REGAL INTERNATIONAL, INC.
52/F BANK OF CHINA TOWER,
1 GARDEN ROAD, HONG KONG
NOTICE OF SPECIAL MEETING
To Be Held
September 9, 1998
NOTICE IS HEREBY GIVEN, in accordance with the provisions of Section 222
of the General Corporation Law of the State of Delaware, that a special meeting
of the stockholders (the "Meeting") of REGAL INTERNATIONAL, INC., a Delaware
corporation (the "Company"), whose principal executive offices are located at
52/F Bank of China Tower, 1 Garden Road, Hong Kong, will be held as follows:
PLACE: The Regent Beverly Wilshire, 9500 Wilshire Boulevard, Beverly
Hills, California
DATE: September 9, 1998
TIME: 5:00 p.m.
The purpose of the Meeting is as follows:
1. To ratify the acquisition of Westronix Limited by the Company.
2. To amend the Company's Certificate of Incorporation to increase
the authorized number of shares of Common Stock up to
1,100,000,000 shares, of par value $0.01 per share.
3. To amend the Company's Certificate of Incorporation (i) Article
Fourth (D)(7), to provide that the Company may remove directors
or adopt, repeal or amend bylaws by a meeting of the shareholders
or a written consent by shareholders holding a majority of the
voting shares; (ii) Article Fifth to provide that the number of
directors shall not be less than three, and to remove the
classification of the board of directors; (iii) Article Sixth to
provide that the affirmative vote of the majority of voting
shares is sufficient for the amendment or adoption of bylaws;
(iv) Article Seventh to remove the requirement of 80%
shareholders' vote for certain transactions and to provide that
the affirmative vote of the majority of voting shares is
sufficient to approve those certain transactions listed in
Article Seventh; and Article Tenth to remove the requirement of
80% shareholders' vote to amend Article Fourth, Paragraph D (7)
and (8), Article Fifth, Sixth, Seventh and Tenth, and to provide
that the affirmative vote of the majority of voting shares is
sufficient to approve amendments to those provisions of the
Company's Certificate of Incorporation.
4. To undertake a 138 to 1 reverse split of the Company's Common
Stock.
5. To adopt restated and amended Bylaws of the Company.
6. To change the Company's name to "Asia Resources Holdings Ltd."
7. To adopt a 1997 Incentive Stock Option Plan.
8. All such other matters as may be brought before such Meeting.
The Board of Directors has fixed the close of business on July 24, 1998
as the record date for determination of stockholders entitled to notice of, and
to vote at, the Meeting.
Shares can be voted at the Meeting only if the record holder thereof is
present at the Meeting or represented by proxy. To ensure the presence of a
quorum at the Meeting, you are requested to sign and date the accompanying
Appointment of Proxy and return it promptly in the enclosed return envelope. The
giving of such Appointment of Proxy will not affect your rights to vote in
person in the event you attend the Meeting.
August 12, 1998 By Order of The Board of Directors
1
<PAGE>
REGAL INTERNATIONAL, INC.
52/F BANK OF CHINA TOWER
1 GARDEN ROAD, HONG KONG
PROXY STATEMENT
Mailing Date: August 12, 1998
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD: SEPTEMBER 9, 1998
GENERAL
This Proxy Statement is furnished to the holders of Common Stock, $0.01
par value per share (the "Common Stock"), of REGAL INTERNATIONAL, INC. (the
"Company" or the "Registrant"), on behalf of the Company, in connection with its
solicitation of Appointments of Proxy in the form enclosed herewith for use at a
special meeting of stockholders (the "Meeting") to be held on September 9, 1998,
and at any adjournments thereof. The Meeting will be held at 5:00 p.m. local
time, on the above date, at The Regent Beverly Wilshire, 9500 Wilshire
Boulevard, Beverly Hills, California. The matters to be acted upon at the
Meeting are set forth in the accompanying Notice of Meeting and are described
herein.
The cost of this solicitation of Appointments of Proxy will be borne by
the Company. In addition to the solicitation of Appointments of Proxy by mail,
certain officers, directors and regular employees of the Company, without
additional remuneration, may solicit Appointments of Proxy, personally or by
telephone, telegraph or cable. Arrangements will also be made with brokerage
firms and other nominee holders for forwarding proxy materials to the beneficial
owners of shares of the Common Stock, and the Company will reimburse such
persons for reasonable out-of-pocket expenses incurred by them in connection
therewith.
A majority of the outstanding shares entitled to vote, present in person
or represented by proxy, shall constitute a quorum. Proxies which abstain on one
or more proposals and "broker non-votes" will be deemed present for quorum
purposes for all proposals to be voted on at the meeting. Broker non-votes occur
where a broker holding stock in street name votes the shares on some matters but
not others. The missing votes are broker non-votes. Client directed abstentions
are not broker non-votes. Broker non-votes will be treated as not entitled to
vote and therefore will not be counted as either a vote for or against the
proposals. Stockholders whose shares are in street name and do not return a
proxy are not counted for any purpose and are neither an abstention nor a broker
non-vote. Stockholders who sign, date and return a proxy but do not indicate how
their shares are to be voted are giving management full authority to vote their
shares as they deem best for the Company.
VOTING OF APPOINTMENTS OF PROXY
The persons named in the enclosed Appointment of Proxy, as proxies to
represent stockholders at the Meeting, are Chung Cho Yee, Mico and Richard N.
Gray, and each of them. An Appointment of Proxy which is properly executed and
returned, and not revoked, will be voted in accordance with the directions
contained therein. If no directions are given, that Appointment of Proxy will be
voted FOR the ratification of the acquisition of Westronix Limited by the
Company as further described in Proposal 1, FOR the amendment to the Company's
Certificate of Incorporation increasing the authorized number of Common Stock to
1,100,000,000, as further described in Proposal 2 herein, FOR amendment to the
Company's Certificate of Incorporation to amend Articles Fourth, Fifth, Sixth,
Seventh and Tenth, as further described in Proposal 3 herein, FOR the amendment
to the Company's Certificate of Incorporation to effect a 1-for-138 reverse
stock split approved by the Board of Directors on January 17, 1997, as further
described in Proposal 4 herein, FOR adoption of the amended and restated Bylaws
of the Company, as further described in Proposal 5 herein, FOR the name change,
as further described in Proposal 6 herein and FOR adoption of 1997 Incentive
Stock Option Plan, as further described in Proposal 7 herein. On any other
matters that may come before the Meeting, each Appointment of Proxy will be
voted in accordance with the best judgment of the proxies.
2
<PAGE>
REVOCABILITY OF APPOINTMENTS OF PROXY
An Appointment of Proxy may be revoked by the stockholder at any time
before it is exercised by filing with the Secretary of the Company a written
revocation or a duly executed Appointment of Proxy bearing a later date, or by
attending the Meeting and announcing his intention to vote in person.
RECORD DATE AND VOTING RIGHTS
The close of business on July 24, 1998 has been fixed as the record date
for the determination of stockholders entitled to notice of, and to vote at, the
Meeting. Only those stockholders of record, on that date, will be entitled to
vote on the proposals described herein.
The voting securities of the Company are the shares of its Common Stock,
of which shares were issued and outstanding as of July 24, 1998. All outstanding
shares of Common Stock are entitled to one vote on each matter submitted for
voting at the meeting.
Horler Holdings Limited, a wholly-owned subsidiary of China Strategic
Holdings Limited has indicated its intention to vote for the proposals to be
presented at the Meeting.
Horler Holdings Limited holds a 49.5% interest in the Registrant. China
Strategic Holdings Limited, by owning 100% of Horler Holdings Limited, also
holds a 49.5% interest in the Registrant.
BENEFICIAL OWNERSHIP OF COMMON STOCK
PRINCIPAL STOCKHOLDERS, DIRECTORS AND OFFICERS. The following table sets
forth the beneficial ownership of the Company's Common Stock, as of July 24,
1998, by each person known to the Company to own more than five percent (5%) of
the Company's Common Stock and by each of the Company's current directors, and
by all directors and officers of the Company as a group. The table has been
prepared based on information provided to the Company by each stockholder.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP CLASS
---------------- -------------------- -----
<S> <C> <C>
China Strategic Holdings Ltd.(1) 1,033,877,483 96.16%
Harlequin Investment Holdings Ltd.(2)(3) 4,452,082 0.41%
Richard N. Gray, Director(2)(3) 4,452,082 0.41%
Noble House, Queens Road
St. Peter Fort, Guernsey, Channel Islands
Oei Hong Leong, Director(1) 1,033,877,483 96.16%
52/F Bank of China Tower
1 Garden Road, Hong Kong
Chung Cho Yee, Mico, (1) 0 0%
President and Director
52/F Bank of China Tower
1 Garden Road, Hong Kong
Ma Wai Man, Catherine,(1) 0 0%
Secretary and Director
52/F Bank of China Tower
1 Garden Road, Hong Kong
Law Wing Tak, Jack 0 0%
Chief Financial Officer
52/F Bank of China Tower
1 Garden Road, Hong Kong
Martin J. Furner, Director 0 0%
24 Chiswick High Road
Chiswick, London W4 1TE
All Directors and Officers 1,038,329,565 96.57%
as a Group (6 persons)
- -------------------------
</TABLE>
3
<PAGE>
As used in this table, "beneficial ownership" means the sole or shared power
to vote, or to direct the voting of, a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose of,
or to direct the disposition of a security).
(1) China Strategic Holdings Limited has direct voting and investment power with
respect to 40,500,000 shares and indirect voting and investment power with
respect to 993,377,483 shares issuable upon the conversion of a $30,000,000
Convertible Note held by Horler Holdings Limited, P.O. Box 71, Craigmuer
Chamber, Road Town, Tortola, British Virgin Islands, a wholly owned
subsidiary of China Strategic Holdings Limited. Mr. Oei Hong Leong is a
majority shareholder of China Strategic Holdings Limited.
(2) Harlequin Investment Holdings Limited has sole voting and investment power
with respect to 4,452,082 shares of Common Stock. The beneficial ownership
set forth herein does not include 8,000,000 shares of Common Stock to be
acquired upon an exercise of a Stock Purchase Option granted by China
Strategic Holdings Limited to Harlequin Investment Holdings Limited.
(3) Harlequin Investment Holdings Limited is a wholly owned subsidiary of GHL
(Senior) Pension Fund (the "Fund"), Noble House, Queens Road, St. Peter
Port, Guernsey, Channel Islands. Richard N. Gray is a director of the Fund
and Overseas Trust Company Limited is a trustee of GHL (Senior) Pension Fund
and have the same address. Mr. Gray and Overseas Trust Company Limited each
disclaim beneficial ownership of the shares of Common Stock.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Set forth below is the indirect beneficial interest of the Registrant's
officers and directors in the acquisition of Westronix Limited, through their
respective holdings in China Strategic Holdings Limited ("CSH") as of September
10, 1996. NONE OF THE PERSONS LISTED BELOW RECEIVED ANY OF THE SECURITIES THEY
BENEFICIALLY OWN IN CSH IN CONNECTION WITH THE ACQUISITION OF WESTRONIX LIMITED.
<TABLE>
<CAPTION>
BENEFICIAL OWNER DIRECT INTEREST INDIRECT INTEREST OPTIONS(2) WARRANTS(5)(1)
---------------- --------------- ----------------- ---------- --------------
HK$
<S> <C> <C> <C> <C>
Oei Hong, Leong(3)(4) 0 223,909,696 12,300,000 127,312,706
Chung Cho Yee, Mico(6) 0 0 4,100,000 0
Ma Wai Man, Catherine 0 0 1,025,000 0
Richard N. Gray 0 0 0 0
Martin J. Furner 0 0 0 0
Law Wing Tak, Jack 0 0 0 0
- -------------------------
</TABLE>
4
<PAGE>
(1) Mr. Oei Hong Leong is the Chairman and a director of the Registrant; Mr.
Chung is the President and a director of the Registrant; Ms. Ma is the
Secretary and a director of the Registrant; Messrs. Gray and Furner are
the directors of the Registrant; and Mr. Law was appointed as the Chief
Financial Officer of the Registrant on December 1, 1997.
(2) Under the executive option plan of CSH, adopted on July 20, 1992,
options were granted to directors and employees of CSH to subscribe for
shares at an initial subscription price of HK$3.03 (US$0.39) per share
(adjusted to HK$2.27 (US$0.29) on January 30, 1996 and further adjusted
to HK$0.606 (US$0.08) on September 23, 1997 due to subdivision of
shares). As of April 17, 1998, Mr. Oei owns 18,500,000 options; the
remaining officers and directors of Regal do not own any options in CSH.
(3) A total of 134,952,296 shares and warrants with a total subscription
value of HK$94,466,606 (US$12,189,239) were beneficially held by Sanion
Enterprises Limited ("Sanion"), of which 134,943,296 shares and warrants
with a total subscription value of HK$94,460,306 (US$12,188,504) were
beneficially held by Calison Developments Limited ("Calison"), a
wholly-owned subsidiary of Sanion. Sanion is a company controlled by Mr.
Oei Hong Leong. As of April 17, 1998, a total of 61,500,000 shares were
beneficially owned by Mr. Oei and a total of 818,471,635 shares and
warrants with a total subscription value of HK$130,955,462
(US$16,897,478) were beneficially owned by Sanion, of which 818,416,975
shares and warrants with a total subscription value of HK$130,946,716
(US$16,896,350) were beneficially owned by Calison.
(4) A total of 88,957,400 shares and warrants with a total subscription
value of HK$32,846,100 (US$4,238,206) were held by Chip Lian Investments
(HK) Limited ("Chip Lian"), a company beneficially owned by Mr. Oei and
his spouse. As of April 17, 1998, a total of 925,909,450 shares and
warrants with a total subscription value of HK$142,121,112
(US$18,338,207) were held by Chip Lian, of which warrants with a
subscription value of HK$9,840,000 (US$1,269,677) are being held in
trust of Mr. Oei. The warrants in units of HK$0.80 (US$0.10) of
subscription rights, each carrying the right to subscribe for shares at
any time up to November 4, 1998 at a subscription price of HK$0.80 per
share, subject to adjustment.
(5) Warrants in units of HK$4.20 (US$0.54) of subscription rights, each
carrying the right to subscribe for shares at any time until August 30,
1997 at an initial subscription price of HK$4.20 (US$0.54) per share
(adjusted to HK$3.32 (US$0.43) on January 30, 1996), subject to
adjustment.
(6) As of April 17, 1998, Mr. Chung is a beneficial owner of 5,000,000
shares of CSH and 800,000 warrants in units of HK$0.80 (US$0.10) of
subscription rights, each carrying the right to subscribe for shares at
any time up to November 4, 1998 at a subscription price of HK$0.80 per
share, subject to adjustment.
As of July 24, 1998, there were approximately 7,431 shareholders of
record. The percentage of beneficial ownership is based upon 81,764,456 shares
of Common Stock outstanding as of July 24, 1998 and 993,377,483 shares of Common
Stock issuable upon conversion of $30,000,000 Convertible Note.
5
<PAGE>
PROPOSAL NO. 1
RATIFICATION OF THE ACQUISITION OF WESTRONIX LIMITED
DESCRIPTION OF TRANSACTION
On September 10, 1996, the Board of Directors of the Company approved
the acquisition of all the issued and outstanding shares of Westronix Limited, a
British Virgin Islands corporation ("Westronix"), from China Strategic Holdings
Limited, a Hong Kong company ("CSH") pursuant to the terms of the Acquisition
Agreement entered into on September 10, 1996. Westronix's sole asset is a 100%
equity interest in China Construction Holdings Limited, formerly known as China
Construction International Group Limited, a Hong Kong company ("China
Construction") which owns 51% joint venture interest in Hangzhou Zhongche
Huantong Development Co., Ltd. ("HZHD"), a Sino-foreign joint venture
established in Hangzhou, Zhejiang Province, the People's Republic of China
("China") on June 23, 1993. The Company's principal executive offices are
located at 52/F Bank of China Tower, 1 Garden Road, Hong Kong, tel. (852)
2514-0300.
The consideration paid for Westronix by the Company consisted of a $30
million Convertible Note bearing interest at the rate of nine percent (9%) per
annum after an initial six (6) month interest-free period (the "Note"). The Note
is payable interest only on an annual basis, with all principal being due and
payable on September 10, 1999. The principal and any unpaid interest due on the
Note are convertible at any time from the date of issuance of the Note, into
shares of Common Stock, $0.01 par value, of the Company ("Common Stock") at a
conversion price of $0.0302 per share. The terms of the Agreement and the Note
provided for a downward adjustment of the principal amount of the Note, if an
opinion issued by an independent third party on the amount of consideration paid
by the Company, stated an amount which is 10% less than the consideration paid
by the Company. The adjustment formula was designed to ensure fairness of the
transaction. The Note is secured by all assets of Westronix and its related
subsidiaries.
The Board of Directors of the Registrant determined that acquisition of
Westronix was in the best interest of the Registrant and was advantageous to the
Company's plans to concentrate the resources of the Company in infrastructure
projects in China.
The acquisition of Westronix by the Company was aimed at building up the
Company's infrastructure investment. The management of the Company observed and
was of the opinion that the PRC had both a pressing need and policy priority to
upgrade its infrastructure in order to accommodate ongoing economic development.
Based on that, the Company analyzed the infrastructure industry in China and
concluded that given the PRC's developing economy, there would be potential for
infrastructure projects. In evaluating an acquisition of Westronix, the
management took into account the following factors: existing cash flow stream of
the Hangzhou Toll Road, which was one-third built at the time of consideration
by the Company; partnership with CSH, which has an established track record in
investing and restructuring PRC companies; the city of Hangzhou being an
important commercial and tourist location with sustained traffic; and the fact
that Westronix's accounts were presented in accounting standards that complied
with USGAAP or International GAAP.
In determining the consideration to be paid for the acquisition of
Westronix, the Company took into account the existing and potential cash flow
streams of Hangzhou Toll Road and the valuation (on comparative basis) of PRC
infrastructure companies that underwent initial public offerings in Hong Kong
around the time of the acquisition. At the approximate time the Company acquired
Westronix, initial public offerings on the Stock Exchange of Hong Kong ("SEHK")
of Hong Kong-based PRC infrastructure project companies, such as Cheung Kong
Infrastructure Holdings Limited (July, 1996), Road King Infrastructure Limited
(June, 1996) and Anhui Expressway Company Limited (October, 1996), commanded
prospective 1997 price to earnings ratios ("PE Ratio") of around 20 times, which
compared to a prospective 1997 PE Ratio of approximately 9 times for the
acquisition of Westronix. In addition, the Company took into account its cash
flow position, and the consideration for Westronix was structured as a
convertible note, to allow the Company to defer cash outlay incurred, if any.
The Hangzhou Toll Road was visited by the directors and management of
the Company and its accounts were reviewed in depth and discussed by the Board
of Directors. Registrant and CSH met on a number of occasions to discuss the
acquisition of Westronix. The aim of these discussions was to ascertain that the
Hangzhou Toll Road met the Registrant's infrastructure investment requirements.
Subsequently, the directors and management of the Registrant visited the
Hangzhou Toll Road, followed by an in depth review and discussion of the
Hangzhou Toll Road's accounts by the Board of Directors. In two subsequent
meetings, the Registrant and CSH agreed on the consideration for the acquisition
of Westronix. CSH made an initial offer to sell Westronix for a consideration of
$30 million. In the subsequent meeting, the Registrant and CSH agreed to sell
Westronix for $30 million and decided the $30 million would be paid in the form
of a convertible note.
6
<PAGE>
The Board of Directors took under consideration the close relationship
of the parties involved in the acquisition of Westronix and decided to obtain an
independent third party opinion to evaluate the fairness of the transaction (see
"Summary of the Fairness Opinion").
Based upon the audited consolidated financial statements of the Company
as of December 31, 1995 ( which reflect the financial condition of the Company
before its acquisition of Acewin Profits Limited in February of 1996), the total
stockholders' equity amounted to approximately $2.6 million, whereas the net
income of the Company for the same period was only $28,000. With 81,764,456
shares of common stock outstanding, the net income per share was negligible, and
thus the conversion of the Note will not result in any meaningful dilution to
earnings per share.
Acquisition of Westronix through the transfer of CSH's equity interest
in Westronix to the Company was accounted for as a reorganization of companies
under common control similar to pooling of interests. The management of the
Company believes that the transaction was exempt from any federal income taxes
and there are no federal tax consequences to the Company.
The Board of Directors obtained a fairness opinion (the "Fairness
Opinion") from The New China Hong Kong Corporate Finance Limited ("New China
Hong Kong"), an independent third party, with respect to the acquisition of
Westronix by the Company at a consideration of $30 million, to be satisfied by
way of the issuance of the Note. The Fairness Opinion was addressed to the Board
of Directors of the Company and should not be relied upon by any parties other
than the directors of the Company. Any reference herein to the Fairness Opinion
is made for reference purposes only. In the Fairness Opinion, New China Hong
Kong was of the opinion that the terms of the proposed acquisition of Westronix
were fair and reasonable to the Company, however, the Fairness Opinion did not
address the Note's dilutive effect if revenue increases in the future and the
conversion price remains above the market price.
New China Hong Kong is a company incorporated in Hong Kong and is a
registered investment advisor under the Hong Kong Securities Ordinance. New
China Hong Kong has a broad experience in providing financial/advisory services
to Hong Kong-listed companies with China-based businesses and/or assets. New
China Hong Kong often acts as an independent financial advisor to minority
shareholders and independent directors of listed companies in Hong Kong. In
selecting New China Hong Kong to provide the Fairness Opinion with respect to
the acquisition of Westronix, the Board of Directors took into consideration the
above factors and New China Hong Kong's vast knowledge of companies based in
China. The Board of Directors also took under advisement the fees charged by New
China Hong Kong for its professional services, which it found reasonable. The
fee paid by the Registrant to the financial advisor was HK$100,000 (US$12,920).
There had been no material relationship between New China Hong Kong and
the Company or between New China Hong Kong and CSH, or any compensation received
by New China Hong Kong from either of those parties as a result of any such
relationship during the two years prior to selecting New China Hong Kong.
Furthermore, no such material relationship was mutually understood to be
contemplated by New China Hong Kong, the Company and CSH at the time New China
Hong Kong was selected and no compensation was received thereof as a result of
such contemplated material relationship.
The terms of the proposed acquisition of Westronix were confirmed by New
China Hong Kong as fair and reasonable. New China Hong Kong's findings were
based on its independent assessment of an internal appraisal report prepared and
provided by CSH, which determined the valuation of Westronix by applying the
discounted cash flow model to the projected cash flow of the Hangzhou Toll Road
over the remaining life of the joint venture. The consideration for Westronix
was recommended by CSH in a internal report which CSH prepared. This
consideration was subsequently determined to be fair by New China Hong Kong.
7
<PAGE>
Summary of New China Hong Kong's Fairness Opinion
- -------------------------------------------------
The Fairness Opinion was prepared by New China Hong Kong at the request
of the Board of Directors. In rendering its recommendation with respect to the
fairness of the transaction, New China Hong Kong relied on the information and
representations provided to it by CSH that such information was complete and
relevant in all material respects. New China Hong Kong has not conducted an
independent in-depth investigation of the business of the joint venture and
Hangzhou Toll Road.
According to the Fairness Opinion, New China Hong Kong has arrived at
its opinion regarding the acquisition of Westronix and the issuance of a
convertible note (collectively, the "Proposal") after having considered the
following principal factors:
a) the valuation of the Hangzhou Toll Road: (i) based upon an internal
study of the Hangzhou Ring Road and the projected net operating cash
flows (income streams available for distribution), prepared by China
Strategic Holdings, the value of the Hangzhou joint venture interest was
estimated to be approximately US$44.0 million if an 18% discount rate
was applied (see a table of projected net operating cash flows below).
This valuation was based upon an 18% discount rate applied to the
projected net operating cash flows commencing from the year 1997 through
2023. The joint venture expires in 2023. The consideration of US$30
million represents an approximately 32% discount to the valuation
figure; (ii) New China Hong Kong stated in its opinion that the discount
rates required for similar toll roads projects by stock analysts for
stock traded in Hong Kong were approximately 17% to 18%. However, in
order to take into consideration the factor that the West Section of the
toll road will only become operational in early 1998, New China Hong
Kong considered that the required rate of return should be increased to
20% to reflect the additional risk involved in this case. In the New
China Hong Kong's opinion the valuation of the joint venture interest
would be reduced to approximately US$37.1 million if a discount rate of
20% is applied, representing an approximately 19% discount to the
reduced valuation figure; (iii) based upon the sensitivity analysis
shown in the Fairness Opinion, the joint venture interest would have a
value exceeding US$27 million (i.e. the lowest value below which it
would require adjustments to the consideration being made) if a discount
rate of not more than 24% is applied.
b) effects of the Proposal on the Company: the New China Hong Kong's
opinion found that the joint venture interest was expected to contribute
profit to the Company commencing in 1997. The net income after tax for
the joint venture was expected by the management to be approximately
RMB60.5 million, RMB46.4 million and RMB193.4 million for the years
1997, 1998 and 1999 respectively. Accordingly, the joint venture
interest was expected to generate profit of approximately US$3.7
million, US$2.84 million and US$11.84 million at an exchange rate of one
US dollar convertible into RMB8.33. Therefore, the acquisition would
result in an increase in earnings (after deduction of the interest of
the $30 million Note) for the Company starting from 1997.
The Fairness Opinion used the following values, ranges and projections
in its analysis. The net present value of the joint venture interest would have
values ranging from US$27.2 million to US$44.1 million, at the range of a
discount rate of 18% to 24%. The valuation was calculated by using the discount
cash flow method and was based on the free income streams available for
distribution and on a predetermined rate of return (the "discount rate"). These
discount rates were applied to the projected net operating cash flows commencing
from the year 1997 through 2023 (the expiration date of the joint venture).
New China Hong Kong further noted that the discount rates required for
similar toll roads projects by stock analysts for stock traded in Hong Kong were
around 17% to 18%. The other comparable projects included Anhui Expressway
Company Limited and Road Infrastructure Limited, both being the companies listed
on The Stock Exchange of Hong Kong Limited. These projects are deemed comparable
by New China Hong Kong because they are listed companies engaging in the
holding, operation and development of toll highways in China.
8
<PAGE>
The Fairness Opinion also addressed the form of consideration, i.e. the
Note, and the terms thereon, and went on to conclude that the conversion price
of $0.0302 per share was substantially above the current price of the Company's
Common Stock ($0.01 on November, 1996). The Fairness Opinion further concluded
that the conversion of the Note would not result in any dilution to earnings per
share of the Common Stock, since based on the consolidated financial statements
of the Company as of December 31, 1995 (which reflect the financial condition of
the Company before the acquisition of Acewin Profits Limited in February, 1996),
total stockholders' equity amounted to approximately US$2.6 million, and based
on the statements of operations of the Company for the same period, its net
income was only US$28,000. Based on 81,806,198 shares of Common Stock
outstanding, the net income per share was negligible and thus the conversion of
the Note will not result in any meaningful dilution to earnings per share.
The projections prepared by CSH in its internal report were used and
relied upon by New China Hong Kong. These same projections were relied upon by
the Board of Directors. The valuation of the Hangzhou Toll Road was calculated
by using the discount cash flow method, which is based on the projected free
income streams available for distribution (please see table below) and a
required rate of return.
PROJECTED PROJECTED
CASHFLOW CASHFLOW
AFTER INTEREST AFTER INTEREST
YEAR (RMB) (US$)
- ---- -------------- --------------
1993 (111,570,000) (13,489,300)
1994 (123,850,000) (14,974,006)
1995 (56,430,000) (6,822,633)
1996 50,000 6,045
1997 (60,000) (7,254)
1998 2,000,000 241,809
1999 13,560,000 1,639,463
2000 110,001,000 13,299,601
2001 208,000,000 25,148,108
2002 163,180,000 19,729,174
2003 206,780,000 25,000,605
2004 235,270,000 28,445,170
2005 192,360,000 23,257,164
2006 206,050,000 24,912,344
2007 220,093,000 26,610,204
2008 236,990,000 28,653,125
2009 254,350,000 30,752,025
2010 273,110,000 33,020,191
2011 285,720,000 34,544,795
2012 298,990,000 36,149,196
2013 312,890,000 37,829,767
2014 327,560,000 39,603,434
2015 342,870,000 41,454,480
2016 359,040,000 43,409,503
2017 375,970,000 45,456,414
2018 393,760,000 47,607,303
2019 409,500,000 49,510,337
2020 409,500,000 49,510,337
2021 409,500,000 49,510,337
2022 409,500,000 49,510,337
2023 205,000,000 24,785,395
* The forecast was prepared based on an exchange rate of US$=Rmb 8.271
The Fairness Opinion concluded that the terms of the proposed
acquisition of Westronix by the Company were fair and reasonable to the Company.
9
<PAGE>
DESCRIPTION OF BUSINESS OF HANGZHOU ZHONGCHE HUANTONG DEVELOPMENT CO., LTD.
Hangzhou Zhongche Huantong Development Co., Ltd. ("HZHD"), is the only operating
subsidiary of the Company. Set forth below is the Company's organizational chart
following the acquisition of Westronix.
------------------------
Regal International Inc.
(Delaware)
------------------------
|
|
|
100%
------------------------
Westronix Limited
(BVI)
------------------------
|
|
|
100%
------------------------
China Construction
Holdings Limited
(Hong Kong)
------------------------
|
|
|
51%
------------------------
Hangzhou Zhongche
Huantong Development Co.
Ltd. (PRC)
------------------------
HZHD has been established to develop the construction project called
"Hangzhou Ring Road". The Hangzhou Ring Road is designed to direct the congested
traffic both inside and outside the city of Hangzhou. The city of Hangzhou,
which covers an area of approximately 16,000 square kilometers and has a
population of approximately 5.6 million, is the capital of Zhejiang Province in
China. The city is located about 150 kilometers from Shanghai and has
experienced rapid growth in its light manufacturing industry in recent years,
most notably in electronic instruments, refined chemicals, machinery and
electrical appliances.
Infrastructure projects, like Hangzhou Ring Road, became a priority to
the government of China in recent years. According to directives of the 10- year
program (1991 - 2000) of the government of China, one of its key national goals
is to build more basic industry and infrastructure projects during the 1990s.
Preference is given to the construction of the principal national trunk
highways. In addition, highway construction in coastal regions is prioritized.
The Hangzhou Ring Road was approved as a priority project by the
Hangzhou Municipal Planning Committee in 1992. HZHD has registered capital of
RMB 200 million and total investment of RMB 600 million. The Chinese partner
contributed RMB 98 million by injecting the existing Class 2 toll road, and CCHL
contributed RMB 102 million in cash. The principal asset of HZHD is its 100%
interest in a 30-year joint venture consisting of the Hangzhou Ring Road, a
three-section toll road surrounding the city of Hangzhou, which was completed in
December, 1997. Two of the three sections of the road were already completed by
the end of 1996.
Hangzhou Ring Road is 38.2 km long and comprised of:
- -13.2 km of existing Class 2 wide single carriageway linking Jichang (Airport)
Road to Xiangfuqiao. The traffic capacity is estimated at about 20,000 vehicles
per day (two way flow).
10
<PAGE>
- -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 starting from
March 1997. The section from Liuxai to Lingjiaqiao was completed in December,
1997 and toll collection should commence in early 1998, upon receiving approval
from the PRC authorities. Upon full completion and after receiving the approval
from 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
and the manual collection of tolls in the toll plazas. The government of
Zhejiang Province approved a toll increase of 100% for the newly completed
second phase of the Hangzhou Ring Road, effective from March 1, 1997.
Overview of Transportation Infrastructure in China
- --------------------------------------------------
The earliest highway appeared in China at the beginning of this century.
Up to the founding of the People's Republic of China in 1949, the country had
merely 75,000 kilometers of highways, most of them cobblestone roads. During the
second half of the century, however, highway construction in China experienced
rapid development. By the end of 1995, total highway mileage had reached 1.14
million kilometers. So far, highways have extended to all provinces throughout
the country, and 98 percent of China's townships and 80 percent of villages have
bus service.
China's highway construction after 1949 can be divided into three
periods. The first period was between 1949 and 1957, when emphasis was put on
filling in the main arteries of the country. The second period, 1958- 1980,
experienced a rapid popularization of highways throughout the country.
During this period highway mileage increased from 254,600 kilometers to
888,000 kilometers, and 90 percent of all counties and townships were made
accessible by roads. In the third period, which started in 1981, China is
seeking the popularization of highways with improvements in road quality.
Priority is now given to the latter. With high grade highways and expressways
being built in the remotest areas, highway construction in China entered a
period of rapid development.
Since the implementation of "reform and opening", along with the
transition from a planned economy to a "socialist market economy", traffic
between different cities and between urban and rural areas in China has
increased. This has resulted in a sharp increase in demand for medium- and
short-distance small-scale freight transport, a large increase in passenger flow
and a steep rise in highway traffic. Many highways have actual traffic volumes
of four to five times more than their designed capacity. Traffic congestion has
become an outstanding bottleneck hindering economic development. To meet the
need of rapid economic development, China's communication bureaus have shifted
emphasis onto the economically developed regions where there are urgent traffic
problems, constructing and renovating roads radiating from economic centers and
coastal areas to neighboring and hinterland areas. At the same time, in line
with the increase in traffic, highways connecting energy bases, harbors and
large and medium-sized cities, tributary roads to railways, arteries connecting
economic zones and important townships, tourist highways, and roads for poor
areas transportation, are to be built or renovated. In addition, a certain
number of expressways will be constructed according to necessity.
Highways in China are no longer the cart roads of the old. They have
become fully facilitated, with smooth surfaces and clear and neat traffic
markings. Sichuan Province, which had very poor transportation, now has a
complete transportation network. The expressway connecting Chengdu and Chongqing
has reduced the time between the two cities to a little over three hours.
11
<PAGE>
Compared with the sharp increase in transportation volume, however,
highway construction is still lagging behind. To solve this problem, the Chinese
government has mapped out a long-term plan to improve the country's
transportation network. The plan covers the construction of highways, waterway
transportation network and related safety systems. According to the key highway
construction projects in the plan, since 1990, construction has begun for 35,000
kilometers of highway network of 12 national arteries connecting Beijing and the
provincial capitals, major cities, important communication hubs and key ports
throughout the country to form a nationwide passageway for rapid transportation.
These highway arteries will be composed mainly of expressways and
grade-1 and grade-2 special roads, and will be well-equipped with complete
safety, telecommunications and administration systems. With the help of modern
traffic monitoring, all information relating to the traffic situation,
accidents, road surface conditions and weather, will be fed back to a computer
system in the traffic control center. Processed information will then be
transmitted back and displayed on information panels erected along the roads.
Raw Materials
- -------------
The raw materials utilized by the Company in construction of the
Hangzhou Ring Road consist mainly of cement, gravel and steel rebar. The third
and final section of the Hangzhou Ring Road, currently under construction, is
being built by a general construction firm hired by the Company. The general
contractor is responsible for procuring all raw materials necessary for
completion of the project, and has not experienced shortages of any raw
materials.
In general, the cement industry in China is competitive and supply
shortages are rare. Since there is a lack of obvious product differentiation,
manufacturers compete based primarily on price and timely delivery. Currently,
there are approximately 7,700 cement plants in China, of which 67 are
state-owned enterprises and are capable of producing high grade cement. The
average annual output of these plants is approximately 660,000 tons. The
production cost of cement in China varies with regions, ranging from RMB150 to
RMB250 per ton. Fuel and electricity account for 40% of the total production
cost, while labor accounts for only about 5% of the total production cost. Since
1993, the government has relaxed state control of cement prices and allowed
cement prices to fluctuate according to market condition determined by demand
and supply. The uneven distribution of resources and differences in the pace of
economic development in different regions of China, result in the movement of
cement prices. In the southeast coastal provinces and the Yangtze river valley,
the average price is comparatively higher than the national level.
Since 1978 the Chinese steel industry has grown rapidly. At the end of
1992 there were 1,744 iron and steel enterprises in China (including mining
companies) and 3.8 million iron and steel workers as compared with 1,322
companies and 2.4 million workers in 1980. From 1980 through 1992, steel
production increased at a compound annual growth rate of 6.7% with growth of
13.9% in 1992 and 16.2% in 1993. In 1994, with total steel production of 91.5
million tons, China became the world's second largest steel producer behind
Japan.
The rate of growth in steel production in China also increased. This
accelerated growth is primarily due to the fact that, under China's new economic
policies, demand for steel as a raw material for various industries for the
building and rebuilding China's infrastructure has increased substantially.
Furthermore, with changes in the pricing system, profitability has improved and
production capacity has increased accordingly.
Since 1980, steel-making technology in China has experienced significant
improvements. Measures have been taken to modernize steel enterprises by merging
and expanding existing facilities and improving and upgrading technologies.
Although in the past three years the steel industry has grown rapidly with an
annual average increase in production of 16%, domestic supply is still far from
meeting demand. Therefore China must continue to import a certain amount of
steel from foreign sources. During periods when importation is permitted the
steel products producers in China generally experience decreased sales, as
currently the Chinese steel industry cannot compete with producers of imported
steel products with respect to price and, in some cases, quality.
12
<PAGE>
Management and Employees
- ------------------------
The Board of Directors of HZHD consists of seven members; three
directors appointed by the Chinese partner and four directors appointed by the
Hong Kong joint venture partner, CCHL. The General Manager, who reports directly
to the Board of Directors of HZHD, is responsible for the day-to-day operations
of the joint venture. HZHD employs approximately 140 employees on a full time
basis.
Competition
- -----------
The Company's potential depends on its ability to identify and implement
attractive transportation infrastructure development opportunities in China and
to negotiate successfully to enter into joint ventures to develop or operate
such projects. In this regard, the Company faces competition from infrastructure
development businesses currently operating in China, and in addition from
foreign investors who may wish to invest in infrastructure projects, thereby
competing with the Company. With respect to transportation infrastructure
projects such as toll roads, there is no assurance that alternate routes which
avoid toll charges or charge lower toll will not be built.
In late 1995, the Hangzhou section of the Shanghai-Hangzhou Expressway
was opened. The Company expects, based on the report from its traffic
consultant, that this would cause diversion of traffic from the Hangzhou Ring
Road and would reduce the flow through the southern toll plaza of the Hangzhou
Ring Road by approximately 30%. On the other hand, the opening of the
north-western and western sections of the Hangzhou Ring Road would provide new
traffic sources. Furthermore, the Hangzhou Ring Road will also be used by local
traffic and as the city of Hangzhou develops, this component of traffic is
expected to grow. In addition, on the opening of the north-western and western
sections of the Hangzhou Ring Road, heavy vehicles will be discouraged from
proceeding on the road going through the city, and thus diversion to the
Hangzhou Ring Road can be expected to be high, since about half of the vehicles
will be affected by the restrictions on entering Hangzhou.
The Company is also facing competition from the Hangzhou section of the
Shanghai - Ningbo Expressway, which was opened in 1996. The diversion of traffic
from the Hangzhou Ring Road resulted in reduction of traffic volume from 6.1
million vehicles in 1995 to 5.2 million vehicles in 1996.
The Company believes that, despite competition, the need of China for
further transportation infrastructure projects will continue to provide
development opportunities for the Company that will yield satisfactory return.
Research and Development
- ------------------------
The Company did not engage in any research and development activities
with respect to its infrastructure project in fiscal 1996.
Distributions From HZHD
- -----------------------
Applicable Chinese laws and regulations require that, before a Sino-
foreign equity joint venture enterprise (such as the Operating Subsidiary)
distributes profits to investors, it must: (1) satisfy all tax liabilities; (2)
provide for losses in previous years; and (3) make statutory appropriations, in
proportions determined at the sole discretion of the Board of Directors, to a
general reserve fund, an enterprise expansion fund and a staff welfare and
employee bonus fund. Since the establishment of HZHD joint venture, each year
the Company has generated profits. However, each year both joint venture
partners have agreed to retain the profits within the joint venture. Such
profits have been used to finance the cost of constructing the Hangzhou Toll
Road, the final phase of which was completed in December, 1997.
13
<PAGE>
Operating In China
- ------------------
ECONOMIC POLICIES. General economic conditions in China could have a
significant impact on the Company's Hangzhou Ring Road project. The economy of
China differs in certain material respects from that of the United States,
including its structure, level of development, capital reinvestment, growth
rate, government involvement, resource allocation, rate of inflation and balance
of payments position. Although the majority of China's productive assets are
still owned by the State, the adoption of economic reform policies since 1978
has resulted in its' gradual reduction in the role of state economic plans,
allocation of resources, pricing and management of such assets. The economic
reform policies have increased emphasis on the utilization of market forces and
rapid growth of the Chinese economy. The success of the Company's infrastructure
project depends in part on the continued economic growth of China.
MARKET DECLINE IN SOUTHEAST ASIA. Several countries in Southeast Asia,
including Korea, Thailand and Indonesia, have experienced a significant
devaluation of their currencies and a decline in the value of their capital
markets. In addition, these countries have experienced a number of bank failures
and consolidations. Because of the nature of the Company's business, the Company
does not believe that the declines in Southeast Asia will have an adverse impact
on its financial condition. No assurance can be given as that currency or other
effects of the decline in Southeast Asia will not have a material adverse effect
on the Company's business, financial condition and results of operations.
INFLATION. The general inflation rate in China was approximately 21.7%,
14.8% and 6.3% per annum in 1994, 1995 and 1996 respectively. Accordingly, the
Chinese government has taken steps to control inflation by means of credit
restrictions and an increase in interest rates which, in turn, may lead to a
slow down of the Chinese economy. In recent years, the Chinese economy has
experienced periods of rapid economic growth as well as high rates of inflation,
which in turn, has resulted in the adoption by the Chinese government from time
to time of various corrective measures designated to regulate growth and contain
inflation. Since 1993, the Chinese government has implemented an economic
program to control inflation which has resulted in the tightening of credit
available to Chinese state-owned enterprises.
FOREIGN CURRENCY EXCHANGE. Prior to January 1, 1994, all foreign
exchange transactions involving Renminbi ("Rmb") in China had to take place
either through authorized financial institutions at the official exchange rate
set by the State Administration of Exchange Control ("SAEC"), the department of
the government of China responsible for foreign exchange administration or at
local swap centers at exchange rates largely determined by supply and demand.
However, transactions effected through swap centers still required the prior
approval of the SAEC.
On January 1, 1994, the government of China implemented a controlled
floating exchange rate system based on market supply and demand and established
a managed foreign exchange system. In place of the official rate and swap center
rate, the People's Bank of China ("PBOC") now publishes a daily exchange rate
(the "PBOC Exchange Rate") for Renminbi based on the previous day's dealings.
The financial institutions authorized to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within a set range above or
below the PBOC Exchange Rate, according to market conditions. In furtherance of
these currency reforms, the China Foreign Exchange Trading Center ("CFETC") was
formally established in Shanghai and came into operation in April 1994. The
establishment of CFETC was originally intended to coincide with the phasing out
of the swap centers. However, the swap centers have been retained as an interim
measure and it is envisaged that the local centers will be phased out gradually.
Currently, foreign investment enterprises ("FIE") in China (including
Sino-foreign equity and cooperative joint ventures) are required to apply to the
local bureau of the SAEC for "foreign exchange registration certificates for
foreign investment enterprises". With such foreign exchange registration
certificates (which are annually reviewed by the local bureau of the SAEC) or
with the foreign exchange sales notice from the local bureau of the SAEC, FIEs
may enter into foreign exchange transactions at the swap center, or in the
future, through the unified market when all swap centers are connected to CFETC.
On January 29, 1996, the State Council promulgated the regulations of
China Regarding Foreign Exchange Control (the "Regulations") which came into
effect on April 1, 1996. Pursuant to the Regulations, conversion of RMB into
foreign exchange for the use of recurring items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible.
FIEs are permitted to remit its foreign exchange from its foreign exchange bank
account in China on the basis of the relevant joint venture contracts and the
board resolution declaring the distribution of payment of the dividend, etc.
Conversion of RMB into foreign exchange for capital items, such as direct
investment, loans, security investment are still under control.
The exchange rate between the Renminbi and the U.S. Dollar as quoted by
the People's Bank of China ranged between Rmb 8.33 and Rmb 8.29 to $1.00 in
1996.
14
<PAGE>
LEGAL SYSTEM. Since 1979, many laws and regulations dealing with
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese Constitution, adopted in 1989, authorizes
foreign investment, and guarantees the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past twelve years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises in
China.
There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
Despite some progress in developing a legal system, China does not have
a comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement of
existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contracts, leading to a higher
than usual degree of uncertainty in the outcome of litigation. Even where
adequate laws exist in China, it may be impossible to obtain swift and equitable
law enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by
national laws may adversely affect foreign investors, such as the Registrant.
HZHD's activities in China may be subject, in some cases, to
administrative review and approval by various national, provincial and municipal
authorities of the Chinese government. While China has promulgated an
administrative procedural law permitting redress to the courts with respect to
certain administrative actions, this law appears to be largely untested in its
context.
Legal Structure of HZHD
- -----------------------
Hangzhou Zhongche Huantong Development Company, Ltd. was organized under
Chinese law as a Sino-foreign equity joint venture enterprise, which is a
distinct legal entity with limited liability. The term of HZHD joint venture is
30 years, after which time Hangzhou Ring Road, the only asset of the joint
venture, will revert back to HZHD's Chinese partner. Such entities are governed
by the Law of China on Joint Ventures Using Chinese and Foreign Investments and
implementing regulations related thereto (the "Equity Joint Venture Law"). The
parties to an equity joint venture have rights in the returns of the joint
venture in proportion to the joint venture interests that they hold. The
operations of equity joint ventures are subject to an extensive body of law
governing such matters as formation, registration, capital contribution, capital
distributions, accounting, taxation, foreign exchange, labor and liquidation.
The transfer or increase of an interest in a Sino-foreign equity joint venture
enterprise requires agreement among the parties to the venture and is effective
upon the approval of relevant government agencies.
Taxation
- --------
A Sino-foreign equity joint venture with a term of 10 years or more,
such as HZHD, and engaged in infrastructure construction is exempt from state
income tax for the first two years after it attains profitability, and for three
years thereafter it is eligible for a 50% reduction in the state income tax.
HZHD will be fully exempted from Chinese state unified income tax of 30% as well
as the local income tax of 3% for two years starting from the first
profit-making year followed by a 50% reduction of the Chinese state unified
income tax for the next three years.
15
<PAGE>
Governance, Operations and Dissolution
- --------------------------------------
Governance, operations and dissolution of a Sino-foreign equity joint
venture enterprise are governed by the Equity Joint Venture Law and by the
parties' joint venture contract and the joint venture's articles of association.
Pursuant to the joint venture contracts and articles of association of HZHD, it
has a 30-year term and is governed by a Board of Directors consisting of seven
members appointed for 4-year terms. CCHL appoints four directors, including the
chairman, to HZHD, while the Chinese joint venture partner appoints the
remaining three directors, including the Vice Chairman.
The Board of Directors of HZHD exercises authority by majority vote over
major corporate decisions, including the appointment of officers, strategic
planning, budgeting, employee compensation and welfare and distribution of
after-tax profits. Management of HZHD is conducted by a management committee
headed by a General Manager and one or two Deputy General Managers, who act on
behalf of HZHD pursuant to the direction and guidance of its Board of Directors.
Pursuant to relevant Chinese Law, certain major actions of HZHD require
unanimous approval by all the directors present at a meeting called to decide
upon the following actions: amendments to its contract and articles of
association; increases in, or assignment of, the registered capital of the joint
venture; a merger of the joint venture with another entity; or dissolution of
the enterprise.
HZHD is subject to the Sino-foreign Equity Joint Venture Enterprise
Labor Management Regulations. In compliance with these regulations, the
management may hire and discharge employees and make other determinations with
respect to wages, welfare, insurance and discipline of its employees.
Pursuant to the Equity Joint Venture Law, Sino-foreign equity joint
venture enterprises may be terminated in certain limited circumstances,
including the inability of the enterprise to conduct its business owing to a
breach by one of its parties, insolvency, force majeure, or confiscation of the
enterprise's assets by the government. Upon termination, the Board of Directors
establishes a liquidating committee to dissolve the enterprise, which
dissolution is subject to government review and approval.
Resort to Chinese courts to enforce a joint venture contract or to
resolve disputes between the parties over the terms of the contracts is
permissible. In practice, however, disputes between the parties are often
resolved by negotiation. The Company believes that it has a good working
relationship with its joint venture partner and that it will be able to reach
agreements with it on business policies and decisions for HZHD.
Government Regulations
- ----------------------
Any increase in toll rates proposed by HZHD is subject to approval by
the Zhejiang Provincial Government and Hangzhou Municipal Government and City of
Hangzhou Transportation Department. There are no assurances that such proposals
will be approved by these government authorities. If such proposals are denied,
toll revenues of HZHD may be affected.
The government of Zhejiang Province has approved a toll increase of 100%
for the newly completed second phase of Hangzhou Ring Road, effective from March
1, 1997.
Compliance with Environmental Laws
- ----------------------------------
HZHD is not aware of any Chinese government environmental regulations
which would have an adverse impact on the Company's operations.
16
<PAGE>
DESCRIPTION OF PROPERTIES
As of March 31, 1997, the Company had no office or facility for U.S.
operations. The Company shares the office space at 52/F, Bank of China Tower, 1
Garden Road, Hong Kong and administrative support, with China Strategic Holdings
Limited, a major shareholder of the Company ("CSH"). During fiscal year 1996,
the Company was charged RMB 1.29 million by CSH as a management fee for the use
of the office space and staff support.
The land on which the Hangzhou Toll Road has been built, is owned by the
PRC government. According to the PRC law, land may be leased (under land use
rights) for certain periods of time to businesses. Therefore, the fact that the
Hangzhou Toll Road does not have title but only a land use right is the norm in
the PRC for businesses. While Chinese law expressly protects the status and
rights of Sino-foreign joint venture enterprises, including their right to use
land during the term of their respective joint venture contracts, the state
reserves the right, in extreme and exceptional circumstances, to terminate the
joint venture and provide compensation therefor. In such an event, a joint
venture's right to use land would terminate and all facilities would revert to
the state in exchange for just compensation. Just compensation is calculated at
the discretion of the relevant government authorities, since there is no
statutory formula for determining such compensation, and no assurance can be
given that such compensation would reflect the valuation of such facilities
provided by the joint venture. Although management sees little risk in not
having title to the land use rights, especially given the fact that new highway
has been built on the land, no assurances can be given that such land use rights
may be not be terminated by the PRC.
Legal Proceedings
- -----------------
Neither the Registrant nor its subsidiaries are a party to any material
pending legal proceedings.
Material Contracts
- ------------------
Other than disclosed in the Proxy Statement, there were no material
contracts or negotiations during the period of time shown in the Financial
Statements of the Registrant or Westronix, between the Registrant and Westronix
(and/or their respective affiliates).
Market for Company's Common Stock
- ---------------------------------
The Registrant's Common Stock was listed on the New York Stock
Exchange("NYSE") (symbol : RGL) until December 7, 1994, at which time the NYSE
suspended its trading since the Registrant did not meet the continued listing
requirements. On February 9, 1995, the Common Stock was removed from
registration and listing on the NYSE. The Registrant's Common Stock began
trading on the NASD Electronic Bulletin Board since August 1995. The Company's
Common Stock trades sporadically on the NASD's Bulletin Board. The following
table sets forth the high and low prices of the Common Stock as reported in the
consolidated transaction reporting system during the periods indicated:
QUARTER ENDED HIGH LOW*
------------- ---- ----
March 31,1996 0.0499 0.01
June 30, 1996 0.1 0.01
September 30, 1996 0.03 0.01
December 31, 1996 0.03 0.001
January 31, 1997 0.10 0.01
March 31, 1997 0.01 0.01
April 30, 1997 0.02 0.01
December 31, 1997 0.05 0
January 31, 1998 0 0
February 28, 1998 0.02 0
March 31, 1998 0 0
* The low price reflects the average of the bid and asked prices.
As of July 24, 1998, there were approximately 7,431 beneficial holders
of record of the shares of the Registrant's Common Stock.
Dividend Policy
- ---------------
The Registrant has never paid a cash dividend. It is the current policy
of the Board to retain earnings, if any, to provide funds for the Company's
operations. The payment of dividends is at the discretion of the Board, and
dividends may be paid only out of current earnings and profits or retained
earnings.
Statement re Accountants
- ------------------------
The Company's accountants, Arthur Andersen & Co., are not expected to be
present at the stockholders' meeting, although they will be presented an
opportunity to attend such meeting and to make a statement, if they desire to do
so. They are expected to be available to respond to any appropriate questions
raised at the meeting via telephone at (852) 2852-0222.
17
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
Selected Financial Data
- -----------------------
The following table presents the selected financial information of the
Registrant as of and for the years ended December 31, 1995, 1996 and 1997 and
for the quarter ended March 31, 1998 assuming that the Registrant had owned the
shares of Westronix Limited in 1995. The information was extracted from the
audited consolidated financial statements of Regal International, Inc. and
subsidiaries prepared under US GAAP.
<TABLE>
Summary of Financial Results - 1995, 1996 & 1997 and three months ended March 31, 1998
<CAPTION>
INCOME STATEMENT 1995 1996 1997 3/31/98 3/31/97
- ----------------
(Amount in thousands)
RMB USD RMB USD RMB USD RMB RMB
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Toll revenue 37,206 4,472 38,463 4,640 45,100 5,447 10,673 9,502
Income from continuing
operations 14,704 1,767 9,681 1,168 (11,237) (1,357) (1,890) 15,654
Net income/(loss) 14,939 1,796 11,876 1,433 (11,237) (1,357) (10,681) 1,697
</TABLE>
BALANCE SHEET 1996 1997 MARCH 31, 1998
- -------------
(Amount in thousands)
RMB USD RMB USD RMB USD
--- --- --- --- --- ---
Current assets 35,610 4,296 33,352 4,027 16,144 1,950
Total assets 656,911 79,242 794,536 95,958 782,630 90,897
Current liabilities 124,206 14,985 76,858 9,282 25,000 3,019
Long-term bank loans 179,500 21,652 342,799 41,400 343,299 41,461
Shareholders' equity (82,298) (9,927) (93,535) (11,296)(104,216) (12,586)
- -------------------------
(a) The U.S. dollar conversion translation amount have been translated
using the unified exchange rate quoted by the Bank of China on December
31,1995, 1996 and 1997 of $1.00 =Rmb 8.32, $1.00 = Rmb 8.29 and $1.00 =
Rmb 8.28 respectively. No representation is made that the Renminbi
amounts could have been, or could be, converted into United States
Dollars at those rate on December 31, 1995, 1996 and 1997 or at any
other certain rate.
DIVIDENDS
Neither Westronix Limited nor the Company paid any cash dividends during
the last three fiscal years.
18
<PAGE>
EARNINGS PER SHARE
REGAL INTERNATIONAL, INC.(1) Westronix Limited(2)
12/31/94 0.012 Rmb 17,717,000 Rmb
12/31/95 0.014 Rmb 15,019,000 Rmb
12/31/96* 0.10 Rmb (US $0.01) 6,861,000 (3)
12/31/97 0.14 Rmb (US $0.02) Not applicable
3/31/98 (0.13) Rmb (US $0.02) Not applicable
*See footnote (3) below
BOOK VALUE PER SHARE
REGAL INTERNATIONAL, INC.(1) WESTRONIX LIMITED(2)
12/31/96 (1.01) Rmb (US $ (0.12)) 43,921,000 Rmb(3)
12/31/97 (1.14) Rmb (US $ (0.13)) Not applicable
3/31/98 (1.27) Rmb (US $ (0.15)) Not applicable
- -------------------------
(1) Based on 81,806,198 shares outstanding.
(2) Based on 1 share issued and outstanding
(3) With respect to Westronix Limited, earnings per share are provided for the
six months period ended June 30, 1996. Westronix Limited was acquired by the
Company in September, 1996.
19
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Overview
- --------
The year 1996 marked a substantial change in the business of the
Company. In an effort to benefit from the growing Chinese economy, management
decided to dispose of the oil exploration equipment supply operation and acquire
the Hangzhou toll road in September of 1996. The Company had thereby redirected
its focus from the US industrial product market to the infrastructure project
investment in China.
As of March 31, 1998, Regal International Inc. (the "Company") had the
following subsidiaries (the Company together with its subsidiaries shall be
collectively referred to as the "Group").
Westronix Limited ("WL") - A holding company incorporated in the British
Virgin Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in
Hong Kong, formally known as China Construction International Group Limited.
Hangzhou Zhongche Huantong Development Co., Ltd. (the "Operating
Subsidiary" or "Hangzhou Toll Road"), a Sino- foreign equity joint venture
located in Hangzhou, Zhejiang province.
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.
The toll road is 38.2 km long and comprised of: 13.2 km of existing
Class 2 wide single carriageway linking Jichang (Airport) Road to Xiangfuqiao.
The traffic capacity is estimated at about 20,000 vehicles per day (two way
flow).
25.0 km of Class 1 construction (6km of four-lane wide single
carriageway with slow lanes and 19km of dual two-lanes with hard shoulders for
emergency) including 21 bridges and three grade-separated junctions. The
implementation of this section of the toll road consists of two phases:
Northwest section (Xiangfuqiao to Liuxai, 13.7 km) which was completed in
December, 1996 and West section (Liuxai to Lingjiaqiao, 11.3km), 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 starting from
March 1997. The section from Liuxai to Lingjiaqiao was completed in December,
1997 and the toll collection is expected to commence in early 1998 upon
receiving approval from the PRC authorities. Upon full completion and after
receiving approval from the PRC authorities, toll plazas are expected to operate
at Xiangfuqiao (already in operation), Liuxai and Lingjiaqiao. The Company is in
a process of installing electronic surveillance systems along with utilizing
computerized and manual toll collection systems in the toll plazas.
Revenue contribution from the new section will further strengthen the
profitability and liquidity position of the Company.
20
<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 will 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 capitalized in the period ended March 31, 1998.
Exchange Gain/(Loss)
- --------------------
Exchange gain/(loss) represents the favorable/(unfavorable) exchange
difference arising from remeasurement of reporting currencies of the different
companies within the Group into Renminbi, which is the Group's functional
currency.
The exchange rates for Renminbi against U.S. Dollars were 8.32, 8.29 and
8.28 for 1995, 1996 and 1997 respectively, representing an appreciation of
Renminbi by 0.4% and 0.12% in 1996 and 1997 respectively, when comparing the
exchange rate at the end of the year with the position at the beginning of the
year. As a consequence, exchange loss aroused. The exchange loss for the three
months period ended March 31, 1998 was Rmb17,000.
21
<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 management 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 will 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.
RESULTS OF OPERATION - 1997 COMPARED TO 1996
SUMMARY FINANCIAL INFORMATION
- -----------------------------
(Rmb in thousands) % CHANGE FROM
1996 1997 PRIOR YEAR
------------ ---- ----------
Toll revenue 38,463 45,100 17.3%
General and administrative expenses 15,419 32,951 113.7%
Interest income 796 1,036 30.1%
Interest expenses 1,023 23,735 2,220.0%
Exchange gain/(loss) 350 (16) (104.6%)
Net income/(loss) 11,876 (11,237) (194.6%)
Toll Revenue
- ------------
Toll revenue increased 17.3% to Rmb 45.1 million in 1997 from Rmb 38.46
million in 1996. This was primarily attributable to an average increase of toll
fees by approximately 41%, partially offset by a decrease in traffic flows.
Competition from the Hangzhou section of the Shanghai - Ningbao Expressway,
which was opened in last year, resulted in reduction of traffic volume from 5.2
million vehicles in 1996 to 4.3 million vehicles in 1997. The management
believes the impact of the Shanghai- Ningbo Expressway on traffic flow has
already been reflected in 1996 and 1997 and that further decrease in traffic
volume is unlikely. Management is also optimistic about the future revenue
generation ability of Hangzhou Toll Road when the final phase of the toll road
had been completed at the end of 1997 and should start to generate revenues in
the first half of 1998.
The authority to approve toll collection rests with the Zhejiang
Provincial authorities. Although the Registrant is not aware of any specific
timetable of when the authorities will approve the collection of tolls, waiting
several months for such an approval in the PRC is not uncommon. The Registrant
believes that its positive working relationship with the relevant governmental
authorities could be helpful in obtaining such approval at the earliest possible
time.
22
<PAGE>
General and Administrative Expenses
- -----------------------------------
As compared with last year, general and administrative expenses went up
113.7% to Rmb 33 million. This is due to the fact that additional depreciation
of Rmb 14.77 million was provided in the Operating Subsidiary as the second
phase of the toll road had been completed and used.
Interest Income
- ---------------
Interest income arose mainly from the US$900,000 note receivable.
Interest Expenses
- -----------------
As compared with last year, interest expenses went up 2220% to Rmb 23.7
million. This is due to the fact that additional interest expenses were incurred
by the US$ 30 million convertible note. Also, with respect to the Operating
Subsidiary, the interest expenses were increased significantly as the bank loans
were increased from Rmb 237.5 million in 1996 to Rmb 362.7 million in 1997 and
interest expense on bank loans to finance construction of the second phase of
the Toll Road could no longer be capitalized in 1997 as operation of the second
phase commenced in the first quarter of fiscal 1997.
Exchange Gain/(Loss)
- --------------------
Exchange gain/(loss) represents the favourable/(unfavourable) exchange
difference arising from remeasurement of reporting currencies of the different
companies within the Group into Renminbi, which is the Group's functional
currency.
The exchange rates for Renminbi against U.S. Dollars were 8.32, 8.29 and
8.28 for 1995, 1996 and 1997 respectively, representing an appreciation of
Renminbi by 0.4% and 0.12% in 1996 and 1997 respectively, when comparing the
exchange rate at the end of the year with the position at the beginning of the
year. As a consequence, exchange loss aroused. The exchange loss in the fiscal
year ended December 31, 1997 was Rmb16,000.
Net Income/(Loss)
- -----------------
Net income fell 194.6% to net loss Rmb (11.2) million in 1997 from Rmb
11.9 million in 1996. This was attributable to the combined effect of the
significant increase in depreciation expenses and interest expenses.
Liquidity and Capital Resources
- -------------------------------
In 1997, net cash used by operating activities and investing activities
was approximately Rmb 0.3 million and Rmb 158.8 million respectively. Net cash
provided by financing activities amounted to Rmb 157.6 million, resulting in a
net decrease in cash and cash equivalents of Rmb 1.5 million.
During the year, the Company incurred capital expenditures of Rmb 158.8
million which was financed through bank borrowings and loans from the Chinese
joint venture partner amounting to Rmb 125 million and Rmb 31 million
respectively. No financing agreements entered into in fiscal year 1997 impose
any limitations on the Company's ability to borrow additional funds. This is
primarily due to the close and informal relationships that the Operating
Subsidiary maintains with its creditors, as is commonplace with formerly
state-run enterprises in China.
CSH undertook to provide continuing financial support to the Company to
the extent of CSH's proportionate interest until December 31, 1997. The joint
venture has been able to independently ( and without CSH's involvement) procure
financing for the construction of the Toll Road and has not required any
additional funds from CSH. CSH provided guaranty for $5 million loans to the
joint venture, however, CSH did not provide any other direct contributions.
After the completion of the construction of the Hangzhou Ring road, the
Registrant does not expect a further need for the financing of large capital
expenditures. Its future cash requirements are expected to be met by cash
received from toll collection.
23
<PAGE>
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.
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 to the Consolidated Financial Statements.
Effects of Inflation
- --------------------
The general inflation rate in terms of the Retail Price Index in China
was approximately 14.8%,6.3% and 0.8% for 1995, 1996 and 1997 respectively.
Management believes that inflation has not had significant impact on the
Operating Subsidiary.
The Year 2000 Issue
- -------------------
The Company recognizes that the Year 2000 issue exists because many
computer systems and application currently use two-digit date fields to
designate a year. As the century date occurs, date sensitive computers will
recognize the year 2000 at 1900 or not at all. The inability to recognize or
properly treat the year 2000 may cause computers to process financial and
operational information incorrectly. The Company is in the process of assessing
the impact, if any, of the Year 2000 issue on its computers.
The Company has not concluded yet its analysis of whether any
modifications to its computers will be necessary. However, the Company believes
that the estimated costs, if any, will not have a material impact on the
Company's business or financial position.
RESULTS OF OPERATION - 1996 COMPARED TO 1995
SUMMARY FINANCIAL INFORMATION
- ----------------------------- % CHANGE
(Rmb in thousands) 1995 1996 FROM PRIOR YEAR
---- ---- ---------------
Toll revenue 37,206 38,463 3.4%
General and
administrative expenses 10,516 15,646 48.8%
Exchange gain 1,101 350 (68.2%)
Net income 14,939 11,876 (20.5%)
Toll Revenue
- ------------
Toll revenue increased 3.4% to Rmb 38.5 million in 1996 from Rmb 37.2
million in 1995. This was primarily attributable to an average increase of toll
fees by approximately 50%, partially offset by a decrease in traffic flows.
Competition from the Hangzhou section of the Shanghai - Ningbo Expressway, which
was opened this year, resulted in reduction of traffic volume from 6.1 million
vehicles in 1995 to 5.2 million vehicles in 1996.
The management believes the impact has already been reflected in 1996.
Further decrease of vehicle flows is unlikely. Management is also optimistic
about the future revenue generation ability of HZHD as the second phase of the
toll road had been completed and started to collect toll revenue since March,
1997. The toll rates for the second phase is approximately double the toll rates
for the first phase. In addition, the third and final phase of the toll road was
completed in December, 1997 and should start to generate revenues in the 1998
fiscal year after obtaining approval from the PRC authorities.
24
<PAGE>
General and Administrative Expenses
- -----------------------------------
As compared with last year, general and administrative expenses went up
48.8% to Rmb 15.6 million. This is due to the fact that additional professional
fees were incurred in 1996 and additional interest expenses incurred by the US$
13.5 million convertible note in excess of the interest income generated from
the US$900,000 note receivable. Also, a management fee of approximately
US$155,000 has been charged by China Strategic Holdings Limited for the year. As
far as the Operating Subsidiary is concerned, general and administrative
expenses as a percentage of toll revenue remained flat and has remained around
28% for the past two years.
Exchange Gain
- -------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year end
revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past three years due to the
continual strengthening of the Renminbi.
The exchange rates for Renminbi against U.S. Dollars were 8.44, 8.32 and
8.29 of 1994, 1995 and 1996 respectively, representing an appreciation of
Renminbi by 1.4% and 0.4% in 1995 and 1996 respectively, when comparing the
exchange rate at the end of the year with the position at the beginning of the
year. As a consequence, the exchange gain dropped substantially from Rmb 1.1
million a year earlier to Rmb 0.35 million this year.
Net Income
- ----------
Net income fell 20.5% to Rmb 11.9 million in 1996 from Rmb 14.9 million
in 1995. This was attributable to the combined effect of increased general and
administrative expenses, a decrease in exchange gain and a loss from
discontinued operations.
Loss from discontinued operations represents the operating loss of Regal
Rubber and Bell Petroleum up to the date of disposal which amounted to
approximately Rmb 972,000. Net income in 1996 included a net gain on disposal of
investment of approximately Rmb 3,730,000.
Liquidity and Capital Resources
- -------------------------------
In 1996, net cash provided by operating activities and financing
activities was approximately Rmb 3.1 million and Rmb 171.3 million respectively.
Net cash used in investing activities amounted to Rmb 175.1 million, resulting
in a net decrease in cash and cash equivalents of Rmb 0.7 million.
For the past three years, the Company had been able to generate
sufficient cash for its working capital needs. Net cash provided by operating
activities dropped substantially from Rmb 48.9 million in 1995 to Rmb 3.1million
in 1996 principally due to the combination of increases in other receivables by
approximately Rmb 13.4 million and a decrease in accounts payable by Rmb 11.4
million in 1996. The major contributor to the increase in other receivables was
the notes receivable arising from the disposal of Regal Bell and Rubber to New
Regal.
During the year, the Company incurred capital expenditures of Rmb 216.9
million which was financed through bank borrowings and loans from the Chinese
joint venture partner amounting to Rmb 140.0 million and Rmb 30.8million
respectively.
25
<PAGE>
As of December 31 1996, the Operating Subsidiary had outstanding capital
commitments for construction contracts of approximately Rmb 91.8 million. The
Operating Subsidiary has been able to raise funds from banks to finance the
construction of the second and third phases of the toll road , which are
expected to be completed by the end of fiscal year 1997. Hangzhou Toll Road will
collect toll revenue from all three phases of the toll road. Given its sound
credit history and good banking relationships, management believes that the
Operating Subsidiary will have access to adequate borrowing facilities to meet
its cash requirements in the foreseeable future.
In general, there are no restrictions with respect to the Company and
its Operating Subsidiary to incur additional debts for financing capital
expenditures. However, the Operating Subsidiary being a PRC entity is required
to seek approval from the State Administration of Foreign Exchange, if it is to
accept loans or incur debts in US dollars or other foreign currencies. The
Company does not foresee any major limitations in this requirement. There are no
restrictions on the Company's further pledge of its assets.
At the end of 1996, there were cash and cash equivalents total to
US$2,587,000 which comprised of approximately US$1.1 million at the corporate
level and US$1.5 million at the Operating Subsidiary level.
CSH undertook to provide continuing financial support to the Company to
the extent of CSH's proportionate interest until December 31, 1997. The joint
venture has been able to independently ( and without CSH's involvement) procure
substantially all financing for the construction of the Toll Road and has not
required any additional funds from CSH. CSH provided guaranty for $5 million
loans to the joint venture, however, CSH did not provide any other direct
contributions.
Effects of Inflation
The general inflation rate in terms of the Retail Price Index in China
was approximately 21.7%, 14.8%, and 6.3% for 1994, 1995 and 1996 respectively.
Management believes that inflation has not had a significant impact on the
Operating Subsidiary. Inflation has resulted in upward pressure on wages and
salaries for employees and other operating expenses at the Operating Subsidiary.
However, management does not expect inflation to have a material effect on
profit margins and income, since it has been able to pass on such cost
increments to toll road users by increasing toll rates.
RESULTS OF OPERATION - 1995 COMPARED TO 1994
SUMMARY FINANCIAL INFORMATION
- ----------------------------- % CHANGE
(Rmb in thousands) 1994 1995 FROM PRIOR YEAR
---- ---- ---------------
Toll revenue 37,614 37,206 (1.1%)
General and administrative expenses 9,616 10,516 9.4%
Exchange gain 3,154 1,101 (65.1%)
Net income 12,790 14,939 16.8%
Toll Revenue
- ------------
Toll revenue decreased slightly by 1.1% to Rmb 37.2 million in 1995 from
Rmb 37.6 million in 1994. There was no material change in toll fees and traffic
volume during the year.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses went up 9.4% to Rmb 10.5 million. As
a percentage of toll revenue, these costs also increased from 25.6% in 1994 to
28.3% in 1995 which was caused by the slight increase of the operation of
Hangzhou Toll Road during 1995.
26
<PAGE>
Exchange Gain
- -------------
Exchange gain represents the favorable exchange difference arising from
remeasurement of reporting currencies of the different companies within the
Group into Renminbi, which is the Group's functional currency. Upon year end
revaluation of the amount payable to CSH, which were in terms of foreign
currency, exchange gains were recorded in the past two years due to the
continual strengthening of the Renminbi.
The appreciation of the Renminbi in 1995 had slowed down as compared
with the magnitude of upward movement in 1994. As a result, exchange gains in
1995 fell to Rmb 1.1 million from Rmb 3.2 million in 1994. Net Income
Net income increased 16.8% to Rmb 14.9 million in 1995 from Rmb 12.8
million in 1994. This was mainly due to income of approximately Rmb 235,000 from
the discontinued operations as recorded in 1995, versus a loss of approximately
Rmb 4.6 million from discontinued operations recorded in 1994.
Liquidity and Capital Resources
- -------------------------------
In 1995, net cash provided by operating activities and financing
activities was approximately Rmb 48.9 million and Rmb 69.4 million respectively.
Net cash used in investing activities amounted to Rmb 167.1 million, resulting
in a net decrease in cash and cash equivalents of Rmb 48.8 million.
The Company was able to generate sufficient cash for its working capital
needs. Net cash provided by operating activities increased substantially from
approximately Rmb 36.1 million in 1994 to approximately Rmb 48.9 million in
1995, principally due to an increase in accounts payable of Rmb 20.4 million and
partially offset by the reduction in operating income of Rmb 2.7 million in
1995.
During 1995, the Company incurred capital expenditures of Rmb 166.2
million. Funds for capital expenditure primarily came from bank borrowings and
cash provided by operating activities.
As of December 31, 1995, the Operating Subsidiary had outstanding
capital commitments for construction contracts of approximately Rmb 228.3
million. The Operating Subsidiary was able to raise sufficient funds from banks
to finance its projects. Given its sound credit history, future cash generating
ability and superior banking relationships, management believes that the
Operating Subsidiary will have access to adequate borrowing facilities to meet
its cash requirements in the foreseeable future.
Financial Statements and Supplementary Data
- -------------------------------------------
The Financial Statements and Supplementary Data for the Company for the
three months period ended March 31, 1998 (unaudited) and for the three years
ended December 31, 1997, 1996 and 1995 (audited) are set forth hereto and made a
part hereof.
27
<PAGE>
UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 1998
OF
REGAL INTERNATIONAL, INC.
28
<PAGE>
<PAGE>
<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$1.00 = Rmb8.28. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on March 31, 1998 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated statements of
income.
-1-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
AS OF MARCH 31, 1998 (UNAUDITED) AND
AS OF DECEMBER 31, 1997 (AUDITED)
(Amounts in thousands, except number of shares and per share data)
<CAPTION>
March March
31, 1998 31, 1998
------------ ------------
US$ Rmb
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents 1,950 16,144
Prepayments and deferred expenses 141 1,167
Other receivables and other current assets 1,430 11,839
------------ ------------
TOTAL CURRENT ASSETS 3,521 29,150
Prepayments for construction-in-progress 100 830
Property, plant and equipment, net 90,897 752,630
------------ ------------
TOTAL ASSETS 94,518 782,610
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Long-term bank loans - current portion 3,019 25,000
Accounts payable 1,669 13,818
Accrued expenses and other payables 2,637 21,836
Taxes other than income 14 116
Due to immediate holding company 1,878 15,549
Due to related company 6 52
------------ ------------
TOTAL CURRENT LIABILITIES 9,223 76,371
------------ ------------
Long-term loans 41,461 343,299
Convertible note payable 30,145 249,600
Due to Chinese joint venture partner 9,190 76,091
Due to China Strategic Holdings Ltd. 435 3,599
Minority interests 16,650 137,866
SHAREHOLDERS' EQUITY:
Common stock 822 6,806
Additional paid-in capital 1,905 15,773
Accumulated deficit (15,313) (126,795)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (12,586) (104,216)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 94,518 782,610
============ ============
</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$1.00 = Rmb8.28. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on March 31, 1998 or at any other certain
rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
-2-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED, 1998 AND 1997
(Amounts in thousands)
<CAPTION>
1998 1998 1997
------------ ------------ ------------
US$ 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 (decrease) 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.
-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
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
-4-
<PAGE>
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
-5-
<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
-6-
<PAGE>
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
-7-
<PAGE>
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
-8-
<PAGE>
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 respectively (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 and its reporting currency is Renminbi. For financial reporting
purposes, the United States Dollars capital injection amounts have been
translated into Renminbi at the unified exchange rate as of December 31,
1995.
-9-
<PAGE>
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
-10-
<PAGE>
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 estimates 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>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
===========================================
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AS OF DECEMBER 31, 1996 AND 1997
--------------------------------
TOGETHER WITH AUDITORS' REPORTS
-------------------------------
<PAGE>
ARTHUR
ANDERSEN
------------------------------
Arthur Andersen & Co.
Certified Public Accountants
------------------------------
25/F., Wing On Centre
111 Connought Road Central
Hong Kong
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO REGAL INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of Regal
International, Inc. and its subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, cash flows and changes in
shareholders' equity for the years ended December 31, 1995, 1996 and 1997,
expressed in Chinese Renminbi. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Regal International, Inc. and its subsidiaries as of December 31,
1996 and 1997, and the results of their operations and their cash flows for the
years ended December 31, 1995, 1996 and 1997 in conformity with generally
accepted accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
Hong Kong,
April 3, 1998.
-1-
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
- ------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts in thousands, except number of shares and earnings per common share)
<CAPTION>
Years ended December 31,
-------------------------------------------------------------
1995 1996 1997 1997
--------------- -------------- -------------- -------------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Toll revenue 37,206 38,463 45,100 5,447
General and administrative expenses (10,516) (15,419) (32,951) (3,980)
Interest income - 796 1,036 125
Interest expense - (1,023) (23,735) (2,866)
Exchange gain 1,101 350 (16) (2)
--------------- -------------- -------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTERESTS 27,791 23,167 (10,566) (1,276)
Provision for income taxes - - - -
--------------- -------------- -------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTERESTS
27,791 23,167 (10,566) (1,276)
Minority interests (13,087) (13,486) (671) (81)
--------------- -------------- -------------- -------------
INCOME FROM CONTINUING OPERATIONS
14,704 9,681 (11,237) (1,357)
Net gain on disposal of investment - 3,730 - -
Income (Loss) from discontinued operations 235 (1,535) - -
--------------- -------------- -------------- -------------
NET INCOME 14,939 11,876 (11,237) (1,357)
=============== ============== ============== =============
Earnings per common share:
- from continuing operations 0.18 0.16 (0.14) (0.02)
- from discontinued operations - (0.01) - -
--------------- -------------- -------------- -------------
0.18 0.15 (0.14) (0.02)
=============== ============== ============== =============
Earnings per common share (Diluted):
- from continuing operations 0.01 0.01 (0.14) -
- from discontinuing operations - - - -
=============== ============== ============== =============
0.01 0.01 (0.14) -
=============== ============== ============== =============
Weighted average number of common shares
outstanding 81,806,198 81,806,198 81,806,198 81,806,198
=============== ============== ============== =============
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1997 of US$1.00 = Rmb8.28. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1997 or at any
other certain rate.
-2-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF
---------------------------------
DECEMBER 31, 1996 AND 1997
--------------------------
(Amounts in thousands, except number of shares and share data)
<CAPTION>
Years ended December 31,
------------------------------------------------------
1996 1997 1997
----------------- ----------------- ----------------
Rmb Rmb US$
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 21,443 19,875 2,400
Prepayments and deferred expenses 469 1,286 155
Other receivables and other current assets 13,698 12,191 1,472
----------------- ----------------- ----------------
TOTAL CURRENT ASSETS 35,610 33,352 4,027
----------------- ----------------- ----------------
Prepayments for construction-in-progress 9,942 830 100
Property, plant and equipment, net 611,359 760,354 91,831
----------------- ----------------- ----------------
TOTAL ASSETS 656,911 794,536 95,958
================= ================= ================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Long-term bank loans - current portion 58,000 20,000 2,415
Accounts payable 9,767 24,223 2,925
Accrued expenses and other payables 56,325 31,240 3,773
Taxes other than income 114 145 18
Due to immediate holding company - 1,212 146
Due to related companies - 38 5
----------------- ----------------- ----------------
TOTAL CURRENT LIABILITIES 124,206 76,858 9,282
----------------- ----------------- ----------------
Long-term bank loans 179,500 342,799 41,400
Convertible note payable 249,600 249,600 30,145
Due to Chinese joint venture partner 41,318 72,376 8,741
Due to China Strategic Holdings Limited 2,418 3,600 435
Minority interests 142,167 142,838 17,251
Contingency (Note 13)
SHAREHOLDERS' DEFICIT
Common stock, par value US$0.01 each; 150,000,000
shares authorized; 81,806,198 shares outstanding
6,806 6,806 822
Additional paid-in capital 15,773 15,773 1,905
Accumulated deficit (104,877) (116,114) (14,023)
----------------- ----------------- ----------------
TOTAL SHAREHOLDERS' DEFICIT (82,298) (93,535) (11,296)
----------------- ----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT 656,911 794,536 95,958
================= ================= ================
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1997 of US$1.00 = Rmb8.28. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1997 or at any
other certain rate.
-3-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts in thousands)
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
1995 1996 1997 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rmb Rmb Rmb US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Income (loss) from continuing operations 14,704 9,681 (11,237) (1,357)
Net gain on disposal of investment - 3,730 - -
Income (Loss) from discontinued operations 235 (1,535) - -
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Minority interests 13,087 13,486 671 81
Depreciation and amortization 4,298 4,117 18,885 2,281
Loss on disposal of fixed assets 19 - - -
(Increase) Decrease in assets:
Prepayments and deferred expenses 146 (18) (817) (99)
Other receivables and other current assets (239) (13,397) 1,507 182
Increase (Decrease) in liabilities:
Accounts payable 20,355 (11,428) 14,456 1,746
Accrued expenses and other payables (3,708) (1,570) (25,085) (3,029)
Due to immediate holding company - - 1,212 146
Taxes other than income (7) 7 31 4
-------------- -------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 48,890 3,073 (377) (45)
-------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Prepayments for construction-in-progress (982) 19,846 - -
Acquisition of property, plant and equipment (166,230) (216,912) (158,768) (19,175)
Changes in net assets of discontinued operations 80 21,949 - -
-------------- -------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (167,132) (175,117) (158,768) (19,175)
-------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of bank loans 117,445 140,000 188,299 22,741
Repayment of bank loans (55,945) - (63,000) (7,609)
Due to related companies (1,000) (1,500) 38 5
Due to Chinese joint venture partner 10,500 30,818 31,058 3,751
Due to China Strategic Holdings Limited (1,601) 1,997 1,182 143
-------------- -------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 69,399 171,315 157,577 19,031
-------------- -------------- -------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (48,843) (729) (1,568) (189)
Cash and cash equivalents, at beginning of year 71,015 22,172 21,443 2,589
-------------- -------------- -------------- --------------
Cash and cash equivalents, at end of year 22,172 21,443 19,875 2,400
============== ============== ============== ==============
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1997 of US$1.00 = Rmb8.28. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States Dollars at that rate on December 31, 1997 or at any
other certain rate.
-4-
<PAGE>
<TABLE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
(Amounts in thousands, except number of shares)
<CAPTION>
Shares of
Common Stock
(US$0.01 par Preferred and Additional
value) Common Stock Paid-in Accumulated
Capital Deficit Total
--------------- --------------- --------------- --------------- ---------------
Number Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 81,806,198 6,806 (80,646) (131,692) (205,532)
Net income - - - 14,939 14,939
--------------- --------------- --------------- --------------- ---------------
BALANCE AT
DECEMBER 31, 1995 81,806,198 6,806 (80,646) (116,753) (190,593)
Contributed by China
Strategic Holdings
Limited ("CSH") (see
Notes 2 & 12) - - 96,419 - 96,419
Net income - - - 11,876 11,876
--------------- --------------- --------------- --------------- ---------------
BALANCE AT
DECEMBER 31, 1996 81,806,198 6,806 15,773 (104,877) (82,298)
Net loss - - - (11,237) (11,237)
--------------- --------------- --------------- --------------- ---------------
BALANCE AT
DECEMBER 31, 1997 81,806,198 6,806 15,773 (116,114) (93,535)
=============== =============== =============== =============== ===============
</TABLE>
-5-
<PAGE>
REGAL INTERNATIONAL, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
- -----------------------------------------
Regal International, Inc. ("Regal" or the "Company") was incorporated in the
State of Delaware, the United States of America and is listed on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") with an
authorized share capital of US$1,500 or 150 million shares of US$0.01 each.
Pursuant to an Acquisition Agreement dated February 8, 1996 between Regal,
Acewin Profits Limited ("AP"), a British Virgin Islands corporation and China
Strategic Holdings Limited ("CSH"), a company incorporated in Hong Kong and
listed on the Stock Exchange of Hong Kong Limited, Regal acquired all the issued
and outstanding shares of AP at a consideration of US$13.5 million satisfied
through the issuance of a US$13.5 million Convertible Note (the "Convertible
Note A") by Regal to Horler Holdings Limited ("Horler"), a Hong Kong company and
a wholly-owned subsidiary of CSH, bearing interest at 9% per annum after an
initial 6-month interest-free period. AP was a wholly-owned subsidiary of CSH
before the transfer and AP's sole asset was a 55% equity interest in Wuxi CSI
Vibration Isolator Co. Ltd., a Sino-foreign equity joint venture incorporated in
the People's Republic of China, held through an intermediate Hong Kong company,
China Machine (Holdings) Limited.
On March 8, 1996, Horler purchased 40,500,000 shares of common stock
representing 49.51% of the then issued and outstanding share capital of Regal
from a major shareholder of the Company thus becoming its major and controlling
shareholder.
Pursuant to a Purchase Agreement dated September 11, 1996 between Regal, an
unrelated company incorporated in the Netherlands and CSH, Regal sold all the
issued and outstanding shares of AP at a consideration of US$13.95 million. The
proceeds were then used to repay the Convertible Note A principal of US$13.5
million, on September 13, 1996. The realized gain of US$450 on the disposal of
AP has been included as part of "Net gain on disposal of investment " in the
Company's consolidated statements of operations for the year ended December 31,
1996.
-6-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- ---------------------------------------------------
Pursuant to another Asset Purchase Agreement ("the Agreement") dated February 8,
1996 between Regal and Regal (New) International, Inc. ("New Regal"), the
Company sold and transferred the operating assets and real property of Regal
existing as of January 31, 1996 to New Regal in exchange for US$2.5 million and
New Regal's assumption of all liabilities incurred, accrued or arising from the
Operations of Regal prior to the closing date of this transaction, other than
the Convertible Note A.
Pursuant to the Agreement, the US$2.5 million portion of the purchase price was
paid as follows: US$800 in cash and the balance by delivery of two promissory
notes, one in the principal amount of US$900 (the "US$900 Note") and the second
in the principal amount of US$800 (the "US$800 Note"). The US$900 Note bears
interest at 9% per annum and is payable in sixty equal monthly installments of
principal and interest. The US$800 Note bears no interest and is due and payable
in one installment on January 31, 2001. The realized loss in connection with
this transaction amounted to approximately US$69 and has been included as part
of "Income (Loss) from discontinued operations" in the Company's consolidated
statements of operations for the year ended December 31, 1996.
Pursuant to an Acquisition Agreement dated September 10, 1996 between Regal and
Westronix Limited ("WL"), a wholly owned subsidiary of CSH, Regal acquired all
the issued and outstanding shares of WL at a consideration of US$30 million to
be satisfied through the issuance of a US$30 million Convertible Note (the
"Convertible Note B") by Regal to Horler bearing interest at 9% per annum after
an initial 6-month interest-free period. The principal and any unpaid interest
owing on the Convertible Note B can be converted into shares of the Common Stock
of Regal ("Common Stock") at a conversion price of US$0.0302 per share. On
conversion, CSH would hold approximately 96.16% of the outstanding shares of the
Company. WL's sole asset is a 51% equity interest in Hangzhou Zhongce Huantong
Development Co. Ltd., a Sino-foreign equity joint venture incorporated in the
People's Republic of China, held through an intermediate Hong Kong company,
China Construction Holdings Limited.
During 1997, Horler agreed to reduce the interest rate of the convertible Note B
from 9% to 5% per annum for the year ended December 31, 1997.
As of December 31, 1997, the Company had the following subsidiaries:
Westronix Limited ("WL") - a holding company incorporated in the British Virgin
Islands.
China Construction Holdings Limited ("CCHL") - a company incorporated in Hong
Kong, formerly known as China Construction International Group Limited.
Hangzhou Zhongce Huantong Development Co., Ltd. (the "Operating Subsidiary" or
"Hangzhou toll road"), a Sino-foreign equity joint venture located in Hangzhou,
Zhejiang Province, the People's Republic of China ("the PRC").
The Company holds a 100% interest in WL. WL holds a 100% interest in CCHL which
in turn holds a 51% interest in Hangzhou toll road.
-7-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- ---------------------------------------------------
Hangzhou toll road is a Sino-foreign equity joint venture enterprise established
on June 23, 1993, which formally began business operations in September 1993 in
the PRC. The total cash consideration paid by CCHL for its interest in Hangzhou
toll road amounted to Rmb102,000. Tolls collected from the existing portion of
the toll road ("the first phase"), which was injected by the Chinese joint
venture partner, Hangzhou City Transportation Development Company, and cash
injected by CSH will be used to finance the construction of the second and third
phases of the toll road (the "CIP Projects") which were completed by the end of
fiscal year 1997. Hangzhou toll road will collect toll from all three phases of
the toll road starting in 1998.
Key provisions of the joint venture agreement of Hangzhou toll road include:
* the joint venture period is 30 years from the date of formation;
* the profit and loss sharing ratio is the same as the percentage of equity
interest; and
* the Board of Directors consists of 7 members : 4 designated by CCHL and 3
designated by Hangzhou City Transportation Development Company.
The acquisition of the Operating Subsidiary by CCHL was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Operating Subsidiary are included in
the consolidated statements of operations from the effective date of the joint
venture, June 23, 1993. No revenue was generated from the toll road before the
formation of the joint venture.
Hangzhou toll road operates in the PRC and accordingly is subject to special
considerations and significant risks not typically associated with investments
in equity securities of United States and Western European companies. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. These are described further in the
following paragraphs:
POLITICAL ENVIRONMENT
The value of the Company's interests in the Operating Subsidiary may be
adversely affected by changes in policies by the Chinese government including,
among others: changes in laws, regulations or the interpretation thereof;
confiscatory taxation; restrictions on foreign currency conversion, imports or
sources of suppliers; or the expropriation or nationalization of private
enterprises.
ECONOMIC ENVIRONMENT
The economy of the PRC differs significantly from the economies of the United
States and Western Europe in such respects as structure, level of development,
gross national product, growth rate, capital reinvestment, resource allocation,
self-sufficiency, rate of inflation and balance of payments position, among
others. Only recently has the Chinese government encouraged substantial private
economic activities.
-8-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- ---------------------------------------------------
ECONOMIC ENVIRONMENT (CONT'D)
The Chinese economy has experienced significant growth in the past five years,
but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly restrained economic expansion recently. Similar
actions by the central government of the PRC in the future could have a
significant adverse effect on economic conditions in the PRC and the economic
prospects for the Operating Subsidiary and the Company.
In recent years, the PRC economy has experienced periods of rapid economic
expansion and high rates of inflation. More recently, it has been exposed to the
economic crisis in Asia. The central government has from time to time adopted
various measures designed to stabilize the economy, regulate growth and contain
inflation. All such economic events and measures could adversely affect the
Group's results of operations and expansion plans.
FOREIGN CURRENCY EXCHANGE
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result, the
Renminbi is not freely convertible into foreign currencies.
The Operating Subsidiary conducts substantially all of its business in the PRC,
and its financial performance and condition are measured in terms of Renminbi.
The Operating Subsidiary's source of income, toll revenue, is denominated in
Renminbi. Revenue and profits have to be converted to United States Dollars or
Hong Kong Dollars to pay dividends to the Company. Should the Renminbi devalue
against the United States Dollar, such devaluation would have a material adverse
effect on the Company's profits measured in foreign currency and reduce the
foreign currency that could be repatriated by the Operating Subsidiary to the
Company. The Company currently is not able to hedge its Renminbi - United States
Dollar exchange rate exposure in the PRC because neither the banks in the PRC
nor any other financial institutions authorized to engage in foreign exchange
transactions offer forward exchange contracts.
LEGAL SYSTEM
Since 1979, many laws and regulations dealing with economic matters in general
and foreign investment in particular have been enacted in the PRC. However, the
PRC still does not have a comprehensive system of laws and enforcement of
existing laws may be uncertain and sporadic.
TOLL REVENUE
Any increase in toll rates proposed by the Operating Subsidiary is subject to
approval by the Hangzhou Municipal Government and Hangzhou City Transportation
Department. However, there is no assurance that proposed increases will be
approved by these government authorities. If such proposals are denied, profit
margins of the Operating Subsidiary could be reduced.
-9-
<PAGE>
2. BASIS OF PRESENTATION
- -------------------------
The accompanying consolidated financial statements were prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP"). This basis of accounting differs from that used in the statutory
financial statements of the Operating Subsidiary, which were prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to joint venture enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory financial statements of
the Operating Subsidiary to U.S. GAAP included the following:
* Provision of depreciation on roads and bridges.
* Recognition of profit from toll operations on the accrual basis and upon the
commencement of operations. Under PRC GAAP, the profit from toll operations
has been deferred until the entire toll road is completed.
Under PRC GAAP, toll revenue was recognized on receipt basis but the toll
operating profit (representing toll revenue less all operating expenses) was
offset against construction-in-progress each year, as agreed with the local PRC
government authority, until the commencement of operation of the entire toll
road. Under US GAAP, toll revenue was also recognized on the receipt basis,
however, the toll operating profit is recorded in the statement of income. This
is different from the accounting treatment under PRC GAAP. The transfer of CSH's
equity interests in CCHL to WL and the transfer of CSH's equity interests in WL
to Regal were accounted for as reorganizations of companies under common control
similar to a pooling of interests. The accompanying consolidated financial
statements of the Company have been restated to present the transfers of CSH's
interests in CCHL to WL and in WL to Regal as if they had occurred on the date
of formation of the Operating Subsidiary, June 23, 1993. The acquisition of the
Operating Subsidiary was financed by advances from CSH. In 1996, the advances
payable to CSH in relation to the above acquisition were capitalized and treated
as an increase in additional paid-in capital. Due to the specific requirements
of U.S. GAAP for transfers of assets between entities under common control, the
difference of Rmb147,600 between the historical cost of the investment of CSH in
Hangzhou toll road and the Company's acquisition cost was treated as a deemed
dividend paid to CSH in 1993. This has resulted in the Company recording total
shareholders' deficit of RMB82,298 and RMB93,535 as at December 31, 1996 and
1997 respectively. CSH has committed to provide continuing financial support to
the Company to the extent of CSH's interest in the Company for a period ending
on December 31, 1998.
Regal's acquisition of CSH's interests in AP and its subsequent disposal have
been accounted for using the purchase method of accounting. The results of
operations of AP and its subsidiaries have not been consolidated into the
financial statements for the year ended December 31, 1996 given the temporary
nature of the holding.
Income from the historical operations of Regal for the years ended December 31,
1995 and 1996, which included income from oilfield, marine rubber, custom molded
and safety devices, has been reclassified as "Income (Loss) from discontinued
operations" in the consolidated statements of operations as a result of the
disposal of the related net assets to New Regal in 1996.
-10-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------
a. BASIS OF CONSOLIDATION
----------------------
The consolidated financial statements include the financial statements of
the Company and its majority-owned subsidiaries. All material intercompany
balances and transactions have been eliminated on consolidation.
b. TOLL REVENUE
------------
Toll revenue represents the gross receipts at the toll stations, net of
business tax calculated at 3.0% of the gross toll receipts.
c. CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents include cash on hand, demand deposits with banks
and liquid investments with an original maturity of three months or less.
Cash and cash equivalents included United States Dollar deposits of US$1,078
(Rmb8,967) and US$1,200 (Rmb9,937) as of December 31, 1996 and 1997
respectively.
d. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed
using the straight-line method over the assets' estimated useful lives,
taking into account the estimated residual value of 10% (except for roads
and bridges which have no residual value) of the cost of the assets.
Depreciation of fixed assets commences when commercial operations related to
the fixed assets begin. The estimated useful lives are as follows:
Roads and bridges 30 years
Buildings 20 years
Machinery and equipment 5 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Safety equipment 8 years
Construction-in-progress ("CIP" see also Note 4) represents new roads and
bridges under construction and plant and machinery pending installation.
This includes the costs of construction, the costs of plant and machinery
and interest charges (net of interest income), arising from borrowings used
to finance these assets during the period of construction or installation.
Interest capitalized amounted to Rmb25,035 and Rmb35,613 for the years ended
December 31, 1996 and 1997.
-11-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------
d. PROPERTY, PLANT AND EQUIPMENT (CONT'D)
---------------------------------------
The Company recognizes an impairment loss on a fixed asset when evidence,
such as the sum of expected future cash flows (undiscounted and without
interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including
depreciation, and when the carrying amount of the asset cannot be realized
through sale. Measurement of the impairment loss is based on the fair value
of the assets.
The Operating Subsidiary retains the ownership interest in the road and
bridges constructed during the joint venture period of 30 years from the
date of formation. Upon expiration of the joint venture period, in
accordance with the joint venture agreement, the roads and bridges owned by
the Operating Subsidiary will be surrendered to the Chinese joint venture
partner.
e. TAXATION: INCOME TAXES
----------------------
No provision for withholding or U.S. federal income taxes or tax benefits on
the undistributed earnings of the subsidiaries and/or losses of the
Operating Subsidiary has been provided as the earnings of the subsidiaries
have been reinvested and, in the opinion of management, will continue to be
reinvested indefinitely.
WL was incorporated under the laws of the British Virgin Islands, and under
current British Virgin Islands laws, WL is not subject to tax on income or
on capital gains.
The Company and its subsidiaries provide for Hong Kong profits tax on the
basis of their income for financial reporting purposes, adjusted for income
and expense items which are not assessable or deductible for profits tax
purposes. The Company and its subsidiaries have had no profits assessable
for Hong Kong profits tax purposes.
Hangzhou toll road is subject to Chinese income taxes at the applicable tax
rate for Sino-foreign equity joint venture enterprises (currently 33%) on
the taxable income as reported in its statutory accounts adjusted in
accordance with the relevant income tax laws. Since it has a joint venture
term of more than 10 years and is engaged in infrastructure construction,
Hangzhou toll road will be fully exempted from Chinese state unified income
tax of 30% as well as the local income tax of 3% for two years starting from
the first profit-making year followed by a 50% reduction of the Chinese
state unified income tax for the next three years ("tax holiday").
-12-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------
e. TAXATION: INCOME TAXES (CONT'D)
--------------------------------
If the Operating Subsidiary had not been in the tax holiday period, the
Company would have recorded additional income tax expense of Rmb9,901,
Rmb10,176 and Rmb10,696 and net income of the Company would have been
reduced by Rmb5,050, Rmb5,190 and Rmb5,455 for the years ended December 31,
1995, 1996 and 1997 respectively (See Note 13).
The Company provides for deferred income taxes using the liability method,
by which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets
or liabilities in the financial statements.
f. TAXATION: BUSINESS TAX
----------------------
In December 1993, the Chinese government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax
regulations replaced a number of former tax laws and regulations including
the Consolidated Industrial and Commercial Tax ("CICT"). Under these new tax
regulations, the Operating Subsidiary is subject to business tax which
replaced the CICT and is now the principal direct tax on the toll revenue
generated. The business tax rate applicable to the Operating Subsidiary is
3.0%.
g. FOREIGN CURRENCY TRANSLATION
----------------------------
The functional currency of the group and the Company is Renminbi.
The Operating Subsidiary maintains its books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the applicable
unified rates of exchange or the applicable rates of exchange quoted by the
applicable foreign exchange adjustment center ("swap center"), prevailing at
the dates of the transactions. Monetary assets and liabilities denominated
in foreign currencies are translated into Renminbi using the applicable
unified rates of exchange or the applicable swap center rates prevailing at
the balance sheet dates. The resulting exchange differences are included in
the determination of income.
The Company's registered capital is denominated in the United States
Dollars and its reporting currency is Renminbi.For financial reporting purposes,
the United States Dollars capital injection amounts have been translated into
Renminbi
at the unified exchange rate as of December 31, 1995.
-13-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------
g. FOREIGN CURRENCY TRANSLATION (CONT'D)
--------------------------------------
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place either through the
Bank of China or other institutions authorized to buy and sell foreign
currencies, or at a swap center. Before January 1, 1994, the exchange rates
used for transactions through the Bank of China and other authorized
institutions were set by the government (the "official exchange rate") from
time to time whereas the exchange rates available at the swap centers (the
"swap center rates") were determined largely by supply and demand. The
Chinese government announced the unification of the two-tier exchange rate
systems in December 1993 effective January 1, 1994. The unification brought
the official exchange rate of the Renminbi in line with the swap center
rate. The unification did not have a major impact on the consolidated
financial statements of the Company under U.S. GAAP.
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and remittance
of earnings outside of the PRC are subject to the availability of foreign
currency which is dependent on the foreign currency denominated earnings of
the entity or must be arranged through a swap center or designated foreign
exchange banks. Approval for exchange at the swap center is granted to joint
venture enterprises for valid reasons such as the purchase of imported
materials and remittance of earnings.
The official exchange rates, unified exchange rates and Shanghai swap center
rates as of December 31, 1995, 1996 and 1997 were as follows:
1995 1996 1997
-------- -------- --------
Rmb equivalents of US$1
Official exchange rate N/A N/A N/A
Unified exchange rate 8.32 8.29 8.28
Shanghai swap center rate 8.32 8.29 8.28
h. DEDICATED CAPITAL
-----------------
In accordance with the relevant laws and regulations for Sino-foreign equity
joint venture enterprises, the Operating Subsidiary maintains discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund and a staff welfare and incentive bonus fund. The Board of
Directors of the Operating Subsidiary will determine on an annual basis the
amount of the annual appropriations to dedicated capital. For the period
from January 1, 1995 to December 31, 1997, the Operating Subsidiary did not
report any profits in the statutory financial statements, and accordingly,
no appropriation to dedicated capital has been made.
-14-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- --------------------------------------------------------
i. USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
j. EARNINGS PER COMMON SHARE
-------------------------
The calculation of basic earnings per common share is based on the weighted
average number of common shares outstanding during the year ended December
31, 1995, 1996 and 1997. The calculation of diluted earnings per common
share is based on the common shares outstanding during the years ended
December 31, 1995, 1996 and 1997 adjusted for the assumed conversion of the
Company's US$30 million convertible Note B as mentioned in Note 1 above and
exercise of the stock options mentioned in Note 11.
The number of shares used in the computation was as follows:
1995 1996 1997
--------------- --------------- ---------------
Basic EPS computation 81,806,198 81,806,198 81,806,198
Diluted EPS computation 1,076,293,694 1,075,293,694 81,806,198
k. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company values its financial instruments as required by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments". The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. The estimates presented herein are not
necessarily indicative of amounts that the Company could realize in a
current market exchange.
The carrying amounts of cash and cash equivalents, and long-term debt are
reasonable estimates of their fair value. The interest rates on the
Company's long-term debt approximate that which would have been available at
December 31, 1997 for debt of similar remaining maturity.
-15-
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------
December 31, December 31,
1996 1997
------------ ------------
Rmb Rmb
Roads and bridges 110,784 763,053
Buildings 148 2,033
Machinery and equipment 3,804 3,998
Motor vehicles 3,084 3,328
Furniture, fixtures and office equipment 38 59
Safety equipment - 14,129
Construction-in-progress 505,734 4,520
LESS: Accumulated depreciation (12,233) (30,766)
------------ ------------
Net book value 611,359 760,354
============ ============
5. LONG-TERM BANK LOANS
--------------------
Long-term bank loans, all of which are unsecured, bear average interest rates of
approximately 14.66% and 14.25% as of December 31, 1996 and 1997 respectively
and are repayable as follows:
December 31, December 31,
1996 1997
------------ ------------
Rmb Rmb
1997 58,000 -
1998 25,000 20,000
1999 54,500 104,500
2000 45,000 100,000
2001 55,000 82,936
2002 - 49,863
2003 - 5,500
------------ ------------
Total 237,500 362,799
============ ============
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb159,500 and Rmb347,799 as of December 31, 1996 and 1997 respectively are
guaranteed by related companies.
-16-
<PAGE>
6. DISTRIBUTION OF PROFITS
- ---------------------------
Dividends from the Operating Subsidiary will be declared based on the profits as
reported in the statutory financial statements. Such profits will be different
from the amounts reported under U.S. GAAP. As of December 31, 1997, the
Operating Subsidiary had no available retained earnings for distribution.
In the opinion of management, any undistributed earnings of the Operating
Subsidiary will continue to be reinvested indefinitely.
7. PROVISION FOR INCOME TAXES
- ------------------------------
The reconciliation of the effective income tax rate based on income before
provision for income taxes and minority interests stated in the consolidated
statements of operations to the statutory income tax rate in Hong Kong, the
British Virgin Islands, the PRC and the U.S. is as follows:
1995 1996 1997
---------- ---------- ----------
Weighted average statutory tax rate 31.6% 35.5% 33.0%
Effect of tax holiday (31.6%) (35.5%) (33.0%)
---------- ---------- ----------
Effective tax rate - - -
========== ========== ==========
Provision for income taxes consists of:
1995 1996 1997
---------- ---------- ----------
Rmb Rmb Rmb
Current - - -
Deferred - 2,082 8,765
Adjustment of valuation allowance - (2,082) (8,765)
---------- ---------- -----------
- - -
========== ========== ===========
The valuation allowance refers to the portion of the deferred tax assets that
are not currently realizable. The realization of these benefits depends upon the
ability of the Company to generate income in future years. No provision or
benefit for deferred income taxes was recognized in 1995, 1996 and 1997.
-17-
<PAGE>
8. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
- -----------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of CSH
in an amount of Rmb75,000 and Rmb56,000 as of December 31, 1996 and 1997
respectively.
The Company paid management fees of US$155 (Rmb1,284) and US$155 (Rmb1,284) to
CSH during 1996 and 1997 for administrative services rendered on behalf of the
Company by CSH.
Amounts due to immediate holding company represented interest payable on
Convertible Note B mentioned in Note 1.
9. DUE TO CHINESE JOINT VENTURE PARTNER
- ----------------------------------------
Balances due to the Chinese joint venture partner as of December 31, 1996 and
1997 represented amounts borrowed from the Chinese joint venture partner to
finance the CIP Projects.
These amounts are unsecured, bear interest at 13.18% and have no fixed repayment
date.
10. RETIREMENT PLANS
- --------------------
As stipulated by the regulations of the Chinese government, all of the Chinese
staff of the Operating Subsidiary are entitled to an annual pension on
retirement, which is equal to their basic salaries at their retirement dates.
The Chinese government is responsible for the pension liability to retired
staff. The Operating Subsidiary is only required to make specified contributions
to the state-sponsored retirement plan calculated at 23% of the basic salary of
the staff. The expense reported in the consolidated financial statements related
to these arrangements was Rmb64, Rmb99 and Rmb191 for the years ended December
31, 1995, 1996 and 1997 respectively.
11. STOCK OPTIONS
- -----------------
The following tables summarize the movement of share options of the Company.
During 1987 and 1988, the Company issued five-year Common Stock options in
conjunction with its financing activities to various promissory note holders and
other selected creditors. During 1989, the Company issued five and ten-year
stock options in an additional financing and extension of debt.
-18-
<PAGE>
11. STOCK OPTIONS (CONT'D)
- --------------------------
COMMON STOCK OPTIONS
1996 1997
------------ ------------
Shares under option at beginning of year 150,000 150,000
Expired - -
------------ ------------
Shares under option at end of year 150,000 150,000
============ ============
Average exercise price of outstanding options $ 0.156 $ 0.156
============ ============
Exercisable at end of year 150,000 150,000
============ ============
In December 1991 the Board of Directors approved the issuance of Common Stock
options to members of the Board of Directors. The options were to expire in five
years and are to be issued at 110% of market value on the date of grant.
COMMON STOCK OPTIONS
1996 1997
------------ ------------
Options at beginning of year 1,000,000 -
Issued - -
Expired (1,000,000) -
------------ ------------
Shares under option at end of year - -
============ ============
Average exercise price of outstanding options - -
============ ============
Exercisable at end of year - -
============ ============
12. OTHER SUPPLEMENTAL INFORMATION
- ----------------------------------
a) The following items are included in the consolidated statements of
operations:
December 31, December 31, December 31,
1995 1996 1997
------------ ------------ ------------
Rmb Rmb Rmb
Business tax 1,171 1,211 1,424
-19-
<PAGE>
12. OTHER SUPPLEMENTAL INFORMATION (CONT'D)
- --------------------------------------------
b) Non-cash investing and financing activities:
December 31, December 31, December 31,
1995 1996 1997
------------ ------------ ------------
Rmb Rmb Rmb
Capitalization of advances
payable to CSH as
additional paid-in capital
(see also Note 2) - 96,419 -
13. CONTINGENCY
- ---------------
The Operating Subsidiary has obtained an approval from the local government to
offset the toll profit collected from the first and second phases of the toll
road against the construction-in-progress balances under PRC GAAP until the CIP
Projects are completed. Thus, the tax holiday has been deferred until the CIP
Projects are completed. As such, the Operating Subsidiary reported zero net
profits in its statutory financial statements starting from the commencement of
operations in 1993 and will continue to do so until the CIP Projects are
completed at the end of 1997. The Company plans to record the net profits offset
against the construction-in-progress account during 1993 to 1997 as income for
statutory purposes during 1998 and 1999 fiscal years (i.e. the first two tax
exemption years of the tax holiday). This plan is subject to the approval of the
local tax bureau. Should such approval not be obtained from the local tax
bureau, a tax liability amounting to approximately Rmb5 million and Rmb5.3
million for the years ended December 31, 1996 and 1997 respectively may arise.
In the opinion of the directors, it is not probable that such a liability will
arise.
-20-
<PAGE>
Financial Statements of Westronix Limited
- -----------------------------------------
WESTRONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AS OF DECEMBER 31,1994 AND 1995
-------------------------------
TOGETHER WITH AUDITORS' REPORTS
-------------------------------
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Westronix Limited:
We have audited the accompanying consolidated balance sheets of Westronix
Limited (incorporated in the British Virgin Islands) and its subsidiaries as of
December 31, 1994 and 1995, and the related consolidated statements of income,
cash flows and changes in shareholders' equity for the period from June 23, 1993
to December 31, 1993 and the years ended December 31, 1994 and 1995, expressed
in Chinese Renminbi.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above present
fairly, in all material respects, the financial position of Westronix Limited
and its subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for the period from June 23, 1993 to December
31, 1993 and the years ended December 31, 1994 and 1995 in conformity with
generally accepted accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
Hong Kong,
November 5,1996.
1
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
--------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30,1995 AND 1996 (UNAUDITED)
----------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Period from
June 23,1993
to Year ended December 31, Period ended June 30,
December 31,
------------- ---------------------------- -------------------------------
1993 1994 1995 1995 1995 1996 1996
------------- -------- -------- -------- -------- -------- -------
Rmb Rmb Rmb US$ Rmb Rmb US$
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Toll revenue 10,462 37,614 37,206 4,472 19,635 18,410 2,213
General and administrative
expenses (2,687) (9,615) (10,517) (1,264) (5,165) (5,020) (603)
Exchange gain 378 3,494 1,417 170 1,417 37 4
------------- -------- -------- -------- -------- -------- -------
Income before income
taxes and minority
interests 8,153 31,493 28,106 3,378 15,887 13,427 1,614
Provision for income taxes - - - - - - -
------------- -------- -------- -------- -------- -------- -------
Income before minority
interests 8,153 31,493 28,106 3,378 15,887 13,427 1,614
Minority interests (3,817) (13,776) (13,087) (1,573) (7,095) (6,566) (789)
------------- -------- -------- -------- -------- -------- -------
Net income 4,336 17,717 15,019 1,805 8,792 6,861 825
============= ======== ======== ======== ======== ======== ========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on June 30,1996 of US$1.00 = Rmb8.32. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on December 31, 1995 and June 30, 1996 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated statements of
income.
2
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
CONSOLIDATED BALANCE SHEETS AS OF
----------------------------------
DECEMBER 31, 1994, 1995 (AUDITED) AND
-------------------------------------
AS OF JUNE 30, 1996 (UNAUDITED)
(Amounts in thousands, except number of shares and share data)
<CAPTION>
December 31, June 30,
--------------------------------------------------------------
1994 1995 1995 1996 1996
---------- ---------- ---------- ---------- ----------
Rmb Rmb US$ Rmb US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents 71,015 22,172 2,665 7,613 915
Prepayments and deferred expenses 598 452 54 1,258 151
Other receivables and
other current assets 60 300 36 247 30
---------- ---------- ---------- ---------- ----------
Total current assets 71,673 22,924 2,755 9,118 1,096
---------- ---------- ---------- ---------- ----------
Prepayments for
construction-in- progress 28,807 29,789 3,580 17,894 2,151
Property, plant and equipment, net 179,883 350,861 42,171 422,352 50,763
---------- ---------- ---------- ---------- ----------
Total assets 280,363 403,574 48,506 449,364 54,010
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
Current liabilities
Short-term bank loans 8,000 - - 10,000 1,202
Accounts payable 840 21,195 2,547 16,879 2,029
Accrued expenses and
other payables 4,832 10,191 1,225 3,909 468
Taxes other than income 115 107 13 101 12
Due to related companies 2,500 1,300 180 - -
---------- ---------- ---------- ---------- ----------
Total current liabilities 16,287 32,993 3,965 30,889 3,711
---------- ---------- ---------- ---------- ----------
Long-term bank loans 28,000 97,500 11,719 127,500 15,325
Due to Chinese joint
venture partner - 10,500 1,262 15,000 1,803
Due to China Strategic
Holdings Limited 98,441 96,940 11,639 96,806 11,635
Minority interests 115,594 128,691 15,466 135,248 16,256
Commitments and contingency (Notes 6 & 13)
Shareholders' equity:
Common stock, par value
US$1 each; 50,000
shares authorized;
1 share outstanding 1 1 1 1 1
Retained earnings 22,040 37,059 4,454 43,920 5,279
---------- ---------- ---------- ---------- ----------
Total shareholders' equity 22,041 37,060 4,455 43,921 5,280
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity 280,363 403,574 48,506 449,364 54,010
========== ========== ========== ========== ==========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on June 30, 1996 of US$1.00 = Rmb8.32. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on December 31, 1995 and June 30, 1996 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
-----------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Period from
June 23,1993
to
December 3l, Year ended December 31, Period ended June 30,
---------- ------------------------------------ ------------------------------------
1993 1994 1995 1995 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
Rmb Rmb Rmb US$ Rmb Rmb US$
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 4,336 17,717 15,019 1,805 8,792 6,861 825
Adjustments to reconcile
net income to net cash
provided by operating activities:
Minority interests 3,817 13,776 13,087 1,573 7,095 6,566 789
Depreciation and amortization 963 3,847 4,173 502 2,160 2,102 253
Loss on disposal of fixed assets - - 19 2 - - -
(Increase) decrease in assets:
Prepayments and deferred expenses (581) (42) 91 11 (90) (843) (101)
Other receivables and other current assets (1,816) 1,755 (239) (29) (208) 53 6
Increase (decrease:) in liabilities:
Accounts payable - 840 20,355 2,447 3,536 (4,316) (519)
Accrued expenses and other payables 205 1,649 (3,526) (424) 787 (8,874) (1,067)
Taxes other than income 98 17 (9) (1) (23) (5) (1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 7,022 39,559 48,970 5,886 22,049 1,544 185
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash flows from investing activities
Prepayments for
construction-in-progress (567) (28,240) (982) (118) (6,302) 11,895 1,430
---------- ---------- ---------- ---------- ---------- ---------- ----------
Acquisition of property,
plant and equipment (39,569) (41,681) (166,230) (19,980) (43,550) (70,964) (8,530)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash used in investing activities (40,136) (69,921) (167,212) (20,098) (49,852) (59,069) (7,100)
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
<TABLE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
------------------------------------------------------------
(Amounts in thousands)
<CAPTION>
Period from
June 23,1993
to
December 3l, Year ended December 31, Period ended June 30,
---------- ------------------------------------ ------------------------------------
1993 1994 1995 1995 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
Rmb Rmb Rmb US$ Rmb Rmb US$
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds of bank loans 10,000 35,500 114,945 13,816 9,000 40,000 4,808
Repayment of bank loans - (9,500) (33,445) (6,424) (8,000) - -
Due to related companies - 2,500 (1,000) (120) (2,500) (1,500) (180)
Due to Chinese joint venture partner 23,748 (23,748) 10,500 1,262 5,500 4,500 541
Due to China Strategic Holdings Limited (373) 68,252 (1,601) (192) (1,414) (34) (4)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities 33,375 73,004 69,399 8,342 2,586 42,966 5,165
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents 261 42,642 (48,843) (5,870) (25,217) (14,559) (1,750)
Cash and cash equivalents, at
beginning of period/year 28,112 28,373 71,015 8,535 71,015 22,172 2,665
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, at
end of period/year 28,373 71,015 22,172 2,665 45,798 7,613 915
========== ========== ========== ========== ========== ========== ==========
</TABLE>
Translation of amounts from Renminbi (Rmb) into United States Dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on June 30, 1996 of US$1.00 = Rmb8.32. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States Dollars at that rate on December 31, 1995 and June 30, 1996 or at
any other certain rate.
The accompanying notes are an integral part of these consolidated statements of
cash flows.
5
<PAGE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE PERIOD FROM JUNE 23, 1993 TO DECEMBER 31, 1993 AND
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (AUDITED) AND
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
(Amounts in thousands, except number of shares)
Shares of
Common Common Retained
Stock Stock Earnings Total
-------- -------- -------- --------
Number Rmb Rmb Rmb
Balance at June 23, 1993 1 1 (13) (12)
Net income - - 4,336 4,336
-------- -------- -------- --------
Balance at December 31, 1993 1 1 4,323 4,324
-------- -------- -------- --------
Net income - - 17,717 17,717
-------- -------- -------- --------
Balance at December 31, 1994 1 1 22,040 22,041
-------- -------- -------- --------
Net income - - 15,019 15,019
-------- -------- -------- --------
Balance at December 31, 1995 1 1 37,059 37,060
Net income (unaudited) - - 6,861 6,861
-------- -------- -------- --------
Balance at June 30,1996
(unaudited) 1 1 43,920 43,921
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements of
changes in shareholders equity.
6
<PAGE>
WESTRONIX LIMITED AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
- --------------------------------------------
Westronix Limited ("the Company") was incorporated in the British Virgin Islands
on July 3, 1996 with an authorized share capital of 50,000 common shares with a
par value of US$1 each. One share was issued at par value to China Strategic
Holdings Limited ("CSH") (formerly known as China Strategic Investment Limited),
a company incorporated in Hong Kong whose shares are listed on the Stock
Exchange of Hong Kong.
The Company is a holding company established to hold a 100% interest in China
Construction International Group Limited ("CCIG" - formally known as China
Construction International Limited and Cassia Taste Limited), a company
incorporated in Hong Kong. CCIG, in turn, holds a 51% interest in Hangzhou
Zhongche Huantong Development Co., Ltd. (the "Operating Subsidiary" or "Hangzhou
toll road"). The Company's interest in Hangzhou toll road was transferred from
CSH pursuant to a shareholders' resolution dated August 28, 1996.
Hangzhou toll road is a Sino-foreign equity joint venture enterprise established
on June 23, 1993, which formally began business operation in September 1993 in
the City of Hangzhou, Zhejiang Province in the People's Republic of China (the
"PRC"). The total cash consideration paid by CCIG for its interest in Hangzhou
toll road amounted to Rmb102,000 at the date of acquisition. Tolls collected
from the existing portion of the toll road ("the first phase"), which was
injected by the Chinese joint venture partner, Hangzhou City Transportation
Development Company, and cash injected by CSH will be used to finance the
construction of second and third phases of the toll road (the "CIP Projects")
which are expected to be completed by the end of fiscal year 1997. Hangzhou toll
road will collect toll from all three phases of the toll road after the CIP
Projects are completed.
Key provisions of the joint venture agreement of Hangzhou toll road include:
* the joint venture period is 30 years from the date of formation;
* the profit and loss sharing ratio is the same as the percentage of
equity interest; and
* the Board of Directors consists of 7 members: 4 designated by CCIG and 3
designated by Hangzhou City Transportation Development Company, the Chinese
joint venture partner of Hangzhou toll road.
7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -------------------------------------------------
The acquisition of the Operating Subsidiary by CCIG was accounted for by the
purchase method of accounting. The tangible assets were valued at their
estimated fair value. The results of the Operating Subsidiary are included in
the consolidated statements of income from the effective date of the joint
venture, June 23, 1993. No revenue was generated from the toll road before the
formation of the joint venture.
The transfer of CSH's interest in CCIG to the Company was accounted for as a
reorganization of companies under common control and similar to a pooling of
interests. The accompanying consolidated financial statements of the Company
have been restated to present the transfer of CSH's interest in CCIG to the
Company as if it had occurred on June 23, 1993.
Hangzhou toll road operates in the PRC and accordingly is subject to special
considerations and significant risks not typically associated with investments
in equity securities of United States and Western European companies. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. These are described further in the
following paragraphs:
Political Environment
The value of the Company's interests in the Operating Subsidiary may be
adversely affected by changes in policies by the Chinese government including,
among others: changes in laws, regulations or the interpretation thereof;
confiscatory taxation; restrictions on foreign currency conversion, imports or
sources of suppliers; or the expropriation or nationalization of private
enterprises.
Economic Environment
The economy of the PRC differs significantly from the economies of the United
States and Western Europe in such respects as structure, level of development,
gross national product, growth rate, capital reinvestment, resource allocation,
self-sufficiency, rate of inflation and balance of payments position, among
others. Only recently has the Chinese government encouraged substantial private
economic activities.
The Chinese economy has experienced significant growth in the past five years,
but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly restrained economic expansion recently. Similar
actions by the central government of the PRC in the future could have a
significant adverse effect on economic conditions in the PRC and the economic
prospects for the Operating Subsidiary and the Company.
8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- ---------------------------------------------------
Foreign Currency Exchange
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result, the
Renminbi is not freely convertible into foreign currencies.
The Operating Subsidiary conducts substantially all of its business in the PRC,
and its financial performance and condition are measured in terms of Renminbi.
The Operating Subsidiary's source of income, toll revenue, is denominated in
Renminbi. Revenues and profits have to be converted to United States Dollars or
Hong Kong Dollars to pay dividends to the Company. Should the Renminbi devalue
against the United States Dollar, such devaluation would have a material adverse
effect on the Company's profits measured in foreign currency and reduce the
foreign currency that could be repatriated by the Operating Subsidiary to the
Company. The Company currently is not able to hedge its Renminbi - United States
Dollars exchange rate exposure in the PRC because neither the banks in the PRC
nor any other financial institution authorized to engage in foreign exchange
transactions offer forward exchange contracts.
Legal System
Since 1979, many laws and regulations dealing with economic matters in general
and foreign investment in particular have been enacted in the PRC. However, the
PRC still does not have a comprehensive system of laws and enforcement of
existing laws may be uncertain and sporadic.
Toll Revenue
Any increase in toll rates proposed by the Operating Subsidiary is subject to
approval by the Hangzhou Municipal Government and Hangzhou City Transportation
Department. However, there are no assurances that such proposal will be approved
by these government authorities. If such approvals proposals are denied, profit
margins of the operating subsidiary will be reduced.
9
<PAGE>
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP"). This basis of accounting differs from that used in the statutory
financial statements of the Operating Subsidiary, which were prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to joint venture enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory financial statements of
the Operating Subsidiary to U.S. GAAP included the following:
* Restatement of monetary assets and liabilities denominated in foreign
currencies to reflect the exchange rates prevailing at the balance sheet dates;
and
* Recognition of toll revenue on the accrual basis and upon the commencement of
operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements of the
Company and its majority-owned subsidiaries. All material intercompany balances
and transactions have been eliminated on consolidation.
b. Toll revenue
------------
Toll revenue represents the gross receipts at the toll stations, net of business
tax calculated at 3.0% of the gross toll receipts
10
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
c. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, demand deposits with banks and
liquid investments with an original maturity of one year or less. Cash and cash
equivalents included United States Dollar deposits of US$8,280 (Rmb69,733),
US$1,078 (Rmb8,967) and US$128 (Rmbl,071) (unaudited) as of December 31, 1993,
1994, 1995 and June 30, 1996 respectively. Deposits of US$700 (Rmb5,824) as of
December 31, 1995 were used to guarantee bank loans of a related company.
d. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of property, plant and equipment is computed using the straight
line method over the assets' estimated useful lives, taking into account the
estimated residual value of 10% (except for roads and bridges which have no
residual value) of the cost of the assets. The estimated useful lives are as
follows:
Roads and bridges 30 years
Buildings 20 years
Machinery and equipment 5 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress ("CIP" see Note 4) represents new roads and bridges
under construction and plant and machinery pending installation. This includes
the costs of construction, the costs of plant and machinery and interest charges
(net of interest income), arising from borrowings used to finance these assets
during the period of construction or installation. Interest capitalized amounted
to Rmb1,752, Rmb6,778, Rmb2,566 (unaudited) and Rmb9,148 (unaudited)
respectively for the period ended December 31, 1993 and for the years/periods
ended December 31, 1994, 1995 and June 30, 1996 respectively.
11
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
e. Taxation: Income Taxes
----------------------
The Company was incorporated under the laws of the British Virgin Islands, and
under current British Virgin Islands law, the Company is not subject to tax on
income or on capital gains.
The Company and its subsidiaries provide for Hong Kong profits tax on the basis
of its income for financial reporting purposes, adjusted for income and expense
items which are not assessable or deductible for profits tax purposes. The
Company and its subsidiaries has had no profits assessable for Hong Kong profits
tax purposes.
Hangzhou toll road is subject to Chinese income taxes at the applicable tax rate
for Sino-foreign equity joint venture enterprises (currently 33%) on the taxable
income as reported in its statutory accounts adjusted in accordance with the
relevant income tax laws. Since it has a joint venture term of not less than 10
years and is engaged in infrastructure construction, Hangzhou toll road will be
fully exempt from Chinese state unified income tax of 30% as well as the local
income tax of 3% for two years starting from the first profit-making year
followed by a 50% reduction of the Chinese state unified income tax for the next
three years ("tax holiday").
If the Operating Subsidiary had not been in the tax holiday period, the Company
would have recorded additional income tax expense of Rmb3,236, Rmb10,000,
Rmb9,901, Rmb5,322 (unaudited) and Rmb4,966 (unaudited) and net income of the
Company would have been reduced by Rmb1,651, Rmb,5,100, Rmb5,050, Rmb2,714 and
Rmb2,533 (unaudited) for the period/years ended December 31, 1993, 1994, 1995
and for the six months ended June 30, 1996 respectively (See Note 13)
The Company provides for deferred income taxes using the liability method, by
which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as current
or non-current based upon the classification of the related assets or
liabilities in the financial statements.
12
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
f. Taxation: Business Tax
----------------------
Prior to December 31, 1993, the Operating Subsidiary was subject to Consolidated
Industrial and Commercial Tax ("CICT") at a rate of 3.03% on the gross toll
revenue.
In December 1993, the Chinese government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax regulations
replaced a number of former tax laws and regulations including the Consolidated
Industrial and Commercial Tax. Under these new tax regulations, the Operating
Subsidiary is subject to business tax which replaced the CICT and is now the
principal direct tax on the toll revenue generated. The business tax rate
applicable to the Operating Subsidiary is 3.0%.
g. Foreign Currency Translation
----------------------------
The Operating Subsidiary maintains its books and records in Renminbi. Foreign
currency transactions are translated into Renminbi at the applicable unified
rates of exchange or the applicable rates of exchange quoted by the applicable
foreign exchange adjustment center ("swap center"), prevailing at the dates of
the transactions. Monetary assets and liabilities denominated in foreign
currencies are translated into Renminbi using the applicable unified rates of
exchange or the applicable swap center rates prevailing at the balance sheet
dates. The resulting exchange differences are included in the determination of
income.
The Company's registered capital and reporting currency are denominated in
United States Dollars. For financial reporting purposes, the United States
Dollars capital injection amounts have been translated into Renminbi at the swap
centre rates prevailing at the capital injection date.
The Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place either through the Bank
of China or other institutions authorized to buy and sell foreign currencies or
at a swap center. Before January 1, 1994, the exchange rates used for
transactions through the Bank of China and other authorized institutions were
set by the government (the "official exchange rate") from time to time whereas
the exchange rates available at the swap centers (the "swap center rates") were
determined largely by supply and demand. The Chinese government announced the
unification of the two-tier exchange rate systems in December 1993 effective
January 1, 1994. The unification brought the official exchange rate of the
Renminbi in line with the swap center rate. The unification did not have a major
impact on the consolidated financial statements of the Company under U.S. GAAP.
13
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- --------------------------------------------------------
g. Foreign Currency Translation (Cont'd)
--------------------------------------
Sino-foreign equity joint venture enterprises can enter into exchange
transactions at swap centers. Payment for imported materials and remittance of
earnings outside of the PRC are subject to the availability of foreign currency
which is dependent on the foreign currency denominated earnings of the entity or
must be arranged through a swap center or designated foreign exchange banks.
Approval for exchange at the swap center is granted to joint venture enterprises
for valid reasons such as the purchase of imported materials and remittance of
earnings.
The official exchange rates, unified exchange rates and Shanghai swap center
rates as of December 31, 1993, December 31, 1994 and December 31, 1995 were as
follows:
December 31,
----------------------------------------
1993 1994 1995
------------ ------------ ------------
Rmb equivalents of US$1
Official exchange rate 5.80 N/A N/A
Unified exchange rate N/A 8.44 8.32
Shanghai swap center rate 8.70 8.44 8.32
h. Dedicated Capital
-----------------
In accordance with the relevant laws and regulations for Sino-foreign equity
joint venture enterprises, the Operating Subsidiary maintains discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund and a staff welfare and incentive bonus fund. The Board of
Directors of the Operating Subsidiary will determine on an annual basis the
amount of the annual appropriations to dedicated capital. For the period from
June 23, 1993 to June 30, 1996, the Operating Subsidiary did not report any
profits in the statutory financial statements, and accordingly, no appropriation
to dedicated capital has been made.
14
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
- -----------------------------------
December 31, June 30,
------------------------------------
1994 1995 1996
---------- ---------- ----------
Rmb Rmb Rmb
(unaudited)
Roads and bridges 108,372 109,020 112,216
Buildings 146 148 148
Machinery and equipment 370 475 529
Motor vehicles 2,121 2,121 2,162
Furniture, fixtures and office
equipment 36 38 38
Construction-in-progress 73,365 247,346 317,435
Less: Accumulated depreciation (4,527) (8,287) (10,176)
---------- --------- ----------
Net book value 179,883 350,861 422,352
========== ========= ==========
5. LONG-TERM BANK LOANS
- ---------------------------
Long-term bank loans, all of which were unsecured, bear average interest rates
of approximately 14.87% as of December 31,1995. December 31,1993 and 1994 -
13.86%, June 30,1996 - 14.54% (unaudited) and are repayable as follows:
December 31, June 30,
1995 1996
------------- ------------
Rmb Rmb
(Unaudited)
1997 58,000 58,000
1998 20,000 25,000
1999 19,500 39,500
2001 - 5,000
----------- ----------
Total 97,500 127,500
=========== ==========
All the long-term bank loans are denominated in Renminbi. Loans amounting to
Rmb19,500 and Rmb49,500 (unaudited) as of December 31, 1995 and June 30, 1996
respectively, are guaranteed by a related company.
6. COMMITMENTS
- ------------------
As of December 31, 1995, the Operating Subsidiary had outstanding capital
commitments for construction contracts contracted for its CIP projects amounting
to approximately Rmb228,270.
15
<PAGE>
7. DISTRIBUTION OF PROFIT
- ----------------------------
Dividends from the Operating Subsidiary will be declared based on the profits as
reported in the statutory financial statements. Such profits will be different
from the amounts reported under U.S. GAAP. As of December 31, 1995, and June 30,
1996 (unaudited), the Operating Subsidiary had no available retained earnings
for distribution.
8. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
- -------------------------------------------------
The Operating Subsidiary guaranteed bank borrowings of a related company of CSH
of Rmbl0,000, and Rmb5l,000 (unaudited), as of December 31, 1995 and June
30,1996 respectively.
9. DUE TO CHINESE JOINT VENTURE PARTNER
- ------------------------------------------
The amounts due to Chinese joint venture partner as at December 31, 1993
represented the excess of the book value of the net assets contributed by the
Chinese joint venture partner upon the formation of the Operating Subsidiary
over its share of the registered capital of the joint venture enterprise. This
was repaid in 1994. Balances due to the Chinese joint venture as at December 31,
1995 and June 30, 1996 (unaudited) represented amounts borrowed from the Chinese
joint venture partner to finance the CIP Projects.
These amounts are unsecured, non-interest bearing and have no fixed repayment
date.
10. RETIREMENT PLANS
- -----------------------
As stipulated by the regulations of the Chinese government, all of the Chinese
staff of the Operating Subsidiary are entitled to an annual pension on
retirement, which is equal to their basic salaries at their retirement dates.
The Chinese government is responsible for the pension liability to retired
staff. The Operating Subsidiary is only required to make specified contributions
to the state-sponsored retirement plan calculated at 23% (for 1994, 1995 and
1996) of the basic salary of the staff. The expenses reported in the
consolidated financial statements related to these arrangements were Rmb34,
Rmb64, Rmb32 (unaudited) and Rmb30 (unaudited) for the years/periods ended
December 31, 1994 and 1995 and six months ended June 30, 1995, 1996
respectively.
16
<PAGE>
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
- ---------------------------------------------------------
Period from June Six months
23, 1993 to ended
December 3l, Year ended December 31, June 30,
----------------------- -----------
1993 1994 1995 1996
----------- --------- ----------- -----------
Rmb Rmb Rmb Rmb
(Unaudited)
Non-cash investing and
financing activities:
Paid-in capital from the
Chinese joint
venture partner
contributed through
the injection of
fixed assets 98,000 - - -
12. OTHER SUPPLEMENTAL INFORMATION
- -------------------------------------
The following items are included in the consolidated statements of income:
Period from June Six months
23, 1993 to ended
December 3l, Year ended December 31, June 30,
------------------------- ------------
1993 1994 1995 1996
------------- ----------- ----------- ------------
Rmb Rmb Rmb Rmb
(Unaudited)
Foreign exchange gain 378 3,494 1,417 37
Business tax 327 1,163 1,171 579
17
<PAGE>
13. CONTINGENCY
- ------------------
The Operating Subsidiary has obtained an approval from the local government to
offset the toll revenue collected from the first phase of the toll road against
the construction-in-progress balances until the CIP Projects are completed by
the end of 1997. Thus, the tax holiday has been deferred until the CIP Projects
are completed. As such, the Operating Subsidiary reported zero net profits in
its statutory financial statements starting from the commencement of operations
in 1993 and will continue to do so until the CIP Projects are completed at the
end of 1997. The Company plans to record the net profits offset in the
construction-in-progress account during 1993 to 1997 in the statutory income
statements of the 1998 and 1999 fiscal years (i.e. the first two tax exemption
years of the tax holiday). This plan is subject to the approval of the local tax
bureau. Should such approval not be obtained from the local tax bureau, a tax
liability amounting to approximately Rmb5 million as of December 31, 1995 may
arise. In the opinion of management, it is not probable that a liability will
arise.
14. SUBSEQUENT EVENTS
- ------------------------
Pursuant to an acquisition agreement dated September 10, 1996 between Regal
International, Inc., ("Regal"), a Delaware Corporation whose shares are listed
on the National Association of Securities Dealers Automated Quotations
("NASDAQ"), the Company and China Strategic Holdings Limited ("CSH"), Regal
acquired all the issued and outstanding shares of the Company for a
consideration of US$30 million (Rmb250 million) to be satisfied through the
issuance of a US$30 million Convertible Note (the "Convertible Note") by Regal
to CSH bearing interest at 9% per annum after an initial 6-month interest-free
period. The principal and any unpaid interest owing on the Convertible Note can
be converted into shares of Common Stock, US$0.01 par value, of Regal ("Common
Stock") at a conversion price of US$0.0302 per share. The Convertible Note, if
exercised by CSH, would give CSH a controlling interest of more than 90% in
Regal. This Convertible Note is secured by a pledge of Regal's interest in the
shares of the Company in favour of CSH.
Pursuant to an agreement signed between CSH and the Company dated September 1,
1996, the payable balance of Rmb96,806 (unaudited) due to CSH as of June 30,
1996 will be contributed by CSH into the Company as additional paid-in capital.
18
<PAGE>
BUSINESS OF THE COMPANY PRIOR TO ACQUISITION OF WESTRONIX
After February 19, 1996 the Registrant owned, as its sole asset, all the
issued and outstanding capital stock of Acewin, a company which owned all the
outstanding capital stock of China Machine Holdings Limited ("CMHL"). CMHL was
the holder of a 55% interest in Wuxi CSI. Wuxi CSI was the only operating
subsidiary of the Registrant prior to September 10, 1996. Wuxi CSI, established
in September 21, 1993, was a Sino-foreign joint venture in China between CMHL
and Wuxi Vibration Isolator Factory. Wuxi Vibration Isolator Factory, built in
1960, is a National Grade II Enterprise (The National Grade System grades all
factories in terms of size, profitability, sales, productivity and excellence in
products. There are only a few Grade I Enterprises in each province) and Wuxi
CSI was the largest vibration isolator producer in China. Wuxi CSI, was a
primary supplier to domestically produced Volkswagens, Peugeots and Audis
developed close ties to China's burgeoning automobile industry.
Wuxi CSI, with registered capital of $8.0 million, occupied 39,540
square meters of land, including a building area of 45,504 square meters and a
workshop area of 37,232 square meters.
The factory was situated in Wuxi City which is located in Southern
Jiangsu Province, at the center of the "golden delta" of the Yangtze River,
bordering Suzhou in the East and the Hangzhou in the West. It is 128 km. apart
from Shanghai; 183 km. from Nangjing and 40 km. away from the natural port of
Zhangjiagang. The urban area around Wuxi City covers 397 square km. with a
population of 0.928 million. Wuxi City has become a major international
open-port city at the mouth of the Yangtze River.
BUSINESS OF WUXI CSI VIBRATION ISOLATOR
Wuxi CSI was engaged in the manufacture and sale of vibration isolators,
rubber damping materials, stainless steel bellows expansion joint and similar
products, primarily for sale within China. Its primary customer base was in
Shanghai, although the distribution of its sales was regional. Being located
only 128 km. from Shanghai where three (3) of the largest automobile
manufacturers in China produce over 50% of the entire automobile market of
China, Wuxi CSI sold over 70% of its output to Shanghai Volkswagon.
WUXI CSI SALES FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
TABLE 1 SALES ANALYSIS
(Rmb in thousands) 1994 1995 % CHANGE
---- ---- --------
Sales 72,570 43,623 49%
Gross Profit 26,357 27,981 66%
Operating income(1) 12,184 16,871 130%
Net income 7,531 124%
- -------------------------
(1) Operating income means income before minority interest, income tax, net
interest expense and other income.
PRODUCTS AND MARKETS
Wuxi CSI produced a complete range of the following products under the
brand name "Xizhen" (See Table 2 - Sales by Units).
1. Rubber-Metal Vibration Isolators
--------------------------------
Minimizes harmful vibrations and noise. Widely utilized in automobiles,
ships, trains and heavy machinery.
2. Metal Bellows
-------------
Widely used in the shipbuilding, petroleum, chemical, industry, railway,
construction, electric power and nuclear industries.
27
<PAGE>
3. Bitumen Damping Materials
-------------------------
Reduces vibration and noise from mechanical equipment installed in
automobiles, refrigerators, fans and machinery.
TABLE 2 SALES BY UNITS
<TABLE>
<CAPTION>
TYPE OF VIBRATION ISOLATOR 1994 1995 % CHANGE MARKET
- -------------------------- ---- ---- --------- ------
<S> <C> <C> <C> <C>
General Vehicle Vibration Isolator 388,007 353,774 8.8% Auto
Santana (Volkswagen) 1,795,260 3,133,754 74.6% Auto
Audi 97,833 161,992 65.6% Auto
Damping Materials and Damping
Materials with Fabrics 1,511,007 4,691,384 210% Auto
Others 285,032 253,631 11.0% Auto
</TABLE>
Approximately 74% of Wuxi CSI's total sales in 1995 were made to
Shanghai Volkswagen. Shanghai Volkswagen manufactures the "Santana". Compared to
the Shanghai region, sales to other regions were relatively small. Sales to
Jilin and Jiangsu come in second and third place but only accounted for 5.4% and
3.5% of total sales, respectively. (See Table 3 Geographical Sales
Distribution).
TABLE 3 GEOGRAPHICAL SALES DISTRIBUTION - 1995
REGION % OF TOTAL SALES
Shanghai 74.1
Jilin 5.4
Jiangsu 3.5
Guangdong 0.2
Sichuan 0.1
Jiangxi 0.8
Shandong 1.3
Others(1) 14.6
Total 100%
- -------------------------
(1) Others refer to regions which are not listed above in the table
28
<PAGE>
The complete information of the Company's business prior to September
10, 1996 has been provided in the Company's report on Form 10-KSB for the fiscal
year ending December 31, 1995, which has been filed with the SEC.
The acquisition of Westronix Limited was approved by the consent in
writing of the majority of the Company's shareholders on September 10, 1996.
The Board of Directors seeks the ratification of the acquisition of
Westronix Limited and decided to include the acquisition of Westronix in the
Proxy Statement for the following reasons: to obtain the approval for the terms
of the Note (i.e. the conversion of the Note to the shares of common stock of
the Company, which would substantially increase the beneficial ownership of CSH
see "Beneficial Ownership"); the fact that Westronix Limited was purchased from
a related party and the significant size of the transaction. If the Note is
fully converted, Horler Holdings Limited, a wholly-owned subsidiary of China
Strategic Holdings Limited, will own 1,033,877,483 shares of the Company's
common stock (96.16%).
The Board of Directors recommends that stockholders ratify the
acquisition of Westronix Limited and approve the terms of the acquisition. This
proposal requires the affirmative vote of 80% of the outstanding shares of
Common Stock entitled to vote at the Meeting.
PROPOSAL NO. 2
AMENDMENT OF CERTIFICATE OF INCORPORATION
INCREASE IN AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK
The Company is soliciting the approval of stockholders for one or more
amendments to the Fourth Article of the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's Common Stock from
150,000,000 to 1,100,000,000 shares. The number of authorized shares of the
Company's Preferred Stock, $0.10 par value per share, shall remain unchanged.
The Company's Certificate of Incorporation currently authorizes the issuance of
a total of 150,000,000 shares of Common Stock. There were 81,764,456 shares of
Common Stock outstanding at the close of business on July 24, 1998.
The Board of Directors has proposed the increase in authorized Common
Stock to provide the Board of Directors with greater flexibility in the event
the Board of Directors determines that it is in the best interest of the Company
to issue additional shares. In connection with the acquisition of Westronix
Limited, the Company has issued a $30,000,000 convertible note to Horler
Holdings Limited, a wholly owned subsidiary of China Strategic Holdings Limited.
The principal and any unpaid interest due on the Note are convertible into
shares of Common Stock, $0.01 par value, of the Company ("Common Stock") at a
conversion price of $0.0302 per share. If the holder of the Note exercise its
conversion rights and converts the full amount of the Note, the number of shares
issued to Noteholder would exceed the total authorized amount of common stock of
the Company.
Under the laws of the State of Delaware, authorized, but unissued and
unreserved, shares may be issued for such consideration (not less than par
value) and purposes as the Board of Directors may determine without further
action by the stockholders. The issuance of such additional shares may, under
certain circumstances, result in the dilution of the equity or earnings per
share of the existing stockholders.
The additional shares of Common Stock authorized by this proposed
amendment will, if and when issued, have the same rights and privileges as the
shares of Common Stock currently authorized. Holders of shares of Common Stock
have no preemptive rights.
The above amendment to the Certificate of Incorporation requires the
affirmative vote of a majority of the outstanding shares of Common Stock
entitled to vote at the Meeting. The Board of Directors recommends that the
stockholders vote FOR this proposal.
29
<PAGE>
PROPOSAL NO. 3
AMENDMENT OF ARTICLES FOURTH, FIFTH, SIXTH, SEVENTH AND TENTH
OF CERTIFICATE OF INCORPORATION
The Company is soliciting the approval of stockholders for one or more
amendments to the Company's Certificate of Incorporation (i) Article Fourth
(D)(7), to provide that a meeting of shareholders or a written consent by
shareholders holding a majority of the voting shares shall be required to remove
directors or adopt, repeal or amend bylaws; (ii) Article Fifth to provide that
the number of directors shall not be less than three, and to remove the
classification of the board of directors; (iii) Article Sixth to provide that
the affirmative vote of the majority of voting shares rather than 80% of such
vote, is sufficient for the amendment or adoption of bylaws; (iv) Article
Seventh to remove the requirement of 80% shareholders' vote for certain
transactions with shareholders that have a 5% or more holdings with the Company
and to provide that the affirmative vote of the majority of voting shares is
sufficient to approve those certain transactions listed in Article Seventh; and
Article Tenth to remove the requirement of 80% shareholders' vote to amend
Article Fourth, Paragraph D (7) and (8), Article Fifth, Sixth, Seventh and
Tenth, and to provide that the affirmative vote of the majority of voting shares
is sufficient to approve amendments to those provisions of the Company's
Certificate of Incorporation.
The Board of Directors of the Company submitted the amendments to the
Articles Fourth, Fifth, Sixth, Seventh and Tenth of the Company's Certificate of
Incorporation to the vote of the shareholders, because it believes that such
amendments would be beneficial to the Company and its shareholders. The Company
seeks to amend Article Fourth (D)(7)to provide that a removal of directors and
adoption, repeal or amendment of bylaws may also be approved by a written
consent in writing of the shareholders holding not less than a majority of the
outstanding shares, in addition to the Company having an option of voting at the
shareholders' meeting. The Board believes that the current requirement of
approving the above actions only at the shareholders meeting, without the
Company having an alternative of an approval of such actions by a written
consent of majority shareholders, is unduly cumbersome, in administrative and
other costs, for the Company which has approximately 9,000 shareholders. The
Company seeks to amend Article Fifth to change the required number of directors
from the minimum of five and the maximum of twelve to the minimum of three and
the maximum as provided by the Delaware General Corporation Law (the "Delaware
Law"), to be determined by the Board. The Company also seeks to remove the
classification of the Board of Directors to which it does not see any benefit at
this time. The classified board was adopted under the circumstances where the
Board of directors felt it was necessary to take strong measures to add
stability to the leadership and policies of the Company and to discourage
certain types of tactics which could involve actual or threatened changes of
control of the Company. Although the Board of Directors still believes
continuity and stability are desirable, it believes that the current
constitution of the Board provides those features without the necessity of a
classified format. The Company believes that the changes to Article Fifth will
not have any significant negative effect on the manaement of the Company and its
shareholders.
The Company proposes to amend Article Sixth and Seventh to provide that
the affirmative vote of the majority of the voting shares shall be sufficient
for the amendment or adoption of the bylaws (Article Sixth) and to approve
certain transactions (such as mergers, sales or leases) involving shareholders
of 5% or more of the Company's common stock (Article Seventh).
Currently, Articles Sixth and Seventh requires the affirmative vote of
80% of the voting shares to take such actions. The effect of Article Sixth and
Seventh currently is that the amendments to the Bylaws or approval of the
transactions set forth in Article Seventh, may presently be made by the
affirmative vote of 80% of voting shares, which find it in the best interest of
the Company to adopt such actions. The purpose of the amendments is to provide
that such actions can be taken by the majority vote of the stockholders in
accordance with the provisions of section 109 of the Delaware Law. The Company
believes that such requirement is too restraining and that the majority vote of
the shareholders should constitute sufficient approval of the shareholders, as
prescribed by the Delaware Law. The Company does not believe that having more
restrictive governing provisions in its Certificate of Incorporation than those
provided in the Delaware Law would serve its shareholders better in making
corporate decisions for the Company.
For the same reasons as stated above, the Company seeks to amend Article
Tenth to remove the requirement of 80% shareholders' vote to amend Article
Fourth (D)(7) and (8) (which requires that the special meeting of the
shareholders may only be called by the Board of Directors), Article Fifth,
Sixth, Seventh and Tenth (discussed above) and to provide that the affirmative
vote of the majority of voting shares shall be sufficient to take those
corporate actions.
The above amendment to the Certificate of Incorporation requires the
affirmative vote of 80% of the outstanding shares of Common Stock entitled to
vote at the Meeting. The Board of Directors recommends that the stockholders
vote FOR this proposal.
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PROPOSAL NO. 4
AMENDMENT OF CERTIFICATE OF INCORPORATION
1-FOR-138 REVERSE STOCK SPLIT
The Board of Directors has proposed to amend the Company's Certificate
of Incorporation to effect a 1-for-138 reverse stock split of its Common Stock
under which each outstanding 138 shares of Common Stock, par value $0.01 per
share, registered in the name of each shareholder as of the record date, will be
exchanged for 1 share of Common Stock. The effective date of the reverse split
shall be immediately upon approval of the shareholders. The Board of Directors
believes that the reverse split is necessary in order to cause the Common Stock
to be tradable at such a price per share as is required by NASDAQ initial
admission rules and that the reverse split will raise earnings per share to
acceptable levels, in connection with the Company's future plans to apply to
NASDAQ for inclusion of the Company's Common Stock. In addition, the Board of
Directors believes that the proposed reverse split will make the management of
shareholding more efficient and cost effective. Fractional shares will be
rounded up to the nearest whole share. Because of the high ratio of the reverse
split, there will be a negative effect of the proposed reverse split on certain
holders, in that many holders will be left with odd lots which are more
expensive to trade.
The above amendment to the Certificate of Incorporation requires the
affirmative vote of 80% of the outstanding shares of Common Stock entitled to
vote at the Meeting. The Board of Directors recommends that the stockholders
vote FOR this proposal.
PROPOSAL NO. 5
ADOPTION OF AMENDED AND RESTATED BYLAWS
Pursuant to the Company's Certificate of Incorporation, the adoption of
amended or restated bylaws may only be approved at the annual or special meeting
of stockholders of the Company. The Board of Directors proposes to adopt the
amended and restated Bylaws. The main amended provisions in the Company's bylaws
are to delete the classified Board requirement, the change in the number of
required directors (as discussed above in Proposal No. 3) and to dispense with
the meeting requirement for the shareholders' approval of any amendments to the
bylaws.
The Board of Directors, by unanimous vote at a meeting on January 27,
1997, adopted new amended and restated Bylaws. The new Bylaws are "standard
form" bylaws for a Delaware corporation and provide for maximum corporate
management operating flexibility as permitted under Delaware Law. The above
proposal requires 80% of the affirmative vote of a majority of the outstanding
shares of Common Stock entitled to vote at the Meeting. The Board of Directors
recommends that the stockholders vote FOR this proposal.
PROPOSAL NO. 6
NAME CHANGE
The Board of Directors has proposed to amend the Company's Certificate
of Incorporation to change the name of the Company to "Asia Resources Holdings
Ltd." The Board of Directors believes that the new name reflects better the
current business of the Company. The above proposal requires the affirmative
vote of a majority of the outstanding shares of Common Stock entitled to vote at
the Meeting. The Board of Directors recommends that the stockholders vote FOR
this proposal.
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PROPOSAL NO. 7
ADOPTION OF 1997 INCENTIVE STOCK OPTION PLAN
The Company's proposed 1997 Incentive Stock Option Plan (the "Plan")
attached hereto, provides for the grant of incentive stock options ("ISO's")
qualifying under the Internal Revenue Code, the grant of nonqualifying stock
options ("NSO's"), and the grant of awards of stock appreciation rights, stock
options, restricted stock or performance units ("Awards") to officers, employees
and consultants of the Company and its affiliates. The Company has not
determined at this time the persons who would receive the benefits, if any,
under the Stock Option Plan. 750,000 post- reverse split shares of the Company's
Common Stock will be reserved for issuance pursuant to the Plan. The Plan will
be administered by the Stock Option Committee of the Board of Directors or such
other committee of the Board, if the Board so designates (the "Committee"). The
purpose of the Plan is to aid the Company in retaining the services of executive
and key employees and in attracting new management personnel when needed for
future operations and growth, to offer such personnel additional incentives to
put forth maximum efforts for the success of the business and to afford them
opportunities to obtain or increase a proprietary interest in the Company on a
favorable basis and, thereby, to have an opportunity to share in its success.
The Plan will expire ten years from its effective date as specified by
the Board of Directors at the time the Plan is approved (except as to options
outstanding at that time, if any). The Board may amend, alter or terminate the
Plan in any respect at any time, except that no amendment, alteration or
termination shall be made which would (i ) impair the rights of an optionee
under a stock option, stock appreciation right, restricted stock or performance
award unit therefore granted without such optionee's consent, or (ii) disqualify
the Plan from the exemption provided by Rule 16b-3 of the Securities Exchange
Act of 1934, and , further, no material amendment shall be made without the
prior approval of the Company's stockholders to the extent such approval is
required by law or agreement.
The Committee has substantial discretion pursuant to the Plan to
determine the persons to whom ISO's, NSO's and Awards may be granted or
authorized and also to determine the amounts, time, price (provided that the
exercise price per share shall not be less than the fair market value of the
Common Stock on the date of such grant ), exercise terms and restrictions
imposed in connection with each individual grant. ISO's, NSO's and Awards may be
granted to any employee (which may include officers, and directors who are also
employees) or consultants of the Company or its subsidiaries. No participant in
the Plan may be granted ISO's, NSO's or Awards aggregating in excess of the
number of shares of Common Stock equal to 10% of issued and outstanding Common
Stock over the life of the Plan and no stock option shall be exercisable more
than ten years after the date such option is granted. Options may expire earlier
as determined by the Committee and the Committee may determine vesting
provisions in its discretion.
Stock appreciation rights may be granted in conjunction with all or part
of any stock options granted under the Plan at the discretion of the Committee.
Shares of restricted stock and performance units may be awarded either alone or
in addition to other Awards granted under the Plan at the discretion of the
Committee.
If an optionee ceases to be an employee of the Company or a subsidiary
other than by reason of death, disability or retirement, any stock option held
by him shall terminate on the date of termination of his employment in the case
of voluntary termination, and shall terminate one month after the termination of
his employment in the case of involuntary termination of employment (but not
later than its specified expiration date). In the case of death, any stock
option held by an optionee may be exercised by his estate, personal
representative or beneficiary at any time prior to the earlier of the specified
expiration date of the stock option or one year from the date of the optionee's
death. If an optionee's employment is terminated by reason of disability or
retirement, the optionee may exercise any stock options held by him at any time
prior to the earlier of the specified expiration date of the stock option or
three years from the date of termination of employment.
Options are, in general, non-assignable. The options carry certain
anti-dilution provisions concerning stock dividends, stock splits,
consolidations, mergers, recapitalizations and reorganizations.
Generally, under applicable provisions of the Internal Revenue Code, the
amount of profit realized by an optionee under exercise of stock option is taxed
as ordinary income to the optionee in the year of exercise. The Company is
entitled to a compensation deduction in the same amount in the same year.
An optionee who holds the stock received upon exercise of a stock option
for at least two years from the date the option was granted and at least one
year from the receipt of the stock upon exercise generally pays no tax until the
stock is sold, at which time any profit or loss realized is long-term capital
gain or loss, as the case may be, and the Company is not entitled to a
corresponding tax deduction at any time. The spread at exercise of a stock
option is effectively treated as a tax preference item in the exercise year for
purposes of calculating the optionee's alternative minimum tax.
An optionee who sells the stock received upon the exercise of a stock
option within two years after the option was granted or within one year of
receipt of the shares upon exercise is taxed on the profit up to the date of the
exercise (which is ordinary income) and the Company is entitled to a
corresponding tax deduction; the income and tax deduction items are recognized
by the optionee and the Company, respectively, in the year the stock is sold.
Appreciation or depreciation after the date of exercise is taxable to the
optionee as capital gain or loss, respectively, and is nondeductible by the
Company.
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The Company may be required to withhold tax on the amount of the income
recognized by the optionee upon exercise of an option and upon transfer of stock
received upon exercise of an option.
The above proposal requires the affirmative vote of a majority of the
outstanding shares of Common Stock entitled to vote at the Meeting. The Board of
Directors recommends that the stockholders vote FOR this proposal.
PROPOSAL NO. 8
OTHER MATTERS
The Board has no knowledge of any other matters which may come before
the meeting and does not intend to present any other matters. However, if any
other matters shall properly come before the meeting or any adjournment thereof,
the persons soliciting proxies will have the discretion to vote as they see fit
unless directed otherwise.
If you do not plan to attend the meeting, in order that your shares may
be represented and in order to assure the required quorum, please sign, date and
return your proxy promptly. In the event you are unable to attend the meeting,
at your request, the Company will cancel the proxy.
August 12, 1998 By Order of The Board of Directors
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