SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One World Trade Center, Suite 7865
New York, New York 10048
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: (212) 938-0574
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(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. [ ]
The issuer's revenues for its most recent fiscal year were $706,433.
As of April 15, 1997, 9,680,000 shares of common stock of the Registrant
were outstanding. As of such date, no trading market existed in the Company's
common stock. The aggregate market value of the common stock held by
non-affiliates, based on the book value per share, was approximately $400,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.................................. 1
ITEM 2. DESCRIPTION OF PROPERTIES................................ 5
ITEM 3. LEGAL PROCEEDINGS........................................ 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS...................................... 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.............................. 5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS..................... 6
ITEM 7. FINANCIAL STATEMENTS..................................... 9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 9
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT......................... 9
ITEM 10. EXECUTIVE COMPENSATION.................................... 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................... 11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 12
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K.......................... 13
SIGNATURES................................................ 14
FINANCIAL STATEMENTS...................................... F-1
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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. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 4 of this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
General and Development of Business
Infrastructure International, Inc. (the "Company"), a Nevada corporation,
through its subsidiaries and a sino-foreign joint venture, is engaged in the
development and operation of a 72 kilometer four-lane toll road (the "Jin Long
Highway") in Huizhou, Guangdong Province, the People's Republic of China
("PRC").
On December 1, 1996, the Company consummated an exchange (the "Exchange")
with the shareholders of Guang Hui Highway Project Company Limited ("Guang Hui")
pursuant to which the Company acquired 100% of the stock of Guang Hui in
exchange for 8,430,000 shares of common stock, representing 87.1% of the
outstanding common stock, and 100,000 shares of preferred stock, representing
100% of the outstanding Series B Preferred Stock, of the Company.
Guang Hui, a British Virgin Island company formed on March 5, 1996,
operating through an 80%-owned subsidiary in the PRC, is engaged in the
development and operation of the Jin Long Highway. An 18 kilometer section of
the Jin Long Highway began operation in March of 1996 and a 17 kilometer section
is scheduled to open by the end of 1997. Development of the remaining 37
kilometers of the Jin Long Highway has commenced and is expected to be completed
during 1997. The development and operation of the Jin Long Highway is being
undertaken by a sino-foreign joint venture, Guanghui Highway Development Company
Limited (the "Highway Joint Venture"), which is 80% owned by the Company and 20%
owned by Huizhou Highway Property Development Company ("HHPD"), a state-owned
company incorporated in the PRC. Guang Hui is generally entitled to 80% of the
profits derived from the operation of the Jin Long Highway for a period of
thirty years, subject to certain guaranteed minimum returns to Guang Hui during
the first seven years of operations and subject to certain additional
allocations to HHPD during years eight through seventeen of operations.
The assets of the Highway Joint Venture and Guang Hui consist principally
of the land use rights relating to, and the portions presently completed or
under construction of, the Jin Long Highway in the PRC. The land use rights
relating to the Jin Long Highway expire in August of 2026 at which time the
Company's interest in the Jin Long Highway will terminate.
Company Strategy
Management's strategy for the Company is to develop and operate the Jin
Long Highway and to capitalize on the anticipated earnings and cash flows of the
Jin Long Highway to acquire interests in other infrastructure projects in the
PRC. The Company believes that the combination of existing profitable operations
of the operational portion of the Jin Long Highway combined with contractual
guarantees of minimum profit levels to the Company during the first seven years
of operations and ongoing interests in the operations of the Jin Long Highway
for an additional twenty-three years will allow the Company to realize superior
returns on equity and assets and strong cash flows over the life of the
Company's investment.
Management believes that the Company's participation in the Highway Joint
Venture and the development and operation of the Jin Long Highway will also
facilitate the Company's participation in future infrastructure projects by (i)
establishing essential governmental and industry contacts necessary for
participation in such ventures in the PRC, (ii) establishing credibility in the
operation of infrastructure projects in the PRC, and (iii) establishing the
Company's ability to attract necessary financing for such projects. While the
Company has not identified additional infrastructure projects in which it
intends to invest, management believes there are substantial opportunities for
further infrastructure investment in transportation, communications, power and
other essential services.
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Jin Long Highway
Overview. The Jin Long Highway is a proposed four-lane toll road located in
Guangdong Province, PRC. When completed, the Jin Long Highway will span 72
kilometers from Longmen Baisachias in the north to Xiaojinkou in the south.
Presently, to travel from northern part of China to the major cities in the
south, namely Hong Kong, Shenzhen and Yantian Harbour, commuters must travel a
166 kilometer road from Xin Faze to Guangzhou and a 134.8 kilometer road from
Guangzhou to Shenzhen. The indirect routing of those roads combined with
congestion and poor surface conditions make travel times between Xin Feng and
Shenzhen unpredictable with typical travel time ranging from five and one-half
to eight hours.
The Jin Long Highway will be a limited access, high quality, maintained
highway which will permit direct travel from Xin Feng to Shenzhen, bypassing
Guangzhou. The Jin Long Highway will save approximately 100 kilometers from the
existing route with an anticipated travel time of three hours. The Company
believes that the Jin Long Highway will become the preferred method of travel
for businessmen and the transportation of goods from northern China to major
cities in the south.
Development. The Jin Long Highway is being constructed in two separate
phases. The first phase, consists of 35 kilometers beginning at Longmen
Baisachias, of which 18 kilometers was completed in March of 1996 and is
presently in operation. The remaining 17 kilometers is presently under
construction and is scheduled for completion during 1997. Construction of the
second phase, consisting of 37 kilometers, has commenced already and is expected
to be completed during 1997.
The first phase of the Jin Long Highway is being constructed by HHPD, a
state-owned enterprise and a 20% owner of the Highway Joint Venture, at a cost
of approximately RMB 248 million (US$29.8 million). In connection with the
formation of the Highway Joint Venture, HHPD entered into a turn-key
construction contract pursuant to which HHPD agreed to construct the entire Jin
Long Highway for RMB 560 million (US$67.3 million), inclusive of the cost of the
first phase.
Construction of phase one extends 35 kilometers from the intersection of
Provincial Expressway Route No. 1914 and National Expressway Route No. 205 in
Shierling, Young's Village to the junction of Gongzhuang Town and Yangcun Town,
Boluo. The road bed on the first 35 kilometer section is 18 meters in width and
may be gradually increased to 23 meters in width in the future. Construction of
the road is required to comply with the technical specifications and standards
for highway construction established by the Ministry of Transportation of the
PRC. The Highway Joint Venture will have the right to supervise and ensure the
quality and progress of construction and will, in turn, be required to pay
construction costs pursuant to a schedule of payments set forth in the
construction contract. Performance by HHPD under the construction contract is
guaranteed by the Huizhou Highway Bureau.
Operation. The Highway Joint Venture has entered into a management
agreement with HHPD pursuant to which HHPD will be responsible for operation of
the first 35 kilometer section of the Jin Long Highway, including the payment of
costs associated with the operation and maintenance of the toll road, for a
period of seventeen years after which time the parties will negotiate a new
contract for the management of the toll road. In return for such services, the
Highway Joint Venture will pay to HHPD a management fee equal to 15% of the
total tolls collected from the operation of the toll road.
The Highway Joint Venture and HHPD have selected two initial sites for toll
booths with additional booths to be opened as agreed to by the parties from time
to time. Operation of the Jin Long Highway will generally consist of the
collection of tolls and deposit of such tolls in a designated bank account and
the maintenance of the toll road, manning of toll booths and accounting for and
handling revenues. Tolls to be charged will vary based on the type of vehicle
traveling on the road and the distance traveled and will be fixed from time to
time by agreement among the Highway Joint Venture and HHPD. Initial tolls for
travel on the 17 kilometer portion of the road which is presently operational
range from $0.24 to $2.40. Tolls for the remaining portions of the road have
not, as yet, been established.
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Joint Venture Agreement
The terms of the Company's ongoing participation in the development and
operation of the Jin Long Highway are governed by a joint venture agreement (the
"Joint Venture Agreement") dated August 6, 1996 between the Company's
wholly-owned subsidiary, Guang Hui, and HHPD whereby the Highway Joint Venture
was formed.
Under the terms of the Joint Venture Agreement, the Company, through Guang
Hui, is required to contribute to the Highway Joint Venture $9.53 million in
cash and HHPD is required to contribute to the Highway Joint Venture $2.38
million in the form of assets comprising a part of the Jin Long Highway. As of
December 31, 1996, the Company had made an initial contribution to the Highway
Joint Venture of $3.0 million in cash. In February of 1997, Guang Hui
contributed an additional $7.0 million to the Highway Joint Venture,
representing the balance of its obligation and a loan of $464,000. HHPD
contributed its interest in the assets comprising the Jin Long Highway with an
appraised value of approximately $22.35 million in satisfaction of its required
capital contribution to the Highway Joint Venture. The excess value of the
assets contributed by HHPD, in the approximate amount of $16.4 million,
constitutes a payable of the Highway Joint Venture to HHPD. HHPD has agreed to
forego repayment of such amount from the Highway Joint Venture until the second
phase of construction of the Jin Long Highway is completed.
During the first seven years of the Highway Joint Venture, profits and
losses will be allocated 80% to the Company and 20% to HHPD; provided, however,
that the Company shall be allocated profits of not less than 22% of the actual
capital contributed to the Highway Joint Venture by the Company for each of the
first seven years with distributions to be made on the last day of each calendar
quarter based on the actual time and amount of each capital injection. During
each of the eighth to the seventeenth years, 30% of the net income of the
Highway Joint Venture shall be allocated to HHPD until HHPD has received a total
return equal to its capital contribution to the Highway Joint Venture plus an
imputed interest rate of 13.5%. The remaining 70% of net income, and net losses,
if any, will be allocated 80% to the Company and 20% to HHPD. During each of the
eighteenth year to the thirtieth year of the Highway Joint Venture, net income
or loss shall be allocated 80% to the Company and 20% to HHPD. After the
thirtieth year of the Highway Joint Venture, in August of 2026, the Highway
Joint Venture will terminate and ownership of the Jin Long Highway will revert
to HHPD.
Income Guarantees
As a further inducement for the Company to enter into the Highway Joint
Venture, HHPD and the Huizhou Highway Bureau have each unconditionally
guaranteed payment of the Company's preferred return during the first seven
years of operations as described above. In order to assure that adequate funds
are available to pay such guaranteed payment, the Huizhou Highway Bureau and
HHPD have agreed to deposit in the Highway Joint Venture's designated bank
account revenues from a separate toll road in an amount sufficient to maintain
at all times a three month reserve against such payments. If operation of the
other toll road fails to provide adequate funding to maintain the required
reserves, the Huizhou Highway Bureau and HHPD have agreed to make deposits
against such reserve account from other revenues or resources of HHPD so as to
maintain the minimum required guarantee reserves at all times.
Government Regulation
The Ministry of Transportation of the PRC establishes various standards and
regulations governing the construction, maintenance and operation of
transportation facilities within the PRC. Those standards and regulations
generally impose standards relating to safety in the construction and operation
of such facilities. Accordingly, the Jin Long Highway will be subject to
periodic inspection by the Ministry of Transportation both during the
construction phase and the operational phase. As the construction contract calls
for HHPD to construct the road in accordance with Ministry of Transportation
standards, the Company does not believe that such regulations will have any
adverse affect upon construction of the road.
With respect to the operation of the Jin Long Highway, transportation
standards in the PRC remain relatively undeveloped by western standards. It is
possible that the Ministry of Transportation may impose new rules and
regulations as to operation of and on transportation facilities from time to
time. The imposition of new rules and regulations could adversely affect the
Company's operations by imposing standards or limitations on the volume of
traffic, tolls chargeable, access to or other aspects of the operation of the
Jin Long Highway.
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The Company believes that its operations comply with all applicable PRC
regulations governing the construction and operation of the Jin Long Highway.
Competition
As discussed, existing non-toll roads service the areas serviced by the Jin
Long Highway. The Company believes that the Jin Long Highway will be able to
attract adequate traffic to operate profitably based on the superior quality of
the road, the limited access permitted on the road and the time and distance
savings which are expected to be achieved by travel on the road. As the region
in which the Jin Long Highway is located continues to grow, it can be expected
that additional roadways will constructed to services such areas. Such new roads
may be a combination of toll and non-toll roads.
The Company believes that it is competitive, and will be competitive, with
transportation facilities which may be constructed in the future based on the
factors discussed above as well as the participation of Huizhou Highway Bureau.
Employees
The Company and its subsidiaries currently employ approximately 76 people;
8 in management, 22 in administration and 45 in toll road operations. Pursuant
to the terms of the agreement by which HHPD operates the Jin Long Highway,
virtually all personnel involved in the day-to-day operations of the Jin Long
Highway are employees of HHPD. The Company and its subsidiaries are not parties
to any traditional labor contracts. The Company has not suffered any labor
stoppages and believes that it has good relations with its employees.
Additional Infrastructure Investment Strategy
Since the inception of market reform in the PRC in the late 1970's, the PRC
economy has experienced strong growth and a general improvement in standard of
living. The growth in the PRC economy has been accompanied by a growing demand
for basic infrastructure improvements necessary to support continued growth and
higher living standards.
In recent years, substantial investment, both domestic and foreign, has
been made to establish and upgrade basic infrastructure in the PRC. Such
investment to date has focused largely on providing power, other utilities and
transportation as well as raw materials and building products to support
industrial growth in the PRC and to meet consumer demand in rapidly growing
metropolitan areas. While infrastructure investment has grown substantially
since the 1970's, the Company believes there are substantial opportunities for
additional infrastructure investment in the PRC. The Company intends to seek
out, evaluate and, where appropriate, invest in other infrastructure projects
where it believes superior investment returns can be achieved. While the Company
has no infrastructure projects presently under consideration for investment,
other than the Jin Long Highway, the Company believes that opportunities will be
available to investment in projects in the PRC in areas such as transportation,
distribution, telecommunications, power, utilities, natural resources and other
basic infrastructure.
Management believes that the Company enjoys a favorable position with
respect to potential participation in future infrastructure projects as a result
of (i) the establishment of key contacts with government and industry officials
as a result of the Company's participation in the Jin Long Highway, (ii) the
existence of a favorable track record for participation in such projects which
the Company believes it will enjoy as a result of its interest in the Jin Long
Highway, (iii) the existence of a favorable track record for financing such
projects which the Company believes it will enjoy as a result of its interest in
the Jin Long Highway, and (iv) strong cash flows which it believes it will enjoy
as a result of its interest in the Jin Long Highway.
While the Company believes that it can successfully seek out, evaluate and
acquire interests in additional infrastructure projects in the PRC, there can be
no assurance that the Company will be successful in that regard or that any such
investments will ultimately be profitable. There are numerous companies which
are presently involved in infrastructure development in the PRC and additional
companies can be expected to enter into such market. Many of the companies which
may compete with the Company with respect to acquisition of interests in such
projects, or operation of competing projects, may have substantially greater
resources, financially and otherwise, than the Company.
4
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive offices consist of 3,315 square feet located at One
World Trade Center, Suite 7865, New York, New York. Such space is provided by a
related party free of charge. The related party's lease expires in August, 1999.
The Company's interest in the Jin Long Highway is held pursuant to a land
use right permit granted by the PRC government to the Highway Joint Venture.
Such land use rights relate to the land underlying the Jin Long Highway and
revert to HHPD in August of 2026. See "Item 1. Description of Business. Jin Long
Highway."
The Company believes that its properties are adequate to support its
current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to, and management is not aware of,
any pending or threatened legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
As of April 15, 1997, there was no active trading market in the Company's
Common Stock and no such market existed during 1996.
The Company intends to apply for listing of its Common Stock initially on
the NASD Electronic Bulletin Board and, later, on the Nasdaq Small-Cap Market at
such time as it meets the requisite listing standards, if ever. There can be no
assurance, however, that the Company's Common Stock will in fact be listed on
Nasdaq or that a sustained trading market will develop.
Record Holders
As of April 15, 1997, there were approximately 624 record owners of the
Common Stock of the Company.
Dividends
The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page of this Form 10-KSB.
Infrastructure International, Inc. (the "Company"), through its
subsidiaries and a sino-foreign joint venture, is engaged in the construction
and operation of a four lane 72 kilometer toll road in Guangdong Province, PRC.
The Company's operations are conducted exclusively through a sino-foreign
joint venture in which its wholly-owned subsidiary, Guang Hui Highway Project
Company Limited ("Guang Hui"), owns an 80% interest. On December 1, 1996, the
Company consummated an exchange (the "Exchange") with the shareholders of Guang
Hui pursuant to which the Company acquired 100% of the stock of Guang Hui in
exchange for 8,430,000 shares of common stock, representing 87.1% of the
outstanding common stock, and 100,000 shares of preferred stock, representing
100% of the outstanding Series B Preferred Stock, of the Company.
Guang Hui is a British Virgin Island company formed on March 5, 1996 to
acquire an interest in and providing for the development and operation of the
Jin Long Highway. An 18 kilometer section of the Jin Long Highway began
operation in March of 1996 and a 17 kilometer section is scheduled to open by
the end of 1997. Development of the remaining 37 kilometers of the Jin Long
Highway is presently under way and is scheduled to be completed during 1997. The
development and operation of the Jin Long Highway is being undertaken by a
sino-foreign joint venture, Guanghui Highway Development Company Limited (the
"Highway Joint Venture"), which is 80% owned by the Company and 20% owned by
Huizhou Highway Property Development Company ("HHPD"), a state-owned company
incorporated in the PRC. Guang Hui is generally entitled to 80% of the profits
derived from the operation of the Jin Long Highway for a period of thirty years,
subject to certain guaranteed minimum returns to Guang Hui during the first
seven years of operations and subject to certain additional allocations to HHPD
during years eight through seventeen of operations.
The assets of the Highway Joint Venture and Guang Hui consist principally
of the land use rights relating to, and the portions presently completed or
under construction of, the Jin Long Highway in the PRC. The land use rights
relating to the Jin Long Highway expire in August of 2026 at which time the
Company's interest in the Jin Long Highway will terminate.
During the first seven years of the Highway Joint Venture, profits and
losses will be allocated 80% to the Company and 20% to HHPD; provided, however,
that the Company shall be allocated profits of not less than 22% of the actual
capital contributed to the Highway Joint Venture by the Company for each of the
first seven years with distributions to be made on the last day of each calendar
quarter based on the actual time and amount of each capital injection. During
each of the eighth to the seventeenth years, 30% of the net income of the
Highway Joint Venture shall be allocated to HHPD until HHPD has received a total
return equal to its capital contribution to the Highway Joint Venture plus an
imputed interest rate of 13.5%. The remaining 70% of net income, and net losses
if any, will be allocated 80% to the Company and 20% to HHPD. During each of the
eighteenth year to the thirtieth year of the Highway Joint Venture, net income
or loss shall be allocated 80% to the Company and 20% to HHPD. After the
thirtieth year of the Highway Joint Venture, in August of 2026, the Highway
Joint Venture will terminate and ownership of the Jin Long Highway will revert
to HHPD.
As a further inducement for the Company to enter into the Highway Joint
Venture, HHPD and the Huizhou Highway Bureau have each unconditionally
guaranteed payment of the Company's preferred return during the first seven
years of operations as described above. In order to assure that adequate funds
are available to pay such guaranteed payment, the Huizhou Highway Bureau and
HHPD have agreed to deposit in the Highway Joint Venture's designated bank
account revenues from a separate toll road in an amount sufficient to maintain
at all times a three month reserve against such payments. If operation of the
other toll road fails to provide adequate funding to maintain the required
reserves, the Huizhou Highway Bureau and HHPD have agreed to make deposits
against such reserve account from other revenues or resources of HHPD so as to
maintain the minimum required guarantee reserves at all times.
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The Highway Joint Venture has entered into a management agreement with HHPD
pursuant to which HHPD will be responsible for operation of the first 35
kilometer section of the Jin Long Highway, including the payment of costs
associated with the operation and maintenance of the toll road, for a period of
seventeen years after which time the parties will negotiate a new contract for
the management of the toll road. In return for such services, the Highway Joint
Venture will pay to HHPD a management fee equal to 15% of the total tolls
collected from the operation of the toll road.
Operation of the first phase of the Jin Long Highway commenced in March of
1996 and the Highway Joint Venture was formed in August of 1996. Accordingly,
the operating results for 1996 reflect the Company's allocable share of income
and expenses for the period from March 5, 1996 to December 31, 1996. Because the
Company had no substantial operations prior to the Exchange and because Guang
Hui and the Highway Joint Venture were not formed until 1996 and the Jin Long
Highway was not in operation prior to March of 1996, no comparable financial
results are presented for 1995.
Results of Operations - Fiscal Year 1996
Revenues. Revenues during 1996 totaled $706,000, consisting of $518,000
from toll road operations and $189,000 from subsidies from the Huizhou Highway
Bureau pursuant to its minimum profits guarantee. Toll paying vehicles for the
period totaled approximately 55,000 with an average toll of $.34 per vehicle.
Average monthly traffic on the Jin Long Highway increased from 45,043 vehicles
in June, 1996 to 65,165 vehicles in December, 1996.
Operating Expense. Operating expenses during 1996 totaled $106,000 (20.4%
of toll road revenues and 15% of total revenues). Operating expenses consisted
principally of a 15% management fee paid to HHPD for turn-key management of the
operations of the Jin Long Highway ($78,000) and general corporate overhead of
the Company. Pursuant to its management agreement with HHPD, HHPD pays all other
operating and maintenance expenses relating to the Jin Long Highway.
Depreciation. Depreciation with respect to the Jin Long Highway totaled
$434,000 during 1996.
Income Taxes. The Company reported no income tax expense during 1996 as a
result of certain concessions granted by the PRC. Pursuant to such tax
concessions, the Highway Joint Venture, through which all of the Company's
current operations are conducted, is exempt from federal and local income taxes
for the first two years of profitable operations and are entitled to a 50%
reduction in federal income taxes for the next three years.
Upon expiration of the PRC income tax concessions, the Highway Joint
Venture will subject to PRC income taxes at current combined rate of 33%. On a
pro forma basis, income tax expense of the Highway Joint Venture, after minority
interests, would have been approximately $1,000 during 1996.
Minority Interests. Minority interest, totaling $650 in 1996 represents the
allocable share of income or loss attributable to the 20% share of the Highway
Joint Venture not owned by the Company.
Liquidity and Capital Resources
At December 31, 1996, the Company had a working capital deficit of $18.7
million and a cash balance of $481. At December 31, 1995, the Company had no
assets and had liabilities of $94,000.
Operating cash flows totaled $2.9 million during 1996. Such cash flows were
primarily attributable to increases in short term operating liabilities relating
to advances of construction costs and management fees due to HHPD ($2.2 million)
and to profitable operations during the year adjusted to reflect $0.4 million of
depreciation which represents a non-cash charge to earnings.
The Company's cash flows from financing activities totaled $19.4 million
during 1996. Those cash flows reflect (i) $2.9 million from the sale of common
stock and preferred stock, net of issuance costs, and (ii) $16.4 million
representing the excess value of assets contributed to the Highway Joint Venture
by HHPD which amount constituted a payable of the Highway Joint Venture to HHPD.
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The Company utilized $22.3 million of cash flows during 1996 to acquire its
interest in and pay for construction costs of the Jin Long Highway.
At December 31, 1996, the primary obligations of the Company consisted of
(i) $1.64 million payable to HHPD relating to the excess value of the assets
contributed, (ii) $2.2 million payable to HHPD for construction costs and
management fees net of the operating differential subsidy.
In addition to its various borrowings, the Company and its subsidiaries are
obligated under the agreement governing operations of the Highway Joint Venture
to contribute an additional $5.1 million to the Highway Joint Venture for use in
connection with ongoing construction of the Jin Long Highway. Such capital
contributions are required to be made as construction progresses provided that
the Company shall not be required to contribute more than $3 million in any one
month.
During 1996, the Company issued 3,000 shares of Series A convertible
preferred stock raising approximately $3.3 million, net of offering costs, all
of which shares remained outstanding and convertible into Common Stock at
December 31, 1996. Each share of Series A convertible preferred stock is
convertible into shares of Common Stock at a price equal to the lesser of the
market price at the time of conversion or $1.00 per share at any time on or
prior to December 31, 1997 and is redeemable by the Company at $1,000 per share
after December 31, 1997.
The proceeds from the sale of securities during 1996 were used to fund the
Company's capital contributions to the Highway Joint Venture.
Other than the foregoing, the Company has no sources of available capital
or commitments to provide additional capital. Management believes that the
Company has sufficient capital resources to fund its current operations for the
foreseeable future. The Company does not presently have sufficient resources to
fund the balance of its required capital contributions to the Highway Joint
Venture. The Company intends to seek additional funding during 1997 to meet its
obligations to the Highway Joint Venture. While the Company has no present plans
in that regard, it is anticipated that the Company will offer some combination
of common stock, convertible preferred stock and convertible debt to meet such
funding obligations.
Certain Factors Affecting Future Operating Results
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. Certain factors that might
cause such a difference include risks pertaining to the timing of completion of
the Jin Long Highway (delays in completion can be expected to reduce revenues),
the construction of new toll or non-toll roads which may compete with the Jin
Long Highway (such competing roads may reduce traffic volumes and effectively
reduce toll rates, both of which would reduce revenues), economic conditions
within China and Hong Kong and globally (economic slowdowns, whether arising as
a result of domestic or global trade or other conditions, may result in reduced
commercial traffic and changes in consumer behavior, any of which might result
in lower revenues), changes in laws and regulations within the PRC (including,
but not limited to, the possible imposition of price controls, property
ownership regulations, tax revisions or other governmental action, any of which
might materially and adversely impact the Company), and other risks pertaining
to operations in the PRC.
The future operations results of the Company will also be affected by a
number of factors including but not limited to the following: the ability of the
Company to raise sufficient funds to execute its business plan; the ability of
the Company to retain its key personnel; the ability of the Company to complete
the balance of the highway and construction on a timely basis and within the
budget and; the use of the toll road to meet or exceed Company projections.
Inflation and Exchange Rates
The Company does not believe that inflation has had a material impact on
the results of its operations. However, high levels of inflation and exchange
rate fluctuations have characterized the PRC economy in recent years. Because
the operations of the Highway Joint Venture are conducted exclusively within the
PRC and because HHPD is required to bear all operating and maintenance costs
relating to the toll road pursuant to its management agreement, management
believes that any price fluctuations attributable to inflation or changes in
exchange rates will not adversely effect the Company. There can be no assurance,
however, that continued inflation and exchange rate fluctuations will not
adversely impact the Company in the future. In particular, as the Company's
revenues are primarily received in Renminbi, the Company's ability to pay
dividends and make other payments denominated in other currencies may be
adversely impacted by exchange rate fluctuations.
8
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Arthur Andersen, appears on pages F-2
through F-18 of this report. See Index to Financial Statements on page F-1 of
this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Following the acquisition of Guang Hui by the Company, on December 27,
1996, the Company's Board of Directors selected Arthur Andersen & Co. to serve
as its new independent accountants and dismissed Mantyla, McReynolds &
Associates, Certified Public Accountants, of Salt Lake City, Utah which
previously served as the independent accountants for the Company.
Mantyla, McReynolds & Associate's reports on the financial statements of
the Company for the fiscal years ended December 31, 1994 and 1995 contain no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope, or accounting principles. In connection with their
audits for fiscal years 1994 and 1995 and through December 27, 1996, there were
no disagreements with Mantyla, McReynolds & Associates on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Mantyla, McReynolds & Associates would have caused them to make reference
thereto in their reports on the financial statements for such years.
Arthur Andersen & Co. served as the principal accounting firm for Guang Hui
with respect to the financial statements of such company prior to the Exchange.
The information described above regarding the Company's decision to dismiss
Mantyla, McReynolds & Associates as its independent accountants and select
Arthur Andersen & Co. as its new independent accountants, along with a letter
from Mantyla, McReynolds & Associates stating that they agree with the above
information regarding the Company's change of accountants, was fully disclosed
in a Form 8-K filed with the SEC.
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 certain information concerning the current
directors and executive officers of the Company
Name Age Position following Exchange
-------- ------- -----------------------------
Yiu Yat Hung 44 Chairman of the Board, Chief Executive Officer and
President
Yiu Yat On 41 Vice President, Treasurer and Director
Ma Ding Jie 62 Director
Jin Hiu Juan 41 Director
All directors will hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified.
Yiu Yat Hung and Yiu Yat On are brothers. Otherwise, there are no family
relationships among any of the officers or directors.
The following is a biographical summary of the business experience of the
directors and present executive officers of the Company.
Yiu Yat Hung is a founder of Guang Hui Highway Project Company Limited and
has served as Chairman of the Board, Chief Executive Officer and President of
the Company since the acquisition of Guang Hui by the Company in December of
1996. Mr. Yiu is also a founder of China Medical Development Company Ltd., a
pharmaceutical manufacturing and distribution company, and has served as
Chairman and Chief Executive Officer of Natural Way Technologies, Inc. since the
acquisition of China Medical by Natural Way Technologies in June of 1996.
Natural Way Technologies is publicly traded over-the-counter. Since 1981, Mr.
Yiu has owned and heads a trading and investment company in Hong Kong. Mr. Yiu
is a medical doctor by education, has a Masters Degree in Political Science and
Economics and has spent his entire career in business.
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. 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 have been workshop director with many years experience of
production management, then transferred as warehouse director for four years,
now Mr. Ma is assistant of general manager, in Shenzhen honghua building
material company, responsible for management.
Jin Hui Juan specialized in fine chemistry with title of engineer, have
worked in ShangHai chemistry research institute for many years, and served as
assistant of general manager in Shenzhen honghui printing and dyeing company,
responsible for technology supervision and management, and acted as general
manager of Hong Kong hongda company.
Compliance with Section 16(a) of the Exchange Act
Under the securities laws of the United States, the Company's directors,
its executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose in this Report any
failure to file by these dates during 1996. All of the filing requirements were
satisfied on a timely basis in 1996, except that Yiu Yat Hung, Yiu Yat On, Ma
Ding Jie, Jin Hui Juan and New Silver Eagle Holdings Limited failed to file on a
timely basis their initial report of their holdings on Form 3. Reports on Form 3
have since been filed by each of such persons. In making these disclosures, the
Company has relied solely on written statements of its directors, executive
officers and shareholders and copies of the reports that they filed with the
Commission.
Committees and Attendance of the Board of Directors
The Company presently maintains no standing committees of its board of
directors. The Company intends to evaluate the creation of a standing Audit
Committee and a standing Compensation Committee at such time as the board deems
appropriate.
During the year ended December 31, 1996, the Board of Directors held 4
formal meetings. Each director (during the period in which each such director
served) attended at least 75% of the aggregate of (i) the total number of
meetings of the Board of Directors, plus (ii) the total number of meetings held
by all committees of the Board of Directors on which the director served.
9
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation and Other Matters
The following table sets forth information concerning cash and non-cash
compensation paid or accrued for services in all capacities to the Company
during the year ended December 31, 1996 of each person who served as the
Company's Chief Executive Officer during fiscal 1996 and the four other most
highly paid executive officers whose total annual salary and bonus exceeded
$100,000 during the fiscal year ended December 31, 1996 (the "Named Officers").
<TABLE>
Long Term
Annual Compensation Compensation
--------------------------------------------- ---------------
Other Annual Stock
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options (#)
- --------------------------- ---- ---------- --------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Yiu Yat Hung (1)................ 1996 -0- -0- -0- -0-
Chairman of the Board and 1995 -0- -0- -0- -0-
Chief Executive Officer 1994 -0- -0- -0- -0-
</TABLE>
- ----------------
(1) Compensation indicated for Mr. Yiu for periods prior to December of 1996
represent amounts paid by the Company's subsidiary, Guang Hui, prior to the
acquisition of Guang Hui by the Company.
Compensation of Directors
No compensation is presently paid to directors for service in such
capacity. The Company intends to establish appropriate compensation arrangements
for non-employee directors consistent with industry practice following the 1997
Annual Meeting.
Employment Contracts
The Company has no employment contracts with any of its present executive
officers and has no plans or arrangements with respect to payments resulting
from the resignation, retirement or any other termination of a named executive
officer's employment or from a change-in-control of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership of Common Stock
The following table is furnished as of April 15, 1997, to indicate
beneficial ownership of shares of the Company's Common Stock by (1) each
shareholder of the Company who is known by the Company to be a beneficial owner
of more than 5% of the Company's Common Stock, (2) each director, Nominee and
named officer of the Company, individually, and (3) all officers and directors
of the Company as a group. The information set out in the following table was
supplied by such persons.
10
<PAGE>
<TABLE>
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned (2) Percent
- -------------------- ---------------------- ---------
<S> <C> <C>
New Silver Eagle Holdings Limited (3).............. 6,100,000 63.0%
Suite 5301, Central Plaza
18 Harbour Road, Wanchai, Hong Kong
Yiu Yat Hung....................................... -0- (3) -
Yiu Yat On......................................... -0- (3) -
Ma Ding Jie........................................ -0- -
Jin Hui Juan....................................... -0- -
All officers and directors as a group (4 persons).. 6,100,000 63.0%
</TABLE>
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to the shares shown opposite the
name of such person or group.
(2) Includes shares of Common Stock not outstanding, but which are subject to
options or warrants exercisable within 60 days of the date of the
information set forth in this table, which are deemed to be outstanding for
the purpose of computing the shares held and percentage of outstanding
Common Stock with respect to the holder of such options or warrants. Such
shares are not, however, deemed to be outstanding for the purpose of
computing the percentage of any other person.
(3) New Silver Eagle Holdings Limited is controlled by Yiu Yat Hung, Yiu Yat
On, and family members, the officers and directors of the Company. Such
individuals may be deemed to be the beneficial owners of the shares held by
New Silver Eagle Holdings Limited. However, each of such individuals
disclaim beneficial ownership of the shares indicated as held by New Silver
Eagle Holdings Limited.
Series B Preferred Stock
The following table is furnished as of April 15, 1997 to indicate
beneficial ownership of the Company's Series B Preferred Stock by each
shareholder of the Company who is known by the Company to be a beneficial owner
of more than 5% of the Company's Series B Preferred Stock.
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned Percent
- -------------------- ------------------ -------
New Silver Eagle Holdings Limited (2)........... 100,000 100.0%
Suite 5301, Central Plaza
18 Harbour Road, Wanchai, Hong Kong
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to the shares shown opposite the
name of such person or group.
(2) New Silver Eagle Holdings Limited is controlled by Yiu Yat Hung, Yiu Yat
On, and family members, the officers and directors of the Company. Such
individuals may be deemed to be the beneficial owners of the shares held by
New Silver Eagle Holdings Limited. However, each of such individuals
disclaim beneficial ownership of the shares indicated as held by Silver
Eagle Holdings Limited.
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 Yiu Yat Hung and Yiu Yat
On, 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."
11
<PAGE>
The Company has, from time to time, borrowed funds from New Silver Eagle
Holdings Limited, a company controlled by Yiu Yat Hung and family. At December
31, 1996, the Company had a balance of $75,000 owed to New Silver Eagle
Holdings. Such loans are unsecured, non-interest bearing and have no definitive
repayment terms.
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 ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
- --------- ----------------------------
2.1 Acquisition Agreement dated December 1, 1996 between
Infrastructure International, Inc. and the shareholders of
Guang Hui Highway Project Company Limited (1)
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 Schedule
- -------------------
* 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.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated December 1, 1996 reporting under items
1, 2, 4, 5 and 7 the acquisition of Guang Hui, the resulting change in control
of the Company, a change of auditors, a change of officers and directors and
providing certain financial statements and exhibits.
12
<PAGE>
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 Hung
-------------------------------------
Yiu Yat Hung
Chairman and Chief Executive Officer
Dated: December 2, 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
- ----------- ------- ------
/s/ Yiu Yat Hung Chairman & Chief Executive Officer December 2, 1999
- -----------------
Yiu Yat Hung
/s/ Yiu Yat On Chief Financial Officer December 2, 1999
- -----------------
Yiu Yat On
/s/ Ma Ding Jie Director December 2, 1999
- ------------------
Ma Ding Jie
/s/ Jin Hiu Juan Director December 2, 1999
- ------------------
Jin Hiu Juan
13
<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, 1996 and 1995........... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994..................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994..................................... F-5
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994..................................... F-6
Notes to Financial Statements.......................................... F-7
F-1
<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. (a company incorporated in the State of
Nevada; "the Company') and Subsidiaries ("the Group') as of December 31, 1995
and 1996, and the related consolidated statements of operations, cash flows and
changes in shareholders' equity for the years ended December 31, 1994, 1995 and
1996. 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 referred to above present
fairly, in all material respects, the financial position of Infrastructure
International, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1994, 1995 and 1996, in conformity with generally accepted accounting
principles in the United States of America.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
April 11, 1997
F-2
<PAGE>
INFRASTRUCTURE INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
1995 1996
------ ------
Rmb Rmb US$
<S> <C> <C> <C>
ASSETS
Current assets:
Cash - 4,002 481
Due from shareholders 9,762 108,160 13,000
------- ----------- ----------
Total current assets - 112,162 13,481
Property, net - 201,475,776 24,215,838
------- ----------- ----------
Total assets 9,762 201,587,938 24,229,319
======= =========== ==========
LIABILITI AND SHAREHOLDERS' EQUITY
Current liabilities:Accrued expenses - 266,240 32,000
Due to a related company - 622,808 74,855
Due to a joint venture partner - 18,238,655 2,192,146
Loan from a joint venture partner - 136,838,179 16,446,897
------- ----------- ----------
Total current liabilities - 155,965,882 18,745,898
------- ----------- ----------
Minority interest - 19,842,556 2,384,922
------- ----------- ----------
Shareholders' equity:
Preferred stock, Series A convertible and
redeemable, par value US$0.001; issued and
outstanding - nil as of December 31, 1995 and
3,000 shares as of December 31, 1996 - 25 3
Preferred stock, Series B supervoting, par value
US$0.001; issued and outstanding - 100,000
shares as of December 31, 1995 and 1996 832 832 100
Common stock, par value US$0.001; issued and
outstanding - 9,680,000 shares as of
December 31, 1995 and 1996 80,532 80,532 9,680
Additional paid-in capital 4,892,202 29,233,017 3,513,584
Accumulated deficit (4,963,804) (3,585,488) (430,948)
Cumulative translation adjustments - 50,582 6,080
------- ----------- ----------
Total shareholder equity 9,762 25,779,500 3,098,499
------- ----------- ----------
Total liabilities, minority interest and
shareholders' equity 9,762 201,587,938 24,229,319
======= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers, which 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 March 31, 1997 of
US$1.00=Rmb8.32. No representation is made that the Rmb amounts could have been,
or could be, converted into US$ at that rate or at any other rate.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
1994 1995 1996
------ ------ ----------------------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Revenue from operation of a toll
expressway - - 4,305,636 517,504
Operating-differential subsidies - - 1,571,890 188,929
------- ------- ----------- ----------
Total revenue - - 5,877,526 706,433
------- ------- ----------- ----------
General and administrative expenses
- - Depreciation - - (3,611,920) (434,125)
- - Other operating expenses - - (881,879) (105,995)
------- ------- ----------- ----------
Total expenses - - (4,493,799) (540,120)
------- ------- ----------- ----------
Income before income taxes
- - 1,383,727 166,313
Provision for income taxes - - - -
------- ------- ----------- ----------
Income before minority
Interest - - 1,383,727 166,313
Minority interest - - (5,411) (650)
------- ------- ----------- ----------
Net income - - 1,378,316 165,663
======= ======= =========== ==========
Earnings per common share
Net income per common share Rmb - Rmb - Rmb 0.139 $ 0.017
======= ======= =========== ==========
Weighted average number of
shares outstanding 9,680,000 9,680,000 9,934,098 9,934,098
========== ========== =========== ==========
</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, which 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 March 31, 1997 of
US$1.00=Rmb8.32. No representation is made that the Rmb amounts could have been,
or could be, converted into US$ at that rate or at any other rate.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 1995 AND 1996
<TABLE>
1994 1995 1996
------ ------ -----------------------
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income - - 1,378,316 165,663
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation of property - - 3,611,920 434,125
Minority interest - - 5,411 650
Increase in operating assets
Due from shareholders - - (98,398) (11,827)
Increase in operating liabilities
Accrued expenses - - 266,240 32,000
Due to a relate company - - 622,808 74,857
Due to a joint venture partner - - 18,238,655 2,192,146
------- ------- ----------- ----------
Net cash provided by
operating activities - - 24,024,952 2,887,614
------- ------- ----------- ----------
Cash flows from investing
activities:
Additions to property - - (185,250,551) (22,265,691)
Effect of translation adjustments - - 50,582 6,080
------- ------- ----------- ----------
Net cash used in investing
Activities - - (185,199,969) (22,259,611)
------- ------- ----------- ----------
Cash flows from financing
activities:
Loan, subsequently capitalized by
issuance of preferred stock - - 27,431,640 3,297,072
Costs for issuance of stock - - (3,090,800) (371,491)
Loan from a joint venture partner - - 136,838,179 16,446,897
------- ------- ----------- ----------
Net cash provided by
financing activities - - 161,179,019 19,372,478
------- ------- ----------- ----------
Net increase in cash - - 4,002 481
Cash, as of beginning of year - - - -
------- ------- ----------- ----------
Cash, as of end of year - - 4,002 481
======= ======= =========== ==========
</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, which 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 March 31, 1997 of
US$1.00=Rmb8.32. No representation is made that the Rmb amounts could have been,
or could be, converted into US$ at that rate or at any other rate.
F-5
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EOUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
Series A convertible Additional Cumulative
and redeemable Series B supervoting paid in Accumulated translation
preferred stock preferred stock Common Stock capital deficit adjustments
------------------------ ---------------------- ---------------------- ----------- ------------ -------------
Number of Number of Number of Rmb Rmb Rmb
shares Amount shares Amount shares Amount
----------- --------- ----------- -------- ------------ -------
Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1993,
1994 and 1995 - - 100,000 832 9,680,000 80,532 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 - - - - - - - 3,378,316 -
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
======== ======== ======== ======== ========== ======= ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
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 from React Systems Inc. to Infrastructure International, Inc., the present
one, with effect from October 4, 1996.
Acquisition of a subsidiary
- ---------------------------
On December l, 1996, the Company entered into an 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 7.a), and 100,000 shares
of Series B supervoting preferred stock.
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 (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 New Silver Eagle Holdings
Limited, 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
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-7
<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.
Subsequent to December 31, 1996, on February 20, 1997, GHHP has further
contributed into GHDC US$7,000,000 (equivalent to approximately Rmb58,247,000,
determined at an exchange rate of US$1.00 for Rmb8.32), representing the balance
of its obligation, and a loan of approximately Rmb3,861,000.
GHHP' s entitlement to the profit or loss of GHDC is summarized below:
a. During each of the first seven years of the joint venture period, GHHP will
be entitled to the higher of 80% of the net income of GHDC, or (ii) an
amount determined at 22% of the capital contributed into GHDC by GHHP. If
the entire net income of GHDC is insufficient to cover GHHP' s entitlement,
HHPD has agreed to pay GHHP the shortfall as operating-differential
subsidies. The obligations of HHPD in relation to such an agreement are
guaranteed by the Huizhou City Roadways Bureau.
b. During each of the eighth to the seventeenth year of the joint venture
period, 30% of the net income of GHDC will be distributed to HHPD until
HHPD has received a total return equal to its capital contribution plus an
imputed interest of 13.5% per annum. GHHP will be entitled to receive 80%
of the remaining 70% of the net income of GHDC; while HHPD will be entitled
to receive 20% of the remaining 70% of the net income of GHDC. In case GHDC
incurs a loss, GHHP will share 80% of the loss.
c. During each of the seventeenth to the thirtieth year of the joint venture
period, GHHP will be entitled to 80% of the net income or loss of GHDC;
while HHPD will be entitled to 20% of the net income or loss of GHDC.
The other key provisions of the joint venture agreement include the followings:
* the Board of Directors of GHDC consists of nine members, with six
designated by GHHP and three designated by HHPD.
* upon early termination or liquidation of GHDC, the net current assets of
GHDC will be distributed to GHHP (80%) and HHPD (20%).
F-8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
-------------------------------------
GHHP and its joint venture (Cont'd)
- --------------------------
The first phase of in Long Highway" to be built and operated by GHDC comprises
the following:
Cost of acquisition/
Length Date of completion of construction construction
-------- ------------------------------------- ---------------------
35 km 18 kilometers completed on March 1, Rmb247,936,000
1996 and the remaining 17 kilometers
are expected to be completed around
December 1997
Upon establishment of GHDC on August 5, 1996, HHPD transferred the partially
completed section of the "Jin Long Highway" into GHDC, which was valued at
approximately Rmb185,948,000 as of February 29, 1996 by Huizhou Assets Appraisal
Office, an authorized state-owned assets appraiser in Huizhou, Guangdong
Province, the PRC. Approximately Rmb19,837,000 of this value was regarded as
HHPD' s capital contribution into GHDC. Up to December 31, 1996, GHDC repaid
approximately Rmb29,273,000 of the loan from HHPD. HHPD has agreed not to demand
repayment of the remaining balance of the loan of approximately Rmb136,838,000
until completion of the construction of the first phase (35 kilometers) of the
"Jin Long Highway", which is expected to be completed around December 1997,
unless GHDC has financial ability to make repayment earlier.
Under a subcontracting agreement dated October 30, 1996, HHPD has agreed to
construct the remaining portion of the first phase (35 kilometers) of the "Jin
Long Highway" for a fixed amount of Rmb61,988,000. Total construction costs
incurred from the establishment of GHDC to December 31, 1996 amounted to
approximately Rmb19,140,000. In addition, GHDC entered into a management
agreement dated October 30, 1996 with HHPD, under which HHPD is responsible to
operate the "Jin Long Highway" and pay all operating costs in return for a fee
determined at 15% of the gross toll fees collected for 17 years from August 1996
to August 2013. Such management fee payable by GHDC to HHPD during the period
ended December 31, 1996 amounted to approximately Rmb670,000.
Upon completion of the first phase (35 kilometers) of the "Jin Long Highway",
GHDC and HHPD will proceed to invest to develop and operate an extension of 37
kilometers of the "Jin Long Highway", with total investment cost estimated to be
approximately Rmb312,064,000.
F-9
<PAGE>
2. SUBSIDIARIES
------------
Details of the Company' s subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1996 were as
follows:
Percentage of
Place of equity interest Principal
Name incorporation held directly activities
------ --------------- ---------------- -------------
Guanghui Highway The British 100% Investment holding
Project Company Virgin Islands
Limited ("GHHP")
Guanghui Highway The People 80% Build and operate a
Development Company Republic of toll road in the PRC
Limited ("GHDC") China (the "PRC")
3. BASIS OF PRESENTATION
---------------------
The acquisition of GHHP by the Company on December 1, 1996 was treated as a
recapitalization of GHHP with GHHP as the acquirer (reverse acquisition). On
this basis, the historical consolidated financial statements of the Company
prior to December 1, 1996 are those of GHHP and the historical shareholders'
equity amounts of GHHP 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 7.a and the Company's common stock and Series B
supervoting preferred stock issued for this acquisition.
The acquisition of GHDC by GHHP on August 5, 1996 has been accounted for using
the purchase method of accounting. Accordingly, the assets acquired and
liabilities assumed have been recorded at their estimated fair value, and the
operations of GHDC are included in the consolidated financial statements of the
Company from the date of acquisition.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of consolidation
----------------------
The consolidated financial statements include the accounts of the Company, its
subsidiaries and its contractual joint venture which is considered de facto
subsidiary. All material intra-group balances and transactions have been
eliminated on consolidation.
F-10
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd )
------------------------------------------
b. Contractual joint venture
-------------------------
A contractual joint venture is an entity established between the Group and
one or more other parties, with the rights and obligations of the joint
venture partners governed by a contract. In case the Group is able to
govern and control the financial and operating policies of the economic
activity of the contractual joint venture, such joint venture is considered
as a de facto subsidiary, and is accounted for as a subsidiary.
c. Property
--------
Property represents the construction costs of roads, structures and
facilities, including toll stations and maintenance facilities, where
construction is completed and is under operation, and is stated at cost
less accumulated depreciation. Major renewals and betterment which will
result in future economic benefits are capitalized, while maintenance and
repair costs are expensed when incurred. Depreciation of property for
financial reporting purpose is provided using the straight-line method over
30 years, the term of the joint venture period.
d. Construction-in-progress
------------------------
Construction-in-progress represents road, structures and facilities under
construction, and is stated at cost which includes construction and
acquisition costs. No depreciation is provided until the construction work
is completed and the related costs are transferred to property.
e. Revenue
-------
Revenue from operation of a toll highway comprises toll fees received from
the operation of the highway less business tax levied at 5% of the toll
fees received, and is recognized when the services are rendered.
Operating-differential subsidies represents the recovery from HHPD when
GHHP' s net income from its investment in GHDC is below the guaranteed
minimum as described in Note 1.
f. 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 retums. 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.
F-11
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont)
------------------------------------------
g. 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
arisen from foreign currency transactions for the years ended December 31,
1994, 1995 and 1996.
h. Earnings per common share
-------------------------
The computation of primary earnings per common share is based on the
weighted average number of shares of common stock outstanding and common
stock equivalents arising from conversion of preferred stock based on
average market price of common stock during the year. Earnings per common
share assuming full dilution is determined by dividing net income by the
weighted average number of shares of common stock outstanding and common
stock equivalents arising from conversion of preferred stock based on the
market price of common stock as of the balance sheet date. The primary and
fully diluted earnings per share are the same for 1996, 1995 and 1994.
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.
5. PROPERTY
--------
Property comprised:
1 9 9 5 1 9 9 6
--------- ----------------------------
Rmb Rmb US$
Road, structures and facilities - 132,196,276 15,888,975
Less: Accumulated
depreciation - (3,611,920) (434,125)
------ ----------- ------------
- 128,584,356 15,454,850
Construction-in-progress - 72,891,420 8,760,988
------ ----------- ------------
- 201,475,776 24,215,838
====== =========== ============
F-12
<PAGE>
5. PROPERTY (Cont'd)
--------
GHDC holds land use rights to the land occupied by the first phase (35
kilometers) of the "Jin Long Highway" for 30 years from August 1996 to August
2026. As of the date of this report, GHDC is in the process of applying for the
issuance of the formal land use right certificate. Pursuant to the joint venture
agreement governing the establishment of GHDC, the right to use the land and the
ownership of the highway will revert to HHPD without compensation upon
expiration of the joint venture in August 2026.
6. LOAN FROM A JOINT VENTURE PARTNER
---------------------------------
The amount represented a loan from HHPD (see Note 1). The loan is unsecured and
non-interest bearing. HHPD has agreed not to demand GHDC for repayment until
completion of construction of the first phase (35 kilometers) of the "Jin Long
Highway", which is expected to be completed around December 1997, unless GHDC
has financial ability to make repayment earlier.
7. 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 presplit 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
Rrnb782,000 (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
constancy 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).
The Company authorized common stock is 25,000,000 shares, par value
US$0.001 each (after the reverse stock split and redenomination of par
value).
F-13
<PAGE>
7. 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 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. No Series A convertible and
redeemable preferred stock has been converted or redeemed.
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-14
<PAGE>
8. 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) is incorporated under the International
Business Companies Act of the British Virgin Islands and, accordingly, is
exempted from the payment of the British Virgin Islands income taxes. The joint
venture enterprise established in the PRC (GHDC) is 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 is
exempted from state unified income tax and local income tax for two years
starting from the first year of profitable operations and then is entitled to a
50% reduction in state unified income tax for the next three years. As of the
date of this report, GHDC is in the process of applying the issuance of formal
tax exemption certificate.
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. Primary 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 reconciliation 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:
1994 1995 1996
------ ------ ------
U.S. federal income tax rate - - 35%
Effect of different tax rates in
foreign jurisdictions - - (2%)
Effect of tax exemption for
GHDC - - (33%)
------ ------ -------
- - 0%
====== ====== =======
9. 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.
F-15
<PAGE>
10. CAPITAL COMMITMENT
------------------
As of December 31, 1996, the Group had outstanding capital comn-Litments of
approximately Rmb42,848,000 for the construction of the "Jin Long Highway".
11. RELATED PARTY TRANSACTIONS
--------------------------
a. Name and relationship of related parties:
Existing relationships
Name of related parties with the Company
------------------------- ------------------------
New Silver Eagle Holdings Limited-Hong Kong Common directors with
("NSE") the Company
Huizhou Highway Property Development PRC joint venture partner
Company ("HHPD")
b. Summary of related party transactions:
1995 1996
Rmb Rmb US$
------ --------------------
Due from shareholders 9,762 108,160 11,827
Due to a related company
- - NSE (i) - 622,808 74,857
Due to a joint venture partner
HHPD (ii) - 18,238,655 2,192,146
1994 1995 1996
------ ------ --------------------
Rmb Rmb Rmb US$
Management fee
paid to HHPD
(see Note 1) - - 670,545 80,594
Operating-
differential
subsidies
received from
HHPD (see Note 1) - - 1,571,890 188,929
Construction cost
paid to HHPD
(see Note 1) - - 19,140,000 2,300,481
F-16
<PAGE>
11. RELATED PARTY TRANSACTIONS (Cont'd)
--------------------------
Note -
(i) This represents payment of certain stock issuance costs and operating
expenses by NSE on behalf of the Company. The amount is unsecured,
non-interest bearing and without pre-determined repayment terms.
(ii) This represents payables on construction costs and management fee
after netting off receivable of operating-differential subsidies,
which is unsecured, non-interest bearing and without pre-determined
repayment terms.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Non-cash investing activities:
- -----------------------------
a. Certain property purchased by the Group of approximately Rmb9,837,000 was
resulted from capital contribution by HHPD into GHDC in the form of the
property.
b. 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 (see Note 1).
C. 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 7.b.).
d. 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 7.b.).
13. OPERATING RISKS
---------------
a. Strategic relationships
-----------------------
The Group present operations and construction of the in Long Highway" in
the PRC are conducted through various agreements with HHPD and Huizhou City
Roadways Bureau as described in Note 1. Any changes in any of these
strategic relationships would have a material adverse affect on the revenue
and profitability of the Group.
F-17
<PAGE>
13. OPERATING RISKS (Cont'd)
---------------
b. Country risk
------------
GHDC operates in the PRC and accordingly is subject to special
considerations and significant risks not typically associated with
companies operating in North America and Western Europe. These include
risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. GHDC' s results may be
adversely affected by, among other things, changes in the political and
social conditions in the PRC and changes in governmental policies with
respect to laws and regulations, inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation. While the PRC
government is expected to continue its economic reform policies, many of
the reforms are new or experimental and may be refined or changed. It is
also possible that a change in the PRC leadership could lead to changes in
economic policy.
A substantial portion of GHDC's revenue is denominated in Renminbi. A
portion of the future profit of GHDC, if any, will need to be converted
into other currencies to meet foreign currency obligations such as payment
of dividends declared. Both the conversion of Renminbi into other foreign
currencies and the remittance of foreign currencies abroad are subject to
PRC government approvals. No assurance can be given that GHDC will be able
to acquire sufficient amounts of foreign currencies in the PRC foreign
exchange markets in the future to meet its needs.
F-18
Exhibit 21
INFRASTRUCTURE INTERNATIONAL, INC.
List of Subsidiaries
----------------------
Name Jurisdiction of Organization
-------- --------------------------------
Guanghui Highway Project Company Limited British Virgin Islands
Guanghui Highway Development Company Limited People's Republic of China
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 481
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,481
<PP&E> 24,215,838
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,229,319
<CURRENT-LIABILITIES> 18,745,898
<BONDS> 0
0
103
<COMMON> 9,680
<OTHER-SE> 3,088,716
<TOTAL-LIABILITY-AND-EQUITY> 24,229,319
<SALES> 706,433
<TOTAL-REVENUES> 706,433
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 540,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 166,313
<INCOME-TAX> 0
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<NET-INCOME> 165,663
<EPS-BASIC> .17
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