SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ______________ to _______________.
Commission File No. 0-6456
INFRASTRUCTURE INTERNATIONAL, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Nevada 87-0287034
- --------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Rm 2211-2215, Science and Technology Building No 1001
Shangbuzhong Road, Futian District Shenzhen, PRC
-----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: 011-07-55-369-9588
Securities Registered Pursuant to Section 13 of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities Registered Pursuant to Section 15(d) of the Act:
Common Stock, $0.001 par value
------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months (or
for such shorter period that the registrant was required to file such reports);
and (2) has been subject to such filing requirements for the past ninety (90)
days. Yes No X
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [x]
The issuer's revenues for its most recent fiscal year were $0.00.
As of December 1, 1999, 2,430,000 shares of Common Stock of the Registrant
were outstanding. There was no market for the stock and accordingly there is no
aggregate market value.
DOCUMENTS INCORPORATED BY REFERENCE
No annual reports to security holders, proxy or information statements, or
prospectuses filed pursuant to Rule 424(b) or (c) have been incorporated by
reference in this report.
<PAGE>
TABLE OF CONTENTS
Page
------
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................... 3
ITEM 2. DESCRIPTION OF PROPERTIES............................. 4
ITEM 3. LEGAL PROCEEDINGS .................................... 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................... 4
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................... 5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.................. 5
ITEM 7. FINANCIAL STATEMENTS.................................. 5
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................ 6
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT..................... 6
ITEM 10. EXECUTIVE
COMPENSATION.......................................... 6
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................. 7
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.......................................... 7
ITEM 13. EXHIBITS AND REPORTS OF FORM
8-K................................................... 7
SIGNATURES.............................................................. 8
<PAGE>
PART I
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
General and Development of Business
Infrastructure International, Inc. (the "Company") was incorporated in the
State of Nevada in 1955 under the name of Dolomite King Inc. It changed its name
to React Systems, Inc. on October 22, 1973, and changed its name from React
Systems, Inc. to Infrastructure International, Inc. effective October 4, 1996.
Acquisition of a subsidiary
On December 1, 1996, the Company entered into an agreement (the
"Acquisition Agreement") with Yiu Yat On to acquire from him 100% interest in
Guanghui Highway Project Company Limited ("GHHP", a company incorporated in the
British Virgin Islands) by issuing to him 8,430,000 shares of common stock, par
value US$0.001 each (after the reverse stock split and redenomination of par
value) and 100,000 shares of Series B supervoting preferred stock. GHHP was
developing and operating a toll road in the People's Republic of China.
On January 2, 1997, Yiu Yat On transferred (i) 5,000,000 shares of common
stock of the Company to New Eagle Infrastructure Limited ("NEI; a company
incorporated in the British Virgin Islands), (ii) 1,100,000 shares of common
stock of the Company and 100,000 shares of Series B supervoting preferred stock
of the Company to New Silver Eagle Holdings Limited ("NSEHL", a company
incorporated in the British Virgin Islands), and (iii) 2,330,000 shares of
common stock of the Company to unrelated parties. NEI is wholly owned by NSEHL,
which is beneficially owned by Yiu Yat On, Yiu Yat Hung and their family
members.
On August 5, 1996, GHHP entered into an agreement with Huizhou Highway
Property Development Company ("HHPD; a state-owned company established in the
People's Republic of China directly under Huizhou City Roadways Bureau) to build
and operate the "Jin Long Highway", a 72 kilometers four-lane highway in
Huizhou, Guangdong Province, the People's Republic of China (the "PRC"). The
first phase of the investment is to establish a sino-foreign contractual
co-operative joint venture in the PRC-Guanghui Highway Development Company
Limited ("GHDC") to build and operate 35 kilometers of the "Jin Long Highway"
for a period of 30 years from August 1996 to August 2026.
2
<PAGE>
Pursuant to the joint venture agreement, GHHP is required to contribute
into GHDC US$9,536,000 (equivalent to approximately Rmb79,349,000, determined at
an exchange rate of US$1.00 for Rmb8.32), representing 80% of the total
registered capital of GHDC, in cash; and HHPD is required to contribute into
GHDC US$2,384,000 (equivalent to approximately Rmb19,837,000, determined at an
exchange rate of US$1.00 for RMB8.32), representing 20% of the total registered
capital of GHDC, in the form of a partially completed section of the "Jin Long
Highway". As of December 31, 1996, GHHP has contributed into GHDC US$3,000,000
(equivalent to approximately Rmb24,963,000, determined at an exchange rate of
US$1.00 for Rmb8.32), representing approximately 31% of its obligation; while
HHPD has contributed to GHDC US$2,384,000 (equivalent to approximately
Rmb19,837,000, determined at an exchange rate of US$1.00 for Rmb8.32),
representing 100% of its obligation. All of these contributions have been
verified by a certified public accountant in the PRC according to PRC
regulations.
Pursuant to an agreement dated June 7, 1997 (the "Disposal Agreement"), the
Company disposed of its 100% interest in GHHP to its original owner. This
Agreement was effective retroactive to December 1, 1996. According to the
Disposal Agreement, the Company agreed to return all the issued and outstanding
shares of GHHP and both the 8,430,000 shares of common stock and 100,000 shares
of series B supervoting preferred stock of the Company were thereupon to be
returned and canceled. GHHP also agreed to return the sum of $3,000,000 injected
by the Company in 1996. The operating results of GHHP have been accounted for as
discontinued operations for the years ended December 31, 1996 and 1997. Revenue
of GHHP for the year ended December 31, 1996 was approximately US$706,490.
Financial Information About Industry Segments
The Company had no operating business and therefore can report no financial
information on industry segments.
ITEM 2. DESCRIPTION OF PROPERTIES
None
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders through
the solicitation of proxies, during the fourth quarter of the Company's fiscal
year ended December 31, 1998.
3
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is available for trading in the over-the-counter
market. The following table sets forth the high and low bid price per share for
the Company's Common Stock for each full quarterly period within the two most
recent fiscal years.
1998 1997
------------------- -------------------------
High Low High Low
------ ----- ------ ------
First Quarter No Quote No Quote No Quote No Quote
Second Quarter No Quote No Quote No Quote No Quote
Third Quarter No Quote No Quote No Quote No Quote
Fourth Quarter No Quote No Quote No Quote No Quote
As of December 1, 1999, there was no quote for the stock
As of December 1, 1999, there were approximately 624 holders of record of
the Common Stock of the Company.
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any dividends in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
As discussed above (see "ITEM 1. Description of Business"), the Company has
been in existence since 1955 and has had business operations but does not
currently operate a business of any type. Accordingly, all risks inherent in a
new and inexperienced enterprise are inherent in the Company's business. The
Company has not made a formal study of the economic potential of any business.
The Company has no assets but $124,500 of liabilities. No business opportunities
are presently contemplated for acquisition. In addition, the Company has no
liquidity and no presently available capital resources, such as credit lines,
guarantees, etc. All expenses have been paid by the shareholders.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, together with the
independent auditors reports thereon of Arthur Andersen appears on pages F-2 -
F-17 of this report. See Index to Financial Statements on page F-1 of this
report.
4
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years there were no
disagreements with Company's accountants on any matter of accounting principal
or practice, financial statement disclosure, or auditing scope or procedure.
Further, the previous accountant's report on the financial statements for the
past two years did not contain an adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principal.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information Regarding Present Directors and Executive Officers
The following table sets forth the names and ages of the present executive
officers and directors of the Company and the positions held by each.
Name Age Title
- ---- --- -----
Yao Yi On 44 Chairman, Chief Executive Officer and Director
Ma Ding Jie 63 Chief Financial Officer and Director
Jin Hui Juan 42 Director
Each of the directors has been elected to serve until the next annual
meeting of the directors by the shareholders or until their respective
successors have been duly elected and shall have qualified.
Yiu Yat On is a co-founder of Guang Hui Highway Project Company Limited and
has served as Vice President, Treasurer and a Director of the Company since the
acquisition of Guang Hui by the Company in December of 1996. Since June of 1997,
Mr. Yiu has served as the Company's Chief Executive Officer and Chairman. Mr.
Yiu is also a co-founder of China Medical Development Company Ltd., and has
served as Vice-Chairman and Vice President of Natural Way since the exchange in
June of 1996. For over twenty years, Mr. Yiu has served as a management
consultant to various companies in the PRC and has operated various companies in
the PRC. Mr. Yiu has a graduate degree in business administration.
Ma Ding Jie has many years experience in production management and
warehousing operations. Mr. Ma is presently an assistant general manager of
HongHua Building Material Company in Shenzhen.
Jin Hui Juan is a chemical engineer with the Shanghai Chemistry Research
Institute and is the assistant general manager of HongHui Printing and Dyeing
Company. He has also served as general manager of Hong Kong Hongda Company.
5
<PAGE>
Information Regarding Nominees for Election as Directors
All of the present directors have been nominated for re-election as
directors at the Company's next annual shareholders' meeting.
ITEM 10. EXECUTIVE COMPENSATION
No compensation has been paid to any officer, director or control person
during the prior three years.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Management
No officer of director of the Company owned any shares of the Company,
either directly or beneficially.
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of December 1, 1999 the number of shares
of the Company's Common Stock know to be held by beneficial owners of more than
five percent of the Company's Common Stock.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- -------------------- ---------------------- ------------------
Metrolink Holdings, Ltd. 325,000 13.37 %
4703 Central Plaza
18 Harbour Road
Wanchai, Hong Kong
Murphy Limited 331,000 13.62 %
4703 Central Plaza
18 Harbour Road
Wanchai, Hong Kong
Regent Holdings Ltd. 150,000 6.17 %
4703 Central Plaza
18 Harbour Road
Wanchai, Hong Kong
Xin Yue Company Ltd. 500,000 20.58 %
Unit 1-2, 18/F
Yat, Chau International Plaza
18 Connaught Road West
Hong Kong
6
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company acquired its interest in Guang Hui and the Highway Joint
Venture during 1996 pursuant to a share exchange with the principal shareholders
of Guang Hui. Pursuant to the terms of such share exchange, the Company acquired
100% of the stock of Guang Hui in exchange for 8,430,000 shares of common stock
and 100,000 shares of Series B Preferred Stock of the Company.
HHPD, which previously operated the Jin Long Highway and is a 20% owner of
the Highway Joint Venture, provides certain management services, construction
services and profit guarantees in connection with the Jin Long Highway. See
"Description of Business."
The Company has no existing policy with respect to related party
transactions. However, management believes that each of the transactions
described above was, or will be, on terms at least as favorable to the Company
as could have been obtained from unaffiliated third parties. Other than the
foregoing, management is not aware of any material transactions between the
Company and any officers, directors or five percent shareholders, or affiliates
of such persons.
PART IV
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
2.1 Acquisition Agreement dated December 1, 1996 between
Infrastructure International, Inc. and the shareholders of
Guang Hui Highway Project Company Limited (1)
2.2 Termination Agreement (2)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Bylaws, as amended to date (2)
4.1 Certificate of Designation for Series A Convertible Preferred Shares (2)
4.2 Certificate of Designation for Series B Convertible Preferred Shares (2)
10.1 Cooperation Contract dated August 5, 1996 (1)
10.2 Supplementary Contract amending Cooperation Contract (1)
10.3 Memorandum amending Cooperation Contract (1)
10.4 Contract of Assurance (1)
10.5 Jinlong Highway Project Construction Turn-key Contract (1)
10.6 Regular Expenses Turn-key Contract (1)
16.1 Letter from Mantyla, McReynolds & Associates re change in
certifying accountant (1)
21.1 Subsidiaries of Registrant
27.1* Financial Data Schedules
__________
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with the
Company's Current Report on Form 8-K dated December 1, 1996.
(2) Incorporated by reference to the respective exhibits filed with the
Company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1996.
7
<PAGE>
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INFRASTRUCTURE INTERNATIONAL, INC.
By:/s/ Yiu Yat On
---------------------------
Yiu Yat On, Chairman
Chief Executive Officer
Dated: December 3, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
----------- ------- ------
YiuYat On
/s/ Yiu Yat On Chairman & Chief Executive Officer December 3, 1999
- ------------------
Yiu Yat On
Ma Ding Jie
/s/ Ma Ding Jie Chief Financial Officer December 3, 1999
- ------------------
Ma Ding Jie
8
<PAGE>
INFRASTRUCTURE INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
-------
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Infrastructure International,
Inc.:
We have audited the accompanying consolidated balance sheets of Infrastructure
International, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for the years ended December 31, 1996, 1997 and 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Infrastructure International, Inc.
and Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1996, 1997 and
1998, in conformity with generally accepted accounting principles in the United
States of America.
The accompanying financial statements have been prepared assuming that the Group
will continue as a going concern. As shown in the accompanying financial
statements, for the years ended December 31, 1997 and 1998, the Group suffered
recurring losses of approximately Rmb26,653,000 and Rmb116,000, respectively,
and as of December 31, 1997 and 1998, the Group's liabilities exceeded its
assets by approximately Rmb919,000 and Rmb1,036,000, respectively. That raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
September 30, 1999.
F-2
<PAGE>
INFRASTRUCTURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
1 9 9 7 1 9 9 8
--------- --------------------
Rmb Rmb US$
ASSETS
Current asset
Accounts receivable, net - - -
-------- ---------- ----------
Total assets - - -
======== ========== ==========
LIABILITIES AND
Current liabilities:
Accrued expenses 919,360 1,035,840 124,500
-------- ---------- ----------
Shareholders' equity (deficit):
Preferred stock, Series A convertible and
Preferred stock, Series B supervoting, par
Common stock, par value US$0.001; issued
Additional paid-in capital 29,227,195 29,227,195 3,512,884
Accumulated deficit (30,167,616) (30,284,096) (3,639,916)
---------- ---------- ----------
Total shareholders' deficit (919,360) (1,035,840) (124,500)
---------- ---------- ----------
Total liabilities and
shareholders' deficit - - -
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
- ------------------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers, and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1998 of
US$1.00=Rmb8.32. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.
F-3
<PAGE>
INFRASTRUCTURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
1 9 9 6 1 9 9 7 1 9 9 8
------- ------- ------------------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Revenue - - - -
General and administrative expenses - (427,649) (116,480) (14,000)
------ -------- -------- --------
Loss from continuing
operations before income
taxes - (427,649) (116,480) (14,000)
Provision for income taxes - - - -
------ -------- -------- --------
Loss from continuing operations - (427,649) (116,480) (14,000)
Discontinued operations
Income from discontinued
operations of toll road
(less: Nil amount of applicable
income taxes 1,383,727 - - -
Loss on disposal of discontinued
operations - (26,225,241) - -
--------- ---------- -------- --------
Income (Loss) before
minority interests 1,383,727 (26,652,890) (116,480) (14,000)
Minority interests (5,411) - - -
---------- ---------- --------- --------
Net income (loss) 1,378,316 (26,652,890) (116,480) (14,000)
========== ========== ========= ========
Basic earnings (loss) per common
Loss from continuing operatio Rmb - Rmb (0.194) Rmb(0.054) US$ (0.006)
Income (loss) from discontinued
operations 0.142 (11.939) - -
---------- ---------- --------- --------
Rmb 0.142 Rmb (12.133) Rmb(0.054) US$(0(0.006)
========== ========== ========= ========
Diluted earnings (loss) per common
share
Loss from continuing operations Rmb - Rmb (0.102) Rmb(0.028) US$ (0.003)
Income from discontinued
operations 0.139 (6.249) - -
---------- ---------- --------- ---------
Rmb 0.139 Rmb (6.351) Rmb (0.28) US$(0(0.003)
</TABLE>
The accompanying notes are an integral part of these financial statements.
- ----------------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers, and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1998 of
US$1.00=Rmb8.32. No representation is made that the Renminbi amounts could have
been, or could be, converted into United States dollars at that rate or at any
other rate.
F-4
<PAGE>
INFRASTRUCTURE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
1 9 9 6 1 9 9 7 1 9 9 8
--------- --------- -----------------------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) 1,378,316 (26,652,890) (116,480) (14,000)
Adjustments to reconcile net income
Depreciation of property 3,611,920 - - -
Minority interests 5,411 - - -
Loss on disposal of discontinued
(Increase) Decrease in operating
Due from shareholders (98,398) 108,160 - -
Increase (Decrease) in operating
Accrued expenses 266,240 653,120 116,480 14,000
Due to a related company 622,808 (283,038) - -
Due to a joint venture partner 18,238,655 - - -
------------ ----------- -------- -------
Net cash provided by operating
activities 24,024,952 50,593 - -
------------ ----------- -------- -------
Cash flows from investing activities:
Additions to property (185,250,551) - - -
Cash outflow from disposal of a
subsidiary - (4,002) - -
------------ ----------- -------- -------
Net cash used in investing
activities (185,250,551) (4,002) - -
------------ ----------- -------- -------
Cash flows from financing activities:
Loan, subsequently capitalized by
issuance of preferred stock 27,431,640 - - -
Costs for issuance of stock (3,090,800) - - -
Loan from a joint venture partner 136,838,179 - - -
------------ ----------- -------- -------
Net cash provided by
financing activities 161,179,019 - - -
------------ ----------- -------- -------
Net increase (decrease) in (46,580) 46,591 - -
Effect of translation adjustments 50,582 (50,593) - -
Cash, as of beginning of year - 4,002 - -
------------ ----------- -------- -------
Cash, as of end of year 4,002 - - -
============ =========== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers, and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1998 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 or at any
other rate.
F-5
<PAGE>
INFRASTRUCTURE INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
Accumulated
other
comprehensive income
Additional Cumulative
Series A convertible and Series B supervoting paid in Accumulated translation
redeemable preferred stock preferred stock Common stock capital deficit adjustments
--------------------------- -------------------- ------------------ ------------ ----------- -----------
Number of Number of Number of
shares Amount shares Amount shares Amount
----------- ----------- ---------- --------- ---------- -------
Rmb Rmb Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31,
1995 - - 100,000 832 8,430,000 70,132 - - -
Effect of exchange
reorganization - - - - 1,250,000 10,400 4,892,202 (4,963,804) -
Issuance of
Series A
preferred stock 3,000 25 - - - - 27,431,615 - -
Issuance Costs - - - - - - (3,090,800) - -
Net income - - - - - - - 1,378,316 -
Translation
adjustments - - - - - - - - 50,582
-------- ------- -------- --------- ---------- ------- ---------- --------- --------
Balance as of
December 31,
1996 3,000 25 100,000 832 9,680,000 80,532 29,233,017 (3,585,488) 50,582
Conversion of 700
Series A preferred
stock into 700,000
shares of common
stock (700) (6) - - 700,000 5,824 (5,822) - -
Cancellation of Series
A preferred stock (300) (2) - - - - - - -
Cancellation of common
stock - - - - (7,950,000) (66,144) - - -
Net loss - - - - - - - 26,652,890) -
Reversal of goodwill
previously eliminated - - - - - - - 70,762 -
Translation adjustments - - - - - - - - (50,582)
-------- ------- ------- -------- ----------- ------- ---------- ---------- ---------
Balance as of December
31, 1997 2,000 17 100,000 832 2,430,000 20,212 29,227,195 (30,167,616 -
======== ======= ======= ======== =========== ======== ============ =========== =========
Net loss - - - - - - - (116,480) -
-------- ------- ------- -------- ----------- -------- ------------ ----------- ---------
Balance as of
December 31, 1998 2,000 17 100,000 832 2,430,000 20,212 29,227,195 (30,284,096) -
======== ======= ======= ======== =========== ======== ============ ============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
INFRASTRUCTURE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
-------------------------------------
Infrastructure International, Inc. ("the Company") was incorporated in the State
of Nevada, United States of America in 1955 under the name of Dolomite King Inc.
It changed its name to React Systems Inc. on October 22, 1973, and changed its
name to Infrastructure International, Inc., the present one, on October 4, 1996.
Acquisition of a subsidiary - GHHP
- ----------------------------------
On December 1, 1996, the Company entered into an agreement (the "Acquisition
Agreement") with Yat-on Yiu to acquire from him 100% interest in Guanghui
Highway Project Company Limited ("GHHP"; a company incorporated in the British
Virgin Islands) by issuing to him 8,430,000 shares of common stock, par value
US$0.001 each (after the reverse stock split and redenomination of par value -
see Note 5.a), and 100,000 shares of Series B supervoting preferred stock. GHHP
was principally engaged in developing and operating a toll road in the People's
Republic of China.
On January 2, 1997, Yat-on Yiu transferred (i) 5,000,000 shares of common stock
of the Company to New Eagle Infrastructure Limited ("NEI"; a company
incorporated in the British Virgin Islands), (ii) 1,100,000 shares of common
stock of the Company and 100,000 shares of Series B supervoting preferred stock
of the Company to New Silver Eagle Holdings Limited ("NSEHL"; a company
incorporated in the British Virgin Islands), and (iii) 2,330,000 shares of
common stock of the Company to unrelated parties. NEI is wholly owned by NSEHL,
which is beneficially owned by Yat-on Yiu, Yat-hung Yiu and his family members.
GHHP and its joint venture
- --------------------------
On August 5, 1996, GHHP entered into an agreement with Huizhou Highway Property
Development Company ("HHPD"; a state-owned company established in the People's
Republic of China directly under Huizhou City Roadways Bureau) to build and
operate the "Jin Long Highway", a 72 kilometers four-lane highway in Huizhou,
Guangdong Province, the People's Republic of China ("the PRC"). The first phase
of the investment is to establish a sino-foreign contractual co-operative joint
venture in the PRC - Guanghui Highway Development Company Limited ("GHDC") to
build and operate 35 kilometers of the "Jin Long Highway" for a period of 30
years from August 1996 to August 2026.
F-8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
GHHP and its joint venture (Cont'd)
- --------------------------
Pursuant to the joint venture agreement, GHHP is required to contribute into
GHDC US$9,536,000 (equivalent to approximately Rmb79,349,000, determined at an
exchange rate of US$1.00 for Rmb8.32), representing 80% of the total registered
capital of GHDC, in cash; and HHPD is required to contribute into GHDC
US$2,384,000 (equivalent to approximately Rmb19,837,000, determined at an
exchange rate of US$1.00 for Rmb8.32), representing 20% of the total registered
capital of GHDC, in the form of a partially completed section of the "Jin Long
Highway". As of December 31, 1996, GHHP has contributed into GHDC US$3,000,000
(equivalent to approximately Rmb24,963,000, determined at an exchange rate of
US$1.00 for Rmb8.32), representing approximately 31% of its obligation; while
HHPD has contributed into GHDC US$2,384,000 (equivalent to approximately
Rmb19,837,000, determined at an exchange rate of US$1.00 for Rmb8.32),
representing 100% of its obligation. All of these contributions had been
verified by a certified public accountant in the PRC according to PRC
regulations.
Disposal of a subsidiary - GHHP
- -------------------------------
In June 1997, the Company entered into an agreement to dispose of 100% interest
in GHHP to Yat-on Yiu and New Silver Eagle Holdings Limited. As consideration,
Yat-on Yiu and New Silver Eagle Holdings Limited have agreed to surrender to the
Company their interest in 8,430,000 shares of common stock of the Company and
100,000 shares of Series B supevoting preferred stock of the Company. As of
December 31, 1997 and 1998, Yat-on Yiu and New Silver Eagle Holdings Limited had
only surrendered to the Company 7,950,000 shares of common stock, which have
been cancelled. In connection with the disposal of GHHP, GHHP have agreed to
return the sum of US$3,000,000 contributed by the Company to GHHP in 1996.
However, it is uncertain whether GHHP has the necessary resources to repay its
obligation to the Company and, consequently, the Company has recorded a full
provision of US$3,000,000 against this receivable. The operating results of GHHP
have been accounted for as discontinued operations for the years ended December
31, 1996. Revenue of GHHP for the years ended December 31, 1996 and December 31,
1997 were approximately Rmb5,878,000 and Nil respectively.
2. BASIS OF PRESENTATION
---------------------
The acquisition of GHHP by the Company on December 1, 1996 has been treated as a
reverse acquisition since GHHP is the continuing entity as a result of the
exchange reorganization. On this basis, the historical financial statements
prior to December 1, 1996 represented the consolidated financial statements of
GHHP. The shareholders' equity accounts of the Company as of December 31, 1995
have been retroactively restated to reflect the one-for-thirty reverse stock
split and the redenomination of par value as described in Note 5.a. and the
Company's common stock and Series B supervoting preferred stock issued for this
acquisition.
F-9
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of consolidation
----------------------
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All material intra-group balances and
transactions have been eliminated on consolidation.
b. Income taxes
------------
Income tax is provided under the provisions of Statement of Financial
Accounting Standards No. 109, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Deferred income tax is provided using the liability method. Under the
liability method, deferred income tax is recognized for all significant
temporary differences between the tax and the financial statements bases of
assets and liabilities. Income tax is not accrued for unremitted earnings
of international operations that have been, or are intended to be
reinvested.
c. Comprehensive income
--------------------
The Group has adopted Statement of Financial Accounting Standards No. 130,
which requires the Group to report all changes in equity during a period,
except for those resulting from investment by shareholders and distribution
to shareholders, in financial statements for the period in which they are
recognized. The Group has disclosed comprehensive income, which encompasses
net income and currency translation adjustments, in the consolidated
statements of changes in shareholders' equity and Note 7.
d. Foreign currency translation
----------------------------
The Company considers Renminbi ("Rmb") as its functional currency as
primary activities of the Group are based in Renminbi.
The translation of the financial statements of group companies into
Renminbi is performed for balance sheet accounts using the closing exchange
rate in effect at the balance sheet date and for revenue and expense
accounts using an average exchange rate during each reporting period. Gains
or losses resulting from translation are included in shareholders' equity
separately as cumulative translation adjustments. There was no gain or loss
arising from foreign currency transactions for the years ended December 31,
1996, 1997 and 1998.
F-10
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
e. Earnings (loss) per common share
--------------------------------
Basic earnings (loss) per common share is computed in accordance with
Statement of Financial Accounting Standards No. 128 by dividing net income
(loss) for each year by the weighted average number of shares of common
stock outstanding. Diluted earnings (loss) per common share reflects the
dilution that would have resulted from the conversion of convertible
debentures and convertible preferred stock, and exercise of warrants and
options based on the average market price of common stock during the year.
The numerator in calculating both basic and diluted earnings per share for
each year is the reported net income (loss). The denominator is based on
the following weighted average number of common shares.
1 9 9 6 1 9 9 7 1 9 9 8
--------- --------- ---------
Basic 9,680,000 2,196,667 2,430,000
Diluted 9,934,098 4,196,667 4,430,000
f. 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.
4. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable comprised:
1 9 9 7 1 9 9 8
--------- ----------------------
Rmb Rmb US$
Accounts receivable 24,960,000 24,960,000 3,000,000
Less: Allowance for doubtful account (24,960,000) (24,960,000) (3,000,000)
---------- ---------- ---------
Accounts receivable, net - - -
========== ========== =========
As mentioned in Note 1, in connection with the disposal of GHHP, GHHP agreed to
return the sum of approximately Rmb24,960,000 (equivalent to US$3,000,000) to
the Company. However, it is uncertain whether GHHP has the necessary resources
to repay its obligation to the Company and, consequently, the Company has
recorded a full provision of approximately Rmb24,960,000 (equivalent to
US$3,000,000) against this receivable as of December 31, 1997 and 1998.
F-11
<PAGE>
5. CAPITAL STOCKS
--------------
a. Common stock
------------
On August 9, 1996, the Company effected a one-for-thirty reverse stock
split and changed the denomination of its common stock, with all fractional
shares to be rounded to the nearest whole share and any shareholder holding
100 or more pre-split shares will retain a minimum of 100 post-split
shares. As a result, the then outstanding 2,984,118 shares of common stock
with a par value of US$0.05 each have become 159,060 shares of common stock
with a par value of US$0.001 each.
In 1996, the Company capitalized a note payable of approximately Rmb782,000
(equivalent to approximately US$94,000) by issuance of 1,667 shares of
common stock, par value US$0.001 each (after the reverse stock split and
redenomination of par value), and capitalized certain payables on
consultancy fee of US$3,175 by issuance of 63,500 shares of common stock,
par value US$0.001 each (after the reverse stock split and redenomination
of par value). In 1996, the Company issued 1,025,773 shares of common
stock, par value US$0.001 each (after the reverse stock split and
redenomination of par value) to certain of its directors and shareholders.
Also, the Company issued 8,430,000 shares of common stock, par value
US$0.001 each (after the reverse stock spilt and redenomination of par
value) in connection with its acquisition of GHHP (see Note 1).
On May 1, 1997, 700 shares of Series A convertible and redeemable preferred
stock, par value US$0.001 each were converted into 700,000 shares of common
stock, par value US$0.001 each.
In 1997, in connection with the disposal of GHHP mentioned in Note 1, the
Company cancelled 7,950,000 shares of common stock, par value US$0.001
each.
F-12
<PAGE>
5. CAPITAL STOCK (Cont'd)
-------------
b. Preferred stock
---------------
Effective from October 4, 1996, the Company authorized the creation of
25,000,000 shares of preferred stock with par value of US$0.001 each. In
this connection, the Board of Directors of the Company are authorized to
assign such shares to different series and to fix the related designation,
powers, preferences and rights of the shares.
i. Series A convertible and redeemable preferred stock
---------------------------------------------------
In 1996, the Company issued 3,000 shares of Series A convertible and
redeemable preferred stock, par value US$0.001 each, for US$3,313,000
(equivalent to approximately Rmb27,432,000), by capitalizing loans of
the same amount. The Series A convertible and redeemable preferred
stock carries preferential rights to dividends and distributions upon
liquidation. Each share of the Series A convertible and redeemable
preferred stock is convertible into common stock with the number of
shares of common stock determined by 1,000 divided by a conversion
factor. The conversion factor equals to the lesser of the average
closing price of the Company's common stock for the five days
immediately preceding the date of notice of conversion or US$1.00. The
outstanding Series A convertible and redeemable preferred stock is
redeemable at the option of the Company at any time after December 31,
1997 by giving ten days of notice at a price equal to US$1,000 per
share plus any accrued dividends. On May 1, 1997, 700 shares of Series
A convertible and redeemable preferred stock were converted into
700,000 shares of common stock. In addition, 300 shares of Series A
convertible and redeemable preferred stock were tendered for
cancellation in December 1997.
ii. Series B supervoting preferred stock
------------------------------------
In 1996, the Company issued 100,000 shares of Series B supervoting
preferred stock, par value US$0.001 each, in connection with its
acquisition of GHHP (see Note 1). The Series B supervoting preferred
stock carries preferential rights to dividends and distributions upon
liquidation. These 100,000 shares of Series B supervoting preferred
stock carry superior voting right, which account for 30% of the total
voting right of the Company on all corporate matters.
F-13
<PAGE>
6. INCOME TAXES
------------
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
The British Virgin Islands entity (GHHP) was incorporated under the
International Business Companies Act of the British Virgin Islands and,
accordingly, was exempted from the payment of the British Virgin Islands income
taxes. The joint venture enterprise established in the PRC (GHDC) was subject to
PRC income taxes at a rate of 33% (30% state unified income tax and 3% local
income tax). However, upon applications and approval by the relevant tax
authorities, GHDC was exempted from state unified income tax and local income
tax for two years starting from the first year of profitable operations and then
was entitled to a 50% reduction in state unified income tax for the next three
years.
The first profitable year for GHDC was the year ended December 31, 1996. If the
tax holiday for GHDC did not exist, the Group's income tax expenses (net of
minority interest) would have been increased by approximately Rmb7,143 for the
year ended December 31, 1996. Basic earnings per common share for the year ended
December 31, 1996 would have been approximately Rmb0.138.
The Company has not provided for income taxes on the undistributed earnings of
its international subsidiaries because the earnings are reinvested and, in the
opinion of management, will continue to be reinvested in the foreseeable future.
The reconciliations of the United States federal income tax rate to the
effective income tax rate based on the income before provision for income taxes
stated in the consolidated statements of operations are as follows:
1 9 9 6 1 9 9 7 1 9 9 8
--------- ---------- ---------
U.S. federal income tax rate 35 % 35 % 35 %
Effect of different tax rates in foreign
Effect of tax exemption for GHDC (33)% - -
Effect of tax loss - (35)% (35)%
------- ------- -------
- - -
======= ======= =======
F-14
<PAGE>
7. COMPREHENSIVE INCOME (LOSS)
--------------------
Comprehensive income (loss), net of tax, comprised:
1 9 9 6 1 9 9 7 1 9 9 8
--------- --------- --------------------
Rmb Rmb Rmb US$
Net income (loss) 1,378,316 (26,652,890) (116,480) (14,000)
Other comprehensive income -
translation adjustments 50,582 (50,582) - -
--------- ---------- ------- -------
Comprehensive income (loss) 1,428,898 (26,703,472) (116,480) (14,000)
========= ========== ======= =======
8. DISTRIBUTION OF INCOME
----------------------
The income of GHDC available for distribution to its shareholders is based on
the income reported in its statutory accounts prepared under generally accepted
accounting principles in the PRC. This differs from the amount reported under
generally accepted accounting principles in the United States of America. As of
December 31, 1996, such difference was insignificant.
9. RELATED PARTY TRANSACTIONS
--------------------------
Summary of related party transactions:
1 9 9 6 1 9 9 7 1 9 9 8
--------- --------- --------------------
Rmb Rmb Rmb US$
Management fee paid to HHPD
(see Note 1) 670,545 - - -
Operating-differential subsidies
received from HHPD (see Note 1) 1,571,890 - - -
Construction cost paid to HHPD
(see Note 1) 19,140,000 - - -
F-15
<PAGE>
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
a. Non-cash investing activities:
i. Certain property purchased by the Group in 1996 of approximately
Rmb19,837,000 was resulted from capital contribution by HHPD into GHDC
in the form of the property.
ii. In 1996, the Company issued 8,430,000 shares of its common stock and
100,000 shares of its Series B supervoting preferred stock to acquire
100% interest in GHHP. 7,950,000 shares of common stock were
subsequently cancelled upon disposal of 100% interest in GHHP in 1997
(see Note 1).
iii. In 1996, the Company issued 1,667 shares of common stock in connection
with a capitalization of a note payable of approximately Rmb782,000
(equivalent to approximately US$94,000) (see Note 5.a).
iv. In 1996, the Company capitalized loans amounting to Rmb27,432,000
(equivalent to US$3,313,000) by issuance of 3,000 shares of Series A
convertible and redeemable preferred stock (see Note 5.b).
b. Details of net assets disposed of as a consequence of the disposal of a
subsidiary (GHHP) in 1997 were as follows (Note 1):
Property, net $ 201,475,776
Cash and bank deposits 4,002
Accounts receivable 2,788,598
Due to a related company (3,128,363)
Due to a joint venture partner (155,076,834)
Minority interests of GHHP acquired (19,842,556)
-------------
Net assets upon disposal 26,220,623
Percentage of interest to reverse 100%
-------------
Group's share of net assets before reversal 26,220,623
Goodwill previously eliminated 70,762
Loss on disposal of a subsidiary (26,225,241)
-------------
Consideration received $ 66,144
=============
Satisfied by:
Cancellation of 7,950,000 shares of common stock of
US$0.001 each $ 66,144
=============
Net cash outflow in respect of the disposal of
interest in a subsidiary was as follows:
Cash and bank deposits disposed $ (4,002)
=============
F-16
<PAGE>
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Cont'd)
------------------------------------------------
c. Cash paid for interest and income taxes:
1 9 9 6 1 9 9 7 1 9 9 8
---------- --------- -------------------
Rmb Rmb Rmb US$
Interest - - - -
Income taxes - - - -
----- ----- ----- -----
- - - -
===== ===== ===== =====
11. SUBSEQUENT EVENT
----------------
Subsequent to December 31, 1998, the Company issued and alloted 17,720,000
shares of common stock, par value US$0.001 each, to Beautimate Group Limited, a
related company, for a cash consideration of approximately US$200,000 which is
yet to be received.
F-17
<PAGE>
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<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 124,500
<BONDS> 0
0
102
<COMMON> 2,430
<OTHER-SE> (127,032)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,000
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (14,000)
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<NET-INCOME> (14,000)
<EPS-BASIC> 0
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