<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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 : April 30, 1998, 81,806,198 shares.
Transitional Small Business Disclosure Format (check one) :
Yes No X
--- ---
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 - FINANCIAL STATEMENTS ----
Consolidated Statements of Operations
for the three months ended March 31, 1998
and 1997 (Unaudited) 1
Consolidated Balance Sheets at March 31, 1998 (unaudited)
and December 31,1997 2
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and 1997 (Unaudited) 3
Notes to Consolidated Financial Statements 4 - 15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 16 - 19
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 20
ITEM 2 - CHANGE IN SECURITIES 20
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 20
ITEM 5 - OTHER INFORMATION 20
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 20
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<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
--------------------------------------------------
(Amounts in thousands, except number of shares and per share data )
<CAPTION>
March March March
31, 1998 31, 1998 31, 1997
----------- ----------- -----------
US$ Rmb Rmb
<S> <C> <C> <C>
Toll revenue 1,289 10,673 9,502
General and administrative expenses (1,274) (10,551) (3,702)
Interest income 1 11 261
Interest expense (1,905) (15,769) (1,291)
Exchange (loss)/gain (2) (17) 14
----------- ----------- -----------
(Loss)/income from continuing
operations before income
taxes and minority interest (1,890) (15,654) 4,784
Provision for income taxes - - -
----------- ----------- -----------
(Loss)/income from continuing
operations before minority
interest (1,890) (15,654) 4,784
Minority interests 600 4,972 (3,087)
----------- ----------- -----------
Net (loss)/income (1,290) (10,681) 1,697
=========== =========== ===========
(Loss)/Earning per common share (Basic):
- from continuing operations (0.02) (0.13) 0.02
=========== =========== ===========
Earnings per common share (Fully diluted):
- from continuing operations N/A N/A 0.00
=========== =========== ===========
Weighted average common
shares outstanding 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 March 31, 1998 of US$1.00 = Rmb8.28. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on March 31, 1998 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated statements of
income.
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<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
AS OF MARCH 31, 1998 (UNAUDITED) AND
AS OF DECEMBER 31, 1997 (AUDITED)
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
March March December
31, 1998 31, 1998 31, 1997
------------ ------------ ------------
US$ Rmb
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents 1,950 16,144 19,875
Prepayments and deferred expenses 141 1,167 1,286
Other receivables and other current assets 1,430 11,839 12,191
------------ ------------ ------------
TOTAL CURRENT ASSETS 3,521 29,150 33,352
Prepayments for construction-in-progress 100 830 830
Property, plant and equipment, net 90,897 752,630 760,354
------------ ------------ ------------
TOTAL ASSETS 94,518 782,610 794,536
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Long-term bank loans - current portion 3,019 25,000 20,000
Accounts payable 1,669 13,818 24,223
Accrued expenses and other payables 2,637 21,836 31,240
Taxes other than income 14 116 145
Due to immediate holding company 1,878 15,549 1,212
Due to related company 6 52 38
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 9,223 76,371 76,858
------------ ------------ ------------
Long-term loans 41,461 343,299 342,799
Convertible note payable 30,145 249,600 249,600
Due to Chinese joint venture partner 9,190 76,091 72,376
Due to China Strategic Holdings Ltd. 435 3,599 3,600
Minority interests 16,650 137,866 142,838
SHAREHOLDERS' EQUITY:
Common stock 822 6,806 6,806
Additional paid-in capital 1,905 15,773 15,773
Accumulated deficit (15,313) (126,795) (116,114)
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY (12,586) (104,216) (93,114)
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 94,518 782,610 794,536
============ ============ ============
</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 March 31, 1998 of US$1.00 = Rmb8.28. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on March 31, 1998 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
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<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED, 1998 AND 1997
(Amounts in thousands)
<CAPTION>
1998 1998 1997
------------ ------------ ------------
US$ Rmb Rmb
<S> <C> <C> <C>
Cash flows from operating activities:
Net (Loss)/Income
(Loss)/Income from continuing operations (1,290) (10,681) 1,697
Adjustments to reconcile net (loss) income to
net cash used in operations:
Minority interests (600) (4,972) 3,087
Depreciation and amortization 987 8,176 1,208
Decrease (Increase) in assets:
Prepayments and deferred expenses 14 119 (186)
Other receivables and other current assets 42 351 462
(Decrease) Increase in liabilities:
Accounts payable (1,256) (10,405) 4,298
Accrued expenses and other payables (69) (579) (52,460)
Taxes other than income (4) (29) 2
------------ ------------ ------------
Net cash used in operating activities (2,176) (18,020) (41,892)
------------ ------------ ------------
Cash flows from investing activities
Prepayments for construction-in-progress - - 2,775
Acquisition of property, plant and equipment (55) (452) (4,955)
------------ ------------ ------------
Net cash used in investing activities (55) (452) (2,180)
------------ ------------ ------------
Cash flows from financing activities
Proceeds of bank loans 664 5,500 54,500
Due to related companies 2 14 -
Due to Chinese joint venture partner 449 3,715 563
Due to China Strategic Holdings Limited 666 5,512 (106)
------------ ------------ ------------
Net cash provided by financing activities 1,781 14,741 54,957
------------ ------------ ------------
Net (descrease) increase in cash and cash equivalents (450) (3,731) 10,885
Cash and cash equivalents, at beginning of period 2,400 19,875 21,443
------------ ------------ ------------
Cash and cash equivalents, at end of period 1,950 16,144 32,328
============ ============ ============
</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 March 31, 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 March 31, 1998 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
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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.
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
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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 March 31, 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 "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.
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
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<PAGE>
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 had been used
to finance the construction of second and third phases of the toll road (the
"CIP Projects"). The "CIP Projects" had been completed at the end of fiscal
year 1997.
Any increase in toll rates proposed by the Operating Subsidiary is subject
to approval by the Hangzhou Municipal Government, Hangzhou City
Transportation Department and the Zhejiang Provincial Government. However,
there is no assurance that any proposal for a toll rate increase will be
approved by these government authorities. If such proposals are denied,
profit margins of the Operating Subsidiary could be reduced.
Key provisions of the joint venture agreement of Hangzhou toll road include:
- - the joint venture period is 30 years from the date of formation;
- - the profit and loss sharing ratio is the same as the percentage of
equity interest; and
- - the Board of Directors consists of 7 members: 4 designated by CCIG and
3 designated by Hangzhou City Transportation Development Company.
The acquisition of the Operating Subsidiary by CCIG was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Operating Subsidiary are included
in the consolidated statements of income from the effective date of the
joint venture, June 23, 1993. No revenue was generated from the toll road
before the formation of the joint venture.
2. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United
States of America ("U.S. GAAP"). This basis of accounting differs from that
used in the statutory financial statements of the Operating Subsidiary,
which were prepared in accordance with the accounting principles and the
relevant financial regulations applicable to joint venture enterprises as
established by the Ministry of Finance of China ("PRC GAAP").
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. 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
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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 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 RMB104,216,000 as
at December 31,1997 and March 31, 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.
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$1,200,000 (Rmb9,937,000) and US$1,234,000 (Rmb10,218,000)
as of December 31, 1997 and March 31,1998 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
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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
Safety equipment 8 years
Construction in progress ("CIP" see Note 4) represents 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 Rmb35,613,000 for the year ended December 31, 1997. No
interest was capitalized for the period ended March 31, 1998.
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.
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.
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.
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
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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
Rmb10,176,000 and Rmb10,696,000 and net income of the Company would have
been reduced by Rmb5,050,000, Rmb5,190,000 and Rmb5,455,000 for the
years ended 1996 and 1997 respextively (See Note 13). No income taxes
would have been recorded for the three months ended March 31, 1998 as
Operating Subsidiary was incurred tax losses.(See Note 14).
The Company provides for deferred income taxes using the liability
method, by which deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities. The tax consequences of those
differences are classified as current or non-current based upon the
classification of the related assets or liabilities in the financial
statements.
f. Taxation : Business Tax
-----------------------
In December 1993, the Chinese government promulgated several major new
tax regulations which came into effect on January 1, 1994. These new tax
regulations replaced a number of former tax laws and regulations
including the Consolidated Industrial and Commercial Tax ("CICT"). Under
these new tax regulations, the Operating Subsidiary is subject to 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%.
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.
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. 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.
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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 Adjustement 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 March 31, 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 8.29 8.28 8.28
rate
h. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign
equity joint venture enterprises, the Operating Subsidiary maintains
discretionary dedicated capital, which includes a general reserve fund,
an enterprise expansion fund and a staff welfare and incentive bonus
fund. The Board of Directors of the Operating Subsidiary will determine
on an annual basis the amount of the annual appropriations to the
dedicated capital. For the period from January 1, 1994 to March 31,
1998, 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
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reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
j. (Loss)/Earning per common share
-------------------------------
The calculation of basic loss or earning per common share is based on
the weighted average number of common shares outstanding during the
period ended March 31, 1997 and 1998. The calculation of fully diluted
earnings per common share is based on the common shares outstanding
during the three months ended March 31, 1997 and March 31, 1998 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:
1997 1998
---- ----
Basic EPS computation 81,806,198 81,806,198
Fully diluted EPS computation 81,806,198 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 estimaties of their fair value. The interest rates on the
Company's long-term debt approximate that which would have been
available at March 31, 1998 for debt of similar remaining maturity.
4. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
March 31, December 31,
1998 1997
--------------- ---------------
Rmb'000 Rmb'000
Road and bridges 763,053 763,053
Buildings 2,033 2,033
Machinery and equipment 4,018 3,998
Motor vehicles 3,328 3,328
Furniture, fixtures and office equipment 59 59
Safety equipment 14,129 14,129
Construction-in-progress 7,472 4,520
Less : Accumulated depreciation (41,462) (30,766)
=============== ===============
Net book value 752,630 760,354
=============== ===============
-11-
<PAGE>
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.
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 and 13.04% as of March
31, 1998 and are repayable as follows:
March 31, December 31,
1998 1997
--------------- ---------------
Rmb'000 Rmb'000
1998 20,000 20,000
1999 85,000 104,500
2000 120,500 100,000
2001 92,931 82,936
2002 49,868 49,863
2003 - 5,500
=============== ===============
368,299 362,799
=============== ===============
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb347.799 million as of December 31,1997 and Rmb315.5 million as of March
31, 1998 respectively are guaranteed by a related company.
6. DISTRIBUTION OF PROFITS
-----------------------
Dividends from the Operating Subsidiary will be declared based on the
profits as reported in the statutory financial statements. Such profits will
be different from the amounts reported under U.S. GAAP. As of March 31,
1998, the Operating Subsidiary had no available retained earnings for
distribution.
-12-
<PAGE>
In the opinion of management, any undistributed earnings of the Operating
Subsidiary have been reinvested and 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 operation to the statutory income tax rate in Hong Kong, the
British Virgin Islands, the PRC and the U.S. is as follows:
March 31, December 31,
1998 1997
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:
March 31, December 31,
1998 1997
Rmb'000 Rmb'000
Current - -
Deferred 10,344 8,765
Adjustment of valuation allowance (10,344) (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 December 31, 1997 and March
31, 1998.
8. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
-------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of
CSH in an amount of Rmb56 million and Rmb72.4 million as of December 31,
1997 and March 31, 1998 respectively.
-13-
<PAGE>
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) to CSH during
1997 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.
9. DUE TO CHINESE JOINT VENTURE PARTNER
------------------------------------
The amount due to Chinese joint venture partner as at December 31, 1997and
March 31, 1998 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. RETIREMENT PLANS
----------------
As stipulated by the regulations of the Chinese government, all of the local
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 Rmb31,000 and
Rmb49,000 for the three months ended March 31, 1997 and 1998 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.
COMMON STOCK OPTIONS
1998 1997
--------------- ---------------
Shares under option as at January 1, 150,000 150,000
Issued - -
Expired - -
=============== ===============
Shares under option as at March 31, 150,000 150,000
=============== ===============
Average exercise price of outstanding $0.156 $0.156
options
=============== ===============
Exercisable at end of period 150,000 150,000
=============== ===============
-14-
<PAGE>
12. OTHER SUPPLEMENTAL INFORMATION
------------------------------
a) The following items are included in the consolidated statements of
operations:
March 31, March 31,
1998 1997
----------------- ------------------
Rmb Rmb
Business tax 330 475
13. 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 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 during 1993 to 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 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 and Rmb 5.3 million
for the years ended 1996 and 1997 may arise. In the opinion of management,
it is unlikely that a liability will arise.
-15-
<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 (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 March 31, 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.
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
-16-
<PAGE>
experienced rapid growth in its light manufacturing industry in recent
years, most notably in electronic instruments, refined chemicals, machinery
and electrical appliances.
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,
11.3km), which was completed at the end of fiscal 1997. This section
encompasses extensive bridge works including:
* river crossing bridges
* bridges for road interchanges
* underpasses and underground crossings for pedestrians and vehicles
The section of the road from Jichang Road to Xiangfuqiao is now in operation
and has been generating revenues from toll collection from the toll plazas
at Xiangfuqiao. The section from Xiangfuqiao to Liuxai was completed in 1996
and obtained approval from the government to collect tolls starting from
March 1997. The section from Liuxai to Lingjiaqiao was completed in December
1997. The toll plazas are currently in the process of installing
electronic surveillance systems along with utilizing computerized toll
collection systems in toll plazas.
Revenue contribution from the new section is expected strengthen the
profitability and liquidity position of the Company.
-17-
<PAGE>
RESULTS OF OPERATION:
SUMMARY FINANCIAL INFORMATION
-----------------------------
Three months
ended March 31,
---------------
1998 1997
---- ----
Rmb'000 Rmb'000
Toll revenue 10,673 9,502
General and administrative expenses 10,551 3,702
Interest income 11 261
Interest expense 15,769 1,291
Exchange (loss)/gain (17) 14
Net (loss)/income (10,681) 1,697
TOLL REVENUE
Toll revenue increased by 12.3% or Rmb1,171,000 in the three months ended
March 31, 1998 as compared with the same period in last year. This was
primarily attributable to an increase in traffic volume by 21.7% from
944,000 vehicles for the first three months ended of 1997 to 1,149,000
vehicles for the first three months ended of 1998. Management is optimistic
about the future revenue generation ability of Hangzhou toll road,
particularly since the second and third phase of the toll road has been
completed and is expected to generate toll revenue in full capacity very
soon.
GENERAL AND ADMINISTRATIVE EXPENSES
During the three months ended March 31, 1998, general and administrative
expenses increased by 185% to Rmb10,551,000 from Rmb3,702,000 for the three
months ended March 31, 1997. This is due to the fact that additional
depreciation of Rmb7.367 Million was provided in the Operating Subsidiary as
the second and third phases of the toll road are now complete and in
operation.
INTEREST INCOME
Interest income was mainly derived from the US$900,000 note receivable.
INTEREST EXPENSE
As compared with last period, interest expense went up 1121% to Rmb 15.8
million. This is due to the fact that additional interest expense was
incurred by the US$ 30 million convertible note. Also, as far as the
Operating Subsidiary concerned, the interest expense increased significantly
as interest expenses on bank loans to finance construction of the second
phase and third phases of the toll road could no longer be capitalised in
the period ended March 31, 1998.
-18-
<PAGE>
NET LOSS
During the three months ended March 31, 1998, net income of the Company
decreased by 729.4% to a net loss of Rmb10,681,000 from a profit of
Rmb1,697,000 for the three months ended March 31, 1997. This was a direct
result of increases in general and administrative expenses and interest
expenses as mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1998, net cash used in operating
activities and investing activities was approximately Rmb26.8 million and
Rmb0.5 million respectively. Net cash provided by financing activities
amounted to Rmb 12.5 million, resulting in a net decrease in cash and cash
equivalents of approximately Rmb3.7 million for the three months ended March
31, 1998.
The Company has been able to generate sufficient cash for its working
capital needs as managment is optimistic about the future revenue generation
ability of Hangzhou toll road, particularly since the second and third
phases of the toll road have been completed and is expected to generate toll
revenue in full capacity very soon.
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.
-19-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file reports on FORM 8-K during the
quarter ending March 31, 1998.
-20-
<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: May 16, 1998 /S/ Mico Chung
---------------------- ------------------------------------
Mico Chung, President
Date: May 16, 1998 /S/ Jack Law
---------------------- ------------------------------------
Jack Law, Chief Financial Officer
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<PERIOD-START> JAN-01-1998
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