Plan. The Plan will be administered by the Stock
Option Committee of the Board of Directors or such other committee of the
Board, if the Board so designates (the "Committee"). The purpose of the
Plan is to aid the Company in retaining the services of executive and key
employees and in attracting new management personnel when needed for future
operations and growth, to offer such personnel additional incentives to put
forth maximum efforts for the success of the business and to afford them
opportunities to obtain or increase a proprietary interest in the Company on
a favorable basis and, thereby, to have an opportunity to share in its
success.
The Plan will expire ten years from its effective date as specified by
the Board of Directors at the time the Plan is approved (except as to
options outstanding at that time, if any). The Board may amend, alter or
terminate the Plan in any respect at any time, except that no amendment,
alteration or termination shall be made which would (i ) impair the rights
of an optionee under a stock option, stock appreciation right, restricted
stock or performance award unit therefore granted without such optionee's
consent, or (ii) disqualify the Plan from the exemption provided by Rule
16b-3 of the Securities Exchange Act of 1934, and , further, no material
amendment shall be made without the prior approval of the Company's
stockholders to the extent such approval is required by law or agreement.
The Committee has substantial discretion pursuant to the Plan to
determine the persons to whom ISO's, NSO's and Awards may be granted or
authorized and also to determine the amounts, time, price (provided that the
exercise price per share shall not be less than the fair market value of the
Common Stock on the date of such grant ), exercise terms and restrictions
imposed in connection with each individual grant. ISO's, NSO's and Awards
may be granted to any employee (which may include officers, and directors
who are also employees) or consultants of the Company or its subsidiaries.
No participant in the Plan may be granted ISO's, NSO's or Awards aggregating
in excess of the number of shares of Common Stock equal to 10% of issued and
outstanding Common Stock over the life of the Plan and no stock option shall
be exercisable more than ten years after the date such option is granted.
Options may expire earlier as determined by the Committee and the Committee
may determine vesting provisions in its discretion.
Stock appreciation rights may be granted in conjunction with all or part
of any stock options granted under the Plan at the discretion of the
Committee. Shares of restricted stock and performance units may be awarded
either alone or in addition to other Awards granted under the Plan at the
discretion of the Committee.
If an optionee ceases to be an employee of the Company or a subsidiary
other than by reason of death, disability or retirement, any stock option
held by him shall terminate on the date of termination of his employment in
the case of voluntary termination, and shall terminate one month after the
termination of his employment in the case of involuntary termination of
employment (but not later than its specified expiration date). In the case
of death, any stock option held by an optionee may be exercised by his
estate, personal representative or beneficiary at any time prior to the
earlier of the specified expiration date of the stock option or one year
from the date of the optionee's death. If an optionee's employment is
terminated by reason of disability or retirement, the optionee may exercise
any stock options held by him at any time prior to the earlier of the
specified expiration date of the stock option or three years from the date
of termination of employment.
Options are, in general, non-assignable. The options carry certain anti-
dilution provisions concerning stock dividends, stock splits,
consolidations, mergers, recapitalizations and reorganizations.
Generally, under applicable provisions of the Internal Revenue Code, the
amount of profit realized by an optionee under exercise of stock option is
taxed as ordinary income to the optionee in the year of exercise. The
Company is entitled to a compensation deduction in the same amount in the
same year.
An optionee who holds the stock received upon exercise of a stock option
for at least two years from the date the option was granted and at least one
year from the receipt of the stock upon exercise generally pays no tax until
the stock is sold, at which time any profit or loss realized is long-term
capital gain or loss, as the case may be, and the Company is not entitled to
a corresponding tax deduction at any time. The spread at exercise of a
stock option is effectively treated as a tax preference item in the exercise
year for purposes of calculating the optionee's alternative minimum tax.
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An optionee who sells the stock received upon the exercise of a stock
option within two years after the option was granted or within one year of
receipt of the shares upon exercise is taxed on the profit up to the date of
the exercise (which is ordinary income) and the Company is entitled to a
corresponding tax deduction; the income and tax deduction items are
recognized by the optionee and the Company, respectively, in the year the
stock is sold. Appreciation or depreciation after the date of exercise is
taxable to the optionee as capital gain or loss, respectively, and is
nondeductible by the Company.
The Company may be required to withold tax on the amount of the income
recognized by the optionee upon exercise of an option and upon transfer of
stock received upon exercise of an option.
The above proposal requires the affirmative vote of a majority of the
outstanding shares of Common Stock entitled to vote at the Meeting. The
Board of Directors recommends that the stockholders vote FOR this proposal.
PROPOSAL NO.8
OTHER MATTERS
The Board of Directors is not aware of any other matters that will be
presented for consideration at the Meeting other than those matters referred
to in this Proxy Statement.
September__, 1997 BY ORDER OF THE BOARD OF DIRECTORS
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