<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of small business as specified in its charter)
Delaware 75-1071589
--------------------- ----------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
52/F, Bank of China Tower,
No.1 Garden Road,
Central, Hong Kong.
(Address of principal executive offices)
(852) 2844-2988
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable dated : October 31, 1998, 81,806,198
shares.
Transitional Small Business Disclosure Format (check one) :
Yes ____ No X
<PAGE> 2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
------
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the nine months and three months ended September 30, 1998
and 1997 (Unaudited) 3
Consolidated Balance Sheets at September 30, 1998 (Unaudited)
and December 31, 1997 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998
and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6-14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 15-18
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 19
ITEM 2 - CHANGE IN SECURITIES 19
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 19
ITEM 5 - OTHER INFORMATION 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 18
<PAGE> 3
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Amounts in thousands, except number of shares and per share data )
<CAPTION>
Nine Months Three Months
Ended September 30 Ended September 30
------------------------------------------ ---------------------------
1998 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------
US$ Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C>
Toll revenue 0 0 29,564 0 9,071
Guaranteed profit 1,386 11,475 0 3,825 0
General and administrative expenses (274) (2,266) (24,242) (919) (9,255)
Interest income 58 480 0 99 0
Interest expense (2,034) (16,839) 0 (5,642) 0
Exchange (loss)/gain 13 108 (1) 4 (8)
------------ ------------ ------------ ------------ ------------
(LOSS)/INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTEREST (850) (7,042) 5,321 (2,633) (192)
Provision for income taxes - - - - -
------------ ------------ ------------ ------------ ------------
(LOSS)/INCOME FROM CONTINUING
OPERATIONS BEFORE MINORITY
INTEREST (850) (7,042) 5,321 (2,633) (192)
Minority interests 0 0 (9,438) 0 (2,883)
------------ ------------ ------------ ------------ ------------
NET LOSS (850) (7,042) (4,117) (2,633) (3,075)
============ ============ ============ ============ ============
Loss per common share (Basic):
- from continuing operations (0.01) (0.09) (0.05) (0.03) (0.04)
============ ============ ============ ============ ============
Earnings per common share (Fully diluted):
- from continuing operations N/A N/A N/A N/A N/A
============ ============ ============ ============ ============
Weighted average common
shares outstanding 81,806,198 81,806,198 81,806,198 81,806,198 81,806,198
============ ============ ============ ============ ============
</TABLE>
Translations of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on September 30, 1998 of US$1.00 = Rmb8.28. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on September 30, 1998 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated statements of
income.
<PAGE> 4
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
AS OF SEPTEMBER 30, 1998 (UNAUDITED) AND
AS OF DECEMBER 31, 1997 (AUDITED)
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
September September December
30, 1998 30, 1998 31, 1997
------------- ------------- -------------
US$ Rmb Rmb
<S> <C> <C> <C>
ASSETS
- - ------
CURRENT ASSETS
Cash and cash equivalents 756 6,256 19,875
Prepayments and deferred expenses 0 0 1,286
Other receivables and other current assets 2,774 22,970 12,191
------------- ------------- -------------
TOTAL CURRENT ASSETS 3,530 29,226 33,352
Investment in subsidiary not consolidated 17,952 148,641 0
Prepayments for construction-in-progress 0 2 830
Property, plant and equipment, net 0 0 760,354
------------- ------------- -------------
Total assets 21,482 177,869 794,536
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES
Long-term bank loans - current portion 0 0 20,000
Accounts payable 0 0 24,223
Accrued expenses and other payables 3,304 27,356 31,240
Taxes other than income 0 0 145
Due to immediate holding company 172 1,424 1,212
Due to related company 8 66 38
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 3,484 28,846 76,858
------------- ------------- -------------
Long-term loans 0 0 342,799
Convertible note payable 30,145 249,600 249,600
Due to Chinese joint venture partner 0 0 72,376
Due to China Strategic Holdings Ltd. 0 3,600
Minority interests 0 0 142,838
SHAREHOLDERS' EQUITY:
Common stock 822 6,806 6,806
Additional paid-in capital 1,905 15,773 15,773
Accumulated deficit (14,874) (123,156) (116,114)
------------- ------------- -------------
TOTAL SHAREHOLDERS' EQUITY (12,147) (100,577) (93,535)
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 21,482 177,869 794,536
============= ============= =============
</TABLE>
Translations of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on September 30, 1998 of US$1.00 = Rmb8.28. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on September 30, 1998 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE> 5
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Amounts in thousands)
<CAPTION>
1998 1998 1997
-------------- -------------- --------------
US$ Rmb Rmb
<S> (c) <C> <C>
Cash flows from operating activities:
Net Loss
Loss from continuing operations (850) (7,042) (1,042)
Adjustments to reconcile net loss to
net cash used in operations:
Minority interests 0 0 6,555
Depreciation and amortization 0 0 2,424
Decrease (Increase) in assets:
Prepayments and deferred expenses 0 0 (1,107)
Other receivables and other current assets (1,354) (11,210) 1,008
(Decrease) Increase in liabilities:
Accounts payable 0 0 5,982
Accrued expenses and other payables 2,019 16,715 (47,143)
Taxes other than income 0 0 (8)
-------------- -------------- --------------
Net cash used in operating activities (186) (1,537) (33,331)
-------------- -------------- --------------
Cash flows from investing activities
Prepayments for construction-in-progress 0 0 7,207
Acquisition of property, plant and equipment 0 0 (48,716)
-------------- -------------- --------------
Net cash used in investing activities 0 0 (41,509)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds of bank loans 0 0 65,436
Due to related companies 3 28 -
Due to Chinese joint venture partner 0 0 563
Due to China Strategic Holdings Limited (263) (2,175) (105)
-------------- -------------- --------------
Net cash (used) provided by financing activities (259) (2,147) 65,894
-------------- -------------- --------------
Net decrease in cash and cash equivalents (445) (3,684) (8,946)
Cash and cash equivalents, at beginning of period 1,200 9,940 21,443
-------------- -------------- --------------
Cash and cash equivalents, at end of period 756 6,256 12,497
============== ============== ==============
</TABLE>
Translations of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on September 30, 1998 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 September 30, 1998 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated statements of
cash flows.
<PAGE> 6
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
-------------------------------------
Regal International, Inc. ("Regal" or the "Company") was incorporated in
the State of Delaware, the United States of America and is listed on the
National Association of Securities Dealers ("NASD") over-the-counter market
with an authorized share capital of US$1.5 million or 150 million shares of
US$0.01 each.
Pursuant to an acquisition agreement dated February 8, 1996 between Regal,
Acewin Profits Limited ("Acewin"), a British Virgin Islands corporation and
China Strategic Holdings Limited ("CSH"), a company incorporated in Hong
Kong and listed on the Stock Exchange of Hong Kong Limited, Regal acquired
all the issued and outstanding shares of Acewin at a consideration of
US$13.5 million satisfied through the issuance of a US$13.5 million
Convertible Note (the "Convertible Note A") by Regal to Horler Holdings
Limited ("Horler"), a British Virgin Islands company and a wholly-owned
subsidiary of CSH, bearing interest at 9% per annum after an initial
6-month interest-free period. Acewin was a wholly-owned subsidiary of CSH
before the transfer and Acewin's sole asset was a 55% equity interest in
Wuxi CSI Vibration Isolator Co. Ltd., a Sino-foreign equity joint venture
incorporated in the People's Republic of China, held through an
intermediate Hong Kong Company, China Machine (Holdings) Limited.
On February 15, 1996, CSH appointed three directors to fill vacancies on
the Board of Directors created by the resignation of three out of the five
directors of Regal effective on the date of consummation of the transaction
whereby Regal acquired all the outstanding share capital of Acewin. On
March 8, 1996, Horler purchased 40,500,000 shares of common stock
representing 49.51% of the then issued and outstanding share capital of
Regal from a major shareholder of the Company thus becoming its major and
controlling shareholder.
Pursuant to a purchase agreement dated September 11, 1996 between Regal, an
unrelated company incorporated in the Netherlands and CSH, Regal sold all
the issued and outstanding shares of Acewin at a consideration of US$13.95
million. The proceeds were then used to repay the Convertible Note A
principal of US$13.5 million, on September 13, 1996. The realized gain of
US$450,000 on the disposal of Acewin was included as "Net gain on disposal
of investment" in the Company's consolidated statements of income for the
year ended December 31, 1996.
Pursuant to another asset purchase agreement (the "Agreement") dated
February 8, 1996 between Regal and Regal (New) International, Inc. ("New
Regal"), the Company sold and transferred the operating assets and real
property of Regal existing as at January 31, 1996 to New Regal in exchange
for US$2.5 million and New Regal's assumption of all liabilities of Regal,
other than the Convertible Note A.
<PAGE> 7
Pursuant to the Agreement, the US$2.5 million portion of the purchase price
was paid as follows: US$800,000 in cash and the balance by delivery of two
promissory notes, one in the principal amount of US$900,000 (the
"US$900,000 Note") and the second in the principal amount of US$800,000
(the "US$800,000 Note"). The US$900,000 Note bears interest at 9% per annum
and is payable in sixty equal monthly installments of principal and
interest. The US$800,000 Note bears no interest and is due and payable in
one installment on January 31, 2001. The realized loss in connection with
this transaction amounted to approximately US$69,000 and has been included
as part of "Loss from discontinued operations" in the Company's
consolidated statements of income for the year ended December 31, 1996.
Pursuant to an acquisition agreement dated September 10, 1996 between
Regal, Westronix Limited ("Westronix"), a wholly owned subsidiary of CSH,
and CSH, Regal acquired all the issued and outstanding shares of Westronix
at a consideration of US$30 million satisfied through the issuance of a
US$30 million Convertible Note (the "Convertible Note B") by Regal to
Horler bearing interest at 9% per annum after an initial 6-month
interest-free period. The principal and any unpaid interest owing on the
Convertible Note B can be converted into shares of the Common Stock of
Regal ("Common Stock") at a conversion price of US$0.0302 per share. On
conversion, CSH would hold approximately 96.16% of the outstanding shares
of the Company. Westronix's sole asset is a 51% equity interest in Hangzhou
Zhongche Huantong Development Co. Ltd., a Sino-foreign equity joint venture
incorporated in the People's Republic of China, held through an
intermediate Hong Kong company, China Construction International Group
Limited (name changed to "China Construction Holdings Limited" on December
5, 1996).
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 September 30, 1998, the Company had the following subsidiaries:
Westronix Limited ("Westronix") - a holding company incorporated in the
British Virgin Islands.
China Construction Holdings Limited ("CCIG") - a company incorporated in
Hong Kong.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Hangzhou Toll
Road"), a Sino-foreign equity joint venture located in Hangzhou, Zhejiang
Province, the People's Republic of China "the PRC".
The Company holds a 100% interest in Westronix, which was incorporated on
July 3, 1996 with an authorized share capital of 50,000 shares with a par
value of US$1 each. At the time of incorporation, one share was issued to
CSH, representing a 100% interest in Westronix. The one share issued to CSH
was subsequently transferred to Regal pursuant to a shareholder's
resolution dated September 10, 1996. Westronix, holds a 100% interest in
CCIG which in turn holds a 51% interest in Hangzhou Toll Road. Westronix's
interest in CCIG and Hangzhou toll road was transferred from CSH pursuant
to a shareholders' resolution dated August 28, 1996.
Hangzhou Toll Road is a Sino-Foreign equity joint venture enterprise
established on June 23, 1993, which formally began business operations in
September 1993 in the City of Hangzhou, Zhejiang Province in the People's
Republic of China (the "PRC"). The total cash consideration paid by CCIG
for its interest in Hangzhou toll road amounted to Rmb102 million.
<PAGE> 8
The acquisition of the Hangzhou Toll Road by CCIG was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Hangzhou Toll Road are included in
the consolidated statements of income from the effective date of the joint
venture, June 23, 1993 to December 31, 1997.
Pursuant to an agreement dated May 18, 1998 between China Construction
Holdings Limited ("CCIG") and Hangzhou City Transportation Development
Limited (the Chinese Partner), the Chinese Partner guarantees that CCIG
will receive an annual profit of Rmb15,300,000 from January 1, 1998 through
the expiration date of the joint venture. Any surplus over the guaranteed
profit will belong to the Chinese Partner and any deficit will be made up
by the Chinese Partner. Besides, an amount of Rmb178,500,000 will be paid
on a lump -sum basis before the expiration of the joint venture as the
foreign partner's share of the depreciation of the toll road, and the roads
and bridges owned by the Hangzhou Toll Road will be surrendered to the
Chinese Partner.
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").
The transfer of CSH's equity interests in CCIG to Westronix and the
transfer of CSH's equity interests in Westronix to Regal were accounted for
as reorganizations of companies under common control, similar to a pooling
of interests. The accompanying consolidated financial statements of the
Company have been restated to present the transfers of CSH's interests in
CCIG to Westronix and in Westronix to Regal as if they had occurred on the
date of formation of the Operating Subsidiary, June 23, 1993. The
acquisition of the Operating Subsidiary was financed by advances from CSH.
In 1996, the advances payable to CSH amounted to Rmb 96,419,000 in relation
to the above acquisition was capitalized and treated as an increase in
additional paid-in capital. In addition, due to the specific requirements
of the U.S. GAAP for transfers of assets between entities under common
control, the difference of Rmb147.6 million between the historical cost of
the investment of CSH in Hangzhou toll road and the Company's acquisition
cost was treated as a deemed dividend paid to CSH in 1993. This has
resulted in the Company recording total shareholders' deficit of
RMB93,535,000 and RMB99,716,000 as at December 31, 1997 and September 30,
1998 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.
<PAGE> 9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements
of the Company and its majority owned and controlled subsidiaries. All
material inter company balances and transactions have been eliminated
on consolidation.
As described in Note (1) , the Chinese Partner guarantees that CCIG
will receive an annual profit of Rmb15,300,000 from January 1, 1998
through the expiration date of the joint venture, any surplus over the
guaranteed profit will belong to the Chinese Partner and any deficit
will be made up by the Chinese Partner, and an amount of Rmb178,500,000
will be paid on a lump -sum basis before the expiration of the joint
venture as the foreign partner's share of the depreciation of the toll
road, instead of sharing the results of Subsidiary. Thus, the financial
position as well as the results of operation of Hangzhou Toll Road are
excluded from the consolidation since January 1, 1998.
b. Recognition of revenue
----------------------
Toll revenue represents the gross receipts at the toll stations, net of
business tax calculated at 3% of the gross toll receipts.
Guaranteed profit represents the net amounts received and receivable
from the Chinese Partner.
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$1,200,000 (Rmb9,937,000) as of December 31, 1997.
d. Investment in subsidiary unconsolidated
---------------------------------------
Investment in subsidiary unconsolidated is stated at the cost of
acquisition by CCIG, plus its share of the cumulative profits and
losses of Hangzhou Toll Road up to December 31, 1997.
e. Taxation : Income Taxes
-----------------------
No provision for withholding or U.S. federal income taxes or tax
benefits has been provided as :
Westronix was incorporated under the laws of the British Virgin
Islands, and under current British Virgin Islands laws, Westronix is
not subject to tax on income or on capital gains.
The Company and its subsidiaries provide for Hong Kong profits tax on
the basis of their income for financial reporting purposes, adjusted
for income and expense items which are not assessable or deductible for
profits tax purposes. The Company and its subsidiaries have had no
profits assessable for Hong Kong profits tax purposes.
For Hangzhou Toll Road, as the guaranteed profit from the Chinese
Partner will be net of tax, no provision is required.
<PAGE> 10
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. Foreign Currency Translation
----------------------------
The functional currency of the group and the Company is 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.
Non-monetary assets and liabilities are translated at the unified
exchange rates prevailing at the time the assets or liabilities were
acquired. The resulting exchange differences are included in the
determination of income.
The Company's registered capital is denominated in the United States
Dollar and its reporting currency is Rmb. For financial reporting
purposes, the United States Dollars capital injection amounts have been
translated into Renminbi at the unified exchange rate as of December
31, 1995.
The Renminbi is not freely convertible into foreign currencies. All
foreign exchange transactions involving Renminbi must take place either
through the Bank of China or other institutions authorized to buy and
sell foreign currencies, or at a Foreign Exchange Adjustment Center
(a "swap center"). Before January 1, 1994, the exchange rates used for
transactions through the Bank of China and other authorized
institutions were set by the government (the "official exchange rate")
from time to time whereas the exchange rates available at the swap
centers ( the "swap center rates" ) were determined largely by supply
and demand. The Chinese government announced the unification of the
two-tier exchange rate systems in December 1993 effective January 1,
1994. The unification brought the official exchange rate of the
Renminbi in line with the swap center rate. The unification did not
have a major impact on the consolidated financial statements of the
Company under U.S. GAAP.
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and
remittance of earnings outside of the PRC are subject to the
availability of foreign currency which is dependent on the foreign
currency denominated earnings of the entity or must be arranged through
a swap center or designated foreign exchange banks. Approval for
exchange at the swap center is granted to joint venture enterprises for
valid reasons such as the purchase of imported materials and remittance
of earnings.
The official exchange rates, unified exchange rates and Shanghai swap
center rates as of December 31, 1996 and 1997 and September 30, 1998
were as follows :
1996 1997 1998
---- ---- ----
Rmb equivalents of US$1
Official exchange rate N/A N/A N/A
Unified exchange rate 8.29 8.28 8.28
Shanghai swap center rate 8.29 8.28 8.28
<PAGE> 11
g. 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.
h. Loss per common share
---------------------
The calculation of basic loss per common share is based on the weighted
average number of common shares outstanding during the period ended
September 30, 1997 and 1998. The calculation of fully diluted loss per
common share is not shown as it is not considered meaningful.
The number of shares used in the computation was as follows:
1997 1998
---------- ----------
Basic EPS computation 81,806,198 81,806,198
Fully diluted EPS computation 81,806,198 81,806,198
i. 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 September 30, 1998 for debt of similar remaining maturity.
<PAGE> 12
4. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
December 31,
1997
------------
Rmb'000
Road and bridges 763,053
Buildings 2,033
Machinery and equipment 3,998
Motor vehicles 3,328
Furniture, fixtures and office 59
equipment
Safety equipment 4,129
Construction-in-progress 4,520
Less : Accumulated depreciation (30,766)
------------
Net book value 760,354
============
As described in Note 3(a), as the financial position of Operating
Subsidiary is excluded from the consolidation since January 1, 1998,
the property, plant and machinery become nil as at period ended
September 30, 1998.
5. LONG-TERM BANK LOANS
--------------------
Long-term bank loans, all of which are unsecured, bear average interest
rates of approximately 14.25% as of December 31, 1997 are repayable as
follows:
December 31,
1997
------------
Rmb'000
1998 20,000
1999 104,500
2000 100,000
2001 82,936
2002 49,863
2003 5,500
------------
362,799
============
All the long-term bank loans are denominated in Renminbi. Loans amounting
to Rmb347.799 million as of December 31, 1997 are guaranteed by a related
company.
As described in Note 3(a), as the financial position of Operating
Subsidiary is excluded from the consolidation since January 1, 1998, the
long-term bank loans become nil as at period ended September 30, 1998.
<PAGE> 13
6. 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 operation to the statutory income tax rate in
Hong Kong, the British Virgin Islands, and the U.S. is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C> <C>
Weighted average statutory tax rate 33.0% 33.0%
Effect of tax holiday (33.0%) (33.0%)
------------- ------------
Effective tax rate - -
============= ============
Provision for income taxes consists of:
September 30, December 31,
1998 1997
------------- -------------
Rmb'000 Rmb'000
Current - -
Deferred 6,704 8,765
Adjustment of valuation allowance (6,704) (8,765)
------------- -------------
- -
============= =============
</TABLE>
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
December 31, 1997 and September 30, 1998.
7. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
-------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of
CSH in an amount of Rmb56 million and Rmb64,526 as of December 31, 1997 and
September 30, 1998 respectively. CSH has undertaken to provide continuing
financial support to the Company to the extent of CSH's interest in the
Company for the period ending on December 31, 1998.
The Company paid management fees of US$155,000 (Rmb1,288,000) and
US$116,194 (Rmb 968,582) to CSH during 1997 and for the period ended 30
September 1998 for administrative services rendered to the Company by CSH.
Amounts due to immediate holding company represented interest payable on
Convertible Note B mentioned in Note 1.
8. OTHER RECEIVABLES AND OTHER CURRENT ASSETS
------------------------------------------
Other receivable and other current assets included RMB11,475,000
guaranteed profit receivable from china partner of Hangzhou Toll Road for
the period from 1 January 1998 to 30 September 1998.
<PAGE> 14
9. 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.
<TABLE>
<CAPTION>
COMMON STOCK OPTIONS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Shares under option as at January 1, 150,000 150,000
Issued - -
Expired - -
========= =========
Shares under option as at September 30, 150,000 150,000
========= =========
Average exercise price of outstanding options $ 0.156 $ 0.156
========= =========
Exercisable at end of period 150,000 150,000
========= =========
</TABLE>
10. OTHER SUPPLEMENTAL INFORMATION
a) The following items are included in the consolidated statements of
operations:
September 30,
1997
-------------
Rmb
Business tax 104
As described in Note 3(a), as the financial position as well as the
operation of Operating Subsidiary is excluded from the consolidation since
January 1, 1998, the business tax become nil for the period ended September
30, 1998.
<PAGE> 15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD - LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY
TO BE COVERED BY THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THE SHAREHOLDERS AND PROSPECTIVE
SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY
FORWARD LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY
ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED HEREIN. THESE FORWARD-LOOKING STATEMENTS INCLUDE PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND
THE TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS,
ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF
WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES
THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN ARE REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND,
THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY
OF THE FORWARD LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. IN
LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD - LOOKING
STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH STATEMENT SHOULD NOT
BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE
OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
OVERVIEW OF RECENT TRANSACTIONS:
On September 10, 1996, the Company acquired all the issued and outstanding
shares of Westronix Limited, a British Virgin Islands corporation, from
China Strategic Holdings Limited (CSH), a Hong Kong company pursuant to the
terms of the Acquisition Agreement entered into on September 10, 1996.
Westronix's sole asset is a 100% equity interest in China Construction
Holdings Limited, a Hong Kong company which owns 51% joint venture interest
in Hangzhou Zhongche Huantong Development Co., Ltd., a Sino-foreign joint
venture established in Hangzhou, Zhejiang Province, the People's Republic
of China ("China") on June 23, 1993.
On September 11, 1996, the Company disposed of all the issued and
outstanding shares of Acewin Profits Limited, a British Virgin Islands
corporation ("Acewin"), to a Netherlands company (the "Purchaser") pursuant
to the terms of the agreement relating to the sale and purchase of the
entire issued share capital of Acewin entered into on September 11, 1996.
On February 8, 1996, the Company had acquired all the issued and
outstanding shares of Acewin, from CSH.
The Board of Directors of the Company determined that disposal of Acewin
was in the best interest of the Company and was advantageous to the
Company's plans to concentrate the resources of the Company in
infrastructure projects in China in connection with the Company's recent
acquisition.
As of September 30, 1998, the Company had the following subsidiaries:
Westronix Limited ("Westronix") - a holding company incorporated in the
British Virgin Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in
Hong Kong and formally known as China Construction International Group
Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. ("Hangzhou Toll Road"
or "Operating Subsidiary"), a Sino-foreign equity joint venture located in
Hangzhou, Zhejiang Province, China.
The Company holds a 100% interest in Westronix. Westronix holds a 100%
interest in CCHL which in turn holds a 51% interest in Hangzhou toll road.
<PAGE> 16
Pursuant to an agreement dated May 18, 1998 between China Construction
Holdings Limited ("CCIG") and Hangzhou City Transportation Development
Limited (the Chinese Partner), the Chinese Partner guarantees that CCIG
will receive an annual profit of Rmb15,300,000 from January 1, 1998 through
the expiration date of the joint venture. Any surplus over the guaranteed
profit will belong to the Chinese Partner and any deficit will be made up
by the Chinese Partner. Thus, the financial position as well as the results
of operation of Hangzhou Toll Road are excluded from the consolidation
since January 1, 1998.
RESULTS OF OPERATION:
SUMMARY FINANCIAL INFORMATION
-----------------------------
Nine months
Ended September 30,
------------------------
1998 1997
-------- --------
Rmb'000 Rmb'000
Toll revenue 0 29,564
Guaranteed profit 11,475 0
General and administrative expenses (2,266) (24,242)
Interest income 480 0
Interest expense (16,839) 0
Exchange (loss)/gain 108 (1)
Net (loss)/income (7,042) (4,117)
TOLL REVENUE
As guaranteed profit was recognized instead of share the result of Hangzhou
Toll Road, toll revenue become nil for the period ended September 30, 1998.
GUARANTEED PROFIT
Being guaranteed profit from Hangzhou City Transportation Development
Limited for the period from January 1, 1998 to September 30, 1998 on the
toll road.
GENERAL AND ADMINISTRATIVE EXPENSES
During the nine months ended September 30, 1998, general and administrative
expenses decreased by 90.7% to Rmb2,266,000 from Rmb24,242,000 for the Nine
months ended September 30, 1997. This is due to the fact that the general
and administrative expenses of Hangzhou Toll Road were not consolidated for
the period ended September 30, 1998.
INTEREST INCOME
Interest income was mainly derived from the US$900,000 note receivable.
<PAGE> 17
INTEREST EXPENSE
As compared with last period, interest expense went up 100% to Rmb16.8
million. This is due to the fact that additional interest expense was
incurred by the US$ 30 million convertible note.
NET LOSS
During the nine months ended September 30, 1998, net loss of the Company
increased by 71% to a net loss of Rm7,042,000 from a net loss of
Rmb4,117,000 for the nine months ended September 30, 1997. This was a
direct result of increases in interest expenses as mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, net cash used in operating
activities and financing activities were approximately Rmb1.537 million and
Rmb2.147 million, resulting in a net decrease in cash and cash equivalents
of approximately Rmb3.684 million for the nine months ended September 30,
1998.
<PAGE> 18
INFLATION RISK
The annual inflation rate in Hong Kong was approximately 8.2% and 6% in
1996 and 1997, respectively. The annual inflation rate in the PRC was
approximately 6.3% and 0.8% in 1996 and 1997, respectively. The Company
does not consider that inflation in Hong Kong or the PRC has had a material
impact on its results of operations in recent years. No assurance can be
given that inflation in Hong Kong or the PRC will not have a material
adverse effect on the business, financial condition and results of
operations of the Company in the future.
THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. Based on a recent
internal assessment, the Company does not anticipate that the cost of any
needed modifications will have a material effect on results of operations.
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file reports on FORM 8-K during the quarter ending
September 30, 1998.
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
REGAL INTERNATIONAL INC.
(Registrant)
Date: /s/ Mico Chung
------------------- ----------------------------------
Mico Chung, President
Date: /s/ Jack Law
------------------- ----------------------------------
Jack Law, Chief Financial Officer
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<PERIOD-START> JAN-01-1998
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