<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-8334
REGAL INTERNATIONAL, INC.
(Exact name of small business as specified in its charter)
Delaware 75-1071589
- ------------------ ----------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
52/F Bank of China Tower
1 Garden Road
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 : July 31, 1997, 81,806,198 shares.
Transitional Small Business Disclosure Format (check one) :
Yes ____ No X
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the six months and three months ended June 30, 1997
and June 30, 1996 (Unaudited) 1
Consolidated Balance Sheets at June 30, 1997
and December 31,1996 (Unaudited) 2
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997
and June 30, 1996 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 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 19
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 19
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------------------------ ---------------------------
1997 1997 1996 1997 1996
------------ ------------ ------------ ------------ ------------
US$ Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C>
Toll revenue 2,472 20,493 18,410 10,991 10,753
General and administrative
expenses (1,808) (14,987) (5,387) (10,255) (2,698)
Exchange gain 1 7 69 (7) 233
------------ ------------ ------------ ------------ ------------
(Loss) Income from continuing
operations before income
taxes and minority interest 665 5,513 13,092 729 8,288
Provision for income taxes - - - - -
------------ ------------ ------------ ------------ ------------
Income from continuing
operations before minority
interest 665 5,513 13,092 729 8,288
Minority interests (791) (6,555) (6,566) (3,468) (4,009)
------------ ------------ ------------ ------------ ------------
Income from continuing
operations (126) (1,042) 6,526 (2,739) 4,279
Loss from discontinued operations - - (1,149) - -
------------ ------------ ------------ ------------ ------------
Net (loss) income (126) (1,042) 5,377 (2,739) 4,279
============ ============ ============ ============ ============
Earnings per common share
(Primary):
- - from continuing operations (0.00) (0.01) 0.08 (0.03) 0.05
- - from discontinued
operations - - (0.01) - -
------------ ------------ ------------ ------------ ------------
(0.00) (0.01) 0.07 (0.03) 0.05
============ ============ ============ ============ ============
Earnings per common share
(Fully diluted):
- - from continuing operations (0.00) (0.00) 0.01 (0.00) 0.00
- - from discontinued
operations - - (0.00) - -
------------ ------------ ------------ ------------ ------------
(0.00) (0.00) 0.01 (0.00) 0.00
============ ============ ============ ============ ============
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 June 30, 1997 of US$1.00 = Rmb8.29. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on June 30, 1997 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated statements of
income.
-1-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1997 AND DECEMBER 31, 1996 (Amounts in
thousands, except number of shares and per share data)
<CAPTION>
June June December
30, 1997 30, 1997 31, 1996
----------- ----------- -----------
US$ Rmb Rmb
<S> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents 1,507 12,497 21,443
Prepayments and deferred expenses 190 1,576 469
Other receivables and other current assets 1,531 12,690 13,698
----------- ----------- -----------
Total current assets 3,228 26,763 35,610
Prepayments for construction-in-progress 330 2,735 9,942
Property, plant and equipment, net 79,331 657,651 611,359
----------- ----------- -----------
Total assets 82,889 687,149 656,911
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current liabilities
Long-term bank loans - current portion 7,599 63,000 58,000
Accounts payable 1,900 15,749 9,767
Accrued expenses and other payables 1,108 9,182 56,325
Taxes other than income 13 106 114
----------- ----------- -----------
Total current liabilities 10,620 88,037 124,206
----------- ----------- -----------
Long-term loans 28,943 239,936 179,500
Convertible note payable 30,108 249,600 249,600
Due to Chinese joint venture partner 5,052 41,881 41,318
Due to China Strategic Holdings Ltd. 279 2,313 2,418
Minority interests 17,940 148,722 142,167
Shareholders' equity:
Common stock 821 6,806 6,806
Additional paid-in capital 1,903 15,773 15,773
Accumulated deficit (12,777) (105,919) (104,877)
----------- ----------- -----------
Total shareholders' equity (10,053) (83,340) (82,298)
----------- ----------- -----------
Total liabilities and shareholders' equity 82,889 687,149 656,911
=========== =========== ===========
</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 June 30, 1997 of US$1.00 = Rmb8.29. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on June 30, 1997 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
-2-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands)
<CAPTION>
1997 1997 1996
--------- --------- ---------
US$ Rmb Rmb
<S> <C> <C> <C>
Cash flows from operating activities:
Net (Loss) Income
(Loss) Income from continuing operations (126) (1,042) 6,526
(Loss) Income from discontinued operations - - (1,149)
Adjustments to reconcile net income (loss) to
net cash used in operations:
Minority interests 791 6,555 6,566
Depreciation and amortization 292 2,424 2,066
(Increase)Decrease in assets:
Prepayments and deferred expenses (134) (1,107) (1,285)
Other receivables and other current assets 122 1,008 (13,693)
Increase (Decrease) in liabilities:
Accounts payable 722 5,982 (4,316)
Accrued expenses and other payables (5,687) (47,143) (6,019)
Taxes other than income (1) (8) (5)
--------- --------- ---------
Net cash used in operating activities (4,021) (33,331) (11,309)
--------- --------- ---------
Cash flows from investing activities
Prepayments for construction-in-progress 869 7,207 11,895
Acquisition of property, plant and equipment (5,876) (48,716) (73,556)
Change in net assets of discontinued operations - - 21,949
--------- --------- ---------
Net cash used in investing activities (5,007) (41,509) (39,712)
--------- --------- ---------
Cash flows from financing activities:
Proceeds of bank loans 7,893 65,436 40,000
Due to related companies - - (1,500)
Due to Chinese joint venture partner 68 563 4,500
Due to China Strategic Holdings Limited (13) (105) 789
--------- --------- ---------
Net cash provided by financing activities 7,948 65,894 43,789
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1,080) (8,946) (7,232)
Cash and cash equivalents, at beginning of period 2,587 21,443 22,172
--------- --------- ---------
Cash and cash equivalents, at end of period 1,507 12,497 14,940
========= ========= =========
</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 June 30, 1997 of US$1.00 = Rmb8.29. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on June 30, 1997 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated statements of
cash flows.
-3-
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
-------------------------------------
Regal International, Inc. ("Regal" or the "Company") was incorporated in the
State of Delaware, the United States of America and is listed on the National
Association of Securities Dealers ("NASD") over-the-counter market with an
authorized share capital of US$1.5 million or 150 million shares of US$0.01
each.
Pursuant to an acquisition agreement dated February 8, 1996 between Regal,
Acewin Profits Limited ("Acewin"), a British Virgin Islands corporation and
China Strategic Holdings Limited ("CSH"), a company incorporated in Hong Kong
and listed on the Stock Exchange of Hong Kong Limited, Regal acquired all the
issued and outstanding shares of Acewin at a consideration of US$13.5 million
satisfied through the issuance of a US$13.5 million Convertible Note (the
"Convertible Note A") by Regal to Horler Holdings Limited ("Horler"), a British
Virgin Islands company and a wholly-owned subsidiary of CSH, bearing interest at
9% per annum after an initial 6-month interest-free period. Acewin was a
wholly-owned subsidiary of CSH before the transfer and Acewin's sole asset was a
55% equity interest in Wuxi CSI Vibration Isolator Co. Ltd., a Sino-foreign
equity joint venture incorporated in the People's Republic of China, held
through an intermediate Hong Kong Company, China Machine (Holdings) Limited.
On February 15, 1996, CSH appointed three directors to fill vacancies on the
Board of Directors created by the resignation of three out of the five directors
of Regal effective on the date of consummation of the transaction whereby Regal
acquired all the outstanding share capital of Acewin. On March 8, 1996, Horler
purchased 40,500,000 shares of common stock representing 49.51% of the then
issued and outstanding share capital of Regal from a major shareholder of the
Company thus becoming its major and controlling shareholder.
Pursuant to a purchase agreement dated September 11, 1996 between Regal, an
unrelated company incorporated in the Netherlands and CSH, Regal sold all the
issued and outstanding shares of Acewin at a consideration of US$13.95 million.
The proceeds were then used to repay the Convertible Note A principal of US$13.5
million, on September 13, 1996. The realized gain of US$450,000 on the disposal
of Acewin was included as "Net gain on disposal of investment" in the Company's
consolidated statements of income for the period ended September 30, 1996 and
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.
-4-
<PAGE>
Pursuant to the Agreement, the US$2.5 million portion of the purchase price was
paid as follows: US$800,000 in cash and the balance by delivery of two
promissory notes, one in the principal amount of US$900,000 (the "US$900,000
Note") and the second in the principal amount of US$800,000 (the "US$800,000
Note"). The US$900,000 Note bears interest at 9% per annum and is payable in
sixty equal monthly installments of principal and interest. The US$800,000 Note
bears no interest and is due and payable in one installment on January 31, 2001.
The realized loss in connection with this transaction amounted to approximately
US$69,000 and has been included as part of "Loss from discontinued operations"
in the Company's consolidated statements of income for the period ended June 30,
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).
As of June 30, 1997, the Company had the following subsidiaries:
Westronix Limited ("Westronix") - a holding company incorporated in the British
Virgin Islands.
China Construction Holdings Limited ("CCIG") - a company incorporated in Hong
Kong.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary" or
"Hangzhou toll road"), a Sino-foreign equity joint venture located in Hangzhou,
Zhejiang Province, the People's Republic of China "the PRC".
The Company holds a 100% interest in Westronix, which was incorporated on July
3, 1996 with an authorized share capital of 50,000 shares with a par value of
US$1 each. At the time of incorporation, one share was issued to CSH,
representing a 100% interest in Westronix. The one share issued to CSH was
subsequently transferred to Regal pursuant to a shareholder's resolution dated
September 10, 1996. Westronix, holds a 100% interest in CCIG which in turn holds
a 51% interest in Hangzhou toll road. Westronix's interest in CCIG and Hangzhou
toll road was transferred from CSH pursuant to a shareholders' resolution dated
August 28, 1996.
-5-
<PAGE>
Hangzhou toll road is a Sino-Foreign equity joint venture enterprise established
on June 23, 1993, which formally began business operations in September 1993 in
the City of Hangzhou, Zhejiang Province in the People's Republic of China (the
"PRC"). The total cash consideration paid by CCIG for its interest in Hangzhou
toll road amounted to Rmb102 million. Tolls collected from the existing portion
of the toll road ("the first phase"), which was injected by the Chinese joint
venture partner, Hangzhou City Transportation Development Company, and cash
injected by CSH will be used to finance the construction of second and third
phases of the toll road (the "CIP Projects"). Construction works of the second
phase had been completed at the reporting date and the third phase was completed
in December, 1997.
Hangzhou toll road will collect tolls from all three phases of the toll road
after the CIP Projects are completed and after obtaining toll collection
approval from the PRC authorities.
Any increase in toll rates proposed by the Operating Subsidiary is subject to
approval by the Hangzhou Municipal Government, Hangzhou City Transportation
Department and the Zhejiang Provincial Government. However, there is no
assurance that any proposal for a toll rate increase will be approved by these
government authorities. If such proposals are denied, profit margins of the
Operating Subsidiary could be affected.
Key provisions of the joint venture agreement of Hangzhou toll road include:
- - - the joint venture period is 30 years from the date of formation;
- - - the profit and loss sharing ratio is the same as the percentage of
equity interest; and
- - - the Board of Directors consists of 7 members: 4 designated by CCIG and
3 designated by Hangzhou City Transportation Development Company.
The acquisition of the Operating Subsidiary by CCIG was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Operating Subsidiary are included in
the consolidated statements of income from the effective date of the joint
venture, June 23, 1993. No revenue was generated from the toll road before the
formation of the joint venture.
2. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements were prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP"). This basis of accounting differs from that used in the statutory
financial statements of the Operating Subsidiary, which were prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to joint venture enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
-6-
<PAGE>
The principal adjustments made to conform the statutory financial statements of
the Operating Subsidiary to U.S. GAAP included the following :
- - - Provision of depreciation on roads and bridges.
- - - Recognition of toll revenue on the accrual basis and upon the
commencement of operations.
The transfer of CSH's equity interests in CCIG to Westronix and the transfer of
CSH's equity interests in Westronix to Regal were accounted for as a
reorganization of companies under common control, similar to a pooling of
interests. The accompanying consolidated financial statements of the Company
have been restated to present the transfers of CSH's interests in CCIG to
Westronix and in Westronix to Regal as if they had occurred on the date of
formation of the Operating Subsidiary, June 23, 1993. The acquisition of the
Operating Subsidiary was financed by advances from CSH. In 1996, the advances
payable to CSH in relation to the above acquisition was capitalized and treated
as an increase in additional paid-in capital. In addition, due to the specific
requirements of the U.S. GAAP for transfers of assets between entities under
common control, the difference of Rmb147.6 million between the historical cost
of the investment of CSH in Hangzhou toll road and the Company's acquisition
cost was treated as a deemed dividend paid to CSH in 1993.
Regal's acquisition of CSH's interests in Acewin and its subsequent disposal
have been accounted for using the purchase method of accounting. The results of
operations of Acewin and its subsidiaries have not been consolidated into the
financial statements for the period ended June 30, 1996 given the temporary
nature of the holding.
Loss from the historical operations of Regal for the period ended June 30, 1996
has been reclassified as "Loss from discontinued operations" in the consolidated
statements of income as a result of the disposal of the related net assets to
New Regal in 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements of the
Company and its majority owned and controlled subsidiaries. All material inter
company balances and transactions have been eliminated on consolidation.
b. Toll Revenue
Toll revenue represents the gross receipts at the toll stations, net of business
tax calculated at 3% of the gross toll receipts.
c. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks and
liquid investments with an original maturity of three months or less. Cash and
cash equivalents included United States Dollar deposits of US$67,000
(Rmb555,000) and US$67,000 (Rmb555,000) as of December 31,1996 and June 30, 1997
respectively.
-7-
<PAGE>
d. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of property, plant and equipment is computed using the straight
line method over the assets' estimated useful lives, taking into account the
estimated residual value of 10% (except for roads and bridges which have no
residual value) of the cost of fixed assets. The estimated useful lives are as
follows:
Roads and bridges 30 years
Buildings 20 years
Machinery and equipment 5 years
Motor vehicle 5 years
Furniture, fixtures and office equipment 5 years
Construction in progress ("CIP" see Note 4) represents new roads and bridges
under construction and plant and machinery pending installation. This includes
the costs of construction, the costs of plant and machinery and interest charges
(net of interest income ), arising from borrowings used to finance these assets
during the period of construction or installation.
e. Foreign Currency Translation
----------------------------
The functional currency of the group and the Company is Renminbi. The Operating
Subsidiary maintains its books and records in Renminbi. Foreign currency
transactions are translated into Renminbi at the applicable unified rates of
exchange or the applicable rates of exchange quoted by the applicable foreign
exchange adjustment center ("swap center"), prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies
are translated into Renminbi using the applicable unified rates of exchange or
the applicable swap center rates prevailing at the balance sheet dates. The
resulting exchange differences are included in the determination of income.
The Company's registered capital is denominated in the United States Dollar and
its reporting currency is the United States Dollar. For financial reporting
purposes, the United States Dollars capital injection amounts have been
translated into Renminbi at the unified exchange rate as of December 31, 1995.
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place either through the Bank
of China or other institutions authorized to buy and sell foreign currencies, or
at a swap center. Before January 1, 1994, the exchange rates used for
transactions through the Bank of China and other authorized institutions were
set by the government (the "official exchange rate") from time to time whereas
the exchange rates available at the swap centers ( the "swap center rates" )
were determined largely by supply and demand. The Chinese government announced
the unification of the two-tier exchange rate systems in December 1993 effective
January 1, 1994. The unification brought the official exchange rate of the
Renminbi in line with the swap center rate. The unification did not have a major
impact on the consolidated financial statements of the Company under U.S. GAAP.
-8-
<PAGE>
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and remittance of
earnings outside of the PRC are subject to the availability of foreign currency
which is dependent on the foreign currency denominated earnings of the entity or
must be arranged through a swap center or designated foreign exchange banks.
Approval for exchange at the swap center is granted to joint venture enterprises
for valid reasons such as the purchase of imported materials and remittance of
earnings.
The official exchange rates, unified exchange rates and Shanghai swap center
rates as of December 31, 1995 and 1996 and June 30, 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 8.29
Shanghai swap center rate 8.32 8.29 8.29
f. Taxation: Income Taxes
----------------------
No provision for withholding or U.S. federal income taxes or tax benefits on the
undistributed earnings of the subsidiaries and/or losses of the Operating
Subsidiary has been provided as the earnings of the subsidiaries have been
reinvested and, in the opinion of management, will continue to be reinvested
indefinitely.
Westronix was incorporated under the laws of the British Virgin Islands, and
under current British Virgin Islands laws, Westronix is not subject to tax on
income or on capital gains.
The Company and its subsidiaries provide for Hong Kong profits tax on the basis
of their income for financial reporting purposes, adjusted for income and
expense items which are not assessable or deductible for profits tax purposes.
The Company and its subsidiaries have had no profits assessable for Hong Kong
profits tax purposes.
Hangzhou toll road is subject to Chinese income taxes at the applicable tax rate
for Sino-foreign equity joint venture enterprises (currently 33%) on the taxable
income as reported in its statutory accounts adjusted in accordance with the
relevant income tax laws. Since it has a joint venture term of not less than 10
years and is engaged in infrastructure construction, Hangzhou toll road will be
fully exempt from Chinese state unified income tax of 30% as well as the local
income tax of 3% for two years starting from the first profit-making year
followed by a 50% reduction of the Chinese state unified income tax for the next
three years ("tax holiday").
If the Operating Subsidiary had not been in the tax holiday period, the Company
would have recorded additional income tax expense of Rmb4,951,000 and
Rmb4,943,000 and net income of the Company would have been reduced by
Rmb2,525,000 and Rmb2,521,000 for the six months ended June 30, 1996 and 1997
respectively (See Note 12).
The Company provides for deferred income taxes using the liability method, by
which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as current
or non-current based upon the classification of the related assets or
liabilities in the financial statements.
-9-
<PAGE>
g. Taxation: Business Tax
----------------------
In December 1993, the Chinese government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax regulations
replaced a number of former tax laws and regulations including the Consolidated
Industrial and Commercial Tax ("CICT"). Under these new tax regulations, the
Operating Subsidiary is subject to a business tax which replaced the CICT and is
now the principal direct tax on the toll revenue generated. The business tax
rate applicable to the Operating Subsidiary is 3.0%.
h. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign equity
joint venture enterprises, the Operating Subsidiary maintains discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund and a staff welfare and incentive bonus fund. The Board of
Directors of the Operating Subsidiary will determine on an annual basis the
amount of the annual appropriations to the dedicated capital. For the period
from January 1, 1994 to June 30, 1997, the Operating Subsidiary did not report
any profits in the statutory financial statements, and accordingly, no
appropriation to dedicated capital has been made.
i. Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
j. Earnings per common share
-------------------------
The calculation of primary earnings per common share is based on the weighted
average number of common shares outstanding during the three and six months
ended June 30, 1996 and 1997. The calculation of fully diluted earnings per
common share is based on the common shares outstanding during the three and six
months ended June 30, 1996 and 1997 adjusted for the assumed conversion of the
Company's US$30 million convertible Note B as mentioned in Note 1 above and
exercise of the stock options mentioned in Note 10.
The number of shares used in the computation was as follows:
1996 1997
---- ----
Primary EPS computation 81,806,198 81,806,198
Fully diluted EPS computation 1,076,293,694 1,075,293,694
-10-
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
June 30, December 31,
1997 1996
----------- -----------
Rmb'000 Rmb'000
Road and bridges 110,608 110,784
Buildings 148 148
Machinery and equipment 3,970 3,804
Motor vehicles 3,328 3,084
Furniture, fixtures and office equipment 38 38
Construction-in-progress 554,040 505,734
Less : Accumulated depreciation (14,481) (12,233)
----------- -----------
Net book value 657,651 611,359
=========== ===========
5. LONG-TERM BANK LOANS
--------------------
Long-term bank loans, all of which are unsecured, bear average interest rates of
approximately 14.66% as of December 31, 1996 and 14.35% as of June 30, 1997 and
are repayable as follows:
June 30, December 31,
1997 1996
----------- -----------
Rmb'000 Rmb'000
1997 58,000 58,000
1998 25,000 25,000
1999 61,500 54,500
2000 65,500 45,000
2001 67,936 55,000
2002 25,000 -
----------- -----------
302,936 237,500
=========== ===========
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb159.5 million as of December 31,1996 and Rmb212 million as of June 30, 1997
respectively are guaranteed by a related company.
-11-
<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 June 30, 1997, the Operating
Subsidiary had no available retained earnings for distribution.
In the opinion of management, any undistributed earnings and/or losses of the
Operating Subsidiary have been reinvested and will continue to be reinvested
indefinitely.
7. PROVISION FOR INCOME TAXES
--------------------------
No provision for income taxes was provided in respect of the income derived from
Hangzhou toll road since the tax holiday has been deferred until the CIP
Projects are completed as mentioned in Note 12.
8. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
-------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of CSH
in an amount of Rmb75 million and Rmb58.5 million as of December 31, 1996 and
June 30, 1997 respectively.
CSH has undertaken to provide continuing financial support to the Company to the
extent of CSH's interest in the Company for a period ending on December 31,
1997.
The Company paid management fees of US$155,000 (Rmb1,288,000) to CSH during 1996
for administrative services rendered to the Company by CSH.
9. DUE TO CHINESE JOINT VENTURE PARTNER
------------------------------------
The amount due to Chinese joint venture partner as at December 31, 1996 and June
30, 1997 represented money borrowed from the Chinese joint venture partner to
finance the CIP projects. These amounts are unsecured, bear interest at
commercial rate and have no fixed repayment date.
10. STOCK OPTIONS
-------------
The following tables summarize the movement of share options of the Company.
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.
-12-
<PAGE>
Common stock options
1997 1996
---------- ----------
Shares under option as at January 1, 150,000 150,000
Issued - -
Expired - -
---------- ----------
Shares under option as at June 30, 150,000 150,000
========== ==========
Average exercise price of outstanding
options $0.156 $0.156
========== ==========
Exercisable at end of period 150,000 150,000
========== ==========
In December 1991 the Board of Directors approved the issuance of Common Stock
options to members of the Board of Directors. The options were to expire in five
years and be issued at 110% of market value on the date of grant.
COMMON STOCK OPTIONS
1997 1996
----------- -----------
Shares under option as at January 1, - 1,000,000
Issued - -
Expired -
----------- -----------
Shares under option as at June 30, - 1,000,000
=========== ============
Average exercise price of outstanding
options - $0.14
=========== ============
Exercisable at end of period - 1,000,000
=========== ============
11. COMMITMENTS
-----------
As of December 31, 1996 and June 30, 1997, the Operating Subsidiary had
outstanding capital commitments for construction contracts related to its CIP
projects amounting to approximately Rmb91,783,000 and Rmb95,000,000
respectively.
12. CONTINGENCY
-----------
The Operating Subsidiary has obtained an approval from the local government to
offset the toll revenue collected from the first and second phase of the toll
road against the construction-in-progress balances until the CIP Projects are
completed by the end of 1997. Thus the tax holiday has been deferred until the
CIP Projects are completed. As such, the Operating Subsidiary reported zero net
profits in its statutory financial statements starting from the commencement of
operations in 1993 and will continue to do so until the CIP Projects are
completed at the end of 1997. The company plans to record the net profits offset
in the construction-in-progress account during 1993 to 1997 into income of the
statutory financial statements of the Operating Subsidiary of the 1998 and / or
1999 fiscal years (i.e. the first two exemption years of the tax holiday). The
plan is subject to the approval of the local tax bureau. Should such approval
not be obtained from the local tax bureau, a tax liability amounting to
approximately Rmb5 million as of December 31, 1996 and Rmb2.5 million as of June
30, 1997 may arise. In the opinion of management, it is unlikely that a
liability will arise.
-13-
<PAGE>
13. RETIREMENT PLANS
----------------
As stipulated by the regulations of the Chinese government, all of the Chinese
staff of the Operating Subsidiary are entitled to an annual pension on
retirement, which is equal to their basic salaries at their retirement dates.
The Chinese government is responsible for the pension liability to retired
staff. The Operating Subsidiary is only required to make specified contributions
to the state-sponsored retirement plan calculated at 23% of the basic salary of
the staff. The expense reported in the consolidated financial statements related
to these arrangements was Rmb49,500 and Rmb59,800 for the six months ended June
30, 1996 and 1997 respectively.
-14-
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF RECENT TRANSACTIONS:
On September 10, 1996, the Company acquired all the issued and outstanding
shares of Westronix Limited, a British Virgin Islands corporation, 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 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 BTR China Holdings B.V., a Netherlands company (the "Purchaser")
pursuant to the terms of the agreement relating to the sale and purchase of the
entire issued share capital of Acewin entered into on September 11, 1996. On
February 19, 1996, the Company had acquired all the issued and outstanding
shares of Acewin, from CSH.
The Board of Directors of the Company determined that disposal of Wuxi was in
the best interest of the Company and was advantageous to the Company's plans to
concentrate the resources of the Company in infrastructure projects in China in
connection with the Company's recent acquisition.
As of June 30, 1997, 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.
BUSINESS:
Hangzhou toll road 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.
-15-
<PAGE>
When the toll road is fully completed, it will be 38.2 km long and comprised of:
- - -13.2 km of existing Class 2 wide single carriageway linking Jichang (Airport)
Road to Xiangfuqiao. The traffic capacity is estimated at about 20,000 vehicles
per day (two way flow).
- - -25.0 km of Class 1 construction (6km of four-lane wide single carriageway
with slow lanes and 19km of dual two-lanes with hard shoulders for emergency)
including 21 bridges and three grade-separated junctions. The implementation of
this section of the toll road consists of two phases: Northwest section
(Xiangfuqiao to Liuxai, 13.7 km) which was completed in December, 1996 and West
section (Liuxai to Lingjiaqiao, 11.3 km), which was completed in December, 1997.
This section encompasses extensive bridge works including:
* river crossing bridges
* bridges for road interchanges
* underpasses and underground crossings for pedestrians and vehicles
The section of the road from Jichang Road to Xiangfuqiao is now in operation
and has been generating revenues from toll collection from the toll plazas at
Xiangfuqiao. The section from Xiangfuqiao to Liuxai was completed in 1996 and
obtained approval from the government to collect tolls. The section from Liuxai
to Lingjiaqiao was completed in December, 1997. Upon full completion and after
receiving the approval of 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 electronic surveillance systems
along with utilizing computerized toll collection systems in toll plazas.
The six months ended June 30, 1997 marked a significant page in the Company's
history. In February, the Zhejiang provincial government granted approval to the
Operating Subsidiary to start collecting toll fees on the second phase of the
toll road commencing March 1997. The second phase was completed in December,
1996. Concurrently, the toll rates for the second phase of the road proposed by
the Operating Subsidiary were also approved. The Management expects that revenue
contribution from the new section should further strengthen the profitability
and liquidity position of the Company.
-16-
<PAGE>
Results of operation:
Summary financial information
- -----------------------------
Six months
ended June 30,
--------------
1997 1996
---- ----
Rmb'000 Rmb'000
Toll revenue 20,493 18,410
General and administrative expenses 14,987 5,387
Loss from discontinued operations - (1,149)
Net income/(loss) (1,042) 5,377
TOLL REVENUE
Toll revenue increased by 11.3% or Rmb2,083,000 in the six months ended June 30,
1997 as compared with the same period last year. Traffic volume recorded a 12.9%
decrease from 1,879,000 vehicles for the first half of 1996 to 1,637,000
vehicles for the first half in 1997. This was an expected result of the almost
100% increase in toll fees on light vehicles during the second quarter of 1997.
Management is optimistic about the future revenue generation ability of Hangzhou
toll road. The second phase of the toll road has been completed, but
it has not yet generated toll revenue in full capacity. The second phase of the
toll road is expected to generate toll revenue in full capacity when the final
phase of the toll road is completed and toll collection begins as those two
phases are linked with each other. The last phase of the toll road was completed
in December, 1997 and the toll collection is expected to commence in early 1998
upon receiving approval from the PRC authorities.
The decreased traffic volume of the Toll Road (Phase I) is considered by the
management to be temporary in nature. The management expects that when all three
phases of the Toll Road are completed, the traffic volume should return to its
original level of 6 million vehicles in 1995. The Company does not view the
current situation as a trend that would have a longer-term material effect on
liquidity, capital resources or results of operations of the Company. The main
reason for the traffic volume decrease was the fact that the Toll Road did not
provide a 26 km road connecting all points around the city of Hangzhou (to be
completed in Phase III). Consequently, the Toll Road's competitor, Ningbo
Expressway has successfully diverted some of the traffic from the Hangzhou Toll
Road.
GENERAL AND ADMINISTRATIVE EXPENSES
During the six months ended June 30, 1997, general and administrative expenses
increased by 178.2% to Rmb 14,987,000 from Rmb 5,387,000 for the six months
ended June 30, 1996. This was primarily attributable to the interest payable on
the US$30 million convertible note in excess of the interest income generated
from the US$ 900,000 note receivable. As far as the Operating Subsidiary is
concerned, general and administrative expenses as a percentage of toll revenue
increased from 27.2% for the six months ending June 30, 1996 to 34.7% for the
same period in 1997. Much of this had come from increase in salaries and wages,
depreciation and interest expense.
NET LOSS
During the six months ended June 30, 1997, the Company recorded a loss of
Rmb1,042,000 as against a net income of Rmb5,377,000 for the corresponding
period in 1996. This was a direct result of increase in general and
administrative expenses as mentioned above. Loss from discontinued operations
represents the operating loss of Regal Bell and Rubber, which had been disposed
in January, 1996.
-17-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1997, net cash used in operating activities
and investing activities was approximately Rmb33.3 million and Rmb41.5 million
respectively. Net cash provided by financing activities amounted to Rmb65.9
million, resulting in a net decrease in cash and cash equivalents of
approximately Rmb8.9 million for the six months ended June 30, 1997.
Cash from operating activities was mainly used in settlement of accrued expenses
and other payables which were reduced by approximately Rmb47.1 million for the
six months ended June 30, 1997. The remaining shortfall in operating cash and
capital expenditures incurred during the period were financed principally
through new bank borrowings of Rmb65.4 million.
The Operating Subsidiary has been able to raise funds from banks for financing
the construction of the second and third phases of the toll road. The second
phase has now been completed and the third phase would follow by the end of
fiscal year 1997. The Company anticipates that in 1998 the Operating Subsidiary
should generate significant toll revenue from all three phases of the toll road,
and such revenue can then be used to repay its bank loans. The Company
anticipates that its cash flows from operations, combined with cash and cash
equivalents, bank lines of credit and other external sources of financing, are
adequate to finance the Company's operating and debt service requirements for
the foreseeable future.
There are no restrictions on the Company's ability to incur any additional debt,
capital expenditure, or to further pledge its assets. The Company is not
required to maintain any financial ratio restrictions. A loan in the amount of
US$5 million is guaranteed by CSH; the loans in RMB currency are guaranteed by
related Hangzhou companies.
EFFECTS OF INFLATION
In recent years, the Chinese economy has experienced periods of rapid growth and
high rates of inflation, which have, from time to time, led to the adoption by
the PRC government of various corrective measures designed to regulate growth
and contain inflation. The general inflation rate in terms of the Retail Price
Index in China was approximately 21.7%, 14.8% and 6.3% for 1994, 1995 and 1996,
respectively. The Chinese government has implemented and maintained an economic
program designed to control inflation, which has resulted in the tightening of
working capital available to Chinese business enterprises. Management believes
that the success of the Company depends in substantial part on the continued
growth and development of the Chinese economy. Management believes that
inflation has not had significant impact on the Operating Subsidiary. Inflation
has resulted in upward pressure on wages and salaries for employees and other
operating expenses at the Operating Subsidiary. However, Management does not
expect inflation to have a material effect on profit margins and income since
the Operating Subsidiary has been effective in controlling costs.
-18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file reports on FORM 8-K during the quarter
ending June 30, 1997.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGAL INTERNATIONAL INC.
(Registrant)
Date: February 22, 1998 /s/ Mico Chung
------------------- --------------------------------
Mico Chung, President
Date: February 22, 1998 /s/ Jack Law
------------------ --------------------------------
Jack Law, Chief Financial Officer
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