SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 1, 1996
INFRASTRUCTURE INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
0-6456
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(Commission File Number)
Nevada 87-0287034
- ------------------------------ ---------------------------------
(State or other jurisdiction
of incorporation) (IRS Employer Identification No.)
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, including area code: (212) 938-0574
1787 East Fort Union Blvd., Suite 106, Salt Lake City, Utah 84121
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(Former name or former address, if changed since last report)
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
On December 1, 1996, Infrastructure International, Inc. (the "Registrant")
consummated an exchange (the "Exchange") of securities with the shareholders of
Guang Hui Highway Project Company Limited ("Guang Hui") pursuant to which
control of the Registrant shifted to the principal shareholders (the "Principal
Shareholders") of Guang Hui. New Eagle Infrastructure Ltd., an entity controlled
100% by Natural Way Technologies, Inc. received 5,100,000 shares of common
stock, representing 52.7% of the outstanding common stock, and 100,000 shares of
preferred stock, representing 100% of the outstanding Series B Preferred Stock,
of the Registrant pursuant to the Exchange. New Silver Eagle Holdings Ltd., an
entity controlled 34% by Yiu Yat Hung, 33% by Yiu Yat On and 33% by other
members of the family of Yiu Yat Hung, received 1,000,000 shares of common
stock, representing 10.3% of the outstanding common stock, pursuant to the
Exchange. The family of Yiu Yat Hung, through ownership in Natural Way
Technologies controls all of the shares held by New Eagle Infrastructure Ltd. in
addition to the shares held by New Silver Eagle Holdings Ltd. Following the
Exchange, the Principal Shareholders, collectively, own approximately 63.0% of
the post-Exchange common stock and 100% of the post-Exchange Series B Preferred
Stock of the Registrant. All of such shares were issued in exchange for stock of
Guang Hui held by the Principal Shareholders, as well as shares held by other
former shareholders of Guang Hui, and representing an aggregate of 100% of the
outstanding stock of Guang Hui at the time of Exchange.
The preferred stock issued pursuant to the Exchange entitles the holders
thereof, as a group, to 30% voting control of the Registrant. Accordingly, the
aggregate voting control held by the family of Yiu Yat Hung, including both the
common stock and preferred stock issued in the Exchange, is approximately 74.1%.
Pursuant to the terms of the Exchange, Messrs. Yiu Yat Hung, Yiu Yat On, Ma
Ding Jie and Jin Hui Juan were elected to the board of directors of the
Registrant, each of whom were nominees designated by Guang Hui, and each of the
prior directors of the Registrant resigned.
To the knowledge of the Registrant, there are no arrangements or
understandings, the operations of which may result in a further change in
control of the Registrant.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 1, 1996, the Registrant consummated the acquisition of 100% of
the common stock of Guang Hui Highway Project Company Limited pursuant to the
Exchange described in Item 1 above. The Registrant issued an aggregate of
8,430,000 shares of common stock and 100,000 shares of preferred stock in
exchange for the stock of Guang Hui. The amount of consideration given by the
Registrant pursuant to the Exchange was determined by arms-length negotiations.
Prior to the Exchange, no material relationships existed between Guang Hui or
any of the Principal Shareholders and the Registrant, its affiliates, any
officer or director of the Registrant or any associate of any such persons.
Guang Hui, a British Virgin Island company formed on March 5, 1996,
operating through an 80%-owned subsidiary in the People's Republic of China (the
"PRC"), is engaged in the development and operation of a 72 kilometer four-lane
toll road (the "Jin Long Highway") in Huizhou, Guangdong Province, the PRC. An
18 kilometer section of the Jin Long Highway began operation in March of 1996
and an 18 kilometer section is scheduled to open by the end of 1997. Upon
completion of the initial 35 kilometer section, development is expected to begin
on the remaining 37 kilometers of the Jin Long Highway. The development and
operation of the Jin Long Highway is being undertaken by a sino-foreign joint
venture, Guanghui Highway Development Company Limited ("GHDC"), 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 seven through seventeen of
operations.
2
The assets of GHDC 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 which the Registrant anticipates will continue to be
used following the Exchange for the same general purposes of the business of
Guang Hui as described above. 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.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
(a) DISMISSAL OF INDEPENDENT ACCOUNTING FIRM
(i) Mantyla, McReynolds & Associates (the "principal
accountants"), the independent accounting firm which audited the
financial statements of the registrant (formerly, React Systems, Inc.)
during fiscal years 1994 and 1995, was dismissed in such capacity on
December 27, 1996.
(ii) None of the principal accountant's reports on the financial
statements of the registrant for either of the past two years has
contained an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting
principles.
(iii) The decision to change accountants was recommended by the
board of directors.
(iv) During the preceding two years and any subsequent interim
period preceding their dismissal, the registrant had no disagreements
with the principal accountants 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
the principal accountants, would have caused it to make reference to
the subject matter of the disagreements in connection with its report.
(v) None of the kinds of events listed in paragraph (a)(1)(v)(A)
through (D) of Regulation S-K Item 304 occurred during the two most
recent fiscal years and any subsequent interim periods.
(b) ENGAGEMENT OF NEW INDEPENDENT ACCOUNTANTS
On December 27, 1996, the registrant's board of directors
formally engaged Arthur Andersen & Co. as its new principal
accountants (the "new accounting firm") to audit the registrant's
financial statements.
The new accounting firm served as the principal accounting firm
for the registrant's subsidiary, Guang Hui with respect to the
financial statements of such subsidiary for the period from inception
to September 30, 1996. Other than its services in that regard, the
registrant, during the two most recent fiscal years and any subsequent
interim period prior to the engagement of the new accounting firm, did
not consult with the new accounting firm with regard to any of the
matters listed in Regulation S-K Items 304(a)(2)(i) or (ii).
ITEM 5. OTHER EVENTS
In connection with the Exchange, Messrs. Yiu Yat Hung, Yiu Yat On, Ma Ding
Jie and Jin Hui Juan were appointed as directors of the Registrant and Zebin Xu,
Angela Morin, K. Scott Crawford and Karen Pollino resigned as directors of the
Registrant. Finally, each of the current officers of the Registrant agreed to
resign at such time as requested by Guang Hui at which time Yiu Yat Hung will be
appointed as President and Yiu Yat On will be appointed as Vice President and
Treasurer of the Registrant.
3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
GUANG HUI HIGHWAY PROJECT COMPANY LIMITED
Independent Auditors' Report............................. F-1
Consolidated Statement of Operations for the
Period from March 5, 1996 (date of inception)
to September 30, 1996.................................. F-2
Consolidated Balance Sheet as of September 30, 1996..... F-3
Consolidated Statement of Cash Flows for the
Period from March 5, 1996 (date of inception)
to September 30, 1996............................... F-4
Consolidated Statements of Changes in
Shareholders' Equity for Period from
March 5, 1996 (date of inception) to
September 30, 1996..................................... F-5
Notes to Consolidated Financial Statements............... F-6
(b) PRO FORMA FINANCIAL INFORMATION
Introduction to Combined Pro Forma Information........ F-13
Unaudited Pro Forma Combined Balance Sheet
at September 30, 1996.................................. F-14
Unaudited Pro Forma Combined Statement of
Operations for the nine months ended
September 30, 1996..................................... F-15
Notes to Pro Forma Combined Financial Statements......... F-16
(c) EXHIBITS
2.1 Acquisition Agreement dated December 1, 1996 between
Infrastructure International, Inc. and the shareholders of
Guang Hui Highway Project Company Limited.
10.1 Cooperation Contract dated August 5, 1996
10.2 Supplementary Contract amending Cooperation Contract
10.3 Memorandum amending Cooperation Contract
10.4 Contract of Assurance
10.5 Jinlong Highway Project Construction Turn-key Contract
10.6 Regular Expenses Turn-key Contract
16.1 Letter from Mantyla, McReynolds & Associates re change in
certifying accountant
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INFRASTRUCTURE INTERNATIONAL, INC.
Date: January 15, 1997 By: /s/ Yiu Yat Hung
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Yiu Yat Hung, Chief Executive Officer
5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Guang Hui Highway Project Company
Limited:
We have audited the accompanying consolidated balance sheet of Guang Hui Highway
Project Company Limited (incorporated in British Virgin Islands; "the Company")
and Subsidiary ("the Group") as of September 30, 1996, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the period from March 5, 1996 (date of incorporation) to September
30, 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 audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
Substantially all of the Group's operations are conducted in the People's
Republic of China. Accordingly, the Group is subject to special considerations
and significant risks as described in Note 10.b to accompanying consolidated
financial statements.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Guang Hui Highway
Project Company Limited and Subsidiary as of September 30, 1996, and the results
of their operations and their cash flows for the period from March 5, 1996 (date
of incorporation) to September 30, 1996, in conformity with generally accepted
accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
------------------------------------
Arthur Andersen & Co.
Hong Kong,
December 12, 1996
F-1
GUANG HUI HIGHWAY PROJECT COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 5, 1996 (DATE OF INCORPORATION)
TO SEPTEMBER 30, 1996
Rmb US$
Revenue from operation of a toll expressway 2,899,057 349,790
Operating-differential subsidies 269,612 32,530
---------- --------
Total revenue 3,168,669 382,320
General and administrative expenses
- -Depreciation (2,528,344) (305,061)
- -Other operating expenses (447,954) (54,048)
---------- --------
Total expenses (2,976,298) (359,109)
---------- ---------
Income before income taxes 192,371 23,211
Income taxes - -
---------- --------
Income before minority interests 192,371 23,211
Minority interests 14,742 1,779
---------- --------
Net income 207,113 24,990
========== ========
The accompanying notes are an integral part of this consolidated statement of
operation.
- -------------------------------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
for the convenience of the readers 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 September 30, 1996 of
US$1.00=Rmb8.288. No representation is made that the Rmb amounts could have
been, or could be, converted into US$ at that rate on September 30, 1996 or at
any other certain rate.
F-2
GUANG HUI HIGHWAY PROJECT COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
Rmb US$
ASSETS
Current assets:
Cash 332,714 40,144
Receivable from a joint venture partner 269,612 32,530
----------- ----------
Total current assets 602,326 72,674
Property, net 183,419,156 22,130,690
----------- ----------
Total assets 184,021,482 22,203,364
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loan from a joint venture partner 139,020,986 16,773,767
----------- ----------
Minority interests 19,822,403 2,391,699
----------- ----------
Shareholders' equity:
Common stock, par value US$1;
authorized 50,000 shares; outstanding
2 shares 18 2
Retained earnings 207,113 24,990
----------- ----------
Total shareholders' equity 207,131 24,992
Loan from ultimate holding company 24,970,962 3,012,906
----------- ----------
25,178,093 3,037,898
----------- ----------
Total liabilities, minority interests
and shareholders' equity 184,021,482 22,203,364
=========== ==========
The accompanying notes are an integral part of this consolidated balance sheet.
- -----------------------------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
for the convenience of the readers 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 September 30, 1996 of
US$1.00=Rmb8.288. No representation is made that the Rmb amounts could have
been, or could be, converted into US$ at that rate on September 30, 1996 or at
any other certain rate.
F-3
GUANG HUI HIGHWAY PROJECT COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 5, 1996 (DATE OF INCORPORATION)
TO SEPTEMBER 30, 1996
Rmb US$
Cash flows from operating activities:
Net income 207,113 24,990
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 2,528,344 305,061
Minority interests (14,742) (1,779)
Increase in receivable from a joint
venture partner (269,612) (32,530)
------------ -----------
Net cash provided by operating
activities 2,451,103 295,742
------------ -----------
Cash flows from investing activities:
Additions to property (166,110,355) (20,042,273)
------------ -----------
Net cash used in investing activities (166,110,355) (20,042,273)
------------ -----------
Cash flows from financing activities:
Issuance of common stock 18 2
Loan advanced from the ultimate holding
company 24,970,962 3,012,906
Loan advanced from a joint venture partner 139,020,986 16,773,767
------------ -----------
Net cash provided by financing
activities 163,991,966 19,786,675
------------ -----------
Cash, at of the end of period 332,714 40,144
============ ===========
The accompanying notes are an integral part of this consolidated statement of
cash flows.
- -----------------------------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
for the convenience of the readers 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 September 30, 1996 of
US$1.00=Rmb8.288. No representation is made that the Rmb amounts could have
been, or could be, converted into US$ at that rate on September 30, 1996 or at
any other certain rate.
F-4
GUANG HUI HIGHWAY PROJECT COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 5, 1996 (DATE OF INCORPORATION)
TO SEPTEMBER 30, 1996
Common stock
------------------------
Number of Retained
Shares Amount Earnings
--------- -------- --------
Rmb Rmb
Balance as of March 5, 1996
(date of incorporation) - - -
Issuance of common stock 2 18 -
Net income - - 207,113
----- ----- -------
Balance as of September 30, 1996 2 18 207,113
===== ===== =======
The accompanying notes are an integral part of this consolidated
statement of changes in shareholders' equity.
F-5
GUANG HUI HIGHWAY PROJECT COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Principal Activities
Guang Hui Highway Project Company Limited ("the Company") was incorporated
in the British Virgin Islands on March 5, 1996.
As of September 30, 1996, the Company allotted and issued 2 shares of
common stock to Mr. Yiu Yat Hung and Mr. Yiu Yat On, directors of the
Company.
The Company entered into a joint venture agreement dated August 5, 1996
with Huizhou Highway Property Development Company ("HHPD"; a state-owned
company incorporated in the People's Republic of China ("the PRC") directly
under Huizhou City Roadways Bureau) to develop and operate the "Jin Long
Highway", a 72 kilometers four-lane highway in Huizhou, Guangdong Province,
the PRC. First phase of the investment is to incorporate a sino-foreign
cooperative joint venture in the PRC - Guanghui Highway Development Company
Limited ("GHDC"), which is principally engaged in the development and
operation of 35 kilometers of the "Jin Long Highway" for a period of 30
years from August 1996 to August 2026.
Pursuant to the joint venture agreement, the Company is required to
contribute into GHDC US$9,536,000 (equivalent of approximately
Rmb79,349,000, determined at an exchange rate of US$1.00 = Rmb8.32) in cash
and HHPD is required to contribute into GHDC US$2,384,000 (equivalent of
approximately Rmb19,837,000, determined at an exchange rate of US$1.00 =
Rmb8.32) in the form of part of the "Jin Long Highway" based on a valuation
as of February 29, 1996 as determined by Huizhou Assets Appraisal Office,
an authorized assets valuer in Huizhou, Guangdong Province, the PRC, and
approved by Huizhou State-owned Assets Administration Bureau.
The Company'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, the
Company will be entitled to the higher of (i) 80% of the net income of
GHDC, or (ii) an amount determined at 22% of the capital contributed
into GHDC by the Company. If the entire net income of GHDC is
insufficient to cover the Company's entitlement, HHPD has agreed to
pay the Company 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, 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. The Company will be entitled to receive
80% of t 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, the Company will share 80% of the
loss.
c. During each of the seventeenth to the thirtieth year, the Company 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.
F-6
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
The other key provisions of the joint venture agreement include the
followings:
o the Board of Directors of GHDC consists of nine members, with six
designated by the Company and three designated by HHPD.
o upon early termination or liquidation of GHDC, the net assets of GHDC
will be distributed to the Company (80%) and HHPD (20%).
The "Jin Long Highway" comprises the following:
COST OF ACQUISITION/
LENGTH DATE OF COMPLETION OF CONSTRUCTION CONSTRUCTION
35 km 18 kilometres completed on March 1, 1996 Rmb 247,936,000
and the remaining 17 kilometres are
expected to be completed before
December 1997
The "Jin Long Highway" was constructed by HHPD and was valued at
approximately Rmb185,948,000 as of February 29, 1996, by Huizhou Assets
Appraisal Office, an authorized assets valuer in Huizhou, Guangdong
Province, the PRC. Such valuation was approved by Huizhou State-owned
Assets Administration Bureau. HHPD used approximately Rmb19,837,000 of this
value as its capital contribution to GHDC, and the remaining Rmb166,111,000
is as a payable by GHDC to HHPD. During the period ended September 30,
1996, GHDC settled approximately Rmb27,090,000 of its payable to HHPD.
According to a supplementary agreement between the Company and HHPD, HHPD
has undertaken not to demand repayment of the remaining balance of
approximately Rmb139,021,000 until completion of the remaining 17
kilometres of the "Jin Long Highway", which is expected to be before
December 1997. Under a subcontracting agreement dated October 31, 1996,
HHPD has agreed to construct the remaining portion of the "Jin Long
Highway" for a fixed sum of Rmb61,988,000.
GHDC entered into a management agreement dated October 31, 1996 with HHPD,
under which HHPD is responsible to operate the highway and pay all
operating costs in return for a fee determined at 15% of the toll fees
collected for 17 years effectively from August 1996 to August 2013. During
the period ended September 30, 1996, GHDC paid management fees of
approximately Rmb 448,000 to HHPD.
Upon completion of the 35 kilometres of the "Jin Long Highway", the Company
and HHPD will proceed to invest in developing and operating a further 37
kilometres of the "Jin Long Highway" with total investment cost estimated
to be approximately Rmb312,064,000.
F-7
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
On December 1, 1996, Mr. Yiu Yat Hung and Mr. Yiu Yat On, the then
shareholders of the Company, entered into an agreement with Infrastructure
International Inc. (formerly known as React Systems Inc.; a company
incorporated in the state of Nevada, United States of America) underwhich
Infrastructure International Inc. acquired a 100% interest in the Company
by issuing to Mr. Yiu Yat Hung and Mr. Yiu Yat On an aggregate of 8,430,000
shares of common stock, par value of US$0.001, and 100,000 shares class B
preferred stock with superior voting right (note: the voting right of these
100,000 shares class B preferred stock will account for 30% of total voting
right of Infrastructure International Inc. on all corporate matters).
2. Subsidiary
Details of the Company's subsidiary (which together with the Company are
collectively referred to as the "Group") as of September 30, 1996 were as
follows:
Percentage of
Place of equity interest
Name incorporation held directly
----------------------------- --------------------- ---------------
Guanghui Highway Development The People's Republic 80%
Company Limited of China
3. Summary of Significant Accounting Policies
a. Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary. All material intra-group balances and
transactions have been eliminated on consolidation.
b. 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 the Company's net income is below the guaranteed
minimum as described in Note 1.
F-8
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c. Income taxes
The Group accounts for income tax 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 taxes are provided using
the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences between
the tax and the financial statements bases of assets and liabilities.
d. Property
Property represents the construction cost of road and structures 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, term of the joint venture period.
e. Construction-in-progress
Construction-in-progress represents road, structures and facilities,
including toll stations and maintenance facilities under construction.
Construction-in-progress 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.
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.
F-9
4. Income Taxes
The Company and its subsidiary are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which
they are domiciled and operate. The Company is incorporated in the British
Virgin Islands under the International Business Companies Act of the
British Virgin Islands and 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.
5. Property
Property comprised:
Rmb US$
Road and structures 132,196,276 15,950,323
Less: Accumulated depreciation (2,528,344) (305,061)
----------- ----------
129,667,932 15,645,262
Construction-in-progress 53,751,224 6,485,428
----------- ----------
Net book value 183,419,156 22,130,690
=========== ==========
GHDC holds land use rights to the land occupied by the 35 km of the "Jin
Long Highway" for 30 years commencing 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 rights 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.
F-10
6. Loan from ultimate holding company
The amount represented a loan from Infrastructure International Inc. (which
has became the Company's ultimate holding company on December 1, 1996 for
the Company's capital injection into GHDC. The loan is unsecured and
non-interest bearing. Infrastructure International Inc. has agreed not to
demand repayment until the Group is financially capable to do so.
Subsequent to September 30, 1996, on December 10, 1996, the Company
increased its authorized share capital to US$5,000,000 by the creation of
4,950,000 shares of common stock of US$1 each. In this connection, the loan
from the ultimate holding company of approximately Rmb24,971,000 was
capitalized for the issuance of 3,000,000 shares at US$1 par value per
share.
7. Loan from a Joint Venture Partner
The amount represented a loan from HHPD. The loan is unsecured and
non-interest bearing. HHPD has agreed not to demand repayment until
completion of construction of the 35 kilometres of the "Jin Long Highway",
which is expected to be in December 1997.
8. Capital Commitment
As described in Note 1, as of September 30, 1996, the Group had outstanding
capital commitments of approximately Rmb 61,988,000 for the construction of
the "Jin Long Highway".
9. Supplemental Disclosure of Cashflow Information
Non-cash item: Certain property purchased by the Group of approximately
Rmb19,837,000 was resulted from capital contribution by HHPD into GHDC.
10. Operating Risk
a. Strategic relationships
The Group's present operations and construction of the "Jin 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 these strategic relationships would have a material adverse
affect on the revenue and profitability of the Group.
F-11
10. OPERATING RISK (CONTINUED)
b. Country risk
GHDC operates in the PRC and accordingly is subject to special
considerations and significant risks not typically associated with
investments in equity securities of North American and Western
European companies. 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 will be denominated in
Renminbi. A portion of the future profits 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 for the payment of dividends.
F-12
INFRASTRUCTURE INTERNATIONAL, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
reflects the December 1, 1996 acquisition by Infrastructure International, Inc.
(the "Company") of 100% of the stock of Guang Hui Highway Project Company
Limited and Subsidiary ("GHH") in exchange for the issuance of 8,430,000 shares
of common stock, 100,000 shares of Series B preferred stock and the infusion of
cash into GHH of $3,000,000. GHH is a British Virgin Island corporation formed
on March 5, 1996. GHH entered into a joint venture agreement dated August 5,
1996 with Huizhou Highway Project Development Company ("HHPD"), a state-owned
company incorporated in the People's Republic of China ("the PRC") directly
under Huizhou City Roadways Bureau, to develop and operate the "Jin Long
Highway", a 72 kilometers four-lane highway in Huizhou, Guangdong Province, the
PRC. The first phase of the investment was to incorporate a sino-foreign
co-operative joint venture in the PRC, Guanghui Highway Development Company
Limited ("GHDC"), which is principally engaged in the development and operation
of 35 kilometers of the "Jin Long Highway" for a period of 30 years from August
1996 to August 2026.
Pursuant to the joint venture agreement, GHH is required to contribute into
GHDC US$9,536,000 in cash and HHPD is required to contribute into GHDC
US$2,384,000 in the form of the "Jin Long Highway" based on a valuation as of
February 29, 1996 as determined by Huizhou Assets Appraisal Office.
The pro forma balance sheet data at September 30, 1996 assumes the
formation of HHPD and acquisition of GHH as of September 30, 1996. The pro forma
statements of operations for the nine months ended September 30, 1996 assumes
the formation of HHPD and acquisition of GHH as of March 5, 1996 (date of
inception).
The historical financial information of GHH as of and for the period ended
September 30, 1996 have been derived from GHH's financial statements included
elsewhere herein and such information with respect to the Company has been
derived from reports filed by the Company on Form 10-QSB for such period. The
pro forma financial information should be read in conjunction with the
accompanying notes thereto and with the financial statements of the Company and
GHH.
The pro forma condensed combined financial information does not purport to
be indicative of the financial position or operating results which would be
achieved had the formation of GHH and the acquisition of GHH been consummated as
of the dates indicated and should not be construed as representative of future
financial position or operating results. In management's opinion, all
adjustments necessary to reflect the effects of the transactions described have
been made.
F-13
INFRASTRUCTURE INTERNATIONAL, INC.
PRO-FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 1996
(Amounts in United States $`000)
(Unaudited)
Infrastructure Guang Hui Highway Proforma Proforma
International, Inc. Project Company Adjustments Combined
ASSETS
Current assets:
Cash $ 0 $ 40 $ - $ 40
Recievable from a joint venture partner 0 33 - 33
Loan to subsidiary 3,013 - (3,013)(1) -
----- ------ ------ -------
Total current assets 3,013 73 (3,013) 73
Property, net 0 22,130 - 22,130
-------- ------- ------ ------
Total assets $3,013 $22,203 $(3,013) $22,203
====== ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Loan from a joint venture partner$ 0 $16,774 $ - $16,774
Loan from shareholders 2 - - 2
Loan from parent - 3,013 (3,013)(1) -
------ ------- ------ -------
Total current liabilities 2 19,787 (3,013) 16,776
Minority interests 0 2,391 - 2,391
-------- ------- ------ -----
Shareholders' equity:
Common stock, par value US$.001;
authorized 25,000,000 shares; pro
forma outstanding 9,680,000 shares 1 1 8(2) 10
Series A Preferred Stock, $.001 par value
3,000 shares issued and outstanding 1 - - 1
Series B Preferred Stock, $.001 par value
100,000 shares outstanding - - 1(2) 1
Additional paid-in capital 3,618 - (9)(2) -
(609)(3) 3,000
Retained earnings (609) 24 609 (3) 24
----- ------- ------ -------
Total shareholders' equity 3,011 25 - 3,036
----- ------- ------ -------
Total liabilities, minority interest
and shareholders' equity $3,013 $22,203 $(3,013) $22,203
====== ======= ======== =======
The accompanying notes are an integral part of this
proforma condensed combined balance sheet.
F-14
INFRASTRUCTURE INTERNATIONAL, INC.
PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1996
(Amounts in United States $`000)
(Unaudited)
Infrastructure Guang Hui Highway Proforma Proforma
International, Inc. ProjectCompany Adjustments Combined
Revenue from operation of
a toll expressway $ 0 $ 350 $ - $ 350
Operating-differential subsidies 0 32 - 32
------- ----- ---- -----
Total revenue 0 382 - 382
General and administrative expenses
Depreciation - (305) - (305)
Other operating expenses (21) (54) - (75)
------- ----- ---- ----
Total expenses (21) (359) - (380)
------- ------ ----- -----
Income before income taxes (21) 23 - 2
Income taxes - - - -
------- ----- ----- -----
Income before minority interests (21) 23 - 2
Minority interests - 2 - 2
------- ----- ----- -----
Net income $ (21) $ 25 $ - $ 4
======== ===== ===== =====
The accompanying notes are an integral part of this proforma
condensed combined statement of operations.
F-15
INFRASTRUCTURE INTERNATIONAL, INC.
NOTES TO CONDENSED COMBINED FINANCIAL INFORMATION
The proforma adjustments were made under the assumption that the proforma
combined financial information has been prepared using the purchase method as a
reverse acquisition whereby the company issuing its shares to effect a business
combination is determined to be the acquiree in the business combination.
Accordingly, Guang Hui Highway Project Company Limited is deemed to be the
acquirer and the assets of the company deemed to be acquired, Infrastructure
International, Inc., are required to be adjusted to fair value on acquisition.
As the only asset of Infrastructure International was cash, no fair value
adjustments are required.
1. To eliminate intercompany recievable/payable.
2. To record the issue of 8,430,000 shares of common stock and 100,000 shares
of Series B preferred stock in exchange for the entire issued share
capital of Guang Hui Highway Project Company Limited.
3. To eliminate the deficit of Infrastructure International, Inc.
F-16