<PAGE>
FORM 10-KSB/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-1071589
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization Identification No.)
52/F Bank of China Tower
1 Garden Road
Hong Kong
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (852) 2514-0300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $.01 par value
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such report)
and (2) has been subject to such filing requirements for the past 90 days.
yes [x] no [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
Revenues for the year ended December 31, 1997 were $5,447,000. The
aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant on March 31, 1998 was $818,062. The aggregate
market value was computed by reference to the average bid and asked prices for
the Common Stock on March 31, 1998. Solely for the purposes of this response,
executive officers and directors are considered the affiliates of the Company at
that date.
As of March 31, 1998, 81,806,198 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I.
ITEM 1 - DESCRIPTION OF BUSINESS
- ---------------------------------
BUSINESS DEVELOPMENT
A. General
-------
In September, 1996, Regal International, Inc. (the "Registrant" or the
"Company"), which term shall include, when the context so requires, its
subsidiaries, completed a series of transactions which resulted in the
Registrant's acquisition of a new business and disposition of its existing
business assets and liabilities. The information set herein discloses
information required by Form 10-KSB with respect to business of the Registrant
(i) prior to the acquisition of the new business and (ii) after the sale of the
existing business and acquisition of the new assets.
B. Formation and Development of Registrant
---------------------------------------
On May 10, 1982 the Registrant became a separately publicly held corporation as
a result of a spin-off from Texas International Company. Shareholders of Texas
International Company were issued one share of the Registrant's common stock for
each two shares of Texas International's Common Stock.
The Company changed its state of incorporation to Delaware in March 1982 through
a merger with a wholly-owned subsidiary organized for that purpose. The
surviving Company's authorized capital stock consisted of 20,000,000 shares of
common, par value $.10 per share ("Common Stock") and 10,000,000 shares per
preferred stock, par value $.10 per share, ("Preferred Stock"). At the November
17, 1987 Annual Meeting, shareholders voted to increase the authorized number of
shares of Common Stock to 75,000,000. At the May 25, 1993 Annual Meeting, the
shareholders voted to change the par value of Common Stock from $.10 per share
to $.01 per share and to increase the authorized number of shares of Common
Stock to 150,000,000.
In 1987 the Company acquired all of the issued and outstanding common stock of
Bell Petroleum Services, Inc. ("Bell"), an oilfield products and services
company.
On December 7, 1994 the New York Stock Exchange ("NYSE") suspended trading of
the Company's Common Stock pending delisting as the Company did not meet the
NYSE's criteria for continued listing. The Company decided not to contest the
delisting and the Common Stock was removed from listing and registration on the
NYSE effective February 9, 1995. The Company's Common Stock began trading on the
NASD Electronic Bulletin Board in August, 1995.
C. Background of Recent Transactions
---------------------------------
On February 19, 1996, the Registrant acquired all the issued and outstanding
shares of Capital Stock of Acewin Profits Limited, a British Virgin Islands
corporation ("Acewin"), from China Strategic Holdings Limited, a Hong Kong
company ("CSH") listed on The Hong Kong Stock Exchange Limited. Acewin's sole
asset is all the issued and outstanding shares of China Machine (Holdings)
Limited, a Hong Kong company ("CMHL"). CMHL's sole asset is a 55% joint venture
equity interest in Wuxi CSI Vibration Isolator Co., Ltd. ("Wuxi CSI"), a
Sino-foreign joint venture established in September 1993.
The consideration paid by the Registrant for the Acewin Stock was $13.5 million.
Said purchase price was paid by the Registrant's delivery of its Convertible
Note bearing interest at the rate of nine percent (9%) per annum after an
initial six (6) month interest-free period (the "Convertible Note"). Interest on
the Convertible Note was payable on an annual basis, with all principal being
due and payable on January 31, 1999. The principal and any unpaid interest owing
on the Convertible Note were convertible into shares of the Common Stock, $0.01
par value, of the Registrant ("Common Stock") at a conversion price of $0.0302
per share. The Convertible Note was secured by a Pledge Agreement granting CSH a
security interest in the Acewin Stock. The Convertible Note was fully repaid
upon the sale of Acewin Stock, as described below.
<PAGE>
Immediately following the acquisition of the Acewin Stock and as a condition
thereto, the Registrant sold and transferred the existing operating assets and
real property of the Registrant to a newly formed corporation, Regal (New)
International, Inc. ("New Regal") in exchange for New Regal's assumption of all
liabilities of the Registrant, other than the Convertible Note, and $2.5
million, all in accordance with the terms and conditions of a certain Asset
Purchase Agreement, dated as of February 8, 1996, by and between Registrant and
New Regal.
The $2.5 million purchase price was paid as follows: $800,000 in cash and the
balance by delivery of two (2) Promissory Notes, one in the principal amount of
$900,000 (the "$900,000 Note") and the second in the principal amount of
$800,000 (the "$800,000 Note"). The $900,000 Note bears interest at 9% per annum
and is payable in sixty (60) equal monthly installments of principal and
interest. The $800,000 Note bears no interest and is due and payable in one
installment on January 31, 2001. New Regal's obligations under the $900,000 Note
and the $800,000 Note are secured by a pledge of all of the issued and
outstanding shares of capital stock of New Regal. All the issued and outstanding
shares of New Regal were owned by Harlequin Investment Holdings Limited
("Harlequin"). Harlequin was at the time of this transaction the beneficial
owner of approximately fifty-five percent (55%) of then currently outstanding
shares of the Registrant's Common Stock. Subsequent to this transaction,
Harlequin reduced its beneficial ownership of the Registrant to less than one
percent. See Item 11 - Security Ownership of Certain Beneficial Owners and Item
13 - Certain Relationships and Related Transactions.
In connection with the above-described transactions, Janak Desai, Nils Ollquist
and Garish Sharma resigned as directors of the Registrant, and Oei Hong Leong,
the Chairman of CSH, Chung Cho Yee Mico, and Ma Wai Man Catherine were elected
to fill the vacancies created by such resignations.
On March 8, 1996, Horler Holdings Limited ("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 for $1,223,000, thus
becoming its major shareholder.
On September 10, 1996, the Registrant 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. The consideration paid by
the Registrant is 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 into shares of Common Stock, $0.01 par value, of the
Registrant ("Common Stock") at a conversion price of $0.0302 per share. The
consideration for the acquisition of Westronix was deemed fair pursuant to the
fairness report issued by the independent third party engaged by the Registrant.
CSH from whom the Registrant acquired HZHD, is an affiliate of the Registrant
and the major shareholder of the Registrant's common stock. Three directors of
the Registrant are also the directors of CSH.
On September 11, 1996, the Registrant 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 (the "Agreement") entered into on
September 11, 1996. Acewin's sole asset was a 100% equity interest in, China
Machine Holdings Limited ("China Machine"), a Hong Kong company, which owned 55%
joint venture interest in Wuxi CSI Vibration Isolator Co., Ltd. ("Wuxi"), a
Sino-foreign joint venture established in September, 1993.
<PAGE>
The consideration paid by the Purchaser consisted of $13,950,000 (the "Purchase
Price"). The major portion of the proceeds were then used to repay the
$13,500,000 Convertible Note payable to Horler Holdings Limited ("Horler"), a
wholly-owned subsidiary of CSH, and issued by the Registrant in connection with
the acquisition of Wuxi in February of 1996.
The Board of Directors of the Registrant determined that disposition of Wuxi was
in the best interest of the Registrant and was advantageous to the Registrant's
plans to concentrate the resources of the Registrant in infrastructure projects
in China in connection with the Registrant's recent acquisition.
As of December 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.
REGAL INTERNATIONAL, INC.
ORGANIZATION CHART
-----------------------------
| Regal International Inc. |
| (Delaware) |
-----------------------------
| 100%
|
-----------------------------
| Westronix Limited |
| (BVI) |
-----------------------------
| 100%
|
-----------------------------
| China Construction |
| Holdings Limited |
| (Hong Kong) |
-----------------------------
|
| 51%
-----------------------------
| Hangzhou Zhongche |
| Huantong Development Co.|
| Ltd. (PRC) |
-----------------------------
<PAGE>
DESCRIPTION OF REGISTRANT'S BUSINESS
On September 10, 1996 the Registrant acquired, as its sole asset, all the issued
and outstanding capital stock of Westronix Limited, a company which owns all the
outstanding capital stock of China Construction Holdings Limited ("CCHL"). CCHL
is a holder of a 51% interest in Hangzhou Zhongche Huantong Development Co.,
Ltd. ("HZHD"). HZHD is the only operating subsidiary of the Registrant. HZHD
established on June 23, 1993, is a Sino-foreign joint venture in China between
CCHL and its Chinese partner, Hangzhou City Transportation Development Company.
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.
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. China party 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 was completed in December, 1997. Two of
the three sections of the road were already completed by the end of 1996.
The toll road is 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), was completed in December, 1997. This
section encompasses extensive bridge works including:
<PAGE>
* 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 was completed in December, 1997. Upon full completion and after
receiving the approval from the PRC authorities, toll plazas are expected to
operate at Xiangfuqiao (already in operation), Liuxai and Lingjiaqiao.
The Company is currently in a process of installing in electronic surveillance
systems along with utilizing computerized toll collection systems in toll
plazas.
The government of Zhejiang Province has approved a toll increase of 100% for the
Hangzhou Ring Road, effective from March 1, 1997, excluding the last unfinished
part of the toll road.
Overview of Transportation Infrastructure in China
- -------------------------------------------------
History
The earliest highway appeared in China at the beginning of this century. Up to
the founding 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 counties 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 1959 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.
Recent Developments
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 volumes of four to five times
more than their designed capacity. Traffic has become an outstanding bottleneck
hindering economic development.
<PAGE>
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, and tourist highways
and roads for poor areas, are to be built or renovated. In addition, a certain
number of expressways will be constructed according to necessity and
possibility.
The construction of the Shenyang-Dalian Expressway in 1987, the first of its
kind in China, has ushered in a new era. So far, more than 20 expressways,
totaling 2,100 kilometers, have been built through China. Completed and opened
on September 1, 1990, it has greatly shortened the time and distance between the
two largest cities in north-eastern China, producing considerable economic
benefit. The Shenyang-Dalian Expressway, the first of its kind in China, has
greatly promoted and accelerated highway and expressway construction throughout
the country, especially in the economically developed areas. So far China has a
total of 33 major highways, including those still under construction.
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
communications 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 still lags. To solve this problem, the Chinese government has
mapped out a long-term plan for enhancing the country's communication network.
The plan covers the construction of highways, waterway transportation and
relevant safety systems. According to the key projects for highway construction
in the plan, starting in 1990, a highway network of 12 national arteries
totaling 35,000 kilometers has started to be constructed between Beijing and the
provincial capitals, major cities, important communication hubs and key ports
throughout the country to form a nationwide passageway for rapid transportation.
The 12 arteries that make up the national highway network will include five
north-south highways from Tongjiang to Sanya, Beijing to Fuzhou, Erenhot to
Hekou and Chongqing to Zhanjiang, and seven east-west arteries from Suifenhe to
Manzhouli, Dandong to Lhasa, Qingdao to Yinchuan, Lianyungang to Korgas,
Shanghai to Chengdu, Shanghai to Ruili and Hengyang to Kunming. These highway
arteries will link up more than 200 cities, covering a population of 600
million. They will be able to shoulder more than 20 percent of the country's
total traffic.
These highway arteries will be composed mainly of expressways and grade-1 and
grade-2 special roads, well-equipped with complete safety, telecommunications
and administration systems. Many new technologies, with micro-electronic
technologies at the core, will be applied to these highways. With the help of
these instruments, all the necessary information on the way, including the
traffic situation, accidents, road surface conditions and weather, will be fed
back in time to a computer system in the traffic control center. The
information, after being processed, will then be transmitted back and displayed
on the information panels erected along the roads.
<PAGE>
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, creates 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 and to build and
rebuild 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.
<PAGE>
Management and Employees
- ------------------------
The Board of Directors of HZHD consists of seven members; three directors
appointed by China partner and four directors appointed by the Hong Kong
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 a charge lower
toll will not be built.
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 5.2 million
vehicles in 1996 to 4.3 million vehicles in 1997.
The Company believes that, despite competition, the need of China for further
transportation infrastructure projects will continue to provide opportunities
for the Company to participate in that will yield a satisfactory return.
Research and Development
- ------------------------
The Company did not engage in any research and development activities with
respect to its infrastructure project in fiscal 1997.
Distributions From HZHD
- -----------------------
Applicable Chinese laws and regulations require that, before a Sino- foreign
equity joint venture enterprise (such as each Operating Subsidiary) distributes
profits to investors, it must: (1) satisfy all tax liabilities; (2) provide for
losses in previous years; and (3) make allocations, 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 generated profits.
However, each year both joint venture partners have agreed to retain the profits
within the joint venture. Such profits have been used to finance the cost of
constructing the Hangzhou Toll Road which was fully completed in December, 1997.
<PAGE>
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, levels 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 14.8%, 6.3% and
0.8% per annum in 1995, 1996 and 1997 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.
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, 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.
<PAGE>
The exchange rate between the Renminbi and the U.S. Dollar as quoted by the Bank
of China ranged between Rmb 8.30 and Rmb 8.28 to $1.00 in 1997.
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. 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.
Taxation
- --------
A Sino-foreign equity joint venture with a term of 10 years or more and engaged
in production 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.
<PAGE>
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 the meeting called to decide
upon the following actions: amendments to it's 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.
<PAGE>
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
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 will be
reduced.
The government of Zhejiang Province approved a toll increase of 100% for the
Hangzhou Ring Road, excluding the last part of the toll road completed in
December 1997, effective from March 1, 1997.
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.
ITEM 2 - DESCRIPTION OF PROPERTIES
- ----------------------------------
As of December 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"). In fiscal 1997, the Company
was charged RMB 1,283,000 million by CSH as a management fee for the use of the
office space and staff support.
All land in the PRC is owned by the government. According to the PRC law, land
may be leased (under land use rights) for certain periods of time to businesses.
Therefore, the fact that the Hangzhou Toll Road does not have title but only a
land use right is the norm in the PRC for businesses. While Chinese law
expressly protects the status and rights of Sino-foreign joint venture
enterprises, including their right to use land during the term of their
respective joint venture contracts, the state reserves the right, in extreme and
exceptional circumstances, to terminate the joint venture and provide
compensation therefor. In such an event, a joint venture's right to use land
would terminate and all facilities would revert to the state in exchange for
just compensation. Although management sees little risk in not having title to
the land use rights, no assurances can be given that such land use rights may be
not be terminated by the PRC.
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
- ---------------------------
Neither the Registrant nor its subsidiaries are a party to any material pending
legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to vote of security holders during the fourth quarter
of the fiscal year ended December 31, 1997.
<PAGE>
PART II.
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------
The registrant's Common stock was listed on the New York Exchange ("NYSE")
(symbol : RGL) until December 7, 1994, at which time the NYSE suspended 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 Company's Common Stock trades sporadically
on the NASD's Bulletin Board. 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
March 31,1997 0.01 0.01
June 30, 1997 0.01 0.01
September 30, 1997 0.01 0.01
December 31, 1997 0.05 0.01
* The low price reflects the average of the bid and asked prices.
As of March 31, 1998, there were approximately 7411 holders of record of the
shares of the Registrant's Common Stock.
Dividend Policy
- ---------------
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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
- ------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- -----------------------
The following table presents the selected financial information of the
Registrant as of and for the years ended December 31, 1995, 1996 and 1997
assuming that the Registrant had owned the shares of Westronix Limited in 1995.
The information was extracted from the audited consolidated financial statements
of Regal International, Inc. and subsidiaries prepared under US GAAP.
Summary of Financial Results - 1995, 1996 & 1997
Income Statement 1995 1996 1997
- ----------------------- ---- ---- ----
(Amount in thousands)
RMB USD RMB USD RMB USD
--- --- --- --- --- ---
Toll revenue 37,206 4,472 38,463 4,640 45,100 5,447
Income from continuing
operations 14,704 1,767 9,681 1,168 (11,237) (1,357)
Net income/(loss) 14,939 1,796 11,876 1,433 (11,237) (1,357)
Balance Sheet 1996 1997
- ---------------------- ---- ----
(Amount in thousands) RMB USD RMB USD
--- --- --- ---
Current assets 35,610 4,296 33,352 4,027
Total assets 656,911 79,242 794,536 95,958
Current liabilities 124,206 14,985 76,858 9,282
Long-term bank loans 179,500 21,652 342,799 41,400
Shareholders' equity (82,298) (9,927) (93,535) (11,296)
- --------------------
(a) The U.S. dollar conversion translation amount have been translated using the
unified exchange rate quoted by the Bank of China on December 31,1995, 1996 and
1997 of $1.00 = Rmb 8.32, $1.00 = Rmb 8.29 and $1.00 = Rmb 8.28 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, 1995, 1996
and 1997 or at any other certain rate.
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 had thereby redirected its
focus from the US industrial product market to the infrastructure project
investment in China.
As of December 31, 1997, Regal International Inc. (the "Company") had the
following subsidiaries (the Company together with its subsidiaries shall be
collectively referred to as the "Group").
Westronix Limited ("WL") - A holding company incorporated in the British Virgin
Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in Hong
Kong, 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.
<PAGE>
Results of Operation - 1997 compared to 1996
- --------------------------------------------
Summary Financial Information
- -----------------------------
% change
(Rmb in thousands) 1996 1997 from prior year
--------- --------- ---------------
Toll revenue 38,463 45,100 17.3%
General and administrative expenses 15,419 32,951 113.7%
Interest income 796 1,036 30.1%
Interest expenses 1,023 23,735 2,220.0%
Exchange gain/(loss) 350 (16) (104.6%)
Net income/(loss) 11,876 (11,237) (194.6%)
Toll Revenue
- ------------
Toll revenue increased 17.3% to Rmb 45.1 million in 1997 from Rmb 38.46 million
in 1996. This was primarily attributable to an average increase of toll fees by
approximately 41%, partially offset by a decrease in traffic flows. Competition
from the Hangzhou section of the Shanghai - Ningbao Expressway, which was opened
in last year, resulted in reduction of traffic volume from 5.2 million vehicles
in 1996 to 4.3 million vehicles in 1997. The management believes the impact of
the Shanghai-Ningbo Expressway on traffic flow has already been reflected in
1996 and 1997 and that further decrease in traffic volume is unlikely.
Management is also optimistic about the future revenue generation ability of
Hangzhou Toll Road when the final phase of the toll road had been completed at
the end of 1997 and should start to generate revenues in the first half of 1998.
General and Administrative Expenses
- -----------------------------------
As compared with last year, general and administrative expenses went up 113.7%
to Rmb 33 million. This is due to the fact that additional depreciation of Rmb
14.77 million was provided in the Operating Subsidiary as the second phase of
the toll road had been completed and used.
Interest income
- ---------------
Interest income arose mainly from the US$900,000 note receivable.
Interest expenses
- -----------------
As compared with last year, interest expenses went up 2220% to Rmb 23.7 million.
This is due to the fact that additional interest expenses were incurred by the
US$ 30 million convertible note. Also, with respect to the Operating Subsidiary,
the interest expenses were increased significantly as the bank loans were
increased from Rmb 237.5 million in 1996 to Rmb 362.7 million in 1997 and
interest expense on bank loans to finance construction of the second phase of
the Toll Road could no longer be capitalized in 1997 as operation of the second
phase commenced in the first quarter of fiscal 1997.
Exchange Gain/(Loss)
- --------------------
Exchange gain/(loss) represents the favourable/(unfavourable) exchange
difference arising from remeasurement of reporting currencies of the different
companies within the Group into Renminbi, which is the Group's functional
currency.
The exchange rates for Renminbi against U.S. Dollars were 8.32, 8.29 and 8.28
for 1995, 1996 and 1997 respectively, representing an appreciation of Renminbi
by 0.4% and 0.12% in 1996 and 1997 respectively, when comparing the exchange
rate at the end of the year with the position at the beginning of the year. As a
consequence, exchange gain/(loss) aroused. The exchange loss in the fiscal year
ended December 31, 1997 was Rmb16,000.
<PAGE>
Net Income/(Loss)
- ----------------
Net income fell 194.6% to net loss Rmb (11.2) million in 1997 from Rmb 11.9
million in 1996. This was attributable to the combined effect of the significant
increase in depreciation expenses and interest expenses.
Liquidity and Capital Resources
- -------------------------------
In 1997, net cash used by operating activities and investing activities was
approximately Rmb 0.3 million and Rmb 158.8 million respectively. Net cash
provided by financing activities amounted to Rmb 157.6 million, resulting in a
net decrease in cash and cash equivalents of Rmb 1.5 million.
During the year, the Company incurred capital expenditures of Rmb 158.8 million
which was financed through bank borrowings and loans from the Chinese joint
venture partner amounting to Rmb 125 million and Rmb 31 million respectively. No
financing agreements entered into in fiscal year 1997 impose any limitations on
the Company's ability to borrow additional funds. This is primarily due to the
close and informal relationships that the Operating Subsidiary maintains with
its creditors, as is commonplace with formerly state-run enterprises in China.
CSH undertook to provide continuing financial support to the Company to the
extent of CSH's proportionate interest until December 31, 1997. The joint
venture has been able to independently ( and without CSH's involvement) procure
financing for the construction of the Toll Road and has not required any
additional funds from CSH. CSH provided guaranty for $5 million loans to the
joint venture, however, CSH did not provide any other direct contributions.
Effects of Inflation
- --------------------
The general inflation rate in terms of the Retail Price Index in China was
approximately 14.8%,6.3% and 0.8% for 1995, 1996 and 1997 respectively.
Management believes that inflation has not had significant impact on the
Operating Subsidiary.
THE YEAR 2000 ISSUE
- -------------------
The Company recognizes that the Year 2000 issue exists because many computer
systems and application currently use two-digit date fields to designate a year.
As the century date occurs, date sensitive computers will recognize the year
2000 at 1900 or not at all. The inability to recognize or properly treat the
year 2000 may cause computers to process financial and operational information
incorrectly. The Company is in the process of assessing the impact, if any, of
the Year 2000 issue on its computers.
The Company has not concluded yet its analysis of whether any modifications to
its computers will be necessary. However, the Company believes that the
estimated costs, if any, will not have a material impact on the Company's
business or financial position.
<PAGE>
Results of Operation - 1996 compared to 1995
- --------------------------------------------
Summary Financial Information
- -----------------------------
% change
(Rmb in thousands) 1995 1996 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%)
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 - Ningbao 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
Hangzhou Toll Road as the second phase of the toll road had been completed and
started to collect toll revenue from March, 1997. The toll rates for the second
phase is about double the toll rates for the first phase. In addition, the third
and final phase of the toll road was completed in December, 1997 and should
start to generate revenues in the 1998 fiscal year after obtaining the approval
from the PRC authorities.
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 continual
strengthening of 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, exchange gain dropped substantially from Rmb 1.1 million of a year
earlier to Rmb 0.35 million this year.
<PAGE>
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 Bell
and Rubber 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.
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 3.1 million 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 30.8 million
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 for financing 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.
In general, there are no restrictions with respect to the Company and its
Operating Subsidiary to incur additional debts for financing capital
expenditures. However, the Operating Subsidiary being a PRC entity is required
to seek approval from the State Administration of Foreign Exchange, if it is to
accept loans or incur debts in US dollars or other foreign currencies. The
Company does not foresee any major limitations in this requirement. There are no
restrictions on the Company's further pledge of its assets.
At the end of 1996, there were cash and cash equivalents total to US$2,587,000
which comprised of approximately US$1.1 million at the corporate level and
US$1.5 million at the Operating Subsidiary level.
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 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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Financial Statements and Supplementary Data for the Registrant for the
period ended December 31, 1997, 1996 and 1995 are set forth hereto and made a
part hereof.
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
===========================================
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AS OF DECEMBER 31, 1996 AND 1997
--------------------------------
TOGETHER WITH AUDITORS' REPORTS
-------------------------------
<PAGE>
ARTHUR
ANDERSEN
------------------------------
Arthur Andersen & Co.
Certified Public Accountants
------------------------------
25/F., Wing On Centre
111 Connought Road Central
Hong Kong
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, 1996 and 1997, and
the related consolidated statements of operations, cash flows and changes in
shareholders' equity for the years ended December 31, 1995, 1996 and 1997,
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 and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit, 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,
1996 and 1997, and the results of their operations and their cash flows for the
years ended December 31, 1995, 1996 and 1997 in conformity with generally
accepted accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
Hong Kong,
April 3, 1998.
-1-
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts in thousands, except number of shares and earnings per common share)
<CAPTION>
Years ended December 31,
-------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1996 1997 1997
--------------- -------------- -------------- -------------
Rmb Rmb Rmb US$
Toll revenue 37,206 38,463 45,100 5,447
General and administrative expenses (10,516) (15,419) (32,951) (3,980)
Interest income - 796 1,036 125
Interest expense - (1,023) (23,735) (2,866)
Exchange gain 1,101 350 (16) (2)
--------------- -------------- -------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTERESTS 27,791 23,167 (10,566) (1,276)
Provision for income taxes - - - -
--------------- -------------- -------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTERESTS
27,791 23,167 (10,566) (1,276)
Minority interests (13,087) (13,486) (671) (81)
--------------- -------------- -------------- -------------
INCOME FROM CONTINUING OPERATIONS
14,704 9,681 (11,237) (1,357)
Net gain on disposal of investment - 3,730 - -
Income (Loss) from discontinued operations
235 (1,535) - -
--------------- -------------- -------------- -------------
NET INCOME 14,939 11,876 (11,237) (1,357)
=============== ============== ============== =============
Earnings per common share:
- from continuing operations 0.18 0.16 (0.14) (0.02)
- from discontinued operations - (0.01) - -
--------------- -------------- -------------- -------------
0.18 0.15 (0.14) (0.02)
=============== ============== ============== =============
Earnings per common share (Diluted):
- from continuing operations 0.01 0.01 (0.14) -
- from discontinuing operations - - - -
=============== ============== ============== =============
0.01 0.01 (0.14) -
=============== ============== ============== =============
Weighted average number of common shares
outstanding 81,806,198 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, 1997 of US$1.00 = Rmb8.28. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1997 or at any
other certain rate.
-2-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF
---------------------------------
DECEMBER 31, 1996 AND 1997
--------------------------
(Amounts in thousands, except number of shares and share data)
<CAPTION>
Years ended December 31,
------------------------------------------------------
1996 1997 1997
----------------- ----------------- ----------------
Rmb Rmb US$
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 21,443 19,875 2,400
Prepayments and deferred expenses 469 1,286 155
Other receivables and other current assets 13,698 12,191 1,472
----------------- ----------------- ----------------
TOTAL CURRENT ASSETS 35,610 33,352 4,027
----------------- ----------------- ----------------
Prepayments for construction-in-progress 9,942 830 100
Property, plant and equipment, net 611,359 760,354 91,831
----------------- ----------------- ----------------
TOTAL ASSETS 656,911 794,536 95,958
================= ================= ================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Long-term bank loans - current portion 58,000 20,000 2,415
Accounts payable 9,767 24,223 2,925
Accrued expenses and other payables 56,325 31,240 3,773
Taxes other than income 114 145 18
Due to immediate holding company - 1,212 146
Due to related companies - 38 5
----------------- ----------------- ----------------
TOTAL CURRENT LIABILITIES 124,206 76,858 9,282
----------------- ----------------- ----------------
Long-term bank loans 179,500 342,799 41,400
Convertible note payable 249,600 249,600 30,145
Due to Chinese joint venture partner 41,318 72,376 8,741
Due to China Strategic Holdings Limited 2,418 3,600 435
Minority interests 142,167 142,838 17,251
Contingency (Note 13)
SHAREHOLDERS' DEFICIT
Common stock, par value US$0.01 each; 150,000,000
shares authorized; 81,806,198 shares outstanding
6,806 6,806 822
Additional paid-in capital 15,773 15,773 1,905
Accumulated deficit (104,877) (116,114) (14,023)
----------------- ----------------- ----------------
TOTAL SHAREHOLDERS' DEFICIT (82,298) (93,535) (11,296)
----------------- ----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT 656,911 794,536 95,958
================= ================= ================
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1997 of US$1.00 = Rmb8.28. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1997 or at any
other certain rate.
-3-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts in thousands)
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
1995 1996 1997 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rmb Rmb Rmb US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Income (loss) from continuing operations 14,704 9,681 (11,237) (1,357)
Net gain on disposal of investment - 3,730 - -
Income (Loss) from discontinued operations 235 (1,535) - -
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interests 13,087 13,486 671 81
Depreciation and amortization 4,298 4,117 18,885 2,281
Loss on disposal of fixed assets 19 - - -
(Increase) Decrease in assets:
Prepayments and deferred expenses 146 (18) (817) (99)
Other receivables and other current assets (239) (13,397) 1,507 182
Increase (Decrease) in liabilities:
Accounts payable 20,355 (11,428) 14,456 1,746
Accrued expenses and other payables (3,708) (1,570) (25,085) (3,029)
Due to immediate holding company - - 1,212 146
Taxes other than income (7) 7 31 4
-------------- -------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 48,890 3,073 (377) (45)
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Prepayments for construction-in-progress (982) 19,846 - -
Acquisition of property, plant and equipment (166,230) (216,912) (158,768) (19,175)
Changes in net assets of discontinued operations 80 21,949 - -
-------------- -------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (167,132) (175,117) (158,768) (19,175)
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of bank loans 117,445 140,000 188,299 22,741
Repayment of bank loans (55,945) - (63,000) (7,609)
Due to related companies (1,000) (1,500) 38 5
Due to Chinese joint venture partner 10,500 30,818 31,058 3,751
Due to China Strategic Holdings Limited (1,601) 1,997 1,182 143
-------------- -------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 69,399 171,315 157,577 19,031
-------------- -------------- -------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (48,843) (729) (1,568) (189)
Cash and cash equivalents, at beginning of year 71,015 22,172 21,443 2,589
-------------- -------------- -------------- --------------
Cash and cash equivalents, at end of year 22,172 21,443 19,875 2,400
============== ============== ============== ==============
</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, 1997 of US$1.00 = Rmb8.28. 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, 1997 or at any
other certain rate.
-4-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts in thousands, except number of shares)
<CAPTION>
Shares of
Common Stock
(US$0.01 par Preferred and Additional
value) Common Stock Paid-in Accumulated
Capital Deficit Total
--------------- --------------- --------------- --------------- ---------------
Number Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C>
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)
Contributed by China
Strategic Holdings
Limited ("CSH") (see
Notes 2 & 12) - - 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)
Net loss - - - (11,237) (11,237)
--------------- --------------- --------------- --------------- ---------------
BALANCE AT
DECEMBER 31, 1997 81,806,198 6,806 15,773 (116,114) (93,535)
=============== =============== =============== =============== ===============
</TABLE>
-5-
<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 Automated Quotations ("NASDAQ") with an
authorized share capital of US$1,500 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
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
the People's Republic of China, held through an intermediate Hong Kong company,
China Machine (Holdings) Limited.
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 operations for the year ended December 31,
1996.
-6-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- ---------------------------------------------------
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.
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 operations for the year ended December 31, 1996.
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal and
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 the
People's Republic of China, held through an intermediate Hong Kong company,
China Construction Holdings Limited.
During 1997, Horler agreed to reduce the interest rate of the convertible Note B
from 9% to 5% per annum for the year ended December 31, 1997.
As of December 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, formerly 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, the People's Republic of China ("the PRC").
The Company holds a 100% interest in WL. WL holds a 100% interest in CCHL which
in turn holds a 51% interest in Hangzhou toll road.
-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
the PRC. The total cash consideration paid by CCHL for its interest in Hangzhou
toll road amounted to Rmb102,000. 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 were completed by the end of
fiscal year 1997. Hangzhou toll road will collect toll from all three phases of
the toll road starting in 1998.
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 operations 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 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.
-8-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- --------------------------------------------------
ECONOMIC ENVIRONMENT (CONT'D)
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.
In recent years, the PRC economy has experienced periods of rapid economic
expansion and high rates of inflation. More recently, it has been exposed to the
economic crisis in Asia. The central government has from time to time adopted
various measures designed to stabilize the economy, regulate growth and contain
inflation. All such economic events and measures could adversely affect the
Group's results of operations and expansion plans.
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. Revenue 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
Dollar exchange rate exposure in the PRC because neither the banks in the PRC
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 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 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 profit from toll operations on the accrual basis and upon the
commencement of operations. Under PRC GAAP, the profit from toll operations
has been deferred until the entire toll road is completed.
Under PRC GAAP, toll revenue was recognized on receipt basis but the toll
operating profit (representing toll revenue less all operating expenses) was
offset against construction-in-progress each year, as agreed with the local PRC
government authority, until the commencement of operation of the entire toll
road. Under US GAAP, toll revenue was also recognized on the receipt
-6-
basis, however, the toll operating profit is recorded in the statement of
income. This different from the accounting treatment under PRC GAAP.
The transfer of CSH's equity interests in CCHL to WL and the transfer of CSH's
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 were capitalized and treated as an increase in additional paid-in
capital. Due to the specific requirements of 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. This has
resulted in the Company recording total shareholders' deficit of RMB82,298 and
RMB93,535 as at December 31, 1996 and 1997 respectively. CSH has committed 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, 1998.
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,
1995 and 1996, which included income from oilfield, marine rubber, custom molded
and safety devices, has been reclassified as "Income (Loss) from discontinued
operations" in the consolidated statements of operations as a result of the
disposal of the related net assets to New Regal in 1996.
-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 three months or less.
Cash and cash equivalents included United States Dollar deposits of US$1,078
(Rmb8,967) and US$1,200 (Rmb9,937) as of December 31, 1996 and 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 the assets.
Depreciation of fixed assets commences when commercial operations related to
the fixed assets begin. 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
Safety equipment 8 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 Rmb25,035 and Rmb35,613 for the years ended
December 31, 1996 and 1997.
-11-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- -------------------------------------------------------
d. PROPERTY, PLANT AND EQUIPMENT (CONT'D)
--------------------------------------
The Company recognizes an impairment loss on a fixed asset when evidence,
such as the sum of expected future cash flows (undiscounted and without
interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including
depreciation, and when the carrying amount of the asset cannot be realized
through sale. Measurement of the impairment loss is based on the fair value
of the assets.
The Operating Subsidiary retains the ownership interest in the road and
bridges constructed during the joint venture period of 30 years from the
date of formation. Upon expiration of the joint venture period, in
accordance with the joint venture agreement, the roads and bridges owned by
the Operating Subsidiary will be surrendered to the Chinese joint venture
partner.
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").
-12-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- -------------------------------------------------------
e. TAXATION: INCOME TAXES (CONT'D)
-------------------------------
If the Operating Subsidiary had not been in the tax holiday period, the
Company would have recorded additional income tax expense of Rmb9,901,
Rmb10,176 and Rmb10,696 and net income of the Company would have been
reduced by Rmb5,050, Rmb5,190 and Rmb5,455 for the years ended December 31,
1995, 1996 and 1997 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.
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%.
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 the United States
Dollars and its reporting currency is Renminbi. 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.
-13-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- -------------------------------------------------------
g. FOREIGN CURRENCY TRANSLATION (CONT'D)
-------------------------------------
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, 1996 and 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 8.28
Shanghai swap center rate 8.32 8.29 8.28
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, 1995 to December 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.
-14-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------
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 basic earnings per common share is based on the weighted
average number of common shares outstanding during the year ended December
31, 1995, 1996 and 1997. The calculation of diluted earnings per common
share is based on the common shares outstanding during the years ended
December 31, 1995, 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 11.
The number of shares used in the computation was as follows:
1995 1996 1997
--------------- --------------- ---------------
Basic EPS computation 81,806,198 81,806,198 81,806,198
Diluted EPS computation 1,076,293,694 1,075,293,694 81,806,198
k. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company values its financial instruments as required by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments". The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. The estimates presented herein are not
necessarily indicative of amounts that the Company could realize in a
current market exchange.
The carrying amounts of cash and cash equivalents, and long-term debt are
reasonable estimates of their fair value. The interest rates on the
Company's long-term debt approximate that which would have been available at
December 31, 1997 for debt of similar remaining maturity.
-15-
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------
December 31, December 31,
1996 1997
------------ ------------
Rmb Rmb
Roads and bridges 110,784 763,053
Buildings 148 2,033
Machinery and equipment 3,804 3,998
Motor vehicles 3,084 3,328
Furniture, fixtures and office equipment 38 59
Safety equipment - 14,129
Construction-in-progress 505,734 4,520
LESS: Accumulated depreciation (12,233) (30,766)
------------ ------------
Net book value 611,359 760,354
============ ============
5. LONG-TERM BANK LOANS
--------------------
Long-term bank loans, all of which are unsecured, bear average interest rates of
approximately 14.66% and 14.25% as of December 31, 1996 and 1997 respectively
and are repayable as follows:
December 31, December 31,
1996 1997
------------ ------------
Rmb Rmb
1997 58,000 -
1998 25,000 20,000
1999 54,500 104,500
2000 45,000 100,000
2001 55,000 82,936
2002 - 49,863
2003 - 5,500
------------ ------------
Total 237,500 362,799
============ ============
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb159,500 and Rmb347,799 as of December 31, 1996 and 1997 respectively are
guaranteed by related companies.
-16-
<PAGE>
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 December 31, 1997, the
Operating Subsidiary had no available retained earnings for distribution.
In the opinion of management, any undistributed earnings of the Operating
Subsidiary will continue to be reinvested indefinitely.
7. 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 operations to the statutory income tax rate in Hong Kong, the
British Virgin Islands, the PRC and the U.S. is as follows:
1995 1996 1997
---------- ---------- ----------
Weighted average statutory tax rate 31.6% 35.5% 33.0%
Effect of tax holiday (31.6%) (35.5%) (33.0%)
---------- ---------- ----------
Effective tax rate - - -
========== ========== ==========
Provision for income taxes consists of:
1995 1996 1997
---------- ---------- ----------
Rmb Rmb Rmb
Current - - -
Deferred - 2,082 8,765
Adjustment of valuation allowance - (2,082) (8,765)
---------- ---------- -----------
- - -
========== ========== ===========
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 1995, 1996 and 1997.
-17-
<PAGE>
8. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
- -----------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of CSH
in an amount of Rmb75,000,000 and Rmb56,000,000 as of December 31, 1996 and 1997
respectively.
The Company paid management fees of US$155,000 (Rmb1,284,000) and US$155,000
(Rmb1,284,000) to CSH during 1996 and 1997 for administrative services rendered
on behalf of the Company by CSH.
Amounts due to immediate holding company represented interest payable on
Convertible Note B mentioned in Note 1.
9. DUE TO CHINESE JOINT VENTURE PARTNER
- ----------------------------------------
Balances due to the Chinese joint venture partner as of December 31, 1996 and
1997 represented amounts borrowed from the Chinese joint venture partner to
finance the CIP Projects.
These amounts are unsecured, bear interest at 13.18% 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% of the basic salary of
the staff. The expense reported in the consolidated financial statements related
to these arrangements was Rmb64, Rmb99 and Rmb191 for the years ended December
31, 1995, 1996 and 1997 respectively.
11. STOCK OPTIONS
- -----------------
The following tables summarize the movement of share options of the Company.
During 1987 and 1988, the Company issued five-year Common Stock options in
conjunction with its financing activities to various promissory note holders and
other selected creditors. During 1989, the Company issued five and ten-year
stock options in an additional financing and extension of debt.
-18-
<PAGE>
11. STOCK OPTIONS (CONT'D)
- --------------------------
COMMON STOCK OPTIONS
1996 1997
------------ ------------
Shares under option at 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 are to be issued at 110% of market value on the date of grant.
COMMON STOCK OPTIONS
1996 1997
------------ ------------
Options at beginning of year 1,000,000 -
Issued - -
Expired (1,000,000) -
------------ ------------
Shares under option at end of year - -
============ ============
Average exercise price of outstanding options - -
============ ============
Exercisable at end of year - -
============ ============
12. OTHER SUPPLEMENTAL INFORMATION
- ----------------------------------
a) The following items are included in the consolidated statements of
operations:
December 31, December 31, December 31,
1995 1996 1997
------------ ------------ ------------
Rmb Rmb Rmb
Business tax 1,171 1,211 1,424
-19-
<PAGE>
12. OTHER SUPPLEMENTAL INFORMATION (CONT'D)
- --------------------------------------------
b) Non-cash investing and financing activities:
December 31, December 31, December 31,
1995 1996 1997
------------ ------------ ------------
Rmb Rmb Rmb
Capitalization of advances
payable to CSH as
additional paid-in capital
(see also Note 2) - 96,419 -
13. CONTINGENCY
- ---------------
The Operating Subsidiary has obtained an approval from the local government to
offset the toll profit collected from the first and second phases of the toll
road against the construction-in-progress balances under PRC GAAP until the CIP
Projects are completed. 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 as income for
statutory purposes during 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 and Rmb5.3
million for the years ended December 31, 1996 and 1997 respectively may arise.
In the opinion of the directors, it is not probable that such a liability will
arise.
-20-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
- --------------------------------------------------------
Not applicable.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------
Listed below are the names, ages and positions as of March 31, 1998 of the
executive officers and directors of the Company. The Company's executive
officers are appointed by the Board of Directors to serve in their respective
capacities until their successors are duly appointed by the Directors and
qualified to serve.[ The Certificate of Incorporation of the Company provides
for classification of the Board of Directors into three classes (Class I, Class
II and Class III) having staggered terms of three years each.] The Board of
Directors of the Company shall consist of not less than five nor more than
twelve members as determined by resolution of the Board or by the stockholders
at any annual meeting. At present, the Company's Board of Directors consists of
five directors who serve during the term of their class, or until their class is
assigned, and until their successor is appointed :
Name Age Position & Office
- ---------------------- --- ---------------------------
Oei Hong Leong 50 Director, Chairman
Chung Cho Yee, Mico 37 Director, President
Ma Wai Man, Catherine 32 Director, Secretary
Richard N Gray 51 Director
Martin Furner 44 Director
Jack Law 43 Chief Financial Officer
Mr. Oei was elected a director on February 19, 1996 and serves as Chairman of
the Board of Directors. Mr. Oei Hong Leong is a prominent businessman in China,
Hong Kong, Singapore and Indonesia. He was educated in Beijing and has gained
extensive knowledge and experience of business operations in China. He has been
the Chairman and Chief Executive Officer of publicly traded companies in Hong
Kong, Indonesia, Malaysia and Singapore. He is currently Chairman and Chief
Executive Officer of China Strategic Holdings Limited ("CSH"), a substantial
shareholder of the Company and the Chairman of China Tire Holdings Limited
("CTHL"), and MRI Holdings Limited ("MRI"), companies listed on the Stock
Exchange of Hong Kong (the "SEHK"), the New York Stock Exchange and the
Australia Stock Exchange respectively. Mr. Oei is also Co-Chairman and Chief
Executive Officer of Star Telecom International Holding Limited ("Star") and a
director of Tricom Holdings Limited ("Tricom"), both are companies listed on the
SEHK.
<PAGE>
Mr. Chung Cho Yee, Mico, was elected a director on February 19, 1996. Mr. Chung
is a solicitor by profession and has extensive experience in the finance
industry. Mr. Chung is a director of CSH, Tricom, and Star, all listed on the
SEHK. He is also a director and a Senior Vice President of CTHL, and a director
of MRI and Chairman of Bolton Internatonal (Group) Limited ("Bolton").
Ms. Ma Wai Man, Catherine, was elected a director on February 19, 1996. Ms. Ma
is a chartered secretary and has over 11 years of working experience in the
company secretarial profession. Ms. Ma is a director of CSH, Allan International
Holdings Limited and Tricom, all of which are companies listed on the SEHK. She
is also a director of MRI and the Secretary of CTHL, Bolton, Star and Tricom.
Mr. Richard Gray, Director, is a practicing Chartered Accountant and Business
Consultant with offices in Guernsey and London as well as associated offices
around the world. Mr. Gray is a Fellow of the Institute of Chartered Accounts in
England and Wales, a Fellow of the British Institute of Directors and a graduate
of the Advanced Management Program of the Harvard Business School.
Mr. Martin Furner, Director, is the Chairman of the Board of Tapestry Holidays,
a specialist tour operator in the UK. Prior to joining Touche Ross Management
Consultants in 1986, he held several positions including legal and fiscal
coordinator (Europe and Africa) for Flopetrol, Inc., a division of the
Schlumberger Group. In 1989, Mr. Furner joined a newly restructured group, Noble
Raredon, PLC. He initially worked in the London head office before moving to
Bremen, Germany as Finance Director of the European Tour Operations Division.
Mr. Furner holds a BA in physics from the prestigious Oxford University, is a
member of the Association of Certified Management Accountants and the Institute
of Travel and Tourism, and holds a Wine & Spirits Education Trust Higher
Certificate.
Mr. Law Wing Tak. Jack, the Chief Financial Officer of the Company. Mr. Law is a
chartered accountant and has extensive experience in the fields of professional
consultancy, banking, finance and accounting.
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
- --------------------------------
No executive received compensation during 1997.
Stock Options
- --------------
No stock options or stock appreciation rights were granted to any directors or
officers of the Company during 1997.
Directors Fees
- ---------------
Directors are reimbursed for travel and other expenses relating to Board and
committee meetings. Mr. Gray and Mr. Furner received $10,000 each in fiscal 1997
for serving as directors of the Company.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table shows, as of March 31, 1998, all shares of Common Stock,
held beneficially, directly or indirectly, by (i) each Director, (ii) each owner
who is known by the Company to own beneficially more than 5% of either class of
stock and (iii) all directors and officers as a group.
Number of Shares of
Common Stock Percentage
Name Beneficially Owned of Class
- --------------------------------------------------------------------------------
China Strategic Holdings Ltd.(1)
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 1,033,877,483 96.16%
Harlequin Investment Holdings
Ltd.(2)(3)
Creque Building, Tortola,
British Virgin Islands 4,452,082 0.41%
Richard N Gray(2)(3)
Director
Noble House, Queens Road
St. Peter Fort, Guernsey
Channel Islands 4,452,082 0.41%
Oei Hong Leong(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 1,033,877,483 96.16%
Chung Cho Yee, Mico(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
<PAGE>
Ma Wai Man, Catherine(1)
Director
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Jack Law(1)
Chief Financial Officer
52nd Floor, Bank of China Tower
1 Garden Road, Hong Kong 0 0%
Martin J Furner
Director
24 Chiswick High Road, Chiswick
London W4 1TE 0 0%
All Directors and Officers as
a Group (6 persons) 1,038,329,565 96.57%
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 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.
(2) Harlequin Investment Holdings Limited has sole voting and investment power
with respect to the shares of common stock. The beneficial ownership set forth
herein does not include 8,000,000 shares of common stock which can be acquired
upon an exercise of a Stock Purchase Option granted by China Strategic Holdings
Limited to Harlequin Investment Holdings Limited. The percentage of beneficial
ownership is based upon 81,806,198 shares of common stock outstanding as of
March 31, 1998.
(3) Harlequin Investment Holdings Limited is a wholly owned subsidiary of GHL
(Senior) Pension Fund, Noble House, Queens Road, St. Peter Port, Guernsey,
Channel Islands. Mr. Gray disclaims beneficial ownership of the shares of common
stock.
As of March 31, 1998, 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 March 31, 1998 and 993,377,483 shares of common stock
issuable upon conversion of the Convertible Note.
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Acquisition of Wuxi, CSI
- ------------------------
On February 19, 1996, Regal International, Inc. (the "Registrant") acquired all
the issued and outstanding shares of Acewin Profits Limited, a British Virgin
Islands corporation ("Acewin"), from China Strategic Holdings Limited, a Hong
Kong Company ("CSH"). Acewin's sole asset is a 55% joint venture interest in
Wuxi CSI Vibration Isolator Co., Ltd. ("Wuxi CSI"), a Sino-foreign joint
venture. Registrant paid $13.5 million for the shares of Acewin capital stock.
Such purchase price was paid by delivery of a $13.5 million Convertible Note
bearing interest at the rate of nine percent (9%) per annum (the "Convertible
Note").
The Convertible Note is payable interest only on an annual basis, with all
principal being due and payable on January 31, 1999. The principal and any
unpaid interest owing on the convertible Note are convertible into shares of
Regal Common Stock at a conversion price of $0.0302 per share. The purchase
price was approved by the Board of Directors of the Registrant based upon Wuxi
CSI having an after-tax profit of not less than $3.0 million so that the
purchase price paid by the Company for the Wuxi CSI interest would not exceed
eight (8) times Wuxi CSI's 1995 after-tax earnings. The Convertible Note is
secured by a Pledge Agreement granting CSH a security interest in the shares of
Acewin capital stock. In connection with above-described transactions, Janak
Desai, Nils Ollquist and Garish Sharma resigned as directors of Regal, and Oei
Hong Leong, the Chairman of CSH, Chung Cho Yee, Mico and Ma Wai Man, Catherine
were elected to fill the vacancies created by such resignations. As a result of
this transaction, CSH became a principal stockholder of the Company. Oei Hong
Leong, Chairman of the Board, Chung Cho Yee, Mico and Ma Wai Man, Catherine, are
also directors and officers of CSH.
Sale of Assets
- --------------
Immediately following the acquisition of the shares of Acewin capital stock and
as a condition thereto, the Registrant sold and transferred all its existing
operating assets and real property of the Registrant to a newly formed
corporation, Regal (NEW) International, Inc. ("New Regal") in exchange for $2.5
million and New Regal's assumption of all outstanding liabilities of the
Registrant, other than the Convertible Note. The $2.5 million portion of the
purchase price was paid as follows: $800,000 in cash and the balance by delivery
to the Registrant of two (2) promissory notes, one in the principal amount of
$900,000 (the "$900,000 Note") and the second in the principal amount of
$800,000 (the "$800,000 Note"). The $900,000 Note bears interest at 9% per annum
and is payable in sixty (60) equal monthly installments of principal and
interest. The $800,000 Note bears no interest and is due and payable in one
installment on January 31, 2001. New Regal's obligations under the $900,000 Note
and the $800,000 Note are secured by a pledge to the
Registrant of all the issued and outstanding shares of capital stock of New
Regal.
<PAGE>
Harlequin Investment Holdings, Inc., a principal stockholder of the Company
("Harlequin"), owns all the outstanding capital stock of New Regal. Harlequin is
a wholly owned subsidiary of GHL (Senior) Pension Fund. Mr. Gray, the Chairman
of the Board of the Company, is a trustee of GHL (Senior) Pension Fund.
Sale of Harlequin Stock
- -----------------------
In April 1996, Horler Holdings Limited, a wholly owned subsidiary of CSH,
acquired 40,500,000 shares of outstanding Common Stock of the Company from
Harlequin in exchange for $1,223,000. The purchase price was paid as follows :
(i) $209,328 in cash, (ii) $211,672 by cancellation of a certain promissory
note, dated August 8, 1994, from Harlequin to CSH and (iii) $800,000 by
cancellation of another promissory note from Harlequin to CSH.
Acquisition of Hangzhou Huantong
- --------------------------------
On September 10, 1996, the Registrant has consummated a transaction whereby the
Registrant acquired all the issued and outstanding shares of Westronix Limited,
a British Virgin Islands corporation ("Westronix"), from 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 Limited Company ("China Construction") which owns 51% joint
venture interest in Hangzhou Zhongche Huantong Development Co., Ltd. ("Hangzhou
Huantong"), a Sino-foreign joint venture established in Hangzhou, Zhejiang
Province, China on June 23, 1993. The consideration paid by the registrant is 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 into shares of Common Stock, $0.01 par value, of the
registrant ("Common stock") at a conversion price of $0.0302 per share. The Note
is secured by all assets of Westronix and its related subsidiaries.
Hangzhou Huantong is a joint venture between China Construction (51%) and
Hangzhou Transportation Development Corporation (49%). CSH from whom the
Registrant acquired Hangzhou Huantong, is an affiliate of the Registrant and the
major shareholder of the Registrant's common stock. Three directors of the
Registrant are also the directors of CSH.
The Company shares the office space and administrative support, with CSH, a
major shareholder of the Company. In fiscal 1997, the Company was charged RMB
1,283,000 million by CSH as a management fee for the use of the office space and
staff support.
OTHER TRANSACTIONS
The Operating Subsidiary guaranteed bank borrowings of a related company of CSH
in an amount of Rmb75,000 and Rmb56,000 as of December 31, 1996 and 1997
respectively.
The Company paid management fees of US$155 (Rmb1,284) and US$155 (Rmb1,284) to
CSH during 1996 and 1997 for administrative services rendered on behalf of the
Company by CSH.
Amounts due to immediate holding company represented interest payable on
Convertible Note B mentioned in Note 1 to the Consolidated Financial Statements.
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) EXHIBITS
Exhibit 21 - Subsidiaries of the Registrant
(b) REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
REGAL INTERNATIONAL, INC.
By: /s/ Oei Hong Leong
---------------------------------
Oei Hong Leong
Chairman of the Board of Directors
Date: June 21, 1998
Pursuant to the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
By: /s/Chung Cho Yee, Mico Date: 6/21/98
------------------------------- -------------------
Chung Cho Yee, Mico
Director
By: /s/ Ma Wai Man, Catherine Date: 6/21/98
------------------------------- -------------------
Ma Wai Man, Catherine
Director
By: /s/ Richard N. Gray Date: 6/21/98
------------------------------- -------------------
Richard N Gray
Director
By: /s/ Martin Furner Date: 6/21/98
------------------------------- --------------------
Martin Furner
Director
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Prior to September 10, 1996
Acewin Profits Limited, a British Virgin Islands corporation
China Machine Holdings Limited, a Hong Kong corporation
Wuxi CSI Vibration Isolator Co., Ltd. (55%), a Sino-foreign joint venture
After September 10, 1996
Westronix Limited, a British Virgin Islands corporation
China Construction Holdings Limited, a Hong Kong corporation
Hangzhou Zhongche Huatong Development Co., Ltd. (51%), a Sino-foreign joint
venture
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2400
<SECURITIES> 0
<RECEIVABLES> 1472
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4027
<PP&E> 91831
<DEPRECIATION> 0
<TOTAL-ASSETS> 95958
<CURRENT-LIABILITIES> 9282
<BONDS> 0
0
0
<COMMON> 822
<OTHER-SE> (12118)
<TOTAL-LIABILITY-AND-EQUITY> 95958
<SALES> 5447
<TOTAL-REVENUES> 5447
<CGS> 0
<TOTAL-COSTS> 3980
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2866
<INCOME-PRETAX> (1276)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1276)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
