UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER: 001-12126
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CHINA ENTERPRISES LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BERMUDA
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
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8TH FLOOR, PAUL Y. CENTRE, 51 HUNG TO ROAD, KWUN TONG, KOWLOON, HONG KONG.
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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N/A N/A
Securities registered or to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of Class)
Securities for which there is a reporting obligation pursuant to section l5(d)
of the Act:
NONE
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Supervoting Common Stock: 3,000,000 shares
Common Stock: 6,017,310 shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
If this is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
[ ] Yes [X] No
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or l5(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check
one):
[ ] Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ] Item 17 [X] Item 18
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Act of 1934, as amended. These
forward-looking statements are, by their nature, subject to significant risks
and uncertainties, and include, without limitation, statements relating to:
- our business strategy;
- our ability to finance out business strategy;
- our ability to integrate successfully the businesses or assets we
acquire;
- future developments in the tire industry in China and changes in
government policies;
- future developments in the Asian travel industry;
- future developments in the real estate industry in China, and
- other statements relating to our future business development and
financial performance.
The words "anticipate", "believe", "estimate", "expect", "intend", "plan",
"may", "will" and similar expressions, as they relate to us, are intended to
identify certain of such forward-looking statements. We do not intend to update
these forward-looking statements except as required by the U.S. securities laws.
These forward-looking statements reflect our current views with respect to
future events and are not a guarantee of future performance. They are based upon
various assumptions, many of which are based, in turn, upon further assumptions,
including without limitation, management's examination of historical operating
trends, data contained in the Company's records and other data available from
third parties. Although the Company believes that these assumptions were
reasonable when made, because these assumptions are inherently subject to
significant uncertainties and contingencies which are difficult or impossible to
predict and are beyond the Company's control, there can be no assurance that the
company will achieve or accomplish these expectations or beliefs.
In addition to these important factors and matters discussed elsewhere
herein, there are a number of important factors that, in the Company's view,
could cause actual results to differ materially from those discussed in the
forward-looking statements, including without limitation, the strength of world
economies and currencies, general market conditions, changes in general domestic
and international political conditions, and other matters described in the "Risk
Factors" included in this annual report or otherwise described from time to time
in the reports the Company files with the Securities and Exchange Commission.
EXCHANGE RATE INFORMATION
Unless otherwise specified, all references in this document to "U.S.
Dollars", "Dollars", "US$" or "$" are to United States dollars; all references
to "Renminbi" or "Rmb" are to Renminbi, which is the legal tender currency of
the People's Republic of China (the "PRC" or "China"); all references to "HK$"
are to Hong Kong dollars, which is the legal tender currency of the Hong Kong
Special Administrative Region ("Hong Kong"). Translation of amounts from
Renminbi to U.S. Dollars for the convenience of the reader has been made in this
document at US$1.00 to Rmb8.28, the exchange rate quoted by the People's Bank of
China on December 31, 2004. No representation is made that the Renminbi amounts
could have been, or could be, converted into U.S. Dollars at that or at any
other rate. See section "Exchange Control" under "Item 10. Additional
Information" in this annual report for more details.
References and statements contained in this document regarding China do
not apply to Taiwan nor the Republic of China.
TABLE OF CONTENTS
PART I
Item 1 Identity of Directors, Senior Management and Advisers
Item 2 Offer Statistics and Expected Timetable
Item 3 Key Information
Item 4 Information on the Company
Item 5 Operating and Financial Review and Prospects
Item 6 Directors, Senior Management and Employees
Item 7 Major Shareholders and Related Party Transactions
Item 8 Financial Information
Item 9 The Offer and Listing
Item 10 Additional Information
Item 11 Quantitative and Qualitative Disclosure about Market Risk
Item 12 Description of Securities Other than Equity Securities
PART II
Item 13 Defaults, Dividend Arrearages and Delinquencies
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15 Controls and Procedures
Item 16 Reserved
Item 16A Audit Committee Financial Expert
Item 16B Code of Ethics
Item 16C Principal Accountant Fees and Services
Item 16D Exemptions from the Listing Standards for Audit Committees
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
PART III
Item 17 Financial Statements
Item 18 Financial Statements
Item 19 Exhibits
SIGNATURES
EXHIBIT INDEX
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISERS
As China Enterprises Limited (the "Company", which term shall include,
when the context so requires, the subsidiaries of the Company during the
applicable period) is filing this Form as its annual report under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the information called
for by Part I, Item 1 of Form 20-F is not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
As the Company is filing this Form as an annual report under the Exchange
Act, the information called for by Part I, Item 2 of the Form 20-F is not
applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following table represents the selected consolidated financial
information of the Company as of and for the years ended December 31, 2000,
2001, 2002, 2003 and 2004.
The Consolidated Statements of Operating Data for each of the three years
in the period ended December 31, 2004 and the Consolidated Balance Sheet Data as
of December 31, 2003 and 2004 has been derived from the audited consolidated
financial statements (the "Consolidated Financial Statements") included in Item
18 "Financial Statements" of this annual report. The Consolidated Statements of
Operations Data for the years ended December 31, 2000 and 2001 and the
Consolidated Balance Sheet Data as of December 31, 2000, 2001 and 2002, as set
forth below, have been derived from audited consolidated financial statements
not included in this annual report. The selected financial information should be
read in conjunction with, and is qualified in its entirety by reference to, the
respective consolidated financial statements and their accompanying notes
thereto.
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, THEIR PAR VALUES AND PER SHARE
DATA)
Year ended December 31,
2000 2001 2002 2003 2004
(a)(b) (a)(b) (a)(b) (a)(b)(c) (a)(b)(c)
Rmb Rmb Rmb Rmb Rmb US$
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues 1,605,842 2,087,885 2,610,076 2,808,369 - -
Income (loss) from operations 8,269 89,461 172,096 100,746 (13,344) (1,612)
(Loss) profit from continuing operations (33,803) 36,425 (62,943) (56,781) 181,942 21,974
Loss from discontinued operations (a) (45,581) (171,784) (199,838) (7,760) - -
Net (loss) income (79,384) (135,359) (262,781) (64,541) 181,942 21,974
Net income from operations per share 0.91 9.92 19.09 11.17 20.18 2.44
Basic and diluted (loss) earnings from continuing
operations per common share (b) (3.73) 4.04 (6.98) (6.30) 20.18 2.44
Basic and diluted loss from discontinued
operations per common share (a) & (b) (5.02) (19.05) (22.16) (0.86) - -
Basic and diluted (loss) earnings per common share (b) (8.75) (15.01) (29.14) (7.16) 20.18 2.44
Weighted-average number of common share outstanding (b) 9,069,956 9,017,310 9,017,310 9,017,310 9,017,310 9,017,310
Dividend declared per common share
- in Rmb 0.66 0.17 - - - -
- in US$ 0.08 0.02 - - - -
CONSOLIDATED BALANCE SHEETS DATA :
Total assets 3,326,983 2,978,965 2,880,680 509,666 791,326 95,571
Shareholders' equity 952,627 804,197 535,206 472,825 667,981 80,674
Supervoting common stock - par value US$0.01 per share
244 244 244 244 244 29
Common stock - par value US$0.01 per share 526 526 526 526 526 64
Notes:
(a) The bias tire factory of Double Happiness Tyre Industries Corporation
Limited ("Double Happiness") was disposed of during 2001, Yantai C.S.I.
Rubber Co., Limited ("Yantai CSI") and Shandong C.S.I. Synthetic Fiber
Co., Limited ("Shandong Synthetic") were disposed of during 2002, the
radial tire factory of Double Happiness, Yinchuan C.S.I. (Greatwall)
Rubber Co. Limited ("Yinchuan CSI") and CSI Rubber Industries Limited
("CSI Rubber") were disposed of during 2003. The Company has thus recorded
the operating result of Double Happiness, Yantai CSI, Shandong Synthetic,
Yinchuan CSI and CSI Rubber separately from continued operations as loss
from discontinued operations retrospectively for 2000 to 2003.
(b) The calculation of basic and diluted (loss) earnings from continuing
operations per common share, basic and diluted loss from discontinued
operations per common share and basic and diluted loss per common share
from 2000 to 2004 is based on the weighted-average number of common stock
outstanding during the years ended December 31, from 2000 to 2004. The
weighted-average number of common stock outstanding for 2000 was 9,069,956
and for 2001, 2002, 2003 and 2004 was 9,017,310. There were no dilutive
securities.
(c) The Company sold a 25% interest in Hangzhou Zhongce Rubber Co., Limited
("Hangzhou Zhongce") during 2003, leaving the Company with a minority
interest in Hangzhou Zhongce as of October 1, 2003. The Company
consolidated the results of operations of Hangzhou Zhongce for the nine
months period ended September 30, 2003 and accounted for its share of
equity in earnings of Hangzhou Zhongce for the period from October 1, 2003
to December 31, 2003.
EXCHANGE RATE INFORMATION
The Consolidated Financial Statements are published and denominated in
Renminbi. Translation of amounts from Renminbi to U.S. Dollars for the
convenience of the reader has been made in this document at US$1.00 to Rmb8.28,
the exchange rate quoted by the People's Bank of China on December 31, 2004. For
the purpose of this annual report, the latest practicable date with respect to
share and certain exchange rate information is December 31, 2005. As of
December 31, 2005, the exchange rate quoted by the People's Bank of China
("PBOC") was at US$1.00 to Rmb8.08. No representation is made that the Renminbi
amounts could have been, or could be, converted into U.S. Dollars at that or at
any other rate.
The following table sets forth the average unified exchange rates as of
and during the years ended December 31, 2000, 2001, 2002, 2003 and 2004.
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 2001 2002 2003 2004
(Rmb equivalent of US$1.00) RMB RMB RMB RMB RMB
At unified exchange rate
- average rate calculated by using the average
of the exchange rates on the last day of each
month during each period
8.28 8.28 8.28 8.28 8.28
The following table sets forth the high and low exchange rates as of and
during the previous six months were as follows:
AT UNIFIED EXCHANGE RATE
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(Rmb equivalent of US$1.00) HIGH LOW
---- -----
December 31, 2005 8.08 8.07
November 30, 2005 8.09 8.08
October 31, 2005 8.09 8.07
September 30, 2005 8.10 8.08
August 31, 2005 8.11 8.10
July 31, 2005 8.28 8.11
See "Exchange Control" under "Item 10. Additional Information" of this annual
report for more details.
RISK FACTORS
Set forth below are certain risk factors that could adversely affect our future
business, operating results or financial condition. You should carefully
consider these risk factors and the other information in this annual report
before making investment decisions involving our shares.
RISKS RELATED TO OUR BUSINESS
The Company May Not Be Able to Implement Successfully Its Business Strategy in
which Case Its Business, Operating Results and Financial Condition Would Suffer
During the past few years, the Company has diversified its operations into
businesses outside of tire manufacturing. In addition, the Company has disposed
of operations it deemed underperforming. During 2003, the Company reduced its
interest in Hangzhou Zhongce from a majority to a minority position. The Company
is actively seeking new investment opportunities. In June 2004, the Company
entered into a conditional agreement to acquire properties interest in a parcel
of land under construction in Shanghai, China, for the usage of both commercial
and residential purposes. However, the Company may not be able to identify and
consummate new investments and implement successfully its business plan.
A key part of the Company's business strategy is to expand its operations
through acquiring new businesses and business lines. The acquisition of new
businesses and business lines carries substantial risk and uncertainties.
Depending on the specific acquisition, there may be risks relating to the
acquired business itself, risks relating to the industry in which the business
operates, and risks relating to the Company itself.
The Company May Not Be Able to Finance Acquisitions, Strategic Investments or
Other Expansions of Operations or May Incur Financial Obligations or Liabilities
in Connection with Any Acquisition or Expansion
Due to the limitation of the Company's existing financial resources, the
Company may experience difficulty in funding acquisitions, investments or
expansion of existing operations. The Company anticipates that it would fund any
such activities through advance of bank loans. The Company could incur an
increase in debt or other liabilities in connection with any acquisition or
other similar matter.
Future Acquisitions or Strategic Investments May Not Be Successful and May Harm
Our Operating Results
An important element of our strategy is to review prospects for
acquisition or strategic investments that would complement our existing
companies, augment our market coverage and distribution ability or enhance our
technological capabilities. Future acquisitions or strategic investments could
have a material adverse effect on our business and financial results because of
possible charges to financial results for purchased technology, restructuring or
impairment charges related to goodwill or amortization expenses associated with
intangible assets; potential increase in our expenses and working capital
requirement and the incurrence of debt and contingent liabilities; difficulties
in successfully integrating any acquired operations, technologies,
customers products and businesses with our operations; diversion or our capital
and management's attention to other business concerns; risks of entering markets
or geographic areas in which we have limited prior experience; or potential loss
of key employees of acquired organizations or inability to hire key employees
necessary for expansion.
Diversification May Result in Lowered Responsiveness to Cyclical Changes of
Different Businesses
Diversification of the Company's businesses will result in assets,
resources and management being committed or allocated to businesses in different
fields. As a result, the Company's flexibility in responding to seasonal changes
or periodic fluctuations in the business cycle in a particular business
operation may be limited.
The Voting Power of the Company's Major Shareholder May Make it Difficult for
the Other Holders to Exercise Influence on Corporate Matters or for the Company
to Engage in Business Combinations that the Public Shareholders May Deem
Desirable
China Strategic Holdings Limited ("CSH") directly and beneficially holds
all 3,000,000 shares of supervoting common stock and 1,629,200 shares of common
stock and also has an indirect interest equivalent to 349,630 shares of common
stock in the Company. As a result, CSH controls 88.8% of the voting rights of
the outstanding capital stock of the Company and CSH is able to elect a majority
of the Company's board of directors and will have sufficient voting control to
affect corporate transactions without the concurrence of the Company's minority
shareholders. In addition, CSH's voting rights tend to preclude any corporate
action by shareholders or a change in control of the Company unless it is
initiated or supported by CSH.
The Company's Business Focus on the Greater China Region Subjects the Company
and Its Business to the Political, Economic and Other Developments in the Region
As a result of the Company's traditional business focus on the Greater
China Region, the Company's business and its financial and operating results may
be affected by significant political, economic, social and cultural developments
in the region.
A substantial portion of the Company's results is derived from its
affiliates, major businesses of which are located in China. These businesses are
dependent in large part on the performance of the Chinese economy, as well as
Chinese government policy. As a result, the future financial condition and
results of operations of the Company could be adversely affected by slowdowns in
the Chinese economy, Chinese macroeconomic policy that de-emphasize the
development of industries which utilize products or services of the Company's
affiliates or other governmental policies, including changes in laws,
regulations or the interpretation thereof; confiscatory taxation; restrictions
on currency conversion, imports or sources of supplies; or the expropriation or
nationalization of private enterprises.
Although the Chinese government has been pursuing economic reform policies
for approximately two decades, the Chinese government has introduced measures in
certain sectors to avoid overheating of the
economy, including tightening bank lending policies and increases in bank
interest rates. Any measures or actions taken by the Chinese government to
control industries that utilize products or services of the Company's affiliates
could restrict their business operations and adversely affect the financial
positions of the Company and its affiliates.
Although the Company believes that the economic reforms and macroeconomic
policies and measures adopted by the Chinese government will continue to have a
positive effect on economic development in China and that the Company and its
affiliates will continue to benefit from these policies and measures, there is
no assurance that the government will continue to pursue such policies or that
such policies may not be significantly altered, especially in the event of a
change in leadership, social or political disruption, or other circumstances
affecting China's political, economic and social life.
In addition, the Company's financial results are significantly dependent
on the economy in the region. The economy of the Greater China Region differs
significantly from the economies of the United States and Western Europe in such
respects as structure, level of development, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation and balance of payments
position, among others. Adverse changes in economic in China, in the policies of
the Chinese government, could have a material adverse effect on the overall
economic growth of China. These developments could adversely affect the
financial condition, results of operations and business of the Company and its
affiliates, by reducing the demand for the products and services of the
Company's affiliates.
As a member of the World Trade Organization, China's economic activity is
expected to become more and more export driven and China's internal market is
expected to see more competition through imports. The expected change in
economic activity in China and the Greater China Region and a greater
interdependence of the Chinese economy on the general world economy as a result
of such changes could also impact the Company's financial results.
In addition, the operation of affiliates of the Company may be affected by
the adequacy of supply of, and demand for electricity in, the Greater China
Region. Demand for resources such as electricity continues to increase. In early
2005, the demand for electricity in the Greater China Region exceeded the
available supply. Limitations on, or shortages in, available resources, such as
electricity, could result in lower production of products than anticipated and
could, accordingly, affect the growth of sales and profitability thereof.
RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND
USE OUR RESOURCES EFFECTIVELY
Any future restrictions on currency exchanges may limit our ability to use
resources generated in Renminbi to fund our business activities outside China or
other payments in Hong Kong dollars or other foreign currencies. Although the
PRC government introduced regulations in 1996 to allow greater convertibility of
the Renminbi for current account transactions, significant restrictions still
remain, including primarily the restriction that foreign invested enterprises
may only buy, sell and/or remit foreign currencies at those banks authorized to
conduct foreign exchange business after providing valid commercial documents. In
addition, remittance of foreign currencies abroad and conversion of Renminbi for
capital account items, including direct investment and loans, is subject to
governmental approval in China, and companies are required to open and maintain
separate foreign exchange accounts for capital account items. We cannot be
certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the Renminbi, especially with respect to
foreign exchange transactions.
FLUCTUATIONS IN THE VALUE OF THE RENMINBI COULD NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS
Our reporting currency is the Renminbi as a substantial portion of our
investments are denominated in Renminbi. Our remaining assets and liabilities
and all of our operating expenses are denominated in Hong Kong dollars. As a
result, we may be exposed to foreign exchange risk, and our results of
operations may be negatively impacted by fluctuations in the exchange rate of
Renminbi against other currencies. As our major assets and liabilities comprise
a mixture of items that are denominated in Renminbi or Hong Kong dollars, our
business and operating result may be materially affected in the event of a
severe increase or decrease in the value of the Renminbi against other
currencies.
The value of the Renminbi is subject to changes in China's governmental
policies and to international economic and political developments. Since January
1, 1994, the PRC government has used a unitary managed floating rate system.
Under this system, the People's Bank of China, or PBOC, publishes a daily based
exchange rate with reference primarily to the supply and demand of Renminbi
against U.S. dollars and other foreign currencies in the market during the
previous day. Authorized banks and financial institutions are allowed to quote
buy and sell rates for Renminbi within a specified band around the central
bank's daily exchange rate. On July 21, 2005, PBOC announced an adjustment of
the exchange rate of the U.S. dollars to Renminbi from 1:8.27 to 1:8.11 and
modified the system by which the exchange rates are determined.
As the exchange rate of the Hong Kong dollars to the U.S. dollars has been
fixed by the Hong Kong government since 1983 at approximately HK$7.80 to
US$1.00, through the currency-issuing banks in Hong Kong., this adjustment has
resulted in an approximately 2.0% appreciation of the Renminbi against the Hong
Kong dollars. While the international reaction to the Renminbi revaluation has
generally been positive, there remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could
result in a further and more significant appreciation of the Renminbi against
the U.S. dollar and other currencies.
We may elect to hedge our currency exchange risk when we judge that such
action may be required. In an attempt to lower the costs of expenditures in
foreign currencies, we may enter into forward contracts or option contracts to
buy or sell foreign currencies against the Renminbi through one of our banks. As
a result, we may suffer losses resulting from the fluctuation between the buy
forward exchange rate and the sell forward exchange rate, or from the price of
the option premium.
As of December 31, 2004, we held no option or future contracts and during
the year we did not purchase or sell any commodity or currency options. We are
continuing to review our hedging strategy and there can be no assurance that we
will not suffer losses in the future as a result of hedging activities.
Limited Liquidity in the Company's Securities May Make It Difficult to Sell
Shares
As a foreign private issuer whose business is substantially in the China
and Asian market, the Company has less exposure in the U.S. capital markets than
comparable U.S. issuers. In addition, the Company has a relative small public
float of its securities. These and other general economic, industry or Company
factors may result in low trading volumes or prices of the Company's securities.
Accordingly, shareholders of the Company bear risks regarding the liquidity of
the Company's shares and may not be able to sell shares in desired quantities,
at desired times or desired prices or a combination thereof.
As a Result of Changes in the Company's Assets and Sources of Income, the
Company Could Become an Investment Company for Purposes of the United States
Investment Company Act of 1940
While the Company believes that through its subsidiaries and affiliates it
is actively engaged in operating businesses, and does not meet the definition of
an investment company for purposes of the United States Investment Company Act
of 1940 (the "1940 Act"), the Company still intended to rent out the property
located in Shanghai, the PRC, in order to receive rental income in the future.
However, it depends on the composition and valuation of the Company's assets and
the sources of the Company's income from time to time, the Company could fall
within the technical definition of the term "investment company" for purposes of
the 1940 Act. We may be deemed to be an investment company under the 1940 Act.
Generally, a company must register under the 1940 Act and comply with
significant restrictions on operations and transactions with affiliates if its
investment securities exceed 40% of the company's total assets, or if it holds
itself out as being primarily engaged in the business of investing, owning or
holding securities. The 1940 Act provides for various exemptions from the
obligation to register thereunder, and we are deemed not to be an investment
company under the 1940 Act. If certain of our investments were to adversely
affect our status under the 1940 Act, we might need to dispose of or acquire
investments to avoid the requirement to register as an investment company on
terms that may not be favourable to us. In addition, if we were deemed to be an
investment company and therefore required to register as such under the 1940
Act, we would be unable to continue operating as we currently do, as a result of
which our market value would be severely harmed.
Changes in Composition of the Company's Assets Could Result in the Company Being
Deemed a "Passive Foreign Investment Company" Which Could Have a Negative Impact
on U.S. Holders
Special U.S. federal income tax rules apply to U.S. holders of shares of a
non-U.S. corporation that is classified as a Passive Foreign Investment Company
("PFIC"), for U.S. federal income tax purposes. The determination of the PFIC
status of the Company principally depends upon the composition of the Company's
assets, including goodwill, and the amount and nature of the income of the
Company, from time to time. The Company disposed of most of its operating
subsidiaries, or its majority interest therein, during the past three years. If
we are characterized as PFIC, our U.S. shareholders may suffer adverse tax
consequences, including having gains realized on the sale of our shares taxed at
ordinary income rates, rather than the capital gain rate. In addition, both
gains upon disposition and amounts received as distributions could be subject to
an additional interest charge by the Internal Revenue Service. A determination
that we are a PFIC could also have an adverse effect on the price and
marketability of our shares.
We do not believe that we were a PFIC for 2004. However, since the
determination of whether we are a PFIC is based upon such factual matters as the
valuation of our assets and, in certain cases, the assets of companies held by
us, there can be no assurance with respect to the position of the Internal
Revenue Service on our status as a PFIC. Our analysis related to 2004 is based,
among others, upon certain assumptions and methodologies with respect to the
various that we have used, the appropriate value of our ownership interest in
companies we held, and the manner in which we have allocated the value among our
active assets and passive assets.
We cannot assure you that the Internal Revenue Service will not challenge
our assumptions and methodologies. If there were such a challenge, we could be
classified as a PFIC for 2004.
With respect to 2005 and subsequent years, the tests for determining PFIC
status are applied annually and it is difficult to make accurate predictions of
future income and assets, which are relevant to this determination. The tests
are impacted by changes in value of our group companies which are difficult to
predict. Accordingly, there can be no assurance that we will not become a PFIC
in 2005 or subsequent years.
Increased Demand on Corporate Management Time May Have Potential Distortion on
Overall Group Performance
As more investment opportunities arise, a significant portion of
management time will be allocated to overseeing and monitoring the operations of
each of the Company's newly acquired subsidiaries and affiliates some of which
may be in industries completely different from the traditional core business of
the Company. This could result in inefficient allocation of managerial resources
in the Company. Moreover, the operation of businesses different from the core
business may require different managerial skills and business acumen. The
Company may not be able to successfully run newly acquired businesses in diverse
industries.
Natural Disasters in the Greater China Region Could Cause Significant Damage to
the Company's Business and Financial Results
The products of the Company's affiliates are manufactured at the factories
located in the PRC. During the past years, the PRC has experienced natural
disasters, including floods and fires. A disaster could cause significant damage
to manufacturing factories which may not be adequately covered by insurance
proceeds and could materially and adversely affect our business and financial
results. The disaster relief and assistance in the PRC is not well developed and
there can be no assurance that adequate government assistance would be available
in the absence of sufficient insurance coverage. In addition, any natural
disaster in the region would adversely impact the travel business of an
affiliate of the Company which is focused on the Asia Pacific region.
Our Results Could Be Harmed If We Have To Comply with New Environmental
Regulations
The operations of our affiliates create some environmentally sensitive
waste that may increase in the future depending on the nature of our
manufacturing operations. The general issue of the disposal of hazardous waste
has received increasing attention from Chinese national and local governments
and foreign governments and agencies and has been subject to increasing
regulation. Currently, relevant Chinese environmental protection laws and
regulations impose fines on discharge of waste materials and empower certain
environmental authorities to close any facility which causes serious
environmental problems. Although it has not been alleged that we have violated
any current environmental regulations by China government officials, there is no
assurance that the Chinese government will not amend its current environmental
protection laws and regulations. Our financial results could be materially and
adversely affected if we were to increase expenditures to comply with
environmental regulations affecting our operations.
Our Insurance Coverage May Not Be Sufficient to Cover the Risks Related to Our
Financial and Losses
The operations of our affiliates have not experienced any major accidents
in the course of our businesses which have caused significant property damage or
personal injuries. However, there is no assurance that we will not experience
major accidents in the future. Although we have purchased the necessary
insurances, the occurrence of certain incidents such as earthquake, war and
flood, and the consequences resulting from them, may not be covered adequately,
or at all, by insurance policies under which we are protected. We also face
exposure to product liability claims in the event that any of our products is
alleged to have resulted in property damage, bodily injury or other adverse
effects. Losses incurred or payments we may be required to make, may have a
material adverse effect on our results of operation if such losses or payments
are not fully insured.
Possible Volatility of Share Prices Worldwide May Have Significant Effects on
the Company's Share Price
The trading price of the Company's shares has been and may continue to be
subject to wide fluctuations. Capital markets worldwide have generally
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of the listed companies
themselves. There can be no assurance that trading prices and price earnings
ratios previously experienced by the Company's common shares will be matched and
maintained. Broad market and industry factors may adversely affect the market
price of shares in the Company, regardless of its operating performance.
Shareholders and potential investors of the Company are advised to exercise
caution when dealing in the securities of the Company.
Legal System Differences between the Greater China Region and the United States
of America Could Impact Investors
Unlike common law systems in the western world, China has a civil law
system based on written statutes and, therefore, decided legal cases are without
binding legal effect, although they are often followed by judges as guidance. As
the Chinese legal system develops, the promulgation of new laws, changes to
existing laws and the preemption of local regulations by national laws may
adversely affect the interests of foreign investors.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
The Company was incorporated under the laws of Bermuda on January 28,
1993. From July 15, 1993 to late 2002, the Company's shares were listed on the
New York Stock Exchange, Inc. (the "NYSE"). On November 26, 2002, the Company's
shares began trading on the OTCBB in the United States. The Company is
registered in Hong Kong under the commercial name of "China Tire Holdings
Limited" due to local company registration considerations.
The principal place of business of the Company is located at 8th Floor,
Paul Y. Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong and its telephone
number is (852) 2372 0130.
IMPORTANT EVENTS OF THE COMPANY'S BUSINESS SINCE THE BEGINNING OF 2004
On January 13, 2004, Wing On Travel (Holdings) Limited ("Wing On") entered
into agreements (as subsequently amended on March 17 and May 4, 2004) with the
Company and another holder of its convertible notes in relation to the issuance
of new convertible notes. Under the agreements Wing On would issued new
convertible notes to the Company or its nominee for a consideration of HK$155.0
million (Rmb165.2 million), of which HK$84.8 million (Rmb90.0 million), settled
by the cancellation of the Company's current convertible notes of Wing On and
the remaining balance would be satisfied in cash by the Company. The new
convertible notes provide the Company rights to convert the notes into new
shares of Wing On during a period of three years from the date of issue, at the
Company's discretion, at an initial conversion price of HK$0.02 per share of
Wing On, subject to adjustments. On June 8, 2004, the agreements were approved
by Wing On's shareholders that do not have any interest in Wing On's current
convertible notes and the transaction was completed on June 14, 2004.
On June 16, 2004, the Company, through an indirect wholly-owned
subsidiary, entered into a conditional sale and purchase agreement with an
independent third party, Shanghai Jiu Sheng Investment Company Limited
("Vendor"), for the proposed acquisition by the Company of a parcel of land (the
"Land") and a 24-story building under construction on the Land (the "Building")
located in Shanghai, the PRC (the Land and the Building together referred to as
the "Properties"). The estimated total gross floor space of the Building is
approximately 37,000 square meters, on a parcel of approximately 5,500 square
meters. Subject to zoning approvals, which are a condition to the acquisition,
the Company expects that the first four floors of the Building will be rented
for commercial purposes and the remaining 20 floors will be developed and rented
as serviced apartments.
The aggregate consideration for the Property is Rmb450 million. The
Company paid the first deposit of Rmb50 million in cash to the Vendor upon
signing of the agreement; and subsequent to the balance sheet date, Rmb8 million
of deposit was additionally advanced by the Company and the aggregate sum paid
by the Company to the Vendor amounted to Rmb58 million as at the date of this
report. Rmb380 million of the consideration will be payable upon the grant and
drawdown of loans to be granted by PRC banks or financial
institutions and secured by the Properties. The remaining Rmb20 million will be
financed by internal resources of the Company and will be due upon completion of
the transfer of the ownership of the Properties from the seller to the Company.
However, the conditions stated in the agreement for the change of the use
of the Properties might not be fulfilled within the said period and accordingly
the Vendor and the Company had entered into another agreement dated February 3,
2005 pursuant to which, among other things, (i) the Company will pay, on behalf
of the Vendor, Rmb22 million to the main contractor of the Properties (the "Main
Contractor"); and (ii) the amount paid by the Company in (i) will be deducted
from the sales consideration.
In June 2005, the Company had commenced legal proceedings against the Vendor,
among other things, to demand the Vendor to fulfill its obligations under the
above two agreements and applied to a PRC court an injunction order on the
Properties to stop the Properties from being transferred (the "Injunction
Order"). It had also come to the attention of the Company that one of the three
secured creditors of the Vendor and the Main Contractor had already applied to
and being granted the Injunction Orders and they, together with the other two
secured creditors, had priority over the Company on the Properties. As a
condition precedent to the application of the Injunction Order, the Company had
issued a counter guarantee of Rmb402 million to an institution in the PRC which
provided a guarantee of the same amount to the PRC court on behalf of the
Company.
At the same time, the directors of the Company are also in discussion with the
Vendor for settlement of the above matters; however, there can be no assurance
that such matters can be resolved and settled with the Vendor eventually.
Despite the above developments, the directors of the Company have consulted its
legal counsel and decided to proceed with the acquisition of the Properties in
consideration of the following:
(a) the legal title of the Properties can be transferred to the Company when the
debts of the Vendor owed to the three secured creditors and the Main
Contractor are settled by the Company;
(b) the usage of the Properties can be changed to both commercial and
residential when the Company obtains the legal title to the Properties and
makes the application to the relevant authority;
(c) the acquisition of the Properties, on a completion basis, is expected to
bring economic benefits to the Company taking into account of the estimated
market value of the Properties as of June 30, 2005; and the ability of the
Company to meet the cash flow requirements to finance the acquisition and
completion of the Properties, given the current financial position of the
Company and financial resources available to the Company from internally
generated funds, advances from its holding companies and/or financial
institutions.
The directors of the Company are of the view that the carrying amount of
the deposit is not less than its recoverable amount at the reporting date. A
copy of the agreement is included as Exhibit 4(a)4 to this annual report.
In October and November, 2004, the Company converted approximately HK$100
million convertible note
of Wing On into ordinary shares of HK$0.01 each of Wing On at conversion price
of HK$0.020 per share. The interest of Wing On held by the Company was
accordingly increased from approximately 32.2% to approximately 38.6% upon
conversion of the convertible notes into shares of HK$0.01 each in Wing On by
the Company. The Company subsequently disposed of approximately 7.9% interest in
Wing On on the open market for a consideration of approximately HK$45 million
and as a result the Company's interest in Wing On was decreased to approximately
30.3%.
On November 30, 2004, the Company entered into two placement and
subscription agreements with Wing On and the placing agent pursuant to which the
placing agent agreed to place 6,000 million shares of Wing On at the price of
HK$0.028 per share and the Company agreed to subscribe for up to 6,000 million
new shares of Wing On at the same price of HK$0.028 per share. The placing of
6,000 million shares of Wing On and subscription 3,660 million new shares of
Wing On issued to the Company under the general mandate of Wing On were
completed in December, 2004. The subscription of 2,340 million new shares of
Wing On issued to the Company pursuant to the approval of independent
shareholders of Wing On were completed in January 2005. Upon completion of the
above transactions, the Company held approximately 25.0% interest in Wing On. No
gain or loss was recorded in the transaction.
On February 4, 2005, the Company further entered into a placing and
subscription agreement with Wing On and the placing agent pursuant to which the
placing agent agreed to place, on a best efforts basis, up to 6,400 million
shares of Wing On at a price of HK$0.022 per Wing On share and the Company would
subscribe for up to 6,400 million new shares of Wing On at the price of HK$0.022
per share. The above transactions were completed in February, 2005. The
Company's interest in Wing On was then decreased to 21.1%. No gain or loss was
recorded in the transaction.
On April 29, 2005, the Company converted HK$55 million convertible notes
of Wing On into ordinary shares of HK$1.00 each of Wing On at conversion price
of HK$1.97 per share. The interest of Wing On held by the Company was
accordingly increased from approximately 21.1% to 27.74% upon conversion of the
convertible notes into share of HK$1.00 each in Wing On by the Company.
China Strategic Holdings Limited ("CSH"), the parent company of the
Company, had been informed by two substantial shareholders of China Strategic
Holdings Limited, that they have entered into the share sale agreement with the
offeror on March 10, 2005 pursuant to which and subject to, inter alia, the
implementation of the Group Reorganization as stated below in full, the offeror
agreed to acquire 135,000,000 shares (equivalent to 67,500,000 consolidated
shares of China Strategic Holdings Limited upon the Capital Reorganization
having become effective) from each of two substantial shareholders, which shares
represent approximately an aggregate of 30.6% of the issued share capital of
China Strategic Holdings Limited, for an aggregate consideration of
HK$52,110,000, equivalent to about HK$0.193 per share (or HK$0.386 per
consolidated share).
CSH announced the following proposals, which the resolutions were approved
and passed at the Extraordinary General Meeting of CSH held on October 6, 2005,
that would result in below:
(i) China Strategic Holdings Limited continuing to be a public listed
company with its subsidiaries concentrating on its business of
manufacturing and trading of battery products, investments in securities
and property and investment in unlisted investments;
(ii) all other subsidiaries of China Strategic Holdings Limited carrying on
sand mining business, property
development, and investment holding business (including the Company),
and all other associates of China Strategic Holdings Limited carrying on
manufacturing and marketing of tires and business of providing package
tour, travel and other related services (including the equity investment
affiliates of the Company) being grouped under Group Dragon Investments
Limited ("GDI"), a wholly-owned subsidiary of China Strategic Holdings
Limited, and its subsidiaries; and
(iii) the distribution in specie of the GDI share to the shareholders of China
Strategic Holdings Limited whose names appear on the register of members
of China Strategic Holdings Limited on the record date on the basis of
one GDI share for one consolidated share of China Strategic Holdings
Limited.
PRINCIPAL CAPITAL EXPENDITURES
Principal capital expenditures, investment and divestitures over the last
three years include the following:
2002 2003 2004
RMB'000 RMB'000 RMB'000
Purchase of property, plant and equipment (287,536) (256,872) -
Proceeds from disposal of property, plant and equipment 77,320 4,601 -
Investments in and advances to affiliates, net (180,612) (197,358) 72,142
Proceeds from disposal of a business component, net 833 (104,128) -
The Company conducts its businesses through subsidiaries and affiliates.
Accordingly, much of the expenditures described above have been made at the
subsidiary level. For a description of the Company's subsidiaries, please refer
to the section "ORGANIZATION STRUCTURE" below.
BUSINESS OVERVIEW
For the two years ended December 31, 2003, the Company principally engaged
in the manufacturing and trading of tires business. And for the year ended
December 31, 2004, no turnover was derived from the manufacturing and trading of
tires products following the disposal of interest of subsidiaries engaged in
this operation. The Company's tire business was primarily conducted through
Hangzhou Zhongce, which, through September 2003, was a majority-owned subsidiary
of the Company. The Company's consolidated operating results for 2003 were
derived substantially from the performance of Hangzhou Zhongce. Also, in 2002,
the Company began to diversify its business and acquired a significant interest
in Wing On Travel, a Hong Kong based travel company. As described above, in the
middle of 2004, the Company continued its diversification by entering into the
sale and purchase agreement for the Properties. It is the intention of the
management of the Company to continue seeking appropriate investment
opportunities in the hotel and travel related businesses in the PRC in view of
the positive outlook in this sector in the coming future. The Company is
actively seeking new investment opportunities.
Since the Company does not have any other operating subsidiary up to the
date of this report, the financial results of the Company in fiscal 2004 was
greatly depended on the share of results of its affiliates, including the tire
business and the travel business.
TIRE BUSINESS
During the years 2002 through 2003, the Company was principally engaged in the
tire manufacturing and trading business, through Hangzhou Zhongce; and is mainly
engaged in the manufacture and sale of bias and radial tires. Accordingly,
Hangzhou Zhongce established Hangzhou Sunrise Rubber com., Ltd ("Hangzhou
Sunrise") with three other PRC enterprises in 1998 and vertically acquired Fu
Chun Jiang in 1999 that manufactures radial tire products and a number of raw
materials including tire rubbers and carbon black,
respectively. During 2003, the Company disposed of its 25% interest in Hangzhou
Zhongce and ceased to consolidate the results of Hangzhou Zhongce and Fu Chun
Jiang (collectively referred to as "Hangzhou Zhongce") and Hangzhou Sunrise was
also ceased to be an affiliate of the Group as of October 1, 2003, following the
completion of the disposal. And as a result of this disposition, the Company
maintains minimal involvement in the manufacturing and trading of tires products
through its 26% held interest in Hangzhou Zhongce, which became a major
affiliate of the Company thereof. For the year ended December 31, 2004, no
turnover of the Group was derived from the tire business engaged in the
manufacturing and marketing of tire products.
PRINCIPAL PRODUCTS
Hangzhou Zhongce manufactures and sells a broad line of tire products,
consisting of motor vehicle (bias and radial tire for truck, tractor, passenger
car and motorcycle), bicycle and wheelbarrow tires. This breadth of products
enables Hangzhou Zhongce to serve its diverse customer base in Zhejiang Province
and along the heavily populated and economically prosperous eastern coastal
region of China.
HANGZHOU ZHONGCE SALES IN UNITS
2002 JAN TO SEPT 2003
----------------------------------- ---------------------------------
CHANGE CHANGE
FROM FROM
TYPE OF TIRES UNITS % OF TOTAL PRIOR YEAR UNITS % OF TOTAL PRIOR YEAR
---------- ---------- ---------- ---------- ---------- ----------
Motor Vehicle Tires
Passenger Car 1,018,277 19.30% 29.04% 1,374,624 25.83% 35.00%
Truck and Light Truck 3,879,185 73.52% 8.29% 3,633,721 68.27% -6.33%
Tractor 348,890 6.61% 31.55% 266,575 5.01% -23.59%
Others 30,282 0.57% -9.58% 47,458 0.89% 56.72%
---------- ------ ---------- ------
Total 5,276,634 100.00% 12.99% 5,322,378 100.00% 0.87%
========== ====== ========== ======
Bicycle Tires 40,651,193 14.11% 34,965,304 -13.99%
Wheelbarrow Tires 2,723,131 8.87% 2,318,035 -14.88%
HANGZHOU ZHONGCE SALES (SALES TAX EXCLUDED)
2002 JAN TO SEPT 2003
---------------------- ----------------------
SALES SALES
---------- ----------
TYPE OF MOTOR VEHICLE TIRES RMB'000 % OF TOTAL RMB'000 % OF TOTAL
---------- ---------- ---------- ----------
Bias Tires 1,053,238 55.66% 811,003 39.68%
Radial Tires 839,017 44.34% 1,232,646 60.32%
--------- ------ --------- ------
Total 1,892,255 100.00% 2,043,649 100.00%
========= ====== ========= ======
TRUCK AND PASSENGER VEHICLE TIRES. The rise in commercial activities in
China, improvement in living standard of the Chinese population and change in
governmental policy of China supported the recent increased demand for
commercial vehicles and road transportation in China. These factors stimulated
the sales of motor vehicle tires for Hangzhou Zhongce, especially for passenger
vehicle tires. Truck and light truck tires continue to be the major products of
Hangzhou Zhongce.
BICYCLE TIRES. Since "Chao Yang" tire, Hangzhou Zhongce's brand name, is
well known in the PRC, Hangzhou Zhongce sold approximately 35 million units of
bicycle tires for the nine-month period ended September 30, 2003, and attained a
leading position in the domestic market. Bicycle remains one of the major modes
of transportation in China and hence the sales of bicycle tires were stable and
provided a steady source of operating income.
MARKETS
MOTOR VEHICLE TIRES. Hangzhou Zhongce distributes its motor vehicle tires
regionally to a large customer base - Zhejiang Province. Other major commercial
and industrial centers along the eastern coastal region to which Hangzhou
Zhongce sells its products include the city of Shanghai, the provinces of
Jiangsu and Anhui and the provinces of Fujian and Jiangxi. As a result of the
increase in productive capacity, Hangzhou Zhongce has successfully increased its
business in Northern China. During 2001 to 2003, Hangzhou Zhongce started to
expand its sales to other districts of China, primarily, as a result of decrease
in percentage of sales in Eastern China and export sales.
GEOGRAPHICAL SALES DISTRIBUTION OF MOTOR VEHICLE TIRE - 2002 AND 2003
% OF REVENUE
----------------------
2002 2003
REGION JAN ~ DEC JAN ~ SEPT
Eastern China (l) 33.5% 32.9%
Northern China (2) 21.5% 22.0%
Western China (3) 5.3% 5.8%
Southwestern China (4) 6.3% 6.1%
Southern China (5) 11.9% 12.2%
Export (6) 21.5% 21.0%
----- -----
Total 100.0% 100.0%
===== =====
(1) Eastern China refers to the provinces of Shandong, Jiangsu, Anhui,
Zhejiang, Jiangxi, Fujian and Shanghai.
(2) Northern China refers to the provinces of Heilongjiang, Jilin, Liaoning,
Hebei, Shanxi, Henan, Inner Mongolia, Beijing and Tianjin.
(3) Western China refers to the provinces of Gansu, Qinghai, Shannxi, Xinjiang
and Ningxia.
(4) Southwestern China refers the provinces of Sichuan, Yunnan, Guizhou and
Tibet.
(5) Southern China refers to the provinces of Taiwan, Hubei, Hunan, Guangxi
and Guangdong.
(6) Export sales are primarily to the Middle East, Philippines, Singapore, the
United States and Canada.
The primary market for Hangzhou Zhongce's products is the replacement tire
market which accounted for over 90% of the domestic sales of Hangzhou Zhongce.
The Company estimates that, on average, tires are replaced more frequently in
China than in any other developed country because of poor road conditions,
frequent overloading of vehicles and the high daily usage rate of vehicles. As
is typical in the China tire market, Hangzhou Zhongce does not have long term
supply contracts with its customers, who customarily place orders for the
following year at the end of each year. Accordingly, Hangzhou Zhongce focuses
much of its marketing effort on developing new distribution opportunities in the
replacement market and strengthening existing relationships with large customers
and distributors.
Hangzhou Zhongce sells its motor vehicle tires and bicycle tires under its
brand name "Chao Yang" and in 2003 had five primary channels for distributing
its motor vehicle tires: (a) direct sales to Original Equipment Manufacturer
customers, (b) sales through an authorized wholesaler, (c) auto repair shops,
(d) Hangzhou Zhongce's retail sales offices, and (e) exports. The enterprise has
3 retail sales offices in 3 provinces and central municipalities, primarily
situated in cities adjacent to the Zhejiang province.
Sino-foreign equity joint venture enterprises are free to set prices for
their products without government control. Hangzhou Zhongce adjusts its prices
in response to market conditions. Based on quality and type of tire, radial
tires are sold for prices higher than those for bias tires of comparable size.
Hangzhou Zhongce offers a "Triple Coverage" warranty for its tires,
guaranteeing repair, return or replacement of defective tires. In 2003, Hangzhou
Zhongce's tire manufacturing defect rate was 0.91%, compared to the national
average of 0.50% and the customer return rate was 1.67%.
BICYCLE TIRES. Hangzhou Zhongce sells bicycle tires primarily in the
Zhejiang Province, Shanghai and surrounding provinces. Its customer base is
mainly in the replacement market. Hangzhou Zhongce believes that it has strong
relationships with its customers. As with the motor vehicle tire market,
Hangzhou Zhongce does not have long term supply contracts with customers, who
customarily place orders for the following year at the end of each year.
The Company does not believe that seasonality has a significant impact on
its tire business.
RAW MATERIALS
A typical bias tire is manufactured, on cost basis, from a mix of
approximately 25% natural rubber, 12% synthetic rubber, 31% nylon cord, 10%
carbon black, 4% steel thread and 18% other materials. A typical radial tire is
manufactured, on cost basis, from a mix of approximately 22% natural rubber, 5%
synthetic rubber, 9% carbon black, 43% steel cord and 21% other materials. As
indicated below, prices of key raw materials increased during 2003.
RAW MATERIAL COSTS: 2002-2003
2002 2003
----------- -----------
AVERAGE AVERAGE
COST COST
PER TON (1) PER TON (1)
Natural Rubber 6,450 9,180
Synthetic Rubber 7,450 10,150
Carbon Black 3,560 3,680
Nylon Cord 18,250 19,850
Steel Thread 3,760 4,180
Steel Cord 17,570 16,540
- -------------
(1) In thousands Rmb.
Hangzhou Zhongce currently pays for their imported raw materials with
Renminbi by purchasing such materials through large Chinese import-export
companies. Imports sourced directly from foreign suppliers are subject to import
duties and must be purchased with foreign currency. However, by exporting its
tires, Hangzhou Zhongce is exempted from paying import duties and earns foreign
currency in an amount sufficient to balance the amount expended on raw material
imports. Because of the lower prices generally quoted by export agencies and
international tire distributors, domestic sales usually provide higher margins
than export sales.
Part of the rubber and carbon black consumed during the year was supplied
by Fu Chun Jiang. However, the volume was insignificant as compared to those
outsourced from other suppliers and importers.
ENVIRONMENTAL ISSUES
In China, the local provincial and municipal governments enforce pollution
control regulations. If a company was found to be in violation of such
regulations, it would be given a period of time to remedy the problem. Should it
fail to do so, the government could force a shutdown of the operations until
such time as that company is in compliance of the regulations.
Hangzhou Zhongce believes that their products and manufacturing and other
operations are in compliance, in all material respects, with existing applicable
laws relating to air, water and noise pollution.
TRAVEL BUSINESS
In 2002, the Company diversified into the travel business through an
investment in Wing On. The travel industry in the Asia Pacific region had a
difficult time in the first half of 2003. The global travel in the region was
affected by, among other factors, hostilities such as the Iraqi war, concerns
over terrorism and the Severe Acute Respiratory Syndrome ("SARS"). The
unemployment rate of Hong Kong was persistently high. Wing On's tour operations
and transportation business were harshly attenuated for several months.
In response to the issues facing the industry, Wing On shifted its
business focus. An increased emphasis was placed on local tours in financial
year 2003. Special promotions and initiatives were launched to rebuild public
confidence in travel in the region. In addition, Wing On introduced new targeted
adventure, photography tours and other tours. At the same time, in order to
achieve greater operational efficiencies and cost savings, Wing On implemented
restructuring changes during the financial year 2003. Several of its less
profitable local branches and overseas offices were closed and its loss-making
transportation business was sold.
Despite these adverse factors, the industry recovered rapidly during the
second half of the year 2003 following the control of epidemic, the subsequent
lifting of various World Health Organization travel advisories, the launch of
the Individual Visit Scheme by the Chinese government, pursuant to which Chinese
citizens in selected cities can more easily travel to Hong Kong, and the
implementation of the Closer Economic Partnership Arrangement by the Chinese
government. Wing On improved its results in 2003.
For the year 2004 under review, Wing On continued to benefit from the
upward rebound to travel business of Hong Kong after the negative impacts
brought by the outbreak of SARS subsided over the corresponding period.
Following the policy trend in the PRC, it is likely the limit on foreign holding
in a company operating with outbound travel license be gradually opened up. In
fact, with the gradual easing of restrictions on the individual mainland
visitors traveling to Hong Kong, the Company expects a great increase in
arrivals once more parts of the PRC are opened up to individual travelers, that
directly benefit the local economy. Consequently, Wing On continues to explore
and develop the hotel and tourist market in the PRC.
Throughout 2004, Hong Kong's economy was picked up together with many
countries around the world. Although the Indian Ocean tsunami did have an impact
on travelers' sentiment, overall performance of the travel industry was quite
promising over the year. Turnover and the profit before taxation of Wing On for
the year ended December 31, 2004 attained HK$1,722.2 million (equivalent to
Rmb1,832.2 million) and HK$37.8 million (equivalent to Rmb40.2 million)
respectively (2003: HK$1,416.2 million (equivalent to Rmb1,506.7 million) and a
loss of HK$373.1 million (equivalent to Rmb396.9 million) respectively).
ORGANIZATIONAL STRUCTURE
The Company is part of a group of companies whose ultimate parent company
is CSH (the "CSH Group"). See "Major Shareholders" in "Item 7. Major
Shareholders and Related Party Transactions" of this annual report for more
details.
The chart below illustrates the simplified position of the Company within
the CSH Group at December 31, 2004.
CSH
(Listed in Hong Kong)
(Incorporated in Hong Kong)
(Investment Holding)
55.22%
The Company
(Traded on OTCBB)
(Incorporated in Bermuda)
26.0% 19.58%
Hangzhou Zhongce Wing On
(Incorporated in PRC) (Listed in Hong Kong)
(Tire Manufacturing) (Incorporated in Bermuda)
(Investment Holding)
The Company itself is a holding company, which has majority interests in a
number of subsidiaries and international entities as of December 31, 2004. The
principal subsidiaries of the Company are Container Limited ("Container"),
Century Lead Limited ("Century Lead"), Capital Canton Limited ("Capital
Canton"), Easy Legend Limited ("Easy Legend"), Manwide Holdings Limited
("Manwide"), Million Good Limited ("Million Good"), Sincere Ocean Limited
("Sincere Ocean"), Supreme Solution Limited ("Supreme Solution"), Wealth Faith
Limited ("Wealth Faith"), Great Windfall Agents Limited ("Great Windfall"),
Honest Map Limited ("Honest Map"), Leading Returns Limited ("Leading Returns"),
Ventures Kingdom Limited ("Ventures Kingdom"), which all subsidiaries are the
British Virgin Islands ("BVI") incorporated companies, and The Rosedale Luxury
Hotel & Suites Limited ("Rosedale"), which is incorporated in the PRC.
CONSOLIDATED PRINCIPAL SUBSIDIARIES AS OF DECEMBER 31, 2004
COMPANY'S
COUNTRY OF OWNERSHIP INTEREST
CONSOLIDATED SUBSIDIARY INCORPORATION PRINCIPAL ACTIVITIES DIRECTLY INDIRECTLY
-------- ----------
Container BVI Investment holding 100% -
Century Lead BVI Investment holding 100% -
Capital Canton BVI Investment holding 100% -
Easy Legend BVI Investment holding 100% -
Manwide BVI Investment holding 100% -
Million Good BVI Investment holding 100% -
Sincere Ocean BVI Investment holding 100% -
Supreme Solution BVI Investment holding 100% -
Wealth Faith BVI Investment holding 100% -
Great Windfall BVI Investment holding and financing 100% -
Honest Map BVI Investment holding and financing 100% -
Leading Returns BVI Investment holding and financing 100% -
Ventures Kingdom BVI Investment holding and financing 100% -
Rosedale PRC Property holding 100% -
Through September 20, 2003, Hangzhou Zhongce, a PRC incorporated company,
was also a majority-owned subsidiary of the Company. Please see Exhibit Number 8
for all subsidiaries of the Company.
PROPERTY, PLANT AND EQUIPMENT
BERMUDA
The registered office of the Company is located at Clarendon House, 2
Church Street, Hamilton, HM11, Bermuda. Only corporate administrative matters
are conducted at this office, through the Company's agent, Butterfield Corporate
Services Limited. The Company neither owns nor leases property in Bermuda.
HONG KONG
The Company's principal executive office is located at 8th Floor, Paul Y.
Centre, 51 Hung To Road, Kwun Tong, Kowloon, Hong Kong. The Company shares the
office with CSH and the Company has agreed to reimburse CSH for administrative
services rendered on behalf of the Company on a cost plus 5% basis. See "Item 7.
Major Shareholders and Related Party Transactions" in this annual report for
more details.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Except for statements of historical facts, this section contains forward-looking
statements involving risks and uncertainties. You can identify these statements
by forward-looking words including "expect", "anticipate", "believe", "seek",
"estimate", "intends", "should" or "may". Forward-looking statements are not
guarantees of our future performance or results and our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under the section of this
Report entitled Item 3. Key Information - "Risk Factors." This section should be
read in conjunction with our Consolidation Financial Statements included as Item
18 of this Report.
OPERATING RESULTS
OVERVIEW
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto contained in "Item 18.
Financial Statements" of this Annual Report.
The forward-looking statements in this Item 5 are not guarantees of future
performance. They involve both risk and uncertainty. Several important factors
could cause our actual results to differ materially from those anticipated by
these statements. Many of those factors are macroeconomic in nature and are,
therefore, beyond the control of our management. Please see the "Forward-Looking
Information" in this Annual Report for more details.
The Company has historically been engaged in the tire manufacturing and
trading and related business. During 2001, the Company decided to reengineer its
operations to improve its financial performance. The Company began to dispose of
loss-making subsidiaries and tried to diversify its business.
In early 2002, the Company acquired a substantive stake in Wing On,
diversifying its business into the travel industry. In fiscal 2003, the Company
further completed its disposals of three loss-making subsidiaries, Yinchuan CSI
and the Company's remaining interests in Double Happiness and ceased to account
for the results of operations and the assets and liabilities of these
subsidiaries from their respective disposal dates.
In order to realize part of its investment, the Company entered into a
contract to sell a 25% interest in Hangzhou Zhongce on June 15, 2003. As a
result, the Company reduced its interest in Hangzhou Zhongce from a majority to
a minority position; and maintains minimal involvement in the manufacturing and
trading of tires products through its 26% held interest in Hangzhou Zhongce. The
sale was completed in September 2003 and
Hangzhou Zhongce became an affiliate of the Group at that time. The Company's
Directors considered the disposal as an attractive opportunity for the Company
to realize part of its investment. The Company also considered the introduction
of an investor in Hangzhou Zhongce to be beneficial to both its future
development in the PRC and hence its future value to the Company. The Company
consolidated the results of operations of Hangzhou Zhongce for the nine months
period end September 30, 2003 and shared equity earnings of Hangzhou Zhongce for
the period from October 1, 2003 to December 31, 2003.
After the completion of the above-mentioned restructuring activities, the
Company is concentrating on its investments in major affiliates, Hangzhou
Zhongce and Wing On.
With its changing political and socio-economic landscape, it is imperative
that the Company expands its vision to encompass investments in other high
growth industries in the region. Going forward, the Company intends to actively
search for potential investments in the PRC with emphasis on achieving a
diversified portfolio. Since the signing of the Closer Economic Partnership
Arrangement, economic exchanges between Hong Kong and the Mainland China have
gained in momentum. The Company believes that, in part as a result of this
development, the economy of the PRC will grow at an increased rate.
TIRE BUSINESS
During the year 2004, Hangzhou Zhongce continued to benefit from the
growth in tire market in the PRC and recorded significant improvement in
turnover. The results of Hangzhou Zhongce improved to a lesser extent as
compared to turnover due to the significant increase in the price of raw
materials. Nevertheless, Hangzhou Zhongce recorded an operating income of
approximately Rmb250 million during fiscal 2004.
TRAVEL BUSINESS
Wing On was mainly engaged in the business of providing package tours,
travel and other related services in Hong Kong. Its major affiliates are engaged
in the operation of hotels. Over 90% of Wing On's operations were derived from
Hong Kong whereas the majority of its assets are located in Hong Kong and the
PRC.
Throughout 2004, the Hong Kong economy has successfully recovered from the
impacts of SARS that happened in 2003. Despite the increased interest rates in
many other countries, local rates remained considerably low. The robust growth
in demand ended the prolonged six-year deflationary period. All these factors
encouraged consumer confidence and boosted their rate of spending. Although the
Indian Ocean tsunami did have an impact on travelers' sentiment, overall
performance of the travel industry was quite promising over the year under
review, statistics show both inbound arrivals and outbound departures increased
greatly.
As a result, Wing On has largely benefited from such growth which resulted
in the achievement of a net profit of approximately HK$35.4 million (equivalent
to Rmb37.6 million) for the year ended December 31, 2004, compared with a net
loss of approximately HK$371.0 million for the year ended December 31, 2003
(equivalent to Rmb393.6 million). Following the SARS and the policy trend in the
PRC, it is likely the limit on foreign holding in a company operating with
outbound travel license will be gradually opened up, the number of
business and leisure travelers increased sharply for both the outbound and
inbound market, Wing On's business was largely benefited from such growth.
POTENTIAL NEW BUSINESS
The Company entered into a conditional agreement for the acquisition of a
property situated in Shanghai, the PRC and the property being erected thereon
which comprises two levels of underground car parks and a 24-storey building for
a consideration of Rmb450 million. It is anticipated that the Properties will be
used for commercial and service apartment rental purposes.
With the increasing number of international events, such as Formula One
racing and other international exhibitions and conferences being held in
Shanghai on a regular basis, the Company believes that demand for
short-term/long-term residential accommodations will continue to increase. The
Company is optimistic that the acquisition could broaden the sources of income
for the Company and strengthen its asset base. As the Company is currently in
legal proceedings with the Vendor of the Properties over the completion of the
acquisition and the acquisition is still subject to the satisfaction of various
conditions, the financial results of the Company for the financial year 2004
comprised solely of the Company's share of the earnings and financial results of
its affiliates in the tire and travel businesses.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and judgments that affect our
reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates and assumptions based upon historical experience and
various other factors and circumstances. Management believes that our estimates
and assumptions are reasonable under the circumstances; however, actual results
may vary from these estimates and assumptions under different future
circumstances. We have identified the following critical accounting policies
that affect the more significant judgments and estimates used in the preparation
of our consolidated financial statements. For further discussion of our
significant accounting policies, refer to Note 2 - "Summary of Significant
Accounting Policies" to the Consolidated Financial Statements.
The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of the Company's consolidated
financial statements.
INCOME TAXES
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that the Company believes is more likely than not to be
realized. In the event the Company was to determine that it would be able to
realize its deferred tax assets in the future in excess of its recorded amount,
an adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
DERIVATIVES EMBEDDED IN CERTAIN DEBT SECURITIES
Convertible notes of Wing On held by the Company contain features that
enable the Company to, at its discretion, make cash payments to Wing On to
convert the debt securities into common stock of Wing On. These features
represent embedded derivatives which are required to be accounted for separately
from the related debt securities. The estimated fair value of these features is
valued using a simulation model that incorporates factors such as the current
price of common stock of Wing On, its volatility, and time to expiration.
Changes in the estimated fair value of the assets represented by these factors
are adjusted to the consolidated statements of operations. The adjustments will
be required until the features are either triggered or expire. The recorded
value of these assets can fluctuate significantly based on changes in the value
of the common stock of Wing On.
FOREIGN EXCHANGE RISK
Our reporting currency is the Renminbi as a substantial portion of our
investments are denominated in Renminbi. Our remaining assets and liabilities
and all of our operating expenses are denominated in Hong Kong dollars. As a
result, we may be exposed to foreign exchange risk, and our results of
operations may be negatively impacted by fluctuations in the exchange rate of
Renminbi against other currencies. As our major assets and liabilities comprise
a mixture of items that are denominated in Reminbi or Hong Kong dollars, our
business and operating result may be materially affected in the event of a
severe increase or decrease in the value of the Renminbi against other
currencies.
In the last five years, the exchange rate between the Renminbi and U.S.
dollars has varied by less than one-tenth of one percent. However, on July 21,
2005, the PBOC adjusted the exchange rate of U.S. dollars to Renminbi from
1:8.28 to 1:8.11 resulting in an approximately 2% appreciation in the value of
the Renminbi against the U.S. dollars. As the exchange rate of the Hong Kong
dollars to the U.S. dollars has been fixed by the Hong Kong government since
1983 at approximately HK$7.80 to US$1.00, through the currency-issuing banks in
Hong Kong, this adjustment has resulted in an approximately 2.0% appreciation of
the Renminbi against the Hong Kong dollars. On July 23, 2005, the PBOC adjusted
the exchange rate of Hong Kong dollars to Renminbi from 1:1.0638 to 1:1.0478
following the Renminbi no longer pegged to the U.S. dollars. For more details,
see Risk Factors -- "Restrictions on Foreign Currency Exchange May Limit Our
Ability to Receive and Use Our Resources Effectively," and "Fluctuations in the
Value of the Renminbi Could Negatively Impact Our Results of Operations."
ACCOUNTING PRONOUNCEMENTS
A detailed discussion of accounting policies adopted and recent accounting
pronouncements not yet adopted by the Company can be found in Note 2 - "Summary
of Significant Accounting Policies" of the Consolidated Financial Statements
included in "Item 18. Financial Statements" of this annual report.
RESULTS OF OPERATION
The following table presents selected consolidated financial information stated
as a percentage of net revenues for the years ended December 31, 2002, 2003 and
2004 (certain amounts may not calculate due to rounding and amounts may not add
due to rounding).
Selected Consolidated Statement of Income Data as a Percentage of Revenue
2002 2003 2004
Revenues: 100.00% 100.00% -
Cost of revenues (86.23%) (89.11%) n/a
Gross Profit 13.77% 10.89% n/a
Selling, general and administrative expenses (7.36%) (7.31%) n/a
Interest income 1.55% 0.33% n/a
Interest expenses (2.07%) (1.18%) n/a
Provision for income taxes (0.68%) (0.38%) n/a
Net loss (10.07%) (3.82%) n/a
2004 compared to 2003
The Company
The Company disposed a 25% equity interest of Hangzhou Zhongce during the
financial year 2003. Due to this disposal, the Company ceased to consolidate
their financial results and the Company has no other revenue generating
subsidiaries; therefore, no revenue was generated from the fiscal year 2004.
Selling, general and administrative expenses decreased 93.5% to Rmb13.3
million in fiscal year 2004 as compared with Rmb205.2 million in fiscal year
2003. The decrease was mainly due to the partial disposal of the Company's 51%
interest in Hangzhou Zhongce in September 2003 and accordingly had ceased to
consolidate their financial results for the fiscal year 2004.
Operating loss from continuing operations amounted to Rmb13.3 million in
fiscal year 2004 as compared with operating profit of Rmb100.7 million in fiscal
year 2003 in consequence of the deconsolidation effect of Hangzhou Zhongce for
the full fiscal year 2004 upon the disposal of a major interest in September
2003. The Rmb13.3 million on operating loss from continuing operations mainly
represented administrative expenses incurred for the year ended December 31,
2004.
Interest expenses decreased from Rmb33.0 million in fiscal year 2003 to
Rmb0.6 million in fiscal year 2004 is in consequence of the deconsolidation
effect of Hangzhou Zhongce for the full fiscal year 2004 upon the disposal of a
major interest in September 2003. Profit from continuing operations for the year
ended December 31, 2004 increased to Rmb181.9 million compared to a loss of
Rmb56.8 million for the last year. The profit for the fiscal year 2004 consisted
primarily of a profit upon an increase in fair value of the call option
associated with the convertible note of Wing On totaling Rmb60.0 million and the
Company's share of profit of Hangzhou Zhongce and Wing On in an amount of
Rmb104.5 million.
For the year ended December 31, 2004, the Company recorded a consolidated
net profit of Rmb181.9 million, or Rmb20.18 per share. By comparison, the net
loss and the net loss per share in 2003 was Rmb64.5 million and Rmb7.16,
respectively.
Tire Business
For the year ended December 31, 2004, Hangzhou Zhongce recorded a
consolidated turnover of approximately Rmb5,131 million, an increase of
approximately 32.9% as compared to the same period in 2003 of approximately
Rmb3,860 million. The audited consolidated net profit for the year ended
December 31, 2004 decreased from approximately Rmb106.3 million for the last
corresponding period to approximately Rmb105.3 million for the current year.
Travel Business
For the year ended December 31, 2004, Wing On recorded a consolidated
turnover of approximately HK$1,722 million (equivalent to Rmb1,832 million), an
increase of approximately 21.6% as compared to the same period in 2003 of
approximately HK$1,416 million (equivalent to Rmb1,503 million). The audited
consolidated net profit for the year ended December 31, 2004 increased from net
loss of approximately HK$371.0 million (equivalent to Rmb393.6 million) for the
last corresponding period to net profit of
approximately HK$35.4 million (equivalent to Rmb37.6 million) for the current
year.
2003 compared to 2002
On September 30, 2003, the Company completed the sale of a 25% equity
interest in a major operating subsidiary, Hangzhou Zhongce. As a result of this
transaction, the Company's equity interest in Hangzhou Zhongce was reduced from
51% to 26%, and Hangzhou Zhongce became an equity method affiliate of the
Company. The Company consolidated results of the operations of Hangzhou Zhongce
up to September 30, 2003 in its consolidated financial statements for the year
ended December 31, 2003, and accounted for Hangzhou Zhongce's results thereafter
using the equity method of accounting.
The Company completed its disposal of most of its operating subsidiaries
during 2003 and as a result, the operating performance of the Company for the
year was mainly generated through those subsidiaries before their disposition
during the nine-month period ended September 30, 2003.
Consolidated revenues arising from continuing operations amounted to
Rmb2.81 billion, representing a 7.7% increase over the fiscal year 2002 revenues
of Rmb2.61 billion. This was mainly due to an increase in sales volume,
especially in the radial tire market. The demand for radial tire has remained
high since 2001 and Hangzhou Zhongce continued to increase its productive volume
of radial tires. The sales amount of radial tires increased by 47% in nine-month
period ended September 30, 2003 as compared to that of the whole year 2002. The
group sold a total of 5.3 million units of vehicle tires, 35.0 million units of
bicycle tires and 2.3 million units of wheelbarrow tires in the nine-month
period ended September 30, 2003. This nine-month period represents the period of
2003 during which Hangzhou Zhongce was part of the Company's consolidated group.
The Company's gross margin from continuing operations decreased from 13.8%
for the year 2002 to 10.9% for the year 2003. The decrease was mainly due to the
increase in cost of raw materials, such as synthetic rubber and natural rubber,
which was caused by the drop in supply of rubber in the year 2003.
The Company's gross profit decreased by 14.8% from Rmb359.3 million for
the year 2002 to Rmb306.0 million for the year 2003. The decrease was due to the
increase in cost of raw materials and increase in warranty claims and sales
rebates. It also related to the deconsolidation effect of Hangzhou Zhongce for
the period of October 1, 2003 to December 31, 2003.
The selling and administrative expenses increased to Rmb205.2 million in
2003 versus Rmb192.2 million in fiscal year 2002 due to an increase in amount of
sales and sales related expenses, e.g., cost of delivery.
Operating income from continuing operations decreased to Rmb100.7 million
in fiscal year 2003 as compared with Rmb172.1 million in fiscal year 2002. It
represented the operating income of Hangzhou Zhongce for a nine-month period in
2003 instead of a whole year in 2002.
Interest expense decreased by 38.8% from Rmb54.0 million for the year 2002
to Rmb33.0 million for the year 2003. This decrease was mainly due to the
decrease in loans obtained from third parties during the year and a lower
interest rates in 2003.
Loss from continuing operations increased to Rmb56.8 million in 2003
compared to Rmb62.9 million in 2002. Loss from discontinued operations decreased
to Rmb7.8 million in the fiscal year 2003 from Rmb199.8 million in fiscal year
2002 and was mainly contributed by the loss on disposal of Yinchuan CSI and CSI
Rubber. The decrease in such loss was due to an impairment write down for
long-lived assets of Yinchuan CSI of Rmb174.4 million in 2002 but no similar
loss was recognized for the discontinued operations in 2003.
For the year ended December 31, 2003, the Company recorded a consolidated
net loss of Rmb64.5 million. The consolidated net loss decreased by 75.4%
compared with Rmb262.8 million in 2002. This improvement resulted mainly from
divestitures of non-performing assets and businesses in 2002 and early 2003.
IMPACT OF INFLATION
Inflation and deflation in the PRC and Hong Kong has not had a material
effect on our past business. During the times of inflation, the affiliated
companies of the Company have generally been able to increase the price of their
products or services in order to keep pace with inflation.
TAX REGULATIONS
For the impact of tax regulations on the Company, see Note 13 to the
Consolidated Financial Statements of the Company included in "Item 18. Financial
Statements".
LIQUIDITY AND CAPITAL RESOURCES
In 2004, the net cash used in operating activities was approximately
Rmb12.9 million compared with Rmb104.8 million provided by operating activities
in 2003. The net cash provided by investing activities and used in financing
activities in 2004 was approximatley Rmb18.4 million and Rmb27.7 million,
respectively; compared with Rmb595.1 million used in investing activities and
Rmb309.3 million provided by financing activities in 2003. The principal reason
for these significant changes in each type of cash flows was due to the
deconsolidation effect of Hangzhou Zhongce for the full fiscal year 2004 upon
disposal of a majority interest in September 2003.
The Company primarily used its cash and cash equivalents, banking
facilities and the cash flows from notes receivable to fund its capital
expenditures, investment in and advances to affiliates and subscription of note
receivables under both short and long terms bases. Other than the subscription
of a new convertible note from Wing On described in Item 4 of this Form 20-F, no
transactions, arrangements and other relationships with unconsolidated entities
or other persons that are reasonably likely to affect materially the liquidity
or the availability of or requirement for capital resources of the Group had
been entered into during the year. In management's opinion, the working capital
is sufficient for the Company's present requirements.
The Company's working capital requirements for continuing operations
significantly decreased in 2004 following the disposal of the Hangzhou Zhongce
Group in 2003. For the year ended December 31, 2004, the Company had no
expenditures for the purchase of property, plant and equipment, compared with
Rmb256.9 million for the year ended December 31, 2003. The Company financed
these expenditures by the cash flows from operations, short-term bank loans and
cash on hand.
In addition, cash and cash equivalents of the Company from continuing
operations decreased from Rmb63.6 million at December 31, 2003 to Rmb41.4
million at December 31, 2004 of which Rmb0.3 million (US$35,100) were U.S.
dollar deposit.
There are no material restrictions, including foreign exchange controls,
on the ability of the Company's subsidiaries to transfer funds to the Company in
the form of cash dividends, loans, advances or product/material purchases.
For related party information, please see "Item 7. Major Shareholders and
Related Party Transactions" in this annual report. In the opinion of management,
these related party transactions have no material effect on the Company's
liquidity or cash flows.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Over the last few years, cash flow financing the operations of the Company
was principally obtained from internally generated funds and bank borrowings.
The Company had working capital of Rmb117.1 million and Rmb81.5 million as of
December 31, 2004 and 2003, respectively.
On June 16, 2004, the Company entered into a conditional agreement with an
independent third party in relation for the proposed acquisition of the
Properties for a total consideration of Rmb450 million. The Company paid the
deposit of Rmb50 million was paid by Manwide on behalf of the Company upon
signing of the agreement and accordingly Rmb8 million of deposit was paid by the
Company. Rmb380 million of the consideration will be payable upon the grant and
drawdown of loans to be granted by PRC banks or financial institutions and
secured by the Properties. The remaining Rmb20 million will be financed by
internal resources of the Company and will be due upon completion of the
transfer of the ownership of the Properties from the sellers to the Company.
TREND INFORMATION
Following its sale of a portion of its interest in Hangzhou Zhongce in
2003, the Company does not have a majority-owned operating subsidiary as of the
date of this report. Currently, the Company`s financial results is largely
dependent on its portion of the earnings and other results of affiliated
companies, Hangzhou Zhongce and Wing On.
Year 2004 has affirmed the Company's consistent positive outlook for to
the economy in China. The on-going investment strategy in China is expected to
be maintained in the future. As China has already attained rich and fruited
development in 2004, the Company is confident to the further growth in the
economy of China and Hong Kong in time to come. Having positioned itself as a
conglomerate investor in China, the Company would, however, maintain its
prevalent conservative and cautious investment posture in the coming year and to
contribute its effort to explore new investment opportunities.
OFF-BALANCE SHEET ARRANGEMENT
For the year of 2004, the Company did not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on the Company's financial condition, changes in financial conditions,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources. Additionally, the Company did not undertake any guarantee as
of December 31, 2004.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The directors, executive officers and senior management of the Company as
of December 31, 2004 are identified below.
DIRECTORS AND SENIOR MANAGEMENT
NAME AGE POSITION EMPLOYED SINCE
Allan Yap 50 Chairman, Chief Executive Officer and Director of the Company 2001 (1)
Chan Ling, Eva 40 Deputy Chairman and Director of the Company 2004 (1)
Dorothy Law 36 Director 2000
Richard Whittall 47 Independent Director and Audit Committee Member of the Company 2000
David Edwin Bussmann 52 Independent Director and Audit Committee Member of the Company 2000 (2)
Lien Kait Long 57 Director 1999
Chow Chun Man, Jimmy 36 Chief Financial Officer 2003
- ----------
(1) Dr. Allan Yap and Ms. Chan Ling, Eva are also executive directors of CSH
(2) Mr. David Edwin Bussmann is also an independent non-executive director of
CSH
BRIEF BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT
Dr. Yap, Allan, aged 50, is the chairman, chief executive officer and
director of the Company. He obtained the honorary degree of Doctor of Laws and
has over 23 years' experience in finance, investment and banking. Dr. Yap is the
managing director of Hanny Holdings Limited ("Hanny") and the vice chairman of
CSH and an executive director of Wing On. Dr. Yap is also the chairman and chief
executive officer of Burcon NutraScience Corporation ("Burcon"), a company whose
shares are listed on the TSX Venture Exchange and the Frankfurt Stock Exchange,
and an executive chairman of PSC Corporation Limited and Intraco Limited, both
public listed companies in Singapore. He is also the chairman of MRI Holdings
Limited, a company whose shares are listed on Australian Stock Exchange. Dr.
Yap, Allan, was appointed as a chairman, chief executive officer and director of
the Company on December 1, 2004.
Ms. Chan Ling, Eva, aged 40, is the deputy chairman and a director of the
Company. She has 17 years' experience in auditing, accounting and finance in
both international accounting and finance in both international accounting firms
and listed companies. Ms. Chan is a member of the Institute of Chartered
Accountants in Australia, a fellow member of the Association of Chartered
Certified Accountants and also a member of the Hong Kong Institute of Certified
Public Accountants. She is a director of China Strategic Holdings Limited and
MRI Holdings Limited. Ms. Chan is also a director of major subsidiaries of Wing
On. Ms. Chan Ling, Eva was appointed as a director of the Company on December 1,
2004.
Ms. Law, Dorothy, aged 36, is a director of the Company. She received her
Bachelor of Commerce and Bachelor of Laws degrees from the University of British
Columbia in Canada. Ms. Law is a Barrister and
Solicitor licensed to practice law in British Columbia and has also been
admitted as a Solicitor of the High Court of Hong Kong. Ms. Law is also a
director of Burcon and corporate counsel of Hanny.
Mr. David Edwin Bussmann, aged 52, is an independent director and an audit
committee member of the Company and an independent non-executive director of
CSH. Mr. Bussmann has more than 23 years experience in the investment and
finance field, and is very familiar with investment issues related to China, as
well as sectors such as technology, real estate, and direct investment. He
previously worked at Salomon Brothers, Citibank, Bank of America and Prudential
Asia.
Mr. Richard Whittall, aged 47, is an independent director and the chairman
of the audit committee of the Company. He is the President of Watershed Capital
Partners Inc., an investment banking firm, based in Vancouver, British Columbia,
Canada. Mr. Whittall has 20 years experience in investment banking advising
domestic and international companies in the areas of fund raising, mergers,
acquisitions, divestitures and strategic business alliances. Mr. Whittall
currently serves as a president of Watershed Capital Partners Inc. and director
of a number of public and private companies, including, Maximizer Software Inc.,
Glacier Ventures International Corp., Canadian General Investments Limited and
Canadian World Fund Limited.
Mr. Lien Kait Long, aged 57, is a director of the Company. Mr. Lien holds
a bachelor's degree in commerce and is a member of Institute of Certified Public
Accounts of Singapore and the CPA Australia. He has over 34 years' experience in
finance, accounting, investment and banking. He is also a director of MRI
Holdings Limited, a company whose shares are listed on the Australian Stock
Exchange. Mr. Lien is also director of Jishan Holdings Limited, Mediastream
Limited, 8Telecom International Holdings Co. Ltd, companies listed on the
Singapore Exchange Securities Trading Limited.
Mr. Chow Chun Man, Jimmy, aged 36, has been appointed as the Chief
Financial Officer on September 24, 2003. Mr. Chow holds a Bachelor Degree in
Accountancy and is a member for both of the Australian Society of Certified
Practicing Accountants and the Hong Kong Society of Accountants. He has over 13
years' of experiences in auditing, financial reporting and corporate finance.
Dr. Chan Kwok Keung, Charles resigned as a director and the chairman of
the Company on December 1, 2004.
There is no family relationship between any director or executive officer
listed above and any other director or executive officer listed above. None of
the directors or executive officers was elected or appointed pursuant to an
arrangement or understanding with any third party.
COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
For the year ended December 31, 2004, the aggregate amount of compensation
and bonuses paid by the Company and its subsidiaries as a compensation to all
directors and executive officers, for service in all capacities, was
approximately Rmb1 million (US$0.12 million). The grant of bonuses is determined
at the discretion of the board of directors.
BOARD PRACTICES
All directors of the Company will hold office until the next annual
meeting of the shareholders and their successors are elected and qualified.
During the annual general meeting of the Company held on December 22, 2005, all
six existing members were re-appointed to the board of directors of the Company.
No director of the Company entered into any service contract nor entitled
to any benefits upon termination of employment with the Company.
The audit committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the selection of our auditors, the scope of the annual
audits, fees to be paid to the auditors, the performance of the auditors and our
accounting practices. As of July 2, 2005, the audit committee of the Company
consists of Mr. Richard Whittall and Mr. David Edwin Bussmann.
EMPLOYEES
The Company disposed of Yinchuan CSI during 2003 and Hangzhou Zhongce
became an affiliate of the Company in September 2003. As of December 31, 2004,
there were no employees in the Company. Pursuant to a management and
administrative services agreement between the Company and CSH in 1993 and
renewed for a term of three years in 2000 and 2003, CSH provides certain
management and administrative services to the Company. See Note 18(c) to
Consolidated Financial Statements in "Item 18 Financial Statements" for more
details.
SHARE OWNERSHIP
No director or member of senior management of the Company beneficially
owns one percent or more of the shares of the Company.
SUMMARY OF THE OPTION SCHEME
The Company's shareholders approved an Executive Share Option Scheme (the
"Option Scheme") at the 1994 Annual General Meeting. The Option Scheme
authorized the granting of options to purchase up to 910,000 shares of the
Company's common stock to officers, directors who are also full-time employees
and other key full or part-time employees of the Company and its subsidiaries.
The Option Scheme terminated on June 6, 2004 pursuant to its terms. There were
no options outstanding under the Option Scheme at January 1, 2004 and at the
time of termination of the Option Scheme.
As of December 31, 2004, none of the Company's directors, officers or their
associates had any personal, family, corporate or other interests in any shares
of the Company or any of its associated corporations.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
Based on filings on Schedule 13G under the Exchange Act, as of July 2,
2004, the following persons beneficially owned shares representing 5% or more of
the issued share capital of the Company.
NAME OF HOLDER NUMBER OF SHARES HELD PERCENTAGE OF CLASS
CSH(1) 4,978,830 55.2%
Forstmann-Leff Associates, LLC(2) 1,337,295 14.8%
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(1) Includes 3,000,000 shares of supervoting common stock, each share having
10 votes on resolutions of shareholders, and 1,978,830 shares of common
stock, each share having 1 vote on resolutions of shareholders. There has
been no change in the percentage ownership of CSH during the past three
years. Dr. Chan Kwok Keung, Charles is deemed to be the beneficial owner
of the interest in shares held by CSH as defined by General Instructions F
for preparing the Form 20-F. Dr. Chan's interest represents 3,000,000
super-voting shares and 1,978,830 common shares, representing 55.2%
effective equity interest and 88.8% effective voting rights, of the
Company beneficially held by CSH directly and indirectly. Dr. Chan is the
Chairman of CSH. Through indirect wholly owned subsidiaries, Dr. Chan owns
33.6% of ITC, of which he is also a Chairman. As of July 2, 2004, ITC
indirectly owns 20.5% interest in Hanny, which owns 29.4% of CSH. ITC,
through wholly owned direct and indirect subsidiaries, also owns 55.1% of
Paul Y. which indirectly owns 29.4% of CSH.
(2) Represents shares of common stock; includes 489,400 shares of common stock
held by FLA International Fund, Ltd., representing 5.4% of the outstanding
capital stock of the Company. According to the disclosure in the Schedule
13G and amendments thereto, Forstmann-Leff Associates, LLC, is a
registered investment advisor under the Investment Advisers Act of 1940.
FLA Advisers L.L.C., which also reported beneficial ownership of the
1,337,295 shares, is also a registered investment adviser under such Act.
The members of Forstmann-Leff Associates, LLC's Investment Committee, are
the managers of FLA Advisers L.L.C. FLA Advisers L.L.C. is the investment
advisor to FLA International Fund, Ltd. The entities reported that various
of their clients have the right to receive, or the power to direct the
receipt of dividends from or the proceeds from the sale of, the common
stock. According to the Schedule 13G and amendments thereto, no client
held interests greater than 5% other than FLA International Fund, Ltd.
For the years ended December 31, 2002 and 2001, Forstmann-Leff Associates,
LLC, FLA Asset Management LLC, FLA Advisers L.L.C. and FLA International
Fund, Ltd reported jointly on Schedule 13G, reporting in the aggregate
beneficial ownership of 1,439,495 and 1,459,095 shares, respectively, as
of the end of such years.
According to the shareholders list, dated December 1, 2005, provided to
the Company by its transfer agent, there are 78 shareholders (representing all
issued common stock of 6,017,310 shares) of record of the Company's common
stock. Among them, 77 holders of the Company's common stock (holding 6,017,110
common shares) are resident in the United States. All issued supervoting common
stock is held by CSH, the major shareholder of the Company which was
incorporated in Hong Kong.
RELATED PARTY TRANSACTIONS
DUE FROM/TO RELATED COMPANIES
The amounts due from related companies primarily arise from sales of tires
and are unsecured, non-interest bearing and repayable at the end of credit
periods granted ranging from 90 days to 180 days. Historically, the Company has
not experienced losses related to these receivables with the exception of an
allowance for doubtful accounts amounting to Rmb27,000,000 charged to the
consolidated statement of operations during fiscal 2001. The management reviewed
the recoverability of these receivables during fiscal 2002 and recognized a net
recovery of Rmb5,016,000 in the consolidated statement of operations for fiscal
2002.
As of December 31, 2002, the loans from related companies represented
funds advanced to the Company and were unsecured, non-interest bearing and had
no fixed repayment terms. As of December 31, 2003 and 2004, as a result of the
disposition of its subsidiaries in the PRC, the Company had no amounts due
from/to related companies.
DUE FROM ULTIMATE PARENT COMPANY
The amounts due from ultimate parent company are unsecured, non-interest bearing
and have no fixed terms of repayment, in the aggregate amount of approximately
Rmb4,030,000 and Rmb37,426,000 for the years ended December 31, 2003 and 2004,
respectively.
DUE TO FELLOW SUBSIDIARY
The amount due to fellow subsidiary is unsecured, non-interest bearing and
have no fixed terms of repayment, in the aggregate amount of Rmb50,000,000 as of
December 31, 2004, compared with nil balance as of December 31, 2003. The fellow
subsidiary has confirmed not to demand repayment of the amount within one year
from December 31, 2004.
MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to a management and administrative services agreement between the
Company and CSH in 1993 and renewed in 1997, 2000 and 2003, in each case for a
term of three years, CSH provides certain management services to the Company for
an annual fee of US$30,000 (Rmb248,000). In addition, the Company has agreed to
reimburse CSH for administrative services not covered by the management and
administrative services agreement rendered on behalf of the Company on a cost
plus 5% basis, in the aggregate amount of approximately Rmb4,731,000,
Rmb5,708,000 and Rmb6,192,000 for the years ended December 31, 2002, 2003 and
2004, respectively.
SALES TO/PURCHASES FROM RELATED PARTIES
Hangzhou Zhongce recorded sales to related companies of approximately
Rmb209,112,000 and Rmb194,971,000 that have been reflected in the Company's
consolidated financial statements for the years ended December 31, 2002 and the
nine months ended September 30, 2003, respectively.
Hangzhou Zhongce paid to an affiliate subcontracting charges of
approximately Rmb199,373,000 and Rmb277,470,000 for tire processing that have
been reflected in the Company's consolidated financial statements for the years
ended December 31, 2002 and the nine months ended September 30, 2003,
respectively.
These transactions were carried out after negotiations between Hangzhou
Zhongce and the respective related companies in the ordinary course of business
and on the basis of the estimated market value as determined by the management
of Hangzhou Zhongce.
RELATED PARTY GUARANTEES
During 2002, Hangzhou Zhongce undertook to guarantee, without charge,
certain bank loan facilities of approximately Rmb160,000,000 and Rmb7,900,000
granted by certain banks to an affiliate in the PRC and a related party
respectively. The guarantees remain outstanding, although Hangzhou Zhongce has
not been called to perform under them.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the Consolidated Financial Statements to the Company included in "Item
18. Financial Statements" of this annual report. See also "Item 17. Financial
Statements" of this annual report for financial statements of Wing On and
Hangzhou Zhongce, included pursuant to the requirements of Article 3-09 of
Regulation S-X.
DIVIDEND POLICY
On July 3, 2001, the board of directors of the Company announced that the
Company would suspend the declaration and payment of any quarterly dividend
until the profitability of the Company and its subsidiaries reached an
acceptable level. During 2002, 2003 and 2004, no dividend was declared or paid
by the Company. Any future determination to pay a dividend to shareholders of
the Company will also depend on the Company's results of operations and
financial condition, and other factors deemed relevant by its board of
directors.
Applicable Chinese laws and regulations require that, before a
Sino-foreign equity joint venture enterprise (such as each PRC Subsidiary)
distributes profits to investors, it must: (1) satisfy all tax liabilities; (2)
provide for losses in previous years; and (3) make allocations, in proportions
determined at the sole discretion of the board of directors, to a general
reserve fund, an enterprise expansion fund and a staff welfare and incentive
bonus fund.
During 2002, no distribution of dividends was made from any subsidiary.
The board of directors of Hangzhou Zhongce declared a dividend of
Rmb39,220,000 for the year ended 2002, which was paid in June 2003. As a result
of its percentage ownership interest in Hangzhou Zhongce, the Company received a
dividend payment of Rmb20,002,200.
SIGNIFICANT CHANGES
On 4th February, 2005, the Company entered into a placing and subscription
agreement with Wing On and the place agent pursuant to which the placing agent
agreed to place, on a best efforts basis, up to 6,400 million shares of Wing On
at a price of HK$0.022 per Wing On share and the Company would subscribe for up
to 6,400 million new shares of Wing On at the price of HK$0.022 per share. The
above transactions were completed in February 2005. The Company's interest in
Wing On was decreased to 21.1%.
On April 29, 2005, the Company converted HK$55 million convertible note of
Wing On into ordinary shares of HK$1.00 each of Wing On at conversion price of
HK$1.97 per share. The interest of Wing On held by the Company was accordingly
increased from approximately 21.1% to 27.74% upon conversion of the convertible
notes into share of HK$1.00 each in Wing On by the Company.
ITEM 9. THE LISTING
Shares of the Company's common stock traded on the NYSE under the symbol
"CSH" from 1993 to late 2002. However, the trading was suspended on September
27, 2002 by the NYSE for the failure of the Company to meet the NYSE's
continuing listing standards. Effective December 30, 2002, the common stock of
the Company was removed from listing on the NYSE.
Since November 26, 2002, the Company's common stock has traded on the
OTCBB under the stock symbol "CSHEF". The OTCBB is a regulated quotation service
that displays real-time quotes, last sale prices and volume information in OTC
equity securities for companies which are registrants with the SEC.
The following table set forth, for the periods indicated the high and low
closing sale prices of the common stock as reported by NYSE from January 1, 2000
to September 27, 2002 and by the OTCBB from November 26, 2002 to December 31,
2004.
YEAR ENDED HIGH LOW
---- ----
December 31, 2004 6.90 1.03
December 31, 2003 3.50 0.25
December 31, 2002 2.00 0.20
December 31, 2001 2.90 0.71
December 31, 2000 9.38 2.00
The following table sets forth the high and low closing sale prices for
the common stock as reported during each of the quarters in the two-year period
ended December 31, 2004 and each of the most recent period.
QUARTER ENDED HIGH LOW
---- ----
December 31, 2005 1.70 0.31
September 30, 2005 2.30 1.10
June 30, 2005 1.82 1.45
March 31, 2005 2.10 1.65
December 31, 2004 2.60 1.03
September 30, 2004 3.10 1.75
June 30, 2004 3.55 2.20
March 31, 2004 6.90 2.55
December 31, 2003 3.50 1.70
September 30, 2003 2.00 1.35
June 30, 2003 2.35 0.30
March 31, 2003 0.55 0.25
The following table sets forth the high and low closing sale prices for
the common stock as reported during each of the most recent six months.
MONTH ENDED HIGH LOW
---- ----
December 31, 2005 0.90 0.31
November 30, 2005 1.70 0.90
October 31, 2005 1.45 1.10
September 30, 2005 1.54 1.37
August 31, 2005 2.30 1.10
July 31, 2005 1.75 1.55
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
For a summary of the Company's Memorandum and Articles of Association see
Item 10 of the Company's Form 20-F for the year ended 2001 to which specific
reference is made.
MATERIAL CONTRACTS
The following is a summary of material contracts, other than contracts
entered into in the ordinary course of business, to which the Company or any
subsidiary of the Company is a party, for the two years immediately preceding
the filing of this report.
Contract for disposal dated January 8, 2003 between Ningxia Yinchuan
Rubber Manufacturing, the Chinese joint venture partner of Yinchuan CSI, as a
buyer and the Company as a seller for the sale of seller's interest in Yinchuan
CSI, a 51% owned subsidiary of the seller, for cash consideration of
Rmb35,000,000.
Contract for disposal dated June 15, 2003 between Hangzhou Industrial &
Commercial Trust & Investment Co. Ltd., an independent third party not connected
with any directors, substantial shareholders or chief executive of the Company
or any of its subsidiaries, as a buyer and the Company as a seller for the sale
a 25% interest in Hangzhou Zhongce for cash consideration of Rmb164,659,657.
Contract for subscription of 2% convertible note dated January 13, 2004
between Wing On and the Company for the issue of 2% convertible note to the
Company or its nominee for a consideration of HK$155,000,000 by Wing On, of
which HK$84.8 million will be settled by the cancellation of the Company's
current convertible note issued by Wing On and the remaining balance will be
satisfied in cash by the Company. The new convertible note entitles the Company
to convert into new shares of Wing On during a period from the date of issue of
the new convertible note at an initial conversation price of HK$0.02 per share
of Wing On, subject to adjustment.
Contract for acquisition dated June 16, 2004 between Shanghui Jiu Sheng
Investment Company Limited, an independent third party, as a seller and the
Company as a buyer for the acquisition of seller's interest in the Properties,
for cash consideration of Rmb450,000,000.
Two contracts for placing and subscription dated November 30, 2004 among
the Company, Wing On and the placing agent pursuant to which the placing agent
agreed to place 6,000 million shares of wing at the price of HK$0.028 per share
and the Company would subscribe for up to 6,000 million new shares of Wing On at
the same price of HK$0.028 per share.
Contract for placing and subscription dated February 4, 2005 among the
Company, Wing On and the placing agent pursuant to which the placing agent
agreed to place 6,400 million shares of Wing On at the price of HK$0.022 per
share and the Company would subscribe 6,400 million new shares of Wing On at the
same price of HK$0.022 per share.
EXCHANGE CONTROLS
CERTAIN FOREIGN ISSUER CONSIDERATIONS
The Company has been designated as a non-resident for exchange control
purposes by the Bermuda Monetary Authority, Foreign Exchange Control, whose
permission for the issue of shares of common stock of the Company has been
obtained.
The transfer of shares between persons regarded as resident outside
Bermuda for exchange control purposes and the issue of shares to or by such
persons may be effected without specific consent under the Exchange Control Act
of 1972 and regulations thereunder. Issues and transfers of shares involving any
person regarded as resident in Bermuda for exchange control purposes require
specific prior approval under the Exchange Control Act of 1972.
There are no limitations on the rights of non-Bermuda owners of the
Company's common stock to hold or vote their shares. Because the Company has
been designated as a non-resident for Bermuda exchange control purposes, there
are no restrictions on its ability to transfer funds in and out of Bermuda or to
pay dividends to United States residents who are holders of the Company's common
stock, other than in respect of local Bermuda currency.
In accordance with Bermuda law, share certificates are only issued in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust.
The Company will take no notice of any trust applicable to any of its
shares whether or not it had notice of such trust.
As an exempted company, the Company is exempt from Bermuda laws which
restrict the percentage of share capital that may be held by non-Bermudan, but
as an exempted company the Company may not participate in certain business
transactions, including: (1) the acquisition or holding of land in Bermuda
(except that required for business and held by way of lease or tenancy for terms
of not more than 21 years) without the express authorization of the Bermuda
legislature; (2) the taking of mortgages on land in Bermuda to secure an amount
in excess of US$50,000 without the consent of the Minister of Finance of
Bermuda; (3) the acquisition of securities created or issued by, or any interest
in, any local company or business, other than certain types of Bermuda
government securities or securities of another exempted company, partnership or
other corporation resident in Bermuda but incorporated abroad; or (4) the
carrying on of business of any kind in Bermuda, except in furtherance of the
business of the Company carried on outside Bermuda or under a license granted by
the Minister of Finance of Bermuda.
The Bermuda government actively encourages foreign investment in exempted
entities like the Company
that are based in Bermuda but do not operate in competition with local business.
In addition to having no restrictions on the degree of foreign ownership, the
Company is subject neither to taxes on its income or dividends nor to any
foreign controls in Bermuda. In addition, there is no capital gains tax in
Bermuda, and profits can be accumulated by the Company, as required, without
limitation.
TAXATION
The following discussion is a summary of certain anticipated tax
consequences of an investment in the Company's common stock under Bermuda tax
laws and United States Federal income tax laws. The discussion does not deal
with all possible tax consequences relating to an investment in the common stock
and does not purport to deal with the tax consequences applicable to all
categories of investors, some of which (such as dealers in securities, insurance
companies and tax-exempt entities) may be subject to special rules. In
particular, the discussion does not address the tax consequences under State,
local and other laws (e.g., non-Bermuda, non-United States Federal tax laws).
This discussion is based upon laws and relevant interpretations thereof in
effect as of the date of this Annual Report, all of which are subject to change.
BERMUDA TAXATION
The Company is incorporated in Bermuda. Under current Bermuda law, the
Company is not subject to tax on income or capital gains, and no Bermuda
withholding tax will be imposed upon payments of dividends by the Company to its
shareholders. Furthermore, the Company has received from the Minister of Finance
of Bermuda under the Exempted Undertakings Tax Protection Act of 1966, as
amended, an undertaking that, in the event that Bermuda enacts any legislation
imposing any tax computed on profits or income, including any dividend or
capital gains withholding tax, or computed on any capital assets appreciation
thereof, or any tax in the nature of an estate, duty or inheritance tax, the
imposition of such tax will not be applicable to the Company or any of its
operations, nor to the shares, debentures or other obligations of the Company,
until March 28, 2016. This undertaking does not, however, prevent the imposition
of property taxes on Company-owned real property or leasehold interests in
Bermuda.
The United States does not have a comprehensive income tax treaty with
Bermuda.
As an exempted company, the Company is liable to pay to the Bermuda
government an annual registration fee calculated on a sliding-scale basis by
reference to its assessable capital, that is, its authorized capital plus any
share premium.
UNITED STATES FEDERAL INCOME TAXATION
Taxation of Shareholders
The following discussion addresses the United States Federal income
taxation of a United States person (i.e., a United States citizen or resident,
corporation or partnership organized under the laws of the United States or any
state thereof, or an estate or trust subject to United States tax on all of its
income regardless of source) (a "U.S. Investor") making an investment in the
common stock. The summary does not address the United States
tax treatment of certain types of investors (e.g., individual retirement and
other tax deferred accounts, life insurance companies and tax-exempt
organizations) or of persons other than a U.S. Investor, all of whom may be
subject to tax rules that differ significantly from those summarized below. If
the U.S. investor holds its common stock through a foreign branch or other
foreign business unit, the following discussion may not be accurate in all
respects as to such investor. Investors are advised to consult their own tax
advisors with respect to their particular circumstances and with respect to the
effects of State, local or foreign tax laws to which they may be subject. In
addition, future changes to United States tax laws could have an effect on the
United States Federal income tax consequences of the purchase, ownership and
disposition of common stock.
A U.S. Investor receiving a distribution in respect of the common stock
will be required to include such distribution in gross income as a taxable
dividend to the extent such distribution is paid from earnings and profits of
the Company as determined under United States Federal income tax principles.
Distributions in excess of the earnings and profits of the Company first will be
treated, for United States Federal income tax purposes, as a nontaxable return
on capital to the extent of the U.S. investor's tax basis in the common stock
and then as gain from the sale or exchange of a capital asset, provided that the
common stock constitutes a capital asset in the hands of the U.S. investor.
Dividends received on the common stock will not be eligible for the corporate
dividends-received deduction. Any amount treated as a dividend for United States
Federal income tax purposes generally will constitute foreign source "passive
income" (or, in the case of certain holders, "financial services income") and
will not be eligible for the dividends received deduction generally allowed to
corporate shareholders for dividends received from United States domestic
corporations. Except for corporations that own 10% or more of the common stock
of the Company, no shareholder will be entitled to claim a foreign tax credit
against United States Federal income tax for any tax paid by the Company or any
entity in which the Company invests, directly or indirectly. For reporting
purposes, any dividends that are paid in any currency other than U.S. dollars
must be translated into U.S. dollars at the spot rate on the date the dividends
are accrued or received by the U.S. Investor, regardless of whether the dividend
receipt is in fact converted into U.S. dollars.
With certain exceptions, gain or loss on the sale or exchange of the
common stock will be treated as capital gain or loss (if the common stock is
held as a capital asset). Such capital gain or loss will be long-term capital
gain or loss if the U.S. Investor has held the common stock for more than one
year at the time of the sale or exchange. Gains realized upon the disposition of
common stock will be domestic source gain for purposes of the United States
foreign tax credit limitation. Under existing authorities, the source of any
loss on the sale of common stock is not clear in all cases. While the source of
a loss arguably would be domestic source, the United States Internal Revenue
Service might contend that the loss should be treated as foreign source. U.S.
Investors should consult their own tax advisors regarding the foreign tax credit
limitation consequences of selling Common Stock at a loss.
The "personal holding company" ("PHC"), "foreign personal holding company"
("FPHC"), "controlled foreign corporation" ("CFC"), and "passive foreign
investment company" ("PFIC") rules under United States Federal income tax law
could apply to the Company and U.S. investors who own Common Stock. However,
based on the current and anticipated ownership of the Company and the Company's
current and anticipated ownership of assets, the Company believes that neither
the taxation of the Company nor any of its shareholders will be affected by any
of those rules. However, no assurances can be given as to the company's future
PHC,
FPHC, CFC or PFIC status.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
The receipt of dividends on the common stock by a holder of the common
stock (a) made by mail or wire transfer to an address in the United States, (b)
made by a paying agent, broker or other intermediary in the United States or (c)
made by a United States broker or a "United States-related" broker to such
holder outside the United States may be subject to United States information
reporting requirements. Holders of common stock who are not United States
persons ("Non-U.S. Holders") generally would be exempt from these reporting
requirements, but may be required to comply with certification and
identification procedures in order to prove their exemption. Treasury
regulations currently in effect do not require backup withholding with respect
to dividends paid by a foreign corporation such as the Company. The United
States Treasury Department is considering, however, whether to extend the backup
withholding rules to dividends from foreign corporations.
The payment of the proceeds of the disposition of common stock by a holder
to or through the United States office of a broker generally will be subject to
information reporting and backup withholding at a rate of 28% unless the holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption. The payment of the proceeds of the
disposition by a holder of common stock to or through a non-U.S. office of a
broker will generally not be subject to backup withholding and information
reporting. Information reporting (but not "backup" withholding) may apply,
however, to such a holder who sells a beneficial interests in Common Stock
through a non-United States branch of a United States broker, or through a
non-United States office of a "United States-related" broker, in either case
unless the holder establishes an exemption or the broker has documentary
evidence in its files of the holder's status as a non-U.S. holder. For purposes
of these rules, a "United States-related" broker is a broker or other
intermediary that is a controlled foreign corporation for United States Federal
income tax purposes or that is a person 50% or more of the gross income from all
sources of which, over a specified three-year period, is effectively connected
with a United States trade or business.
Any amounts withheld under the backup withholding rules from a payment to
a holder should be refunded (or credited against the holder's United States
Federal income tax liability, if any), provided that the required information is
furnished to the United States Internal Revenue Service.
DOCUMENTS ON DISPLAY
The Company is subject to certain of the information reporting
requirements of the Exchange Act. The Company, as a "foreign private issuer", is
exempt from the rules and regulations under the Exchange Act prescribing the
furnishing and content of proxy statements, and the officers, directors and
principal shareholders of the Company are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act, with respect to their purchase and sale of the Company's shares. In
addition, the Company is not required to file reports and financial statements
with the SEC as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. However, the Company does file with the SEC
an annual report on Form 20-F containing consolidated financial statements
audited by an independent accounting firm. The Company also furnishes as an
interim report on Form 6-K containing
unaudited financial information after the end of a six-month period in a year.
You may read and copy any document the Company files with the SEC at its
public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You
may also obtain copies of the documents at prescribed rates by writing to the
Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C.
20549. The SEC also maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of this web site is http://www.sec.gov.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference facilities.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to fluctuations in interest rates and currency
exchange rates primarily with respect to borrowings. Under its current policies,
the Company does not use interest rate derivative instruments to manage exposure
to interest rate changes.
EXCHANGE RATE INFORMATION
The Consolidated Financial Statements are prepared in Rmb. The financial
statements of foreign subsidiaries are translated into Rmb in accordance with
Statement of Financial Accounting Standards No. 52.
The Hong Kong dollar is tied to and allowed to fluctuate within a narrow
range against the value of the U.S. dollar. Historically, there has been no
material fluctuation in the exchange rate between the Rmb and the U.S. dollar,
restrictions was set on the flow of Rmb between the PRC and the United States.
Starting from July 21, 2005, the PRC reformed the exchange rate regime by moving
into a managed floating exchange rate regime based on market supply and demand
with reference to a basket of other currencies. Rmb will no longer be pegged to
the U. S. dollar, and the Rmb exchange rate will be improved with greater
flexibility thereafter.
Fluctuations in the value of foreign currencies cause U.S. dollar
translated amounts to change in comparison with previous periods. However, the
fluctuation in exchange rates did not have material effect on the financial
position of the Company in the past three years.
FOREIGN CURRENCY RISK
As our major assets and liabilities comprise a mixture of items that are
denominated in Renminbi or Hong Kong dollars, our business and operating result
may be materially affected in the event of a severe increase or decrease in the
value of the Renminbi against other currencies. If Renminbi appreciated against
the Hong Kong dollars, our operating expenses and net income may be affected
depending upon the then composition of our assets and liabilities.
Historically, both Hong Kong dollars and Renminbi are peg to the U.S.
dollars. As a result, exchange rate of the Hong Kong dollars to Renminbi
fluctuated within a narrow range. However, on July 21, 2005, the PBOC adjusted
the exchange rate of U.S. dollars to Renminbi from 1:8.27 to 1:8.11, resulting
in an approximately 2% appreciation in the value of Renminbi against the U.S.
dollars. As Hong Kong dollars are peg to the U.S. dollars, such adjustment has
effectively resulted in an approximately 2% appreciation in the value of
Renminbi against the Hong Kong dollars. For more details, see "RISK FACTORS -
FLUCTUATIONS IN THE VALUE OF THE RENMINBI COULD NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS".
As of December 31, 2004, the Company had no open forward contracts or
option contracts. The Company's cash on hand as of December 31, 2004 was Rmb16.6
million of which Rmb0.3 million equivalents (US$35,100) were held in U.S. dollar
deposit.
INTEREST RATE FLUCTUATIONS
The Company's interest income is sensitive to change in interest rates. The
Company had a short-term payable of Rmb27.7 million as of December 31, 2003. The
borrowing bore floating rate of interest. As the borrowing was immaterial to the
Company, any fluctuation in the interest rate had no material impact on the
Company's interest expenses.
The Company did not have any short-term or long-term debt as of December 31,
2004.
The Company will be exposed to interest rate fluctuations on any new borrowings
under any new loan facility and any change in interest rate could affect its
results of operations and cash flows.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
As the Company is filing this Form as its annual report under the Exchange
Act, the information called for by Part I, Item 12 of Form 20-F is not
applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There has been no material default in the payment of principal or interest
or other material default requiring disclosure pursuant to this item. There have
been no arrears in the payment of dividends or other material delinquency
requiring disclosure pursuant to this item.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
There has been no material modification to the rights of security holders
required to be disclosed pursuant to this item.
ITEM 15. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures, as defined in Exchange Act Rule 13a-14(c), 13a-15(e) and 15d-15(e),
as of the end of the period covered by this Form 20-F, have concluded that, as
of such date, the Company's disclosure controls and procedures were effective.
During 2004, there were no changes in the Company's internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
As the Company's common stock is not currently listed on a U.S. national
securities exchange, the Company is not obligated to have an audit committee of
the board of directors. The Company has, however, had an Audit Committee for
many years and continues to do so. The Company's Board of Directors has
determined that the two members of the Audit Committee, Mr. Richard Whittall and
Mr. David Edwin Bussmann, do not qualify as "audit committee financial experts"
as defined by Item 401(h) of Regulation S-K adopted pursuant to the Exchange
Act. The Company is currently in the process of seeking a qualified financial
expert for the audit committee. Each of Mr. Whittall and Mr. Bussmann are
independent directors of the Company.
ITEM 16B CODE OF ETHICS
The Company has adopted a Code of Ethics for the Chief Executive and
Senior Financial Officers, which applies to the Company's principal executive
officer and to its principal financial and accounting officers. A copy of the
Code of Ethics is attached as Exhibit 14.1 to this Annual Report on Form 20-F.
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte Touche Tohmatsu has served as our independent registered public
accounting firm for each of the three fiscal years in the period ended December
31, 2004, for the audit of the consolidated financial statements of the Company
appearing in this annual report.
The following table presents the aggregate fees for professional services
and other services rendered by Deloitte Touche Tohmatsu in 2004 and 2003.
2004 2003
US$'000 US$'000
------- -------
Audit Fees 315 306
Audit-Related Fees - -
Tax Fees (1) - 2
All Other Fees - -
----- -----
Total 315 308
===== =====
(1) Tax Fees include fees billed for tax compliance services, including the
preparation and submission of tax returns and the supporting tax
computation to the Inland Revenue Department of Hong Kong.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee members are responsible for the review on the quality
and performance of external auditors. The Audit Committee has adopted a policy
regarding pre-approval of audit and permissible non-audit services provided by
our independent auditors.
Under the Policy, the Audit Committee pre-approves all auditing services.
The engagement of Deloitte Touche Tohmatsu as independent registered public
accounting firm has been approved by the Audit Committee. If the Audit Committee
approves an audit service within the scope of the engagement of the audit
service, such audit service is deemed to have been pre-approved.
The aggregate amounts of all tax services provided to the Company by Deloitte
Touche Tohmatsu in 2004 and 2003 that were approved by the audit committee where
pre-approval was not required (de minimis exception) represent 0.008% and 0.007%
of total amounts of fees paid by the Company to Deloitte Touche Tohmatsu in 2004
and 2003, respectively.
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
As the Company's common stock is not listed on a U.S. national securities
exchange, the information called for by Part II, Item 16D of the Form 20-F is
not applicable.
ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
The Company has not made any repurchases of its equity securities during
the period covered by this report.
PART III
ITEM 17. FINANCIAL STATEMENTS
See "Item 18. Financial Statements" of this annual report for the Company's
Consolidated Financial Statements.
Pursuant to Article 3-09 of Regulation S-X of the Exchange Act, separate
financial statements of significant unconsolidated companies of the Company
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") or reconciled to U.S. GAAP must be filed
as part of the Company's Form 20-F. For the year ended December 31, 2002, 2003
and 2004, Wing On was a significant affiliate of the Company in accordance with
Article 3-09 of Regulation S-X and for the year ended December 31, 2003,
Hangzhou Zhongce changed from a subsidiary to a significant affiliate of the
Company under Article 3-09 of Regulation S-X and remains as a significant
affiliate of the Company for the year ended December 31, 2004. Wing On prepared
its financial statements in accordance with accounting principles generally
accepted in Hong Kong ("Wing On Statements") and Hangzhou Zhongce prepared its
statutory financial statements in accordance with the accounting principles and
the relevant financial regulations as established by the Ministry of Finance of
the PRC ; however, for the purposes of complying with Article 3-09 of Regulation
S-X, Hangzhou Zhongce prepared separate financial statements in accordance with
U.S. GAAP ("Hangzhou Zhongce Statements").
Pursuant to Article 3-09 of Regulation S-X, Wing On Statements for the two
years ended December 31, 2004 and 2003 and the nine months period ended
December 31, 2002, including a reconciliation to U.S. GAAP, are set out as
follows.
WING ON TRAVEL (HOLDINGS) LIMITED
---------------------------------
(incorporated in Bermuda with limited liability)
Report and Financial Statements
For the two years ended 31 December 2004 and 2003
and the nine-month period ended 31 December 2002
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
REPORT AND FINANCIAL STATEMENTS
FOR THE TWO YEARS ENDED 31 DECEMBER 2004 AND 2003
AND THE NINE-MONTH PERIOD ENDED 31 DECEMBER 2002
- -------------------------------------------------
CONTENTS PAGE(S)
- -------- -------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 1
CONSOLIDATED INCOME STATEMENTS 2 & 3
CONSOLIDATED BALANCE SHEETS 4 & 5
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY 6
CONSOLIDATED CASH FLOW STATEMENTS 7 - 9
NOTES TO THE FINANCIAL STATEMENTS 10 - 69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF WING ON TRAVEL (HOLDINGS) LIMITED
- --------------------------------------------------------------
(incorporated in Bermuda with limited liability)
We have audited the accompanying consolidated balance sheets of Wing On Travel
(Holdings) Limited and its subsidiaries (the "Company") as of 31 December 2004
and 2003 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the two years ended 31 December 2004
and 2003 and the nine-month period ended 31 December 2002, all expressed in Hong
Kong dollars. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of 31 December 2004
and 2003 and the results of their operations and their cash flows for the two
years ended 31 December 2004, 2003 and the nine-month period ended 31 December
2002 in conformity with accounting principles generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in certain
significant respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of net profit for the year ended 31 December 2004 and net loss for
the year ended 31 December 2003 and the nine-month period ended 31 December 2002
and the determination of shareholders' equity and financial position at 31
December 2004 and 2003, to the extent summarized in note 55.
Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong, 26 April 2005 (21 September 2005 as to Note 52(e and f))
-1-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
CONSOLIDATED INCOME STATEMENTS
FOR THE TWO YEARS ENDED 31 DECEMBER 2004 AND 2003
AND THE NINE-MONTH PERIOD ENDED 31 DECEMBER 2002
- --------------------------------------------------------------------------------
1.1.2004 1.1.2003 1.4.2002
to to to
NOTES 31.12.2004 31.12.2003 31.12.2002
----- ---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Turnover 4 1,722,177 1,416,235 1,323,286
Direct operating costs (1,426,652) (1,258,481) (1,170,593)
--------- --------- ---------
Gross profit 295,525 157,754 152,693
Other operating income 6 20,784 22,536 16,925
Distribution costs (51,039) (38,809) (30,974)
Administrative expenses (210,944) (202,699) (195,613)
Net unrealized holding loss on other
investments (127) (2,849) (733)
Reversal of impairment loss (impairment
loss recognized) in respect of leasehold
land and buildings 15 4,511 (301) (12,281)
Release of negative goodwill arising on
acquisition of subsidiaries 23 1,863 - -
Impairment loss recognized in respect of
investments in securities 21 (5,659) (26,974) -
Impairment loss recognized in respect of
properties under construction 15 (1,100) (2,400) (1,000)
Surplus arising from revaluation of
investment property 16 - 7 -
Loss on disposal of investment securities - (30,633) -
Loss on disposal of other investments - (465) -
Loss on disposal of interest in a co-operative
joint venture 20 - (20,000) -
Amortization of goodwill arising on
acquisition of subsidiaries 22 - (496) (165)
Allowance for short term investment deposit - - (23,000)
Allowance for advances to service suppliers 7 - - (162,122)
--------- --------- ---------
Profit (loss) from operations 8 53,814 (145,329) (256,270)
Finance costs 10 (53,711) (25,045) (12,708)
Gain (loss) on disposal of associates 17 37,930 (23,471) -
Share of results of associates (195) (114,788) (33,463)
Impairment loss recognized in respect of
interest in an associate 17 - (31,717) -
Loss on disposal of discontinued operation 43 - (32,697) -
Loss on deemed disposal/disposal of
subsidiaries 44 - - (1,712)
--------- --------- ---------
Profit (loss) before taxation 37,838 (373,047) (304,153)
Taxation credit 12 23 2,075 669
--------- --------- ---------
Profit (loss) before minority interests 37,861 (370,972) (303,484)
Minority interests (2,484) - 1,236
--------- --------- ---------
Net profit (loss) for the year/period 35,377 (370,972) (302,248)
========= ========= =========
Dividends 13 - - -
========= ========= =========
-2-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
1.1.2004 1.1.2003 1.4.2002
to to to
NOTE 31.12.2004 31.12.2003 31.12.2002
---- ---------- ---------- ----------
HK$'000 HK$'000 HK$'000
(Restated) (Restated)
Earnings (loss) per share
Basic 14 0.18 (2.03) (1.83)
========= ========= =========
Diluted 14 0.13 N/A N/A
========= ========= =========
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
-3-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
CONSOLIDATED BALANCE SHEETS
AT 31 December 2004 AND 2003
- --------------------------------------------------------------------------------
NOTES 2004 2003
----- ---- ----
HK$'000 HK$'000
Non-current assets
Property, plant and equipment 15 1,738,801 70,213
Investment property 16 3,400 1,400
Interest in associates 17 1,989 221,467
Other long term investment 19 - 70,500
Investments in securities 21 93,789 99,258
Goodwill 22 50,215 -
Negative goodwill 23 (72,651) -
Investment deposits 24 221,695 -
Club debentures, at cost 713 -
--------- -------
2,037,951 462,838
--------- -------
Current assets
Property held for sale, at cost 98 -
Inventories 25 5,807 667
Amounts due from related companies 26 6,522 2,928
Amounts due from associates 27 391 11,732
Trade and other receivables 28 276,500 350,838
Consideration receivable on disposal of
an associate and interest in a co-operative
joint venture - 108,000
Loan receivables 29 131,000 54,950
Investments in securities 21 2,778 2,847
Tax recoverable 31 36
Pledged bank deposits 47 6,800 390
Trading cash balances 30 246 416
Bank balances and cash 134,317 111,709
--------- -------
564,490 644,513
--------- -------
Current liabilities
Trade and other payables 31 234,441 239,191
Loans from related companies 32 260,778 8,000
Amounts due to associates 27 11,327 12,134
Amounts due to related companies 33 17,598 13,009
Obligations under finance leases - amount due
within one year 34 378 -
Borrowings - amount due within one year 35 57,066 28,230
Convertible notes 36 - 254,125
--------- -------
581,588 554,689
--------- -------
Net current (liabilities) assets (17,098) 89,824
--------- -------
Total assets less current liabilities (c/f) 2,020,853 552,662
--------- -------
-4-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
NOTES 2004 2003
----- ---- ----
HK$'000 HK$'000
Total assets less current liabilities (b/f) 2,020,853 552,662
--------- -------
Minority interests 312,171 29,778
--------- -------
Non-current liabilities
Loans from related companies 32 112,098 223,312
Obligations under finance leases - amount due
after one year 34 93 -
Borrowings - amount due after one year 35 300,395 6,251
Convertible notes 36 55,000 -
Promissory note 37 365,000 -
Deferred taxation 38 243,354 -
--------- -------
1,075,940 229,563
--------- -------
Net assets 632,742 293,321
========= =======
Capital and reserves
Share capital 39 322,267 183,167
Reserves 41 310,475 110,154
--------- -------
Shareholders' funds 632,742 293,321
========= =======
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
-5-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE TWO YEARS ENDED 31 DECEMBER 2004 AND 2003
AND THE NINE-MONTH PERIOD ENDED 31 DECEMBER 2002
- --------------------------------------------------------------------------------
Total equity
------------
HK$'000
At 1 April 2002 640,009
-------
Exchange difference arising on translation of financial statements of
operations outside Hong Kong (322)
Share of translation reserve of an associate (65)
-------
Amount of loss not recognized in the income statement (387)
-------
639,622
Issue of shares 322,560
Repurchase of shares (5,896)
Reserves released on deemed disposal and disposal of subsidiaries 538
Net loss for the period (302,248)
-------
At 31 December 2002 and 1 January 2003 654,576
-------
Exchange difference arising on translation of financial statements of
operations outside Hong Kong (286)
Surplus arising from revaluation of investment property 163
Share of translation reserve of an associate 73
-------
Amount of net loss not recognized in the income statement (50)
-------
654,526
Transfer of goodwill reserve to investments in securities on
reclassification of investments 9,767
Net loss for the year (370,972)
-------
At 31 December 2003 and 1 January 2004 293,321
-------
Exchange difference arising on translation of financial statements of
operations outside Hong Kong (757)
Surplus arising from revaluation of investment property 2,000
-------
Amount of net gain not recognized in the income statement 1,243
-------
294,564
Issue of shares 303,648
Realization of translation reserve on liquidation of a subsidiary (847)
Net profit for the year 35,377
-------
At 31 December 2004 632,742
=======
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
-6-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE TWO YEARS ENDED 31 DECEMBER 2004 AND 2003
AND THE NINE-MONTH PERIOD ENDED 31 DECEMBER 2002
- --------------------------------------------------------------------------------
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Cash flows from operating activities
Profit (loss) before taxation 37,838 (373,047) (304,153)
Adjustments for:
Share of results of associates 195 114,788 33,463
Depreciation and amortization of property,
plant and equipment 26,938 24,575 18,575
Interest income (3,381) (1,150) (10,679)
Interest expenses 53,578 22,586 11,858
Finance lease charges 133 2,459 850
Loss on disposal of property, plant and
equipment 220 28,587 2,042
(Gain) loss on disposal of associates (37,930) 23,471 -
Loss on disposal of discontinued operations - 32,697 -
Loss on disposal of investment securities - 30,633 -
Loss on disposal of interest in a co-operative
joint venture - 20,000 -
Loss on disposal of other investments 11 465 -
Allowance for irrecoverable trade debts 1,262 - 22,813
Impairment loss recognized in respect of
investments in securities 5,659 26,974 -
Impairment loss recognized in respect of
properties under construction 1,100 2,400 1,000
Impairment loss recognized in respect of
interest in an associate - 31,717 -
(Reversal of impairment loss) impairment
loss recognized in respect of leasehold land
and buildings (4,511) 301 12,281
Release of negative goodwill arising on
acquisition of subsidiaries (1,863) - -
Net unrealized holding loss on other investments 127 2,849 733
Amortization of goodwill arising on acquisition
of subsidiaries - 496 165
Surplus arising from revaluation of investment
property - (7) -
Loss on deemed disposal/disposal of subsidiaries - - 1,712
Allowance for short term investment deposit - - 23,000
Allowance for advances to service suppliers - - 162,122
------- ------- -------
Operating cash flows before movement in working
capital 79,376 (9,206) (24,218)
------- ------- -------
-7-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
1.1.2004 1.1.2003 1.4.2002
to to to
NOTES 31.12.2004 31.12.2003 31.12.2002
----- ---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Movement in working capital
Decrease in inventories 254 540 254
Increase in amounts due from related companies (3,594) (1,972) (11,989)
Decrease (increase) in amounts due from
associates 1,916 (7,282) (1,267)
Decrease (increase) in trade and other receivables 139,499 (46,582) (9,153)
Decrease (increase) in trading cash balances 170 747 (469)
(Decrease) increase in trade and other payables (111,100) 26,950 (6,305)
(Decrease) increase in amounts due to associates (807) (13,354) 7,372
(Decrease) increase in amounts due to related
companies (77,065) 1,340 4,443
------- ------- -------
(50,727) (39,613) (17,114)
------- ------- -------
Cash generated from (used in) operations 28,649 (48,819) (41,332)
Interest paid (53,578) (12,429) (8,616)
Finance lease charges paid (133) (2,459) (850)
Taxation in other jurisdictions refunded 28 724 99
------- ------- -------
Net cash used in operating activities (25,034) (62,983) (50,699)
------- ------- -------
Cash flows from investing activities
Payment for investment deposits (221,695) - (99,400)
Acquisition of associates and advances (82,135) - -
Acquisition of subsidiaries 42 (47,387) - -
Net cash outflow of loans advanced to certain
companies and individuals (36,050) (9,678) (22,272)
Purchase of property, plant and equipment (18,669) (23,028) (3,489)
(Increase) decrease in pledged bank deposits (6,410) 412 1,217
Purchase of other investments (58) (5,571) (6,008)
Purchase of investment securities (1) - -
Proceeds from disposals of associates and
advances 188,988 13,219 -
Refund of other long term investment 70,500 - -
Proceeds from disposal of property, plant and
equipment 9,908 41,611 900
Interest received 3,381 1,150 6,368
Proceeds from disposal of other investments 12 4,860 -
Investment in an associate - (82) (300,217)
Acquisition of additional interest in a subsidiary - - (10,169)
Disposal of discontinued operation (net of
cash and cash equivalents disposed of) 43 - 26,911 -
Repayment of loan receivables - - 10,000
Deemed disposal/disposal of subsidiaries
(net of cash and cash equivalents disposed of) 44 - - (1,448)
Short term investment deposits refunded - - 5,000
------- ------- -------
Net cash (used in) from investing activities (139,616) 49,804 (419,518)
------- ------- -------
-8-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
1.1.2004 1.1.2003 1.4.2002
to to to
NOTE 31.12.2004 31.12.2003 31.12.2002
---- ---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Cash flows from financing activities
Net cash inflow from loans from related
companies 141,564 224,838 6,474
Proceeds from issue of new shares for cash,
net of expenses of HK$3,832,000
(1.1.2003 to 31.12.2003: HK$nil and
1.4.2002 to 31.12.2002: HK$2,915,000) 98,648 - 206,685
Proceeds from issue of convertible notes 70,200 - 370,000
New bank loans and other loans raised 5,569 61,096 150,000
Repayment of bank loans and other loans (89,599) (209,909) (139,024)
Redemption of convertible notes (64,325) - -
Repayment of obligations under finance leases (1,182) (4,619) (7,376)
Repurchase of shares - - (5,896)
------- ------- -------
Net cash from financing activities 160,875 71,406 580,863
------- ------- -------
Net (decrease) increase in cash and cash
equivalents (3,775) 58,227 110,646
Cash and cash equivalents at beginning of the
year/period 111,709 53,793 (56,969)
Effect of foreign exchange rate changes (1,798) (311) 116
------- ------- -------
Cash and cash equivalents at end of the
year/period 46 106,136 111,709 53,793
======= ======= =======
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
-9-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
NOTES TO THE FINANCIAL STATEMENTS
FOR THE TWO YEARS ENDED 31 DECEMBER 2004 AND 2003
AND THE NINE-MONTH PERIOD ENDED 31 DECEMBER 2002
- --------------------------------------------------------------------------------
1. GENERAL
Wing On Travel (Holdings) Limited (together with its subsidiaries the
"Company") is an exempted company incorporated in Bermuda with limited
liability. Its shares are listed on The Stock Exchange of Hong Kong Limited
(the "Stock Exchange").
The Company is an investment holding company. Its subsidiaries are
principally engaged in the business of providing package tours, travel and
other related services and hotel operations.
The financial statements for the current and prior period cover the
twelve-month year ended 31 December 2004 and 2003. The corresponding
amounts shown for the income statement, statement of changes in
shareholders' equity, cash flow statement and related notes cover a
nine-month period from 1 April 2002 to 31 December 2002 and therefore may
not be comparable with amounts shown for the current and prior year.
These financial statements have been prepared for the special purpose of
filing with the United States Securities and Exchange Commission for the
express purpose of complying with Article 3 - 09 of Regulation S - X of the
Securities Act 1933. This filing requirement is based on the Company being
a significant investee of China Enterprises Limited ("CEL").
2. POTENTIAL IMPACT ARISING FROM THE RECENTLY ISSUED ACCOUNTING STANDARDS
In 2004, the Hong Kong Institute of Certified Public Accountants issued a
number of new or revised Hong Kong Accounting Standards and Hong Kong
Financial Reporting Standards (hereinafter collectively referred to as "new
HKFRSs") which are effective for accounting periods beginning on or after 1
January 2005. The Company has not early adopted these new HKFRSs in the
financial statements for the two years ended 31 December 2004 and 2003 and
the nine-month period ended 31 December 2002.
The Company has commenced considering the potential impact of these new
HKFRSs but is not yet in a position to determine whether these new HKFRSs
would have a significant impact on how its results of operations and
financial position are prepared and presented. These new HKFRSs may result
in changes in the future as to how the results and financial position are
prepared and presented.
-10-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared under the historical cost
convention, as modified for the revaluation of certain properties and
investments in securities. The financial statements have been prepared in
accordance with accounting principles generally accepted in Hong Kong.
The principal accounting policies are as follows:
Basis of consolidation
The consolidated financial statements incorporate the financial statements
of the Company and its subsidiaries made up to 31 December.
The results of subsidiaries acquired or disposed of during the year are
included in the consolidated income statement from the effective date of
acquisition or up to the effective date of disposal, as appropriate.
All significant inter-company transactions and balances within the Company
are eliminated on consolidation.
Goodwill
Goodwill represents the excess of the cost of acquisition over the
Company's interest in the fair value of the identifiable assets and
liabilities of a subsidiary or an associate at the date of acquisition.
Goodwill arising on acquisition prior to 1 April 2001 continues to be held
in reserves and will be charged to the income statement at the time of
disposal of the relevant subsidiary or associate, or at such time as the
goodwill is determined to be impaired.
Goodwill arising on acquisition after 1 April 2001 is capitalized and
amortized on a straight line basis over its useful economic life. Goodwill
arising on acquisition of an associate is included within the carrying
amount of the associate. Goodwill arising on the acquisition of
subsidiaries is presented separately in the balance sheet.
Negative goodwill
Negative goodwill represents the excess of the Company's interest in the
fair value of the identifiable assets and liabilities of a subsidiary or an
associate at the date of acquisition over the cost of acquisition.
Negative goodwill arising on acquisition prior to 1 April 2001 continues to
be held in reserves, and will be credited to income at the time of disposal
of the relevant subsidiary or associate.
Negative goodwill arising on the acquisition of an associate after 1 April
2001 is deducted from the carrying value of that associate. Negative
goodwill arising on the acquisition of subsidiaries after 1 April 2001 is
presented separately in the balance sheet as a deduction from assets.
Negative goodwill is released to income based on an analysis of the
circumstances from which the balance resulted. To the extent that the
negative goodwill is attributable to losses or expenses anticipated at the
date of acquisition, it is released to income in the period in which those
losses or expenses arise. The remaining negative goodwill is recognized as
income on a straight line basis over the remaining average useful life of
the identifiable acquired depreciable assets. To the extent that such
negative goodwill exceeds the aggregate fair value of the acquired
identifiable non-monetary assets, it is recognized as income immediately.
-11-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue recognition
Income from tour and travel services is recognized upon the departure date
of each tour. Income from other travel related services is recognized when
the services are rendered.
Hotel revenue from rooms and other ancillary services are recognized when
the services are rendered.
Income from transportation services is recognized when the services are
rendered.
Interest income is accrued on a time basis by reference to the principal
outstanding and at the interest rate applicable.
Rental income, including rental invoiced in advance from properties under
operating leases, is recognized on a straight line basis over the term of
the relevant lease.
Dividend income from investments is recognized when the shareholders'
rights to receive payment have been established.
Income from disposal of investments is recognized when the risks and
rewards of the ownership of the investments have been transferred.
Property, plant and equipment
Hotel properties
Hotel properties are stated at cost less accumulated impairment loss. Cost
comprises land costs, development costs, borrowing cost capitalized in
accordance with the Company's accounting policy and other direct cost
attributable to the property. No depreciation or amortization is provided
on hotel property. It is the Company's policy to maintain these assets in a
continual state of sound repair and maintenance and to extend and make
improvements thereto from time to time, and accordingly the directors
consider that given the estimated life of this asset any depreciation would
be insignificant.
The gain or loss arising from disposal or retirement of hotel property is
determined as the difference between the sale proceeds and the carrying
amount of the asset and is recognized in the income statement.
Other property, plant and equipment
Property, plant and equipment other than hotel properties and properties
under construction are stated at cost or valuation less accumulated
depreciation or amortization and any identified impairment loss.
The gain or loss arising from disposal or retirement of an asset is
determined as the difference between the sale proceeds and the carrying
amount of the asset and is recognized in the income statement.
-12-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Property, plant and equipment - continued
Other property, plant and equipment - continued
Depreciation and amortization is provided to write off the cost or
valuation of property, plant and equipment other than hotel properties and
properties under construction over their estimated useful lives, using the
straight line method, at the following rates per annum:
Leasehold land Over the remaining unexpired terms of the leases
Buildings 2% or over the remaining unexpired terms of the
leases, whichever is shorter
Furniture and fixtures 10% - 20%
Leasehold improvements 10% - 20% or the term of the lease
or land use rights, if shorter
Motor vehicles 8.33% - 20%
Office equipment and machinery 20%
Vessels 5%
Assets held under finance leases are depreciated over their estimated
useful lives on the same basis as owned assets.
Properties under construction are stated at cost less impairment loss. Cost
includes all development expenditure and other direct costs attributable to
such projects. Properties under construction are not depreciated until
completion of construction. Cost on completed properties is transferred to
other categories of property, plant and equipment.
Investment properties
Investment properties are completed properties which are held for their
investment potential, any rental income being negotiated at arm's length.
No depreciation is provided in respect of investment properties which are
held under leases with unexpired terms, including the renewable period, of
more than twenty years. Investment properties are stated at their open
market values based on a professional valuation at the balance sheet date.
Any surplus or deficit arising on revaluation of investment properties is
credited or charged to the investment property revaluation reserve unless
the balance of this reserve is insufficient to cover a deficit, in which
case the excess of the deficit over the balance on the investment property
revaluation reserve is charged to the income statement.
On subsequent sale of an investment property, any revaluation surplus
thereon is included in the determination of the gain or loss on disposal.
-13-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Impairment
At each balance sheet date, the Company reviews the carrying amounts of its
assets to determine whether there is any indication that those assets have
suffered an impairment loss. If the recoverable amount of an asset is
estimated to be less than its carrying amount, the carrying amount of the
asset is reduced to its recoverable amount. An impairment loss is
recognized as an expense immediately, unless the relevant asset is carried
at a revalued amount, in which case the impairment loss is treated as a
revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the
asset is increased to the revised estimate of its recoverable amount, but
so that the increased carrying amount does not exceed the carrying amount
that would have been determined had no impairment loss been recognized for
the asset in prior years. A reversal of an impairment loss is recognized as
income immediately, unless the relevant asset is carried at a revalued
amount, in which case the reversal of the impairment loss is treated as a
revaluation increase.
Interest in associates
An associate is an enterprise over which the Company is in a position to
exercise significant influence, including participation in financial and
operating policy decisions.
The consolidated income statement includes the Company's share of the
post-acquisition results of its associates for the year. In the
consolidated balance sheet, the interest in associates is stated at the
Company's share of net assets of the associates less any negative goodwill
on acquisition in so far as it has not already been released to income and
any identified impairment loss.
Other long term investment
Other long term investment is stated at cost less impairment loss.
Investments in securities
Investments in securities are recognized on a trade-date basis and are
initially measured at cost.
At subsequent reporting dates, debt securities that the Company has the
expressed intention and ability to hold to maturity (held-to-maturity
securities) are measured at amortized cost, less any impairment loss
recognized to reflect irrecoverable amounts. The annual amortization of any
discount or premium on the acquisition of a held-to-maturity security is
aggregated with other investment income receivable over the terms of the
investment so that the revenue recognized in each period represents a
constant yield on the investment.
Investments other than held-to-maturity securities are classified as
investment securities and other investments.
Investment securities, which are securities held for an identified
long-term strategic purpose, are measured at subsequent reporting dates at
cost, as reduced by any impairment loss that is other than temporary.
Other investments are measured at fair value, with unrealized gains and
losses included in net profit or loss for the year.
-14-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Club debenture
Club debenture is stated at cost less any identified impairment loss.
Properties held for sale
Properties held for sale are stated at the lower of cost and net realizable
value. Cost comprises all costs of purchase. Net realizable value is
calculated at the actual or estimated selling price less related costs of
marketing and selling.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost
is calculated using the weighted average cost method.
Taxation
Income tax expense represents the sum of the tax currently payable and
deferred tax.
The tax currently payable is based on taxable profit for the year/period.
Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or
deductible in other periods and it further excludes items that are never
taxable or deductible.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax bases used in the
computation of taxable profit, and is accounted for using the balance sheet
liability method. Deferred tax liabilities are generally recognized for all
taxable temporary differences, and deferred tax assets are recognized to
the extent that it is probable that taxable profit will be available
against which deductible temporary differences can be utilized. Such assets
and liabilities are not recognized if the temporary difference arises from
goodwill (or negative goodwill) or from the initial recognition (other than
in a business combination) of other assets and liabilities in a transaction
that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognized for taxable temporary differences
arising on investments in subsidiaries and associates, except where the
Company is able to control the reversal of the temporary difference and it
is probable that the temporary difference will not reverse in the
foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the
asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in
the period when the liability is settled or the asset is realized. Deferred
tax is charged or credited to the income statement, except when it relates
to items charged or credited directly to equity, in which case the deferred
tax is also dealt with in equity.
-15-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Retirement benefit schemes
The retirement benefit costs charged in the income statement represent the
contributions payable in respect of the current year/period to the
state-managed retirement benefit schemes and the Company's defined
contribution schemes.
Stock-based compensation
The Company operates a share option scheme where its directors or employees
are granted options to acquire shares of the Company at specified exercise
prices. No compensation costs are recognized in the income statement.
Leases
Leases are classified as finance leases whenever the terms of the leases
transfer substantially all the risks and rewards of ownership of the leased
assets to the Company. Assets held under finance leases are capitalized at
their fair value at the date of acquisition. The corresponding principal
portions of leasing commitments are shown as obligations under finance
leases. The finance costs, which represent the difference between the total
leasing commitments and the original principal outstanding at the inception
of the leases, are charged to the income statement over the period of the
relevant leases so as to produce a constant periodic rate of charge on the
remaining balances of the obligations for each accounting period.
All other leases are classified as operating leases and their rentals
payable or receivable are charged or credited to the income statement on a
straight line basis over the term of the relevant lease.
Foreign currencies
Transactions in foreign currencies are translated at the approximate rates
prevailing on the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are re-translated at the
rates ruling on the balance sheet date. Gains and losses arising on
exchange are included in the income statement.
On consolidation, the assets and liabilities of operations outside Hong
Kong are translated at the rates prevailing on the balance sheet date.
Income and expense items are translated at the average exchange rate for
the year/period. Exchange differences arising, if any, are classified as
equity and transferred to the Company's translation reserve. Such
translation differences are recognized as income or as expenses in the
period in which the operation is disposed of.
Foreign currency risk
The Company conducts business in a number of foreign countries, with
certain transactions denominated in currencies other than the functional
currency of the respective subsidiary conducting the business. The purpose
of the Company's foreign currency management is to manage the effect of
exchange rate fluctuations on certain foreign currency denominated
revenues, costs and eventual cash flows.
-16-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Concentration of credit risk
Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of cash and cash equivalents, and trade
receivables. The Company places its cash and cash equivalents with
financial institutions with high-credit ratings and quality.
The Company conducts credit evaluation of customers and generally does not
require collateral or other security from its customers. The Company
establishes an allowance for doubtful accounts primarily based upon the age
of the receivables and factors surrounding the credit risk of specific
customers.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, trade receivables and
trade payables approximate their fair values due to the short-term maturity
of these instruments.
4. TURNOVER
Turnover represents the amounts received and receivable from outside
customers, less trade discounts and returns during the year/period. An
analysis of the Company's turnover is as follows:
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Travel and related services 1,532,143 1,291,906 1,185,560
Hotel and leisure services 190,034 - -
Transportation services - 124,329 137,726
--------- --------- ---------
1,722,177 1,416,235 1,323,286
========= ========= =========
-17-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
5. BUSINESS AND GEOGRAPHICAL SEGMENTS
Business segments
During the year, for management purposes, the Company was organized into
two operating divisions - travel and related services, and hotel and
leisure services. In 2003, the Company was also involved in the business of
transportation services that was discontinued in October 2003. These
divisions are the basis on which the Company reports its primary segment
information.
Principal activities are as follows:
Travel and Hotel and
related leisure
services services Elimination Consolidated
-------- -------- ----------- ------------
HK$'000 HK$'000 HK$'000 HK$'000
For the year ended 31 December 2004
TURNOVER
External sales 1,532,143 190,034 - 1,722,177
Inter-segment sales - 1,234 (1,234) -
--------- ------- ------ ---------
Total 1,532,143 191,268 (1,234) 1,722,177
========= ======= ====== =========
Inter-segment sales are charged at
prevailing market price.
RESULTS
Segment results 49,349 33,701 - 83,050
========= ======= ======
Interest income 3,381
Net unrealized holding loss on other
investments (127)
Impairment loss recognized in respect
of investments in securities (5,659)
Unallocated corporate expenses (26,831)
---------
Profit from operations 53,814
Finance costs (53,711)
Gain on disposal of associates 37,930 - - 37,930
Share of results of associates (195) - - (195)
---------
Profit before taxation 37,838
Taxation credit 23
---------
Profit before minority interests 37,861
Minority interests (2,484)
---------
Net profit for the year 35,377
=========
- 18 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued
Business segments - continued
Travel and Hotel and
related leisure
services services Consolidated
-------- -------- ------------
HK$'000 HK$'000 HK$'000
As at 31 December 2004
ASSETS
Segment assets 728,181 1,697,328 2,425,509
Interest in associates 1,989 - 1,989
Unallocated corporate assets 174,943
---------
Consolidated total assets 2,602,441
=========
LIABILITIES
Segment liabilities 198,949 62,723 261,672
Unallocated corporate liabilities 1,395,856
---------
Consolidated total liabilities 1,657,528
=========
OTHER INFORMATION
Capital additions 5,221 1,696,828 1,702,049
Goodwill arising from acquisition of
subsidiaries 50,215 - 50,215
Depreciation and amortization of
property, plant and equipment 4,204 22,734 26,938
Impairment losses recognized 6,759 - 6,759
Reversal of impairment loss in respect
of leasehold land and buildings (4,511) - (4,511)
Loss (profit) on disposal of property,
plant and equipment 365 (145) 220
Allowance for irrecoverable trade debts 1,262 - 1,262
======= ======= =========
- 19 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued
Business segments - continued
Continuing Discontinued
operation operation
---------- --------------
Travel and
related Transportation
services services Elimination Consolidated
---------- -------------- ----------- ------------
HK$'000 HK$'000 HK$'000 HK$'000
For the year ended 31 December 2003
TURNOVER
External sales 1,291,906 124,329 - 1,416,235
Inter-segment sales - 5,248 (5,248) -
--------- ------- ------ ---------
Total 1,291,906 129,577 (5,248) 1,416,235
========= ======= ====== =========
Inter-segment sales are charged
at prevailing market price.
RESULTS
Segment results (60,207) (20,169) - (80,376)
========= ======= ======
Interest income 1,150
Loss on disposal of investments in
securities (31,098)
Net unrealized holding loss on other
investments (2,849)
Unallocated corporate expenses (32,156)
---------
Loss from operations (145,329)
Finance costs (25,045)
Loss on disposal of associates (23,471) - - (23,471)
Share of results of associates (114,788) - - (114,788)
Impairment loss recognized in respect
of interest in an associate (31,717) - - (31,717)
Loss on disposal of discontinued
operation - (32,697) - (32,697)
---------
Loss before taxation (373,047)
Taxation credit 2,075
---------
Loss before minority interests (370,972)
Minority interests -
---------
Net loss for the year (370,972)
=========
- 20 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued
Business segments - continued
Continuing Discontinued
operation operation
---------- --------------
Travel and
related Transportation
services services Consolidated
---------- -------------- ------------
HK$'000 HK$'000 HK$'000
As at 31 December 2003
ASSETS
Segments 676,963 - 676,963
Interest in associates 221,467 - 221,467
Unallocated corporate assets 208,921
---------
Consolidated total assets 1,107,351
=========
LIABILITIES
Segment liabilities 245,147 - 245,147
Unallocated corporate liabilities 539,105
---------
Consolidated total liabilities 784,252
=========
OTHER INFORMATION
Capital additions 7,947 15,081 23,028
Depreciation and amortization of
property, plant and equipment 4,935 19,640 24,575
Loss on disposal of property, plant
and equipment 28,419 168 28,587
Loss on disposal of interest in a
co-operative joint venture 20,000 - 20,000
Impairment losses recognized 29,675 - 29,675
Amortization of goodwill arising on
acquisition of subsidiaries - 496 496
======= ======= =========
- 21 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued
Business segments - continued
Continuing Discontinued
operation operation
---------- --------------
Travel and
related Transportation
services services Elimination Consolidated
---------- -------------- ----------- ------------
HK$'000 HK$'000 HK$'000 HK$'000
For the period from 1 April 2002
to 31 December 2002
TURNOVER
External sales 1,185,560 137,726 - 1,323,286
Inter-segment sales - 6,768 (6,768) -
--------- ------- ------ ---------
Total 1,185,560 144,494 (6,768) 1,323,286
========= ======= ====== =========
Inter-segment sales are charged
at prevailing market price.
RESULTS
Segment results (227,740) (7,786) - (235,526)
========= ======= ======
Interest income 10,679
Net unrealized holding loss on other
investments (733)
Unallocated corporate expenses (30,690)
---------
Loss from operations (256,270)
Finance costs (12,708)
Share of results of associates (33,463) - - (33,463)
Loss on deemed disposal/disposal of
subsidiaries (1,712) - - (1,712)
---------
Loss before taxation (304,153)
Taxation credit 669
---------
Loss before minority interests (303,484)
Minority interests 1,236
---------
Net loss for the period (302,248)
=========
- 22 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
5. BUSINESS AND GEOGRAPHICAL SEGMENTS - continued
Geographical segments
No geographical segment information in respect of the Company's operations
has been presented as over 90% of the Company's operations were derived
from Hong Kong.
The analysis of carrying amount of segment assets and additions to
property, plant and equipment and intangible assets analyzed by the
geographical area in which the assets are located is as follows:
Additions to
property, plant and
Carrying amount equipment and
of segment assets intangible assets
------------------------- -------------------------
2004 2003 2004 2003
--------- ------- --------- -------
HK$'000 HK$'000 HK$'000 HK$'000
The People's Republic of China
(excluding Hong Kong) (the "PRC") 1,372,774 248,358 1,074,210 -
Hong Kong 1,040,390 300,522 677,865 23,028
South-east Asia 120,914 180,433 137 -
Japan and Korea 64,710 155,771 - -
Others 1,664 800 52 -
--------- ------- --------- -------
2,600,452 885,884 1,752,264 23,028
========= ======= ========= =======
6. OTHER OPERATING INCOME
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
An analysis of the Company's other
operating income is as follows:
Exchange gain 135 335 168
Insurance claims received 2,208 - -
Interest income 3,381 1,150 10,679
Net income on sale of computer program
source code - 3,000 -
Recovery of overseas sales tax - 8,242 -
Sundry income 15,060 9,809 6,078
------ ------ ------
20,784 22,536 16,925
====== ====== ======
- 23 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
7. ALLOWANCE FOR ADVANCES TO SERVICE SUPPLIERS
The Company makes advances to its overseas tour operators for financing
their provision of tourist services to the Company in their destination
points. The allowance made in the nine-month period ended 31 December 2002
represented the amounts due from those operators with whom the Company did
not have further business and the directors consider that their
recoverability was remote.
8. PROFIT (LOSS) FROM OPERATIONS
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Profit (loss) from operations has been arrived at
after charging:
Allowance for irrecoverable trade debts 1,262 - 22,813
Auditors' remuneration 2,878 1,792 1,598
Cost of inventories recognized as expenses 20,490 2,005 2,701
Depreciation and amortization on:
Owned assets 26,289 19,689 14,622
Assets held under finance leases 649 4,886 3,953
Information technology development expenses - 1,136 844
Loss on disposal of other investments 11 465 -
Loss on disposal of property, plant and
equipment 220 28,587 2,042
Minimum lease payments paid in respect
of rented premises 12,913 12,459 19,850
Staff costs * 128,023 80,194 125,272
and after crediting:
Rental income from investment property
and premises within the hotel properties
less expenses of HK$79,000
(1.1.2003 to 31.12.2003: HK$nil and
1.4.2002 to 31.12.2002: HK$nil) 12,993 109 82
Rental income from motor vehicles 74 - -
======= ====== =======
* The amount includes retirement benefit scheme contributions (net of
forfeiture) of HK$5,910,000 (1.1.2003 to 31.12.2003: HK$1,879,000 and
1.4.2002 to 31.12.2002: HK$4,615,000).
- 24 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
9. DIRECTORS' REMUNERATION AND HIGHEST PAID EMPLOYEES
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Emoluments to executive directors
Fees - - -
Salaries and other benefits (Note) 3,554 1,500 4,513
Compensation for loss of office - - 2,600
Retirement benefit scheme contributions 24 97 389
------ ------ ------
3,578 1,597 7,502
------ ------ ------
Emoluments to non-executive directors
Fees - - -
Salaries and other benefits 2,923 1,980 1,286
Retirement benefit scheme contributions 45 210 137
------ ------ ------
2,968 2,190 1,423
------ ------ ------
Emoluments to independent non-executive
directors
Fees 30 200 -
------ ------ ------
6,576 3,987 8,925
====== ====== ======
Number of director(s)
------------------------------------------------------
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
Emoluments of the directors were within
the following bands:
Nil - HK$1,000,000 12 13 9
HK$1,000,001 - HK$1,500,000 - - 1
HK$2,000,001 - HK$2,500,000 - 1 -
HK$2,500,001 - HK$3,000,000 2 - 1
HK$3,500,001 - HK$4,000,000 - - 1
==== ==== ====
Note: The directors' salaries and other benefits include the
operating lease rentals amounting to HK$1,200,000 (1.1.2003 to
31.12.2003: HK$nil and 1.4.2002 to 31.12.2002: HK$1,401,000)
in respect of rental premises provided to directors. The
amounts were also included in the minimum lease payments paid
in respect of rental premises under note 8 above.
- 25 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
9. DIRECTORS' REMUNERATION AND HIGHEST PAID EMPLOYEES - continued
Details of emoluments paid by the Company to the five highest paid
individuals (including directors, details of whose emoluments are set out
above) are as follows:
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Salaries and other benefits 10,003 5,927 8,479
Retirement benefit scheme contributions 179 485 601
------ ------ ------
10,182 6,412 9,080
====== ====== ======
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
Emoluments of the five highest paid individuals were
within the following bands:
Nil - HK$1,000,000 - 3 2
HK$1,000,001 - HK$1,500,000 2 - 1
HK$1,500,001 - HK$2,000,000 1 1 -
HK$2,000,001 - HK$2,500,000 - 1 -
HK$2,500,001 - HK$3,000,000 2 - 1
HK$3,500,001 - HK$4,000,000 - - 1
=== === ===
Number of directors 2 2 3
Number of employees 3 3 2
--- --- ---
5 5 5
=== === ===
10. FINANCE COSTS
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Finance lease charges 133 2,459 850
Interest on borrowings wholly repayable
within five years 39,997 17,504 7,847
Interest on convertible notes 3,760 5,082 4,011
Interest on promissory note 9,821 - -
------ ------ ------
Total finance costs 53,711 25,045 12,708
====== ====== ======
- 26 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
11. DISCONTINUED OPERATION
On 25 October 2003, the Company entered into a sale and purchase agreement
to dispose of its then subsidiary, Trans-Island Limousine Service Limited
and its subsidiaries ("Trans-Island Group") which carried out all of the
Company's transportation services. The disposal was completed on 31 October
2003, when the control of Trans-Island Group was passed to the purchaser.
The results of the transportation services for the period from 1 January
2003 to 31 October 2003, which have been included in the consolidated
financial statements, were as follows:
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Turnover - 124,329 137,726
Direct operating costs - (99,712) (123,684)
Other operating income - 1,403 3,113
Administrative expenses - (45,687) (24,744)
Finance costs - (2,337) (1,655)
------ ------- -------
Loss before taxation - (22,004) (9,244)
Taxation credit - 1,718 460
------ ------- -------
Net loss for the year/period - (20,286) (8,784)
====== ======= =======
During the year ended 31 December 2003, Trans-Island Group contributed
HK$26,547,000 (1.4.2002 to 31.12.2002: HK$16,288,000) to the Company's net
operating cash flows, HK$11,644,000 (1.4.2002 to 31.12.2002: HK$778,000) in
respect of investing activities, and HK$11,205,000 (1.4.2002 to 31.12.2002:
HK$13,938,000) in respect of financing activities.
The carrying amounts of assets and liabilities of Trans-Island Group at the
date of disposal are disclosed in note 43.
A loss of HK$32,697,000 arose on the disposal of Trans-Island Group, being
the proceeds of disposal less the carrying amount of the net assets of
Trans-Island Group and attributable unamortized goodwill.
- 27 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
12. TAXATION CREDIT
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Taxation in other jurisdictions for current
year/period - - 11
Overprovision in prior years 23 - 19
Deferred tax (Note 38) - 1,718 460
------ ------ ------
Taxation attributable to the Company 23 1,718 468
------ ------ ------
Share of taxation attributable to associates
Hong Kong - - (270)
Other jurisdictions - 357 471
------ ------ ------
- 357 201
------ ------ ------
Taxation credit 23 2,075 669
====== ====== ======
No provision for Hong Kong Profits Tax has been made as the Company either
has no assessable profit in the year/period or the estimated assessable
profits were wholly absorbed by tax losses brought forward.
Taxation for other jurisdictions represents overprovision for taxation in
prior years. No provision for overseas taxation has been made as the
Company has no taxable profit during the two years ended 31 December 2004
and 2003 and the nine-month period ended 31 December 2002 in other
jurisdictions.
No charge or credit arose on the loss on discontinuance of the
transportation services during the year ended 31 December 2003.
Taxation for the year/period can be reconciled to the profit (loss) before
taxation per the consolidated income statement as follows:
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Profit (loss) before taxation 37,838 (373,047) (304,153)
====== ======= =======
Tax at the domestic income tax rate of 17.5%
(1.1.2003 to 31.12.2003: 17.5% and
1.4.2002 to 31.12.2002: 16%) (6,622) 65,283 48,664
Tax effect of share of results of associates (34) (19,495) (5,133)
Tax effect of expenses that are not deductible
in determining taxable profit (887) (14,614) (11,866)
Tax effect of income that is not taxable in
determining taxable profit 13,649 3,848 2,415
Tax effect of tax losses not recognized (6,645) (33,901) (33,443)
Tax effect of tax losses utilized but not
previously recognized 3,604 2,023 248
Effect of different tax rates of subsidiaries
operating in other jurisdictions (3,065) (314) (235)
Overprovision in prior years 23 - 19
Increase in opening deferred tax liability
resulting from an increase in Hong Kong
Profits Tax rate - (755) -
------ ------- -------
Taxation credit for the year 23 2,075 669
====== ======= =======
- 28 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
13. DIVIDENDS
No dividends were declared by the Company for the year ended 31 December
2004 (1.1.2003 to 31.12.2003: HK$nil and 1.4.2002 to 31.12.2002: HK$nil).
14. EARNINGS (LOSS) PER SHARE
The calculation of the basic and diluted earnings (loss) per share is based
on the following data:
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Earnings (loss) for the purpose of basic
earnings (loss) per share 35,377 (370,972) (302,248)
======= =======
Interest expenses on convertible notes 3,102
------
Earnings for the purpose of diluted earnings
per share 38,479
======
Number of shares
------------------------------------------------------
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
(Restated) (Restated)
Weighted average number of ordinary shares
for the purpose of basic earnings (loss)
per share 201,251,437 183,167,328 165,090,000
=========== ===========
Effect of dilutive potential ordinary shares
relating to convertible notes 97,498,216
-----------
Weighted average number of ordinary
shares for the purpose of diluted earnings
per share 298,749,653
===========
Notes:
(a) The above weighted average number of ordinary shares for the
calculation of the basic and diluted earnings (loss) per share for the
years ended 31 December 2004 and 2003 and the nine-month period ended
31 December 2002 have been adjusted to take into account of the
consolidation of shares as mentioned under Note 52(c) completed
subsequent to 31 December 2004.
(b) No diluted loss per share has been presented for the year ended 31
December 2003 and the nine-month period ended 31 December 2002 as the
conversion of the convertible notes and shares issuable under the
subscription agreement dated 31 May 2002 to a subscriber would result
in a decrease in loss per share.
- 29 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
14. EARNINGS (LOSS) PER SHARE - continued
Notes: - continued
(c) A reconciliation of the restatement of loss per share for 2003 and
2002 to adjust for the consolidation of shares as mentioned under Note
52(c) subsequent to 31 December 2004 is as follows:
1.1.2003 1.4.2002
to to
31.12.2003 31.12.2002
---------- ----------
HK$ HK$
As originally stated (0.0203) (0.0183)
Consolidation of shares (2.0097) (1.8117)
------- -------
As restated (2.0300) (1.8300)
======= =======
15. PROPERTY, PLANT AND EQUIPMENT
Office
Leasehold Properties Furniture equipment
land and Hotel under and Leasehold Motor and
buildings properties construction fixtures improvements vehicles machinery Vessels Total
--------- ---------- ------------ --------- ------------ -------- --------- ------- ---------
HK$'000 HK'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
Note (a)
COST OR VALUATION
At 1 January 2004 80,153 - 46,728 3,361 8,592 1,017 15,648 6,467 161,966
Currency realignment - - - 195 118 20 243 - 576
Acquisition of subsidiaries - 1,604,752 - 54,422 15,907 1,448 6,665 - 1,683,194
Additions - - - 4,220 12,043 937 1,655 - 18,855
Disposals (42,128) - - (7,198) (5,180) (443) (905) - (55,854)
------ --------- ------ ------ ------ ----- ------ ----- ---------
At 31 December 2004 38,025 1,604,752 46,728 55,000 31,480 2,979 23,306 6,467 1,808,737
------ --------- ------ ------ ------ ----- ------ ----- ---------
Comprising
At cost 31,025 1,604,752 46,728 55,000 31,480 2,979 23,306 6,467 1,801,737
At valuation 7,000 - - - - - - - 7,000
------ --------- ------ ------ ------ ----- ------ ----- ---------
38,025 1,604,752 46,728 55,000 31,480 2,979 23,306 6,467 1,808,737
------ --------- ------ ------ ------ ----- ------ ----- ---------
DEPRECIATION, AMORTIZATION
AND IMPAIRMENT
At 1 January 2004 58,939 - 8,128 2,087 3,943 583 12,598 5,475 91,753
Currency realignment - - - 152 17 16 197 - 382
Provided for the year 299 - - 17,771 5,464 526 2,697 181 26,938
(Reversal of impairment loss)
impairment loss recognized
for the year (Note (c)) (4,511) - 1,100 - - - - - (3,411)
Eliminated on disposals (33,161) - - (6,501) (4,793) (443) (828) - (45,726)
------ --------- ------ ------ ------ ----- ------ ----- ---------
At 31 December 2004 21,566 - 9,228 13,509 4,631 682 14,664 5,656 69,936
------ --------- ------ ------ ------ ----- ------ ----- ---------
NET BOOK VALUES
At 31 December 2004 16,459 1,604,752 37,500 41,491 26,849 2,297 8,642 811 1,738,801
====== ========= ====== ====== ====== ===== ====== ===== =========
At 31 December 2003 21,214 - 38,600 1,274 4,649 434 3,050 992 70,213
====== ========= ====== ====== ====== ===== ====== ===== =========
- 30 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
15. PROPERTY, PLANT AND EQUIPMENT - continued
An analysis of the properties of the Company held at the balance sheet date
is as follows:
Leasehold Hotel Properties
land and buildings properties under construction
-------------------- --------------------- -------------------
2004 2003 2004 2003 2004 2003
------ ------ --------- ------ ------ ------
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
Long leases in Hong Kong 13,299 10,237 626,165 - - -
Medium term leases in Hong Kong 3,160 10,977 - - - -
Medium term land use rights in
the PRC (note b) - - 978,587 - 37,500 38,600
------ ------ --------- ------ ------ ------
16,459 21,214 1,604,752 - 37,500 38,600
====== ====== ========= ====== ====== ======
Notes:
(a) Included in the hotel properties at the balance sheet date is a hotel
property with a carrying value of HK$160,837,000 situated in Luoyang,
the PRC and held under a medium term land use rights. The land use
rights of the hotel property is currently held by Luoyang Power Supply
Bureau, a minority shareholder of the subsidiary holding the hotel
property. Pursuant to a land use rights agreement entered into between
Luoyang Power Supply Bureau and the subsidiary on 15 April 1999
(before the Company acquired the said subsidiary in 2004), Luoyang
Power Supply Bureau agreed to permit the said subsidiary to use the
land use rights of the hotel property for a term commencing from April
1999 to April 2049 for hotel use.
(b) Included in the hotel properties held under medium term land use
rights in the PRC of HK$978,587,000 is a hotel property with a
carrying value of approximately HK$217,487,000 of which the Company
has been granted the right to operate and manage the hotel in
Guangzhou, the PRC for a period from January 1987 to January 2017, and
subject to certain conditions to be fulfilled, the operating period
may be extended for a further period of 20 years.
(c) During the year, the directors reviewed the carrying amounts of its
property, plant and equipment and identified that the value of
properties under construction was impaired and the value of certain
properties has increased. Accordingly, the carrying amounts of
properties under construction and properties were stated to their
recoverable amounts, which were determined with reference to the
independent professional valuation on an open market value as at 31
December 2004.
- 31 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
15. PROPERTY, PLANT AND EQUIPMENT - continued
Details of property, plant and equipment which are stated at valuation at
the balance sheet date are as follows:
Leasehold
land and buildings
----------------------
2004 2003
------ ------
HK$'000 HK$'000
At valuation
- 31 July 1997 4,800 4,800
- 31 March 1998 2,200 2,200
------ ------
7,000 7,000
Less: Accumulated depreciation, amortization and
impairment (4,628) (4,588)
------ ------
Net book value 2,372 2,412
====== ======
The valuations at 31 July 1997 and 31 March 1998 represented the carrying
values (equivalent to their approximately fair value) of the leasehold land
and buildings at the time when they ceased to be classified as investment
properties. Had the leasehold properties been carried at their historical
cost less accumulated depreciation, amortization and impairment loss, the
carrying value of the leasehold properties would have been stated at
HK$2,372,000 (2003: HK$2,412,000).
The net book value of motor vehicles, and office equipment and machinery of
the Company held under finance leases at 31 December 2004 was HK$1,774,000
(2003: HK$nil).
The net book value of motor vehicles of the Company leased to outsiders to
earn rental income at 31 December 2004 was HK$890,000 (2003: HK$nil).
16. INVESTMENT PROPERTY
2004 2003
------ ------
HK$'000 HK$'000
At beginning of the year 1,400 1,230
Surplus on revaluation 2,000 170
------ ------
At end of the year 3,400 1,400
====== ======
The investment property of the Company is freehold and held outside Hong
Kong.
The investment property was revalued at 31 December 2004 by a firm of
independent professional property valuers on an open market value basis at
HK$3,400,000 (2003: HK$1,400,000). The valuation gave rise to a revaluation
increase of HK$2,000,000 (2003: HK$170,000), of which HK$nil (2003:
HK$7,000) and HK$2,000,000 (2003: HK$163,000) has been credited to the
income statement and the investment property revaluation reserve
respectively.
- 32 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
17. INTEREST IN ASSOCIATES
2004 2003
------ -------
HK$'000 HK$'000
Share of net assets 1,989 253,184
Impairment loss recognized - (31,717)
------ -------
1,989 221,467
====== =======
Particulars of the Company's associates as at 31 December 2004 are as
follows:
Issued and Proportion of
Place of paid up issued/registered
Form of incorporation share capital/ capital held
Name of associate business structure and operation registered capital by the Company Principal activities
----------------- ------------------ ------------- ------------------ ----------------- --------------------
'000 2004 2003
---- ----
Ananda Travel Service Limited liability Australia A$400 40% 40% Travel and related
(Aust.) Pty. Limited company services
Apex Quality Group Limited liability British Virgin HK$43,276 - 49.6% Investment holding
Limited ("Apex") company Islands/
Hong Kong
Cherry Development Limited liability Hong Kong HK$0.002 50% - Inactive
Limited company
CYTS Wing On Travel Limited liability Hong Kong HK$2,000 50% 50% In the process of
Service Company Limited company deregistration
Heilongjiang Ananda Sino-foreign PRC RMB283,140 - 50% Operation of a hotel
Entertainment Company equity joint and an entertainment
Limited venture resort complex and
("Heilongjiang Ananda") development of a
residential and
commercial complex
Siu Wah Investments Limited liability Hong Kong HK$0.002 50% - Inactive
Limited company
Wing On International Sino-foreign PRC RMB5,000 49% 49% Travel and related
Travel Service Ltd. equity joint services
Guangdong venture
Wing On JAS Nice Wing Limited liability Hong Kong HK$1,000 - 50% Liquidated
Limited company
Other than Ananda Travel Services (Aust.) Pty. Limited whose financial year
end date ends on 31 March, the financial year end date of all other
associates end on 31 December. The Company's share of their results and net
assets under the equity method is based on their financial statements made
to 31 December 2004.
In February 2004, a 50% associate of the Company acquired an interest in a
piece of land in Hong Kong for redevelopment purpose. Subsequently, the
Company entered into a sale and purchase agreement to dispose of the entire
interest of the aforesaid associate resulting and recognizing a profit of
HK$37,430,000.
- 33 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
17. INTEREST IN ASSOCIATES - continued
Included in the interest in associates at 31 December 2003 was the interest
in Apex which became a subsidiary of the Company during the year ended 31
December 2004 and Heilongjiang Ananda which was disposed of during the year
ended 31 December 2004 at a profit of HK$500,000. Extracts from the
financial statements prepared in accounting principles generally accepted
in Hong Kong of Apex for the period from 13 December 2003 (the date Apex
became an associate of the Company) to 31 December 2003 and Heilongjiang
Ananda for the year ended 31 December 2003 and the nine-month period ended
31 December 2002 are as follows:
Apex 2003
---- ----
HK$'000
FINANCIAL POSITION
Non-current assets 1,592,960
---------
Current assets 84,038
Current liabilities (143,811)
---------
Net current liabilities (59,773)
---------
Total assets less current liabilities 1,533,187
Non-current liabilities (1,018,106)
Minority interests (72,058)
---------
Net assets 443,023
=========
Share of net assets attributable to the Company 219,739
=========
RESULTS FOR THE PERIOD
Turnover 7,857
=========
Net loss for the period (12,985)
=========
Net loss for the period attributable to the Company (6,441)
=========
- 34 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
17. INTERESTS IN ASSOCIATES - continued
Heilongjiang Ananda 2003 2002
------------------- -------- -------
HK$'000 HK$'000
FINANCIAL POSITION
Non-current assets 876,215
--------
Current assets 32,119
Current liabilities (844,900)
--------
Net current liabilities (812,781)
--------
Net assets 63,434
========
Share of net assets attributable to the Company 31,717
Impairment loss recognized (31,717)
-------
-
========
RESULTS FOR THE YEAR/PERIOD
Turnover 53,388 56,223
======= =======
Net loss for the year/period (52,722) (60,430)
======= =======
Net loss for the year attributable to the Company (26,361) (30,215)
======= =======
In addition, included in the Company's share of results of associates for
2003 was its share of results of Rosedale Hotel Group Limited ("Rosedale").
The financial statements of Rosedale for the period from 1 January 2003 to
16 December 2003, the date of completion of disposal of Rosedale, prepared
in accounting principles generally accepted in Hong Kong, are as follows:
Rosedale 2003 2002
-------- -------- -------
HK$'000 HK$'000
RESULTS FOR THE PERIOD
Turnover 131,303 181,692
======== =======
Net loss for the period (165,871) (99,810)
======== =======
Net loss for the period attributable to the Company (81,774) (2,447)
======== =======
As Rosedale was disposed of in December 2003, no financial position as at
31 December 2003 was presented.
- 35 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
18. NEGATIVE GOODWILL ARISING FROM ACQUISITION OF AN ASSOCIATE
2004 2003
---- ----
HK$'000 HK$'000
NEGATIVE GOODWILL
Balance at beginning of the year - 59,043
Released on disposal - (59,043)
------ ------
Balance at end of the year - -
------ ------
REALIZATION
Balance at beginning of the year - 125
Released to the income statement during the year - 1,350
Released on disposal - (1,475)
------ ------
Balance at end of the year - -
------ ------
CARRYING AMOUNT
At end of the year - -
====== ======
Negative goodwill was recognized to the income statement over 40 years,
which was determined based on the remaining average useful life of
identifiable acquired depreciable assets.
19. OTHER LONG TERM INVESTMENT
Other long term investment represented the contribution paid to a joint
venture partner in 2001 for a joint development of a piece of land in
Chengdu, the PRC, into a tourist attraction. On 11 December 2002, the
Company entered into an agreement with the joint venture partner to
withdraw from the project. Under the agreement, the joint venture partner
would transfer the titles of a total of approximately 3,000 square meters
of commercial areas and car parking spaces in a commercial building in
Chengdu, the PRC, to the Company. The transaction was cancelled and the
contribution paid was refunded during the year ended 31 December 2004.
20. LONG TERM INVESTMENT DEPOSITS
2004 2003
---- ----
HK$ HK$
Deposits for acquisition of investment (Note) - 60,000
Disposal - (60,000)
------ ------
- -
====== ======
-36-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
20. LONG TERM INVESTMENT DEPOSITS - continued
Note: The amount represented the deposits paid for acquisition of 100%
interest in a co-operative joint venture which will develop and
operate a hotel in Guangdong, the PRC. During the year ended 31
December 2003, the Company entered into an agreement to dispose
of two-third of its rights to the intended interests in the
co-operative joint venture for HK$40,000,000 but the completion
thereof had not yet taken place. After the aforesaid agreement,
the directors considered it was not viable to carry out the
investment to avoid further substantial commitments. The Company
then entered into another agreement with the aforesaid purchaser
to dispose of the remaining rights and entire commitments of the
Company in the said co-operative joint venture (which together
with the aforesaid partial interest disposed of constitute the
Company's entire interests in the co-operative joint venture in
the acquisition agreement) to the purchaser at a nominal
consideration. The loss arising therefrom was disclosed as loss
on disposal of interest in a co-operative joint venture for the
year ended 31 December 2003.
21. INVESTMENTS IN SECURITIES
Investment securities Other investments Total
--------------------- -------------------- --------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
Equity securities
Unlisted shares, at cost 126,422 126,232 - - 126,422 126,232
Listed shares in Hong Kong - - 2,778 2,847 2,778 2,847
------- ------- ----- ----- ------- -------
126,422 126,232 2,778 2,847 129,200 129,079
Less: Impairment losses recognized (32,633) (26,974) - - (32,633) (26,974)
------- ------- ----- ----- ------- -------
93,789 99,258 2,778 2,847 96,567 102,105
======= ======= ===== ===== ======= =======
Market value of listed shares - - 2,778 2,847 2,778 2,847
======= ======= ===== ===== ======= =======
Carrying amount analyzed for
reporting purposes as:
Non-current 93,789 99,258 - - 93,789 99,258
Current - - 2,778 2,847 2,778 2,847
------- ------- ----- ----- ------- -------
93,789 99,258 2,778 2,847 96,567 102,105
======= ======= ===== ===== ======= =======
Particulars of the Company's major investment securities as at 31 December
2004 are as follows:
Issued Proportion of
Place of and paid up issued/registered Interest
incorporation share capital/ capital held attributable
Name of company and operation registered capital by the subsidiaries to the Company Principal activities
--------------- ------------- ------------------ ------------------- --------------- --------------------
'000 2004 2003 2004 2003
---- ---- ---- ----
Guilin Osmanthus Hotel PRC US$3,489 49.5% 49.5% 49.5% 49.5% Operation of a hotel
Note (a)
Guangxi Guijia Property PRC US$8,021 26% 26% 18.2% 18.2% Property holding and
Management Company Note (b) operation of leisure
Limited services
-37-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
21. INVESTMENTS IN SECURITIES - continued
Notes:
(a) Though the Company holds a 49.5% interest in Guilin Osmanthus Hotel,
the directors considered that the Company cannot exercise influence on
the financial and operating policies of the investee company.
Accordingly, Guilin Osmanthus Hotel is classified as investment in
securities. At 31 December 2003, the directors reviewed the carrying
amounts of investments in securities and considered that it is
unlikely to recover the interest in Guilin Osmanthus Hotel and the
present value of the estimated future cash flows expected to arise
from the investment is minimal. Accordingly, an impairment loss of
HK$26,974,000 was recognized in the financial statements to write down
the carrying amount of the investment.
(b) Though the Company holds a 26% interest in this investee company, the
directors considered that the Company cannot exercise significant
influence on the financial and operating policies of the investee
company and accordingly, it is classified as an investment in
securities. At 31 December 2004, the directors reviewed the carrying
amount of this investment and considered that it is unlikely to
recover the full amount of the interest in this investment and
accordingly an impairment loss of HK$5,659,000 was recognized in the
financial statements to write down the carrying amount of the
investment to its recoverable amount.
22. GOODWILL
2004 2003
---- ----
HK$'000 HK$'000
COST
At beginning of the year - 13,232
Arising from acquisition during the year (Note 42 (b)) 50,215 -
Eliminated on disposal of a subsidiary - (13,232)
------ ------
At end of the year 50,215 -
------ ------
AMORTIZATION AND IMPAIRMENT
At beginning of the year - 165
Charge for the year - 496
Eliminated on disposal of a subsidiary - (661)
------ ------
At end of the year - -
------ ------
CARRYING AMOUNT
At end of the year 50,215 -
====== ======
The amortization period adopted for the goodwill is 20 years.
No amortization is provided for the goodwill arising during the year as the
acquisition was completed in December 2004. The directors considered that
the amount involved was insignificant.
-38-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
23. NEGATIVE GOODWILL
2004 2003
---- ----
HK$'000 HK$'000
GROSS AMOUNT
Arising on acquisition of Apex during the year (Note 42(a)) 74,514 -
RELEASE TO INCOME
Released during the year (1,863) -
------ -----
CARRYING AMOUNT
At end of the year 72,651 -
====== =====
The negative goodwill arose on the Company's acquisition of Apex in January
2004. The negative goodwill is released to income on a straight line basis
of 40 years, the remaining weighted average useful life of the depreciable
assets acquired.
24. INVESTMENT DEPOSITS
2004 2003
---- ----
HK$'000 HK$'000
Deposits for the acquisition of 100% interests in companies
holding land use rights in the PRC (Note a) 150,000 -
Deposits for the acquisition of a hotel booking business (Note b) 50,945 -
Deposits for the acquisition of interest in a hotel (Note c) 20,750 -
------- ------
221,695 -
======= ======
Notes:
(a) The amount represents deposits paid for the acquisition of 100% equity
interests in certain companies holding land use rights in the PRC for
various development projects, with the objective of developing hotel,
shopping malls, recreational and other tourists related amenities
respectively. The aggregate consideration for the purchase will amount
to HK$180,000,000. The transactions have not been completed as at the
date of this report.
(b) The amount represents the deposits paid for the acquisition of 51%
interest in an enterprise established in the PRC engaging in full
scale on-line and off-line hotel booking services for a consideration
of approximately HK$51,500,000. The transaction has not been completed
as at the date of this report.
(c) The amount represents the deposits paid for the acquisition of
approximately 34.24% attributable interest in a hotel in Macau
("Kingsway Hotel") for a total consideration to be paid of
HK$157,504,000 in accordance with the acquisition agreement dated 20
November 2004. Details of the acquisition are set out in the Company's
circular dated 16 December 2004. As mentioned in notes 52(d), the
terms of acquisition was subsequently changed and the transaction was
completed on 17 February 2005.
-39-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
25. INVENTORIES
The inventories were carried at cost and represent principally food,
beverages and general stores which are to be utilized in the ordinary
course of operations.
26. AMOUNTS DUE FROM RELATED COMPANIES
The balances represent the aggregate amounts due from related parties.
Certain directors of the Company are also directors of and/or have
beneficial interests in these companies. The amounts are unsecured and
interest free. The balances were principally trading balances.
The aged analysis of amounts due from related companies at the reporting
dates is as follows:
2004 2003
---- ----
HK$'000 HK$'000
0 - 30 days 661 -
31 - 60 days 47 4
61 - 90 days 462 -
Over 90 days 5,352 2,924
------ ------
6,522 2,928
====== ======
27. AMOUNTS DUE FROM (TO) ASSOCIATES
The amounts due from (to) associates are unsecured, interest free and have
no fixed terms of repayment.
28. TRADE AND OTHER RECEIVABLES
2004 2003
---- ----
HK$'000 HK$'000
Trade receivables 13,538 7,029
Advance cost to tour operators 136,996 276,522
Deposits and prepayments 93,845 17,080
Interest receivable 3,716 1,384
Other receivables 28,405 48,823
------- -------
276,500 350,838
======= =======
-40-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
28. TRADE AND OTHER RECEIVABLES - continued
The aged analysis of the trade receivables at the reporting dates is as
follows:
2004 2003
---- ----
HK$'000 HK$'000
0 - 30 days 7,446 2,617
31 - 60 days 2,869 1,573
61 - 90 days 1,414 815
Over 90 days 1,809 2,024
------ ------
13,538 7,029
====== ======
The Company allows an average credit period of 60 days to local customers
and 90 days to overseas customers.
29. LOAN RECEIVABLES
2004 2003
---- ----
HK$'000 HK$'000
Loan to certain companies and individuals (Notes a and b) 108,000 31,950
Loan to land operator (Note c) 23,000 23,000
------- ------
131,000 54,950
======= ======
Notes:
(a) (i) Included in the amount at 31 December 2004 was HK$40,000,000
relating to the consideration receivable on disposal of an
interest in a co-operative joint-venture in 2003 (note 20). The
purchaser entered into an agreement on 31 December 2004 with the
Company, under which the Company grants loan facility to the
extent of HK$40,000,000 to the purchaser. The loan is repayable
on demand, carries interest at prime rate and is secured on
equity interest in an enterprise established in the PRC.
(ii) Included in the balances was approximately HK$5,074,000 (2003:
HK$nil) due from a related company. Certain directors of the
Company have beneficial interests in and/or are also directors of
the related company.
(b) The amounts are unsecured, carrying interest at market rates and
repayable within one year.
(c) The loan to land operator represents an advance made to one of the
Company's land operators for the designated purpose of purchase of
coaches. The amount is secured, bears interest at 10% per annum on the
principal amount over a period of thirty months and should be
repayable by thirty equal monthly instalments commencing August 2000.
Pursuant to the subsequent supplemental agreements thereafter, the
repayment date of the loan was extended to 31 December 2005.
-41-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
30. TRADING CASH BALANCES
The amounts represent foreign currencies held for money exchange purposes.
31. TRADE AND OTHER PAYABLES
2004 2003
---- ----
HK$'000 HK$'000
Trade payables 113,844 77,121
Amounts payable for acquisition of investments - 43,000
Accrued liabilities 63,632 40,160
Other payables 27,453 20,497
Receipt in advance 29,512 58,413
------- -------
234,441 239,191
======= =======
The aged analysis of the trade payables at the reporting dates is as
follows:
2004 2003
---- ----
HK$'000 HK$'000
0 - 30 days 60,876 44,715
31 - 60 days 22,542 15,687
61 - 90 days 16,316 9,593
Over 90 days 14,110 7,126
------ ------
113,844 77,121
======= ======
32. LOANS FROM RELATED COMPANIES
Certain directors of the Company are also directors of and/or have
beneficial interests in those companies. The loans are unsecured, bear
interest at market rates and with the terms of repayment as follows:
2004 2003
---- ----
HK$'000 HK$'000
Amounts repayable within 1 year 260,778 8,000
Amounts repayable after 1 year but within 2 years 112,098 223,312
------- -------
372,876 231,312
======= =======
33. AMOUNTS DUE TO RELATED COMPANIES
The balances represent principally trading balances including trade
payables and loan interest payable, which are unsecured, interest free and
repayable on demand.
-42-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
34. OBLIGATIONS UNDER FINANCE LEASES
Present value
Minimum of minimum
lease payments lease payments
--------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
HK$'000 HK$'000 HK$'000 HK$'000
Amounts payable under finance leases:
Within one year 395 - 378 -
Between one to two years 106 - 93 -
----- ----- ----- -----
501 - 471 -
Less: Future finance charges (30) - - -
----- ----- ----- -----
Present value of lease obligations 471 - 471 -
===== =====
Less: Amount due within one year
shown under current liabilities (378) -
----- -----
Amount due after one year 93 -
===== =====
The Company entered into finance leases to acquire certain of its property,
plant and equipment. The terms of the finance leases ranged from 2 to 4
years and the average effective borrowing rate was 6% (2003: 8.5%) per
annum. Interest rate was fixed at the contract date. The leases were on a
fixed repayment basis and no arrangement was entered into for contingent
rental payments. The Company's obligations under the finance leases were
secured by the lessors' charge over the leased assets.
35. BORROWINGS
2004 2003
---- ----
HK$'000 HK$'000
Bank loans 329,091 921
Bank overdrafts 28,181 -
Other loans 189 33,560
------- ------
357,461 34,481
Less: Amount due within one year
shown under current liabilities (57,066) (28,230)
------- ------
Amount due after one year 300,395 6,251
======= ======
Secured 327,287 921
Unsecured (Note) 30,174 33,560
------- ------
357,461 34,481
======= ======
Borrowings are repayable as follows:
Within one year or on demand 57,066 28,230
Between one to two years 30,020 6,251
Between two to five years 270,375 -
------- ------
357,461 34,481
======= ======
-43-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
35. BORROWINGS - continued
Note: At 31 December 2003, included in unsecured other loans of the Company
were HK$15,000,000 which were secured on assets provided by a related
company (Note 53(g)).
Interest rates for bank loans and overdraft are generally based on the
banks' usual lending rates in Hong Kong. Other loans amounting to HK$nil
(2003: HK$15,000,000) carry a fixed interest rate of 12% per annum and the
remainder carries interest at prime interest rate per annum.
36. CONVERTIBLE NOTES
2004 2003
---- ----
HK$'000 HK$'000
Convertible notes 260,000 254,125
Less: Conversion into shares (205,000) -
------- -------
55,000 254,125
Less: Amount repayable within one year classified
under current liabilities - (254,125)
------- -------
55,000 -
======= =======
During the year, the Company issued new convertible notes amounting to
HK$260,000,000 to finance the redemption of the convertible notes amounting
to HK$254,125,000 issued in 2002 and due in 2004. All the 2002 convertible
notes were redeemed or cancelled by the replacement of the 2004 convertible
notes. The new convertible notes carry interest at 2% per annum and are
repayable on 14 June 2007. The holders of the new convertible notes were
initially entitled to convert on any business day the convertible notes
into new shares of the Company at any time from the date of issue of the
new convertible notes, at an initial conversion price of HK$0.02 per share,
subject to adjustments.
During the year, HK$205,000,000 of the 2004 convertible notes were
converted into 10,250,000,000 new shares in the Company of HK$0.01 each.
Following the issue of shares in the Company pursuant to the placing and
subscription agreement dated 4 February 2005 (note 52(b)), the conversion
price of the convertible notes was adjusted to HK$0.0197 per share in
accordance with its terms and conditions. On 14 March 2005, the day
immediately preceding the effective date of the share consolidation as
mentioned under note 52(c), the conversion price was adjusted to HK$1.97
per new consolidated share.
If and whenever the average closing price per share of the Company for 20
consecutive trading days immediately preceding the first or second
anniversary of the date of issue of the convertible notes is lower than the
then prevailing conversion price, such conversion price shall be
immediately adjusted to such average closing price, provided that such
average closing price shall not fall below HK$1.50. Upon full conversion of
the new convertible notes at 31 December 2004 at HK$1.97 per new
consolidated share, a total of 27,918,781 new consolidated shares in the
Company of HK$1.00 each would be issued. Should the conversion price be
HK$1.50 per share as noted above, a total of 36,666,666 new consolidated
shares in the Company of HK$1.00 each would be issued.
-44-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
36. CONVERTIBLE NOTES - continued
The conversion price of the convertible notes may be adjusted from
time to time in accordance with the following relevant provisions:
(a) If and whenever the Company will issue (other than in lieu of a cash
dividend) any shares credited as fully paid by way of capitalization
of profits or reserves (including any share premium account or capital
redemption reserve fund),
(b) If and whenever the Company will make any capital distribution (except
where, and to the extent that, the conversion price is adjusted under
(a) above) to holders (in their capacity as such) of shares (whether
on a reduction of capital or otherwise) or will grant to such holders
rights to acquire for cash assets of the Company or any of its
subsidiaries.
(c) If and whenever the Company will offer to holders of shares new shares
for subscription by way of rights, or will grant to holders of shares
any options, warrants or other rights to subscribe for or purchase any
shares.
(d) (i) If and whenever the Company will issue wholly for cash any
securities which by their terms are convertible into or
exchangeable for or carry rights of subscription for new shares,
and the total effective consideration per share initially
receivable for such securities is less than the greater of either
the closing price per share at the date of the announcement of
the terms of issue of such securities or the conversion price in
effect immediately prior to the date of the announcement of the
terms of issue of such securities.
(ii) If and whenever the rights of conversion or exchange or
subscription attached to any such securities as are mentioned in
(d) (i) are modified so that the total effective consideration
per share initially receivable for such securities will be less
than the greater of either the closing price per share at the
date of announcement of the proposal to modify such rights of
conversion or exchange or subscription or the conversion price in
effect immediately prior to the date of announcement of the
proposal to modify such rights of conversion or exchange or
subscription.
(e) If and whenever the Company will issue shares for the acquisition of
assets at a total effective consideration per share which is less than
the greater of either the closing price per share at the date of the
announcement of the terms of such issue or the conversion price in
effect immediately prior to the date of the announcement of the terms
of such issue.
-45-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
37. PROMISSORY NOTE
The promissory note was issued during the year ended 31 December 2002 by a
subsidiary of Apex (note 42(a)) to Hutchison Hotels Holdings
(International) Limited as partial consideration for the acquisition of the
entire share capital of, and shareholders' loan to, Makerston Limited
("Makerston"), which holds indirectly a 95% interest in a group company
holding a hotel property in Beijing. The promissory note is interest
bearing at Hong Kong Inter-Bank Offered Rate plus 2%, repayable on 1
December 2007 and secured by the entire issued share capital of, and
shareholders' loan to, Makerston and its subsidiaries holding the aforesaid
hotel property.
38. DEFERRED TAXATION
The following are the major deferred tax liabilities and assets recognized
and movement thereon during the current and prior accounting periods:
Accelerated
tax Tax Hotel
depreciation losses properties Others Total
------------ ------ ---------- ------ -----
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
At 1 January 2003 13,062 (5,012) - - 8,050
Credit to income for the year (106) (2,133) - (234) (2,473)
Effect of change in tax rate
- charge (credit) to income
for the year 1,225 (470) - - 755
Released on disposal of
subsidiaries (14,181) 7,615 - 234 (6,332)
------- ----- ------- ----- -------
At 31 December 2003 and
1 January 2004 - - - - -
Acquisition of subsidiaries
(note 42(a)) - - 243,354 - 243,354
------- ----- ------- ----- -------
At 31 December 2004 - - 243,354 - 243,354
======= ===== ======= ===== =======
For the purpose of the balance sheet presentation, the above deferred tax
assets and liabilities were offset.
At 31 December 2004, the Company has unused tax losses of HK$947,791,000
(2003: HK$555,159,000) available for offset against future profits. No
deferred tax asset has been recognized in respect of the tax losses due to
the unpredictability of future profit streams. Pursuant to the relevant
laws and regulations in the PRC, the unutilized tax losses of approximately
HK$65,000,000 (2003: HK$nil) can be carried for a period of five years. The
losses arising from overseas subsidiaries are insignificant, which will
expire after a specific period of time, other unrecognized tax losses may
be carried forward indefinitely.
-46-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
39. SHARE CAPITAL
Number of shares Amount
---------------- -------
HK$'000
Shares of HK$0.01 each
Authorized
At 1 January 2003, 31 December 2003,
1 January 2004 and 31 December 2004 50,000,000,000 500,000
============== =======
Issued and fully paid
At 1 January 2003, 31 December 2003 and
1 January 2004 18,316,732,770 183,167
Conversion into shares from convertible notes (note 36) 10,250,000,000 102,500
Issue of shares (note) 3,660,000,000 36,600
-------------- -------
At 31 December 2004 32,226,732,770 322,267
============== =======
Note: On 30 November 2004, the Company entered into two placing and
subscription agreements with CEL, a subsidiary of China Strategic
Holdings Limited ("CSH") and a substantial shareholder of the Company,
and Deutsche Bank AG, Hong Kong Branch (the "Placing Agent") pursuant
to which the Placing Agent agreed to place 6,000 million shares of
HK$0.01 each in the Company then held by CEL at the price of HK$0.028
per share to independent investors and CEL would subscribe for up to
6,000 million new shares of HK$0.01 each in the Company at the same
price of HK$0.028 per share. The first placing and subscription
agreement and the second placing and subscription agreement related to
the placing and the conditional subscription of 3,660 million and
2,340 million shares of HK$0.01 each in the Company respectively. The
subscription of the shares under the second placing and subscription
agreement was conditional upon, among others, the approval of the
independent shareholders of the Company. The total proceeds from the
above two placing and subscription agreements will be used principally
towards payments of HK$107.5 million of the consideration for the
acquisition of interest in Kingsway Hotel and the balance of
approximately HK$53.1 million will be utilized as general working
capital of the Company. On 14 December 2004, 3,660 million of shares
were issued and allotted at the price of HK$0.028 per share in
accordance with the first placing and subscription agreement and the
proceeds, net of expense, amounted to approximately HK$98.6 million.
The new shares issued rank pari passu in all respects with the then
existing shares. The details of the second placement are set out in
note 52 to the financial statements.
-47-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
40. SHARE OPTION SCHEME
The Company has a share option scheme (the "Scheme"), which was approved
and adopted by shareholders of the Company on 3 May 2002, enabling the
directors to grant options to employees, executives or officers of the
Company or any of its subsidiaries (including executive and non-executive
directors of the Company or any of its subsidiaries) and any suppliers,
consultants, agents or advisers who will contribute or have contributed to
the Company or any of its subsidiaries as incentives and rewards for their
contribution to the Company or such subsidiaries. The maximum number of
shares in respect of which options may be granted under the Scheme, when
aggregated with any shares subject to any other schemes, shall not exceed
1,388,131,777 shares of HK$0.01 each in the Company before the
consolidation of shares, representing 10% of the issued share capital of
the Company on the date of approval and adoption of the Scheme.
Options granted must be accepted and paid for within 30 days of the date of
offer. The consideration payable for the option is HK$1. Options may be
exercised at any time from the date of acceptance of the share option to
such date as determined by the board of directors but in any event not
exceeding 10 years. The exercise price is determined by the directors of
the Company and will not be less than the higher of (i) the average closing
price of the shares for the five business days immediately preceding the
date of grant, (ii) the closing price of the shares on the date of grant or
(iii) the nominal value of the shares of the Company.
No share options have been granted under the Scheme since its adoption.
41. RESERVES
Investment
property
Share Special revaluation Translation Goodwill Statutory Accumulated
premium reserve reserve reserve reserve reserves losses Total
------- ------- ------- ------- ------- -------- ------ -----
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
At 1 April 2002 795,296 55,554 573 (262) (9,767) 150 (292,348) 549,196
Premium on issue of shares,
net of expenses
of HK$2,915,000 228,349 - - - - - - 228,349
Premium utilized on repurchase
of shares (4,039) - - - - - - (4,039)
Exchange difference arising on
translation of financial
statements of operations
outside Hong Kong - - - (322) - - - (322)
Share of reserve of an associate - - - (65) - - - (65)
Reserve released on disposal of
subsidiaries - - - 68 - - - 68
Reserve released on deemed
disposal of a subsidiary - - - 470 - - - 470
Net loss for the period - - - - - - (302,248) (302,248)
--------- ------ ----- ------ ------ ----- ------- -------
At 31 December 2002 and
1 January 2003 1,019,606 55,554 573 (111) (9,767) 150 (594,596) 471,409
Exchange difference arising
on translation of financial
statements of operations
outside Hong Kong - - - (286) - - - (286)
Surplus arising from revaluation
of investment property - - 163 - - - - 163
Share of reserve of an associate - - - 73 - - - 73
Transfer to investments in
securities on reclassification
of investments - - - - 9,767 - - 9,767
Net loss for the year - - - - - - (370,972) (370,972)
--------- ------ ----- ------ ------ ----- ------- -------
At 31 December 2003 and
1 January 2004 1,019,606 55,554 736 (324) - 150 (965,568) 110,154
Exchange difference arising on
translation of financial
statements of operations
outside Hong Kong - - - (757) - - - (757)
Conversion into shares from
convertible notes 102,500 - - - - - - 102,500
Issue of shares 65,880 - - - - - - 65,880
Share issue expenses (3,832) - - - - - - (3,832)
Surplus arising from revaluation
of investment property - - 2,000 - - - - 2,000
Realization on liquidation of a
subsidiary - - - (847) - - - (847)
Net profit for the year - - - - - - 35,377 35,377
--------- ------ ----- ------ ------ ----- ------- -------
At 31 December 2004 1,184,154 55,554 2,736 (1,928) - 150 (930,191) 310,475
========= ====== ===== ====== ====== ===== ======= =======
-48-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
41. RESERVES - continued
The special reserve represents the difference between the nominal value of
the shares of the acquired subsidiaries and the nominal value of the shares
of the Company issued for the acquisition under the Company reorganization
in September 1997.
The accumulated losses, translation reserve and statutory reserves of the
Company include losses of HK$1,739,000 (2003: HK$246,293,000), surplus of
HK$73,000 (2003: HK$73,000) and HK$150,000 (2003: HK$150,000) respectively
attributable to the associates of the Company.
In the opinion of the directors, the reserves of the Company which were
available for distribution to shareholders at 31 December 2004 were nil
(2003: nil).
42. ACQUISITION OF SUBSIDIARIES
(a) During the year, the Company acquired through a cash offer further
interest in its former associate, Apex. On 9 January 2004, Apex became
a subsidiary of the Company. The effect of the acquisition is
summarized as follows:
2004
----
HK$'000
Property, plant and equipment 1,683,105
Club debenture 713
Investments in securities 212
Properties held for sale 98
Inventories 5,394
Trade and other receivables 65,423
Bank balances and cash 22,258
Trade and other payables (104,544)
Amount due to the Company (9,425)
Obligations under a finance lease (1,467)
Bank and other borrowings (378,829)
Amounts due to related companies (81,654)
Promissory note (365,000)
Deferred taxation (243,354)
Minority interests (279,909)
---------
Net assets acquired 313,021
Less: Interest previously acquired and classified
as interest in an associate (218,360)
---------
94,661
Negative goodwill arising on acquisition (74,514)
---------
Cash consideration 20,147
=========
Net cash inflow arising on acquisition:
Cash consideration (20,147)
Bank balances and cash acquired 22,258
---------
2,111
=========
Apex contributed HK$190,034,000 to the Company's turnover and
HK$5,927,000 to the Company's profit before taxation for the
current year.
-49-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
42. ACQUISITION OF SUBSIDIARIES - continued
(b) In December 2004, the Company acquired 100% of the issued share
capital of International Travel Systems Inc. The effect of the
acquisition is summarized as follows:
2004
----
HK$'000
Net assets acquired:
Property, plant and equipment 89
Trade and other receivables 1,000
Bank balances and cash 502
Trade and other payables (1,806)
------
Net liabilities acquired (215)
Goodwill arising on acquisition 50,215
------
Cash consideration 50,000
======
Net cash outflow arising on acquisition:
Cash consideration (50,000)
Bank balances and cash acquired 502
------
(49,498)
======
The subsidiary acquired during the year ended 31 December 2004
contributed an insignificant amount to the Company's turnover and
profit before taxation for the current year.
(c) On 24 September 2003, the Company acquired 100% of the issued share
capital of Sinomatrix Limited by assets swap mentioned under note
45(d). Sinomatrix Limited, in turn, holds 70% interest in Silver Bay
Commodities Limited. The aggregate assets and liabilities are as
follows:
2003
----
HK$'000
Net assets acquired:
Investments in securities 99,258
Minority interests (29,778)
------
Net assets acquired 69,480
======
The subsidiaries acquired during the year ended 31 December 2003
contributed an insignificant amount to the Company's turnover and loss
from operations.
These acquisitions have been accounted for by the acquisition method of
accounting.
-50-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
43. DISPOSAL OF DISCONTINUED OPERATION
On 31 October 2003, the Company disposed of its subsidiary which carried
out the segment of transportation services. The net assets of Trans-Island
Group at the date of disposal and at 31 December 2002 were as follows:
2003 2002
---- ----
HK$'000 HK$'000
Net assets disposed of:
Property, plant and equipment 92,977 101,132
Inventories 56 57
Amounts due from group companies 8,775 17,698
Trade and other receivables 24,779 30,910
Tax recoverable - 727
Bank balances and cash 3,356 4,654
Trade and other payables (39,476) (26,524)
Tax payable (61) (61)
Bank borrowings (15,152) (27,400)
Obligations under finance leases (18,529) (22,486)
Deferred taxation (6,332) (8,050)
------ ------
50,393 70,657
Unamortized goodwill 12,571 13,067
------ ------
62,964 83,724
======
Cash consideration (36,131)
------
26,833
Commission and related expenses 5,864
------
Loss on disposal of discontinued operation 32,697
======
Net cash inflow arising from disposal:
Cash consideration 36,131
Less: Bank balances and cash disposed of (3,356)
Commission and related expenses (5,864)
------
26,911
======
The subsidiaries disposed of during the year ended 31 December 2003
contributed HK$124,329,000 to the Company's turnover and HK$22,004,000 to
the Company's loss before taxation for that year.
-51-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
44. DEEMED DISPOSAL/DISPOSAL OF SUBSIDIARIES
During the period from 1 April 2002 to 31 December 2002, several
subsidiaries of the Company were deemed disposed/disposed of. The aggregate
assets and liabilities of these subsidiaries at their respective dates of
disposal were as follows:
2002
----
HK$'000
Net assets disposed of:
Property, plant and equipment 517
Trade and other receivables 7,659
Amounts due from related companies 56
Tax recoverable 47
Bank balances and cash 1,448
Trade and other payables (5,733)
Tax payable (346)
Amounts due to related companies (15)
Obligations under finance leases (56)
Bank borrowings (792)
Deferred taxation (15)
------
2,770
Retained as investments in associates/ investments in securities
by the Company (1,596)
Reserves released on disposal of subsidiaries 538
------
1,712
Loss on deemed disposal/disposal of subsidiaries (1,712)
------
Consideration -
======
Satisfied by:
Cash consideration -
------
-
======
Analysis of net cash outflow of cash and cash equivalents in connection
with the deemed disposal/disposal of subsidiaries:
Cash consideration -
Bank balances and cash disposed of (1,448)
------
(1,448)
======
The subsidiaries disposed of during the period from 1 April 2002 to 31
December 2002 did not have any significant impact on the turnover,
operating results and cash flows of the Company.
-52-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
45. MAJOR NON-CASH TRANSACTIONS
(a) During the year, the Company issued convertible notes to finance the
redemption of the convertible notes issued in 2002 and due in 2004.
The total consideration of 2004 convertible notes of HK$260,000,000
was partly settled by the cancellation of 2002 convertible notes of
HK$189,800,000.
(b) During the year, the consideration receivable on disposal of interest
in a co-operative joint venture in 2003 of HK$40,000,000, which was
yet to be received as at 31 December 2003, was transferred to loan
receivable (note 29a(i)).
(c) During the year, the Company entered into finance lease arrangements
in respect of assets with a total capital value of HK$186,000
(1.1.2003 to 31.12.2003: HK$nil and 1.4.2002 to 31.12.2002:
HK$12,155,000) at the inception of the finance leases.
(d) During the year ended 31 December 2003, the Company disposed of the
amount receivable from the property purchaser together with interests
in other investments amounting to HK$77,200,000 and HK$22,913,000
(including HK$287,000 receivable from the investee companies)
respectively to exchange for a 70% interest in an investment company
which holds a 26% interest in a PRC joint venture engaged in property
holding and operation of leisure services. The acquired investee
company is classified as investment securities at a fair value of
HK$99,258,000 at the date of completion of the transaction.
(e) During the year ended 31 December 2003, the Company disposed of its
interests in Rosedale for a consideration of HK$88,000,000 of which
HK$68,000,000 was due for payment after 31 December 2003.
(f) During the nine-month period ended 31 December 2002, the Company
disposed of its interest in an investment holding company which holds
a right to acquire a 60% interest in Luogang Golden Golf Hotel Co.
Limited to Rosedale for a consideration of HK$110,000,000 satisfied by
366,666,666 new shares of Rosedale. Accordingly, the Company's
investment in associates amounting to HK$110,000,000 were transferred
from long term investment deposits which comprised of HK$24,400,000
brought forward, an amount of HK39,400,000 paid during the period and
the balance of HK$46,200,000 unpaid as at 31 December 2002.
(g) During the nine-month period ended 31 December 2002, the Company
acquired the remaining 25% interest in Trans-Island Group for
HK$40,000,000. At 31 December 2002, a balance of HK$30,000,000 was
outstanding.
46. ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS
2004 2003 2002
---- ---- ----
HK$'000 HK$'000 HK$'000
Bank balances and cash 134,317 111,709 61,510
Bank overdrafts (28,181) - (7,717)
------- ------- ------
106,136 111,709 53,793
======= ======= ======
-53-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
47. PLEDGE OF ASSETS
Save as otherwise disclosed, at 31 December 2004, the Company's credit
facilities were secured by the Company's assets as follows:
2004 2003
---- ----
HK$'000 HK$'000
Hotel property 641,569 -
Property interests 14,060 19,839
Bank balances 6,800 390
------- ------
662,429 20,229
======= ======
48. CONTINGENT LIABILITIES
2004 2003
---- ----
HK$'000 HK$'000
An undertaking to Apex to indemnify it against any
potential loss upon the transfer of the land use right
in relation to the disposal thereof - 37,347
Guarantee to the holder of the promissory note issued
by a subsidiary of Apex - 365,000
------ -------
- 402,347
====== =======
In addition, the Company also had contingent liabilities in respect of
liabilities arising from claims against Trans-Island Group in connection
with its businesses before the disposal. The directors consider that the
final outcomes of those claims will not be material and, accordingly, no
provision has been made in the financial statements.
49. OPERATING LEASE COMMITMENTS
As lessee
At 31 December 2004, the Company had commitments for future minimum lease
payments under non-cancellable operating leases which fall due as follows:
2004 2003
---- ----
HK$'000 HK$'000
Land and buildings
Within one year 9,690 13,752
In the second to fifth years inclusive 3,029 7,777
------ ------
12,719 21,529
====== ======
Equipment
Within one year 358 -
In the second to fifth years inclusive 1,254 -
------ ------
1,612 -
====== ======
Operating lease payments represent rentals payable by the Company for
certain of its office properties, shops and employees' quarters as well as
equipment. Leases are negotiated for an average term of two years.
-54-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
49. OPERATING LEASE COMMITMENTS - continued
As lessor
Property rental income earned during the year was HK$13,072,000 (1.1.2003
to 31.12.2003: HK$109,000 and 1.4.2002 to 31.12.2002: HK$82,000).
At the balance sheet date, the Company had contracted with tenants for the
following future minimum lease payments for its investment property and
premises within the hotel properties:
2004 2003
---- ----
HK$'000 HK$'000
Within one year 11,369 -
In the second to fifth years inclusive 33,577 -
------ -----
44,946 -
====== =====
50. CAPITAL COMMITMENTS
2004 2003
---- ----
HK$'000 HK$'000
Contracted for but not provided in the financial statements
in respect of investments 137,697 -
Contracted for but not provided in the financial statements
in respect of acquisition of property, plant and equipment 30,760 -
------- -----
168,457 -
======= =====
51. PROVIDENT FUND SCHEMES
The Company has retirement schemes covering a substantial portion of its
employees in Hong Kong. The principal schemes are defined contribution
schemes. The assets of these schemes are held separately from those of the
Company in funds under the control of independent trustees.
With effect from 1 December 2000, the Company joined a Mandatory Provident
Fund Scheme ("MPF Scheme") for all its new employees in Hong Kong employed
therefrom or existing employees wishing to join the MPF Scheme. The MPF
Scheme is registered with the Mandatory Provident Fund Scheme Authority
under the Mandatory Provident Fund Schemes Ordinance. The assets of the MPF
Scheme are held separately from those of the Company in funds under the
control of an independent trustee. Under the rules of the MPF Scheme, the
employer and its employees are required to make contributions to the MPF
Scheme at rates specified in the rules. The only obligation of the Company
in respect of MPF Scheme is to make the required contributions under the
MPF Scheme.
-55-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
51. PROVIDENT FUND SCHEMES - continued
The employees of the Company's subsidiaries in the PRC are members of the
state-managed retirement benefit scheme operated by the government of the
PRC. The subsidiaries are required to contribute certain percentage of
their payroll costs to the retirement benefit scheme to fund the benefits.
The only obligation of the Company with respect to the retirement benefit
scheme is to make the specified contributions.
The amounts charged to the income statement represent contributions payable
to schemes and the MPF Scheme by the Company at rates specified in the
rules of the schemes less forfeiture of HK$277,134 (1.1.2003 to 31.12.2003:
HK$1,003,589 and 1.4.2002 to 31.12.2002: HK$650,000) arising from employees
leaving the Company prior to completion of the qualifying service period,
if any.
At the balance sheet date, the total amount of forfeited contributions,
which arose upon employees leaving the retirement benefit schemes and which
are available to reduce the contributions payable in future years was
HK$65,025 (2003: HK$98,530).
52. POST BALANCE SHEET EVENTS
Subsequent to the balance sheet date, the following events have taken
place:
(a) On 31 January 2005, the Company issued and allotted 2,340 million of
new shares of HK$0.01 each in the Company at the price of HK$0.028 per
share under the second placing and subscription agreement as mentioned
under note 39 after the approval by the independent shareholders at
the special general meeting on 11 January 2005. The proceeds, net of
expense, amounted to approximately HK$61.8 million. The new shares
issued rank pari passu in all respects with the then existing shares.
(b) On 4 February 2005, the Company entered into a placing and
subscription agreement with CEL and Tai Fook Securities Company
Limited ("Tai Fook") pursuant to which Tai Fook agreed to place up to
6,400 million shares in the Company then held by CEL at the price of
HK$0.022 per share to independent investors and CEL would subscribe
for up to 6,400 million new shares of the Company at the same price of
HK$0.022 per share. The net proceeds from the placement amounted to
approximately HK$136.8 million, net of expenses. HK$50 million of the
net proceeds will be used for financing the refurbishment, renovation
and upgrading of Kingsway Hotel and the balance of approximately
HK$86.8 million will be used for future investment opportunities
relating to existing businesses. The subscription was completed on 18
February 2005. The new shares issued rank pari passu in all respects
with the then existing shares.
(c) On 4 February 2005, the directors proposed to the shareholders of the
Company for approval of the consolidation of every one hundred shares
of HK$0.01 each in the issued and unissued ordinary share capital of
the Company into one share of HK$1.00 each. The consolidation of
shares of the Company was approved by the shareholders of the Company
in the special general meeting on 14 March 2005. The number of issued
ordinary shares immediately after the consolidation of shares of the
Company was 409,667,327.
-56-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
52. POST BALANCE SHEET EVENTS - continued
(d) On 17 February 2005, the Company entered into a supplemental agreement
under which the Company acquired the attributable interest in Kingsway
Hotel from approximately 34.24% (note 24(c)) to 36.26% for a revised
consideration of HK$166,800,000. The transaction was completed on the
same date.
(e) On 17 May 2005, the directors proposed to the shareholders of the
Company for approval of the cancellation of share premium account (the
"Cancellation") pursuant to which the entire amount standing to the
credit of the share premium account of the Company will be cancelled
and the credit arising from the Cancellation will be transferred to
the contributed surplus account of the Company and such credit will be
partially used to set off against the accumulated losses of the
Company (the "Set Off"). The Cancellation and the Set Off were
approved by the shareholders of the Company in the special general
meeting on 5 July 2005.
In addition, the directors proposed to increase the authorized share
capital of the Company from HK$500,000,000 divided into 500,000,000
shares of HK$1 each to HK$1,500,000,000 divided into 1,500,000,000
shares of HK$1 each by creation of an additional 1,000,000,000 shares
of HK$1 each. The increase in the authorized share capital of the
Company was approved by the shareholders of the Company in the special
general meeting on 5 July 2005.
(f) On 13 July 2005, the Company entered into an agreement with an
independent third party under which the Company disposed of a 8.13%
interest in Triumph Up Investments Limited, a subsidiary holding the
equity interest in Kingsway Hotel, at a consideration of
HK$22,800,000. The transaction was completed on the same date.
-57-
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
53. RELATED PARTY TRANSACTIONS
(a) During the year/period, the Company had transactions with related
parties as follows:
1.1.2004 1.1.2003 1.4.2002
to to to
(I) Nature of transactions Notes Name of company 31.12.2004 31.12.2003 31.12.2002
---------------------- ----- --------------- ---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Property rental expenses paid and (i) Mass Success International
payable by the Company Limited 2,268 1,790 288
Cycle Company Limited and
Gunnell Properties Limited 2,266 1,630 -
------ ------ ------
4,534 3,420 288
====== ====== ======
Air ticketing and travel service (ii) Paul Y. - ITC Construction
income received and receivable Holdings Limited and its
by the Company subsidiaries 1,965 486 838
Hanny Holdings Limited
and its subsidiaries 1,240 666 1,056
Cheung Wah Ho Dyestuffs
Company Limited 233 17 -
China Strategic Holdings
Limited and its subsidiaries 174 213 248
ITC Corporation Limited
and its subsidiaries 153 266 460
PSC Corporation Limited 68 213 -
Cyber Business Network 3 - -
(Hong Kong) Limited
Pacific Century Premium
Developments Limited
(formerly known as
Dong Fang Gas Holdings
Limited) and its subsidiaries - 318 -
SMI Corporation Limited
(formerly known as
Star East Holdings Limited)
and its subsidiaries - 118 901
Mobile Media Management
Limited - 27 -
X-One Management Limited - 11 -
------ ------ ------
3,836 2,335 3,503
====== ====== ======
Interest on convertible notes (iii) Million Good Limited 2,177 1,696 1,345
====== ====== ======
Loan interest paid and payable (iv) Hanny Holdings Limited
by the Company and its subsidiaries 9,742 1,790 1,298
Million Good Limited 5,256 1,710 -
Nation Cheer Investment
Limited 2,051 385 -
China Strategic Holdings
Limited and its subsidiaries 1,465 2,229 891
------ ------ ------
18,514 6,114 2,189
====== ====== ======
Interest on loan receivables (v) Ruili Holdings Limited 76 - -
====== ====== ======
Net income on sales of computer (vi) Cyber Business Network
program source code (Hong Kong) Limited - 3,000 -
====== ====== ======
Website maintenance services (vii) Cyber Business Network
paid by the Company (Hong Kong) Limited 1,200 - -
====== ====== ======
- 58 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
53. RELATED PARTY TRANSACTIONS - continued
(a) During the year/period, the Company had transactions with related
parties as follows: - continued
Notes:
(i) The property rental expenses paid and payable by the Company
were transactions determined in accordance with the terms of
relevant agreements.
(ii) The above companies purchased air tickets and related services
from the Company at rates comparable to market rates.
(iii) The interest on convertible notes was calculated at the rate
specified in the convertible notes issued.
(iv) The interest paid and payable by the Company for loans from
these companies was calculated at rates comparable to market
rates.
(v) The interest on loan receivables was calculated at rates
comparable to market rates.
(vi) The above company purchased the computer source code from the
Company at a price with reference to the market rate.
(vii) The above company charged website maintenance service to the
Company at comparable market price.
Certain directors of the Company are also directors of and/or have
beneficial interests in those companies.
1.1.2004 1.1.2003 1.4.2002
to to to
(II) Nature of transactions Notes Name of company 31.12.2004 31.12.2003 31.12.2002
---------------------- ----- --------------- ---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Agency fees paid by the Company (i) Ananda Travel Service, Inc. - 60 111
HK Ananda Travel (Malaysia) - - 484
Ananda Travel Company
Limited ** - - 321
Ananda Travel Philippines, Inc. - - 103
------ ------ ------
- 60 1,019
====== ====== ======
Air ticketing and travel services (ii) Ananda Travel Service, Inc. - 7 64
income received by the Company HK Ananda Travel (Malaysia)
Sdn. Bhd. - - 14
------ ------ ------
- 7 78
====== ====== ======
Property rental expenses paid by (iii) Tower Property Limited
the Company - - 5,439
====== ====== ======
Printing expenses paid by the (iv) Ananda Public Relations
Company & Advertising Limited - - 1,013
====== ====== ======
** Being English translation of legal Chinese name as the
company does not have any legal English name.
- 59 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
53. RELATED PARTY TRANSACTIONS - continued
(a) During the year/period, the Company had transactions with related
parties as follows: - continued
Notes:
(i) During the year ended 31 December 2003 and the nine-month
period ended 31 December 2002, the above company acted as the
Company's land operators in the jurisdiction in which it is
located. Agency fees were calculated in accordance with the
agency agreement entered into between the Company and the
above related company on 20 September 1997.
(ii) During the year ended 31 December 2003 and the nine-month
period ended 31 December 2002, the above company purchased air
tickets and other travel related services from the Company at
rates comparable to market rates.
(iii) The Company continued to occupy office premises owned by Tower
Property Limited until December 2002. The rentals were
calculated on the basis of an amount determined by reference
to the floor area of the relevant property, and comparable
rent paid for similar properties by tenants occupying such
premises.
(iv) During the period ended 31 December 2002, Ananda Public
Relations & Advertising Limited provided printing services for
the Company's promotional materials at prices comparable to
market rates.
The Company paid an annual fee of HK$nil (1.1.2003 to 31.12.2003:
HK$10 and 1.4.2002 to 31.12.2002: HK$10) to Ananda Holdings Limited
for a non-exclusive licence to the Company to use the "Ananda"
trademark.
The Company accrued no fee (1.4.2002 to 31.12.2002: HK$9,000)
payable to each of Ananda Development Limited and Ananda Holdings
Limited for the Company to use the address of certain premises in
Guangzhou and Hong Kong as the correspondence address of the
Company's representative office in Guangzhou and the Company's head
office and principal place of business respectively.
Mr. Chan Yeuk Wai has controlling interests in the above companies,
except for Ananda Travel Philippines, Inc., Ananda Travel Service,
Inc., Ananda Travel Company Limited and HK Ananda Travel (Malaysia)
Sdn. Bhd., companies in which they have minority interests.
(b) During the year, the Company received loans from related companies.
Details of their relationship and the terms of the loans are set out
in note 32.
(c) The Company maintained current accounts with related companies and
associates. Their balances as at 31 December 2004 are set out in notes
26, 27 and 33.
Certain directors of the Company are also directors of and/or have
beneficial interests in those companies.
- 60 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
53. RELATED PARTY TRANSACTIONS - continued
(d) During the year, the Company made loans to a related company. Details
of its relationship and the terms of the loan are set out in note
29a(ii).
(e) During the year, the Company issued convertible notes amounting to
HK$155,000,000 to a related company. Details of the convertible notes
are set out in note 36. As at the balance sheet date, the related
company holds the convertible notes amounting to HK$55,000,000.
Certain directors of the Company are also directors of and/or have
beneficial interests in that related company.
(f) During the year/period, the Company received commission and hotel
management fee of HK$3,628,000 (1.1.2003 to 31.12.2003: HK$nil and
1.4.2002 to 31.12.2002: HK$1,075,000) from Heilongjiang Ananda in
accordance with the hotel management contract entered with
Heilongjiang Ananda.
(g) During the year ended 31 December 2003, a subsidiary of an indirect
substantial shareholder pledged certain of its investments listed in
Hong Kong with a lender to secure its loans to the Company. No
commission or charges were paid to the subsidiary of the indirect
substantial shareholder by the Company in respect of the security
provided.
(h) During the year ended 31 December 2003, the Company executed a
guarantee in favour of the holder of the promissory note issued by a
subsidiary of Apex as security to secure the note to the extent of
HK$365 million together with interest. No commission or charges were
received from the Apex Company in respect of the guarantee.
(i) During the year ended 31 December 2003, two directors including a
former executive director of the Company executed personal guarantees
to a bank and a securities company to secure their loans granted to
the Company. No commission or charges were paid to the directors by
the Company in respect of the above guarantees.
(j) On 22 July 2002, the Company together with other parties entered into
a series of agreements with Rosedale. One of them included disposing
of its interest in an investment company (the "Investment Company")
holding a right to acquire a 60% interest in Luoyang Golden Gulf Hotel
Co., Limited whose principal asset is the Golden Gulf Hotel in
Luoyang, the PRC, for a consideration of HK$110,000,000 which was
satisfied by 366,666,666 new shares of Rosedale.
The Company, in relation to the disposal of the interest in the
Investment Company holding Luoyang Golden Gulf Hotel Co., Limited gave
an undertaking to Rosedale to indemnify it against any potential loss
they may suffer as a result of failure to transfer the land use right
including the payment of any land premium payable for such transfer.
It is estimated that the land premium for such transfer would be
approximately RMB39.7 million (equivalent to approximately
HK$37,347,000).
In addition to the above 366,666,666 new shares in Rosedale, the
Company also subscribed for 1,000,000,000 shares in Rosedale at a
price of HK$0.30 per share amounting in aggregate to a total
consideration of HK$300,000,000. The transaction was also approved by
the independent shareholders of the Company at the special general
meeting held on 28 October 2002.
- 61 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
54. PRINCIPAL SUBSIDIARIES
Details of the Company's principal subsidiaries as at 31 December 2004 are
as follows:
Proportion of
Issued and nominal value of
Place of paid up issued share capital/
incorporation/ share capital/ registered capital Principal activities
Name of company registration registered capital held by Company and place of operation
--------------- ------------- ------------------ --------------------- ----------------------
Directly Indirectly
% %
Allied Glory Investment Hong Kong HK$2 - 55.7 Investment holding in Hong Kong
Limited
Ananda Travel (Canada) Canada C$15,000 - 100 Travel and related services in
Limited Canada
Apex Quality Group British Virgin US$5,548,172 - 67.9 Investment holding in Hong Kong
Limited Islands
Asian Pearl Investments British Virgin US$1 - 100 Investment holding in the PRC
Limited Islands
Benchmark Pacific Limited British Virgin US$1 - 100 Investment holding in Hong Kong
Islands
China-HK International Hong Kong HK$2 - 67.9 Financial services in Hong Kong
Finance Limited
Clever Basin Holdings Limited British Virgin US$1 - 67.9 Investment holding in Hong Kong
Islands
Credit Paradise Limited Hong Kong HK$2 - 100 Property investment in Malaysia
DS Eastin Limited Hong Kong HK$20 - 67.9 Investment holding in Hong Kong
Golden Sun Limited Hong Kong HK$2 - 100 Investment holding in Hong Kong
Hey Wealth Limited Hong Kong HK$2 - 67.9 Property holding in Hong Kong
HKWOT (BVI) Limited British Virgin US$1 100 - Investment holding in Hong Kong
Islands
HMH China Investments Bermuda CAD$1,152,913 - 55.7 Investment holding in Canada
Limited
Hong Kong Wing On Travel Hong Kong Ordinary - - 100 Outbound travel and related
Service Limited HK$180,000,100 services in Hong Kong
Deferred -
HK$20,000,000*
Kingsgrove International Hong Kong HK$2 - 100 Property investment in Hong Kong
Limited
Lucky Million Investments British Virgin US$1 - 67.9 Investment holding in Hong Kong
Limited Islands
Luoyang Golden Gulf Hotel PRC # RMB145,000,000 - 40.8 Hotel ownership and operation in
Co., Ltd. the PRC
Makerston Limited British Virgin US$1 - 67.9 Investment holding in Hong Kong
Islands
Many Good Money Exchange Hong Kong HK$100,000 - 100 Money exchange services in
Limited Hong Kong
Mexmara Holdings Limited British Virgin US$1 - 100 Property investment in Hong Kong
Islands
- 62 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
54. PRINCIPAL SUBSIDIARIES - continued
Proportion of
Issued and nominal value of
Place of paid up issued share capital/
incorporation/ share capital/ registered capital Principal activities
Name of company registration registered capital held by Company and place of operation
--------------- ------------- ------------------ --------------------- ----------------------
Directly Indirectly
% %
Millennium Target Holdings British Virgin US$1 - 100 Investment holding in Hong Kong
Limited Islands
Ming Hung (Holdings) Limited Hong Kong HK$1,591,158,590 - 67.9 Investment holding in Hong Kong
Multi-Million Assets Limited British Virgin US$1 - 55.7 Investment holding in Hong Kong
Islands
Rosedale Hotel Beijing PRC # US$17,200,000 - 64.5 Hotel ownership and operation in
Co., Ltd the PRC
Rosedale Hotel Group Limited British Virgin US$1 - 67.9 Investment holding in Hong Kong
Islands
Rosedale Hotel Guangzhou PRC ## US$11,500,000 - 55 Hotel operation in the PRC
Co., Ltd.
("Rosedale Guangzhou")
Rosedale Hotel Management Hong Kong HK$2 - 67.9 Hotel management in Hong Kong
Limited
Rosedale Hotel Management British Virgin US$1 - 67.9 Hotel management in areas
International Limited Islands other than Hong Kong
Rosedale Park Limited Hong Kong HK$2 - 67.9 Hotel operation in Hong Kong
South Africa Express Limited British Virgin US$1 - 100 Overseas travel services
Islands
Success Fund Industrial Hong Kong HK$100 - 100 Property investment in the PRC
Limited
Super Grade Investment British Virgin US$1 - 100 Property investment in
Limited Islands Hong Kong
Watertours of Hong Kong Hong Kong Ordinary - - 100 Watertour services in Hong Kong
Limited HK$1,500,000
"B" - HK$100*
Wing On Holidays (Macau) Macau MOP1,000,000 - 100 Travel and related services in
Limited Macau
(Formerly known as
"Ananda Travel, Limited")
Wing On Hotel Management British Virgin US$4 - 100 Hotel management services in the
Limited Islands PRC
Wing On Travel and Tour Hong Kong HK$2,000,000 - 100 Inbound travel and related services
Limited in Hong Kong
Wing on Travel Finance Limited Hong Kong HK$2 - 100 Money lending in Hong Kong
(Formerly known as Asian
Universe Limited)
Wing On Travel International British Virgin US$1 100 - Investment holding in Hong Kong
Limited Islands
Wing On Travel (BVI) Limited British Virgin US$10,000 - 100 Investment holding in Hong Kong
Islands
Wing On Travel (U.K.) Limited United Kingdom Pound Sterling 2 - 100 Travel and related services in U.K.
(Formerly known as "Ananda
Travel (U.K.) Limited")
Yechain Development Limited Hong Kong HK$2 - 67.9 Property investment in Hong Kong
* The deferred shares and "B" shares are owned by the Company,
practically carry no rights to dividends or to receive notice of or to
attend or vote at any general meeting of the respective companies or
to participate in any distribution in winding up.
# The subsidiaries are PRC Sino-foreign equity joint ventures.
## This subsidiary is a PRC Sino-foreign co-operative joint venture.
Allied Glory Investment Limited ("Allied Glory"), a subsidiary of the
Company, is entitled to recoup its total investment (including
capital and interest) from the after-tax earnings of Rosedale
Guangzhou before any amount are distributed. Thereafter, the after-tax
earnings of Rosedale Guangzhou are to be distributed at 80% and 20% to
Allied Glory and other joint venture partner respectively.
The above table lists the subsidiaries of the Company which, in the opinion
of the directors, principally affected the results or assets and
liabilities of the Company. To give details of other subsidiaries would, in
the opinion of the directors, result in particulars of excessive length.
Save as disclosed, no debt securities have been issued by any of the
subsidiaries during the year.
- 63 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
55. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP")
The consolidated financial statements are prepared in accordance with HK
GAAP, which differ in certain significant respects from US GAAP. The cash
flow statement used in the primary financial statements complies with
International Accounting Standards No. 7.
The significant differences between HK GAAP and US GAAP as they relate to
the Company are principally attributable to the accounting for the goodwill
and negative goodwill arising on acquisition, convertible notes with
beneficial conversion features, valuation of hotel and investment
properties and reversal of impairment losses.
Under HK GAAP, the excess of purchase consideration paid over the fair
value of the net assets acquired before 1 January 2005 is recorded as
goodwill and is being amortized on a straight line basis over its useful
economic life. Under US GAAP, intangible assets, including goodwill, with
indefinite useful lives are not amortized but instead tested for impairment
at least annually in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible
Assets".
Under HK GAAP, the excess of the fair value of the net assets acquired over
the purchase consideration paid for the acquisition before 1 January 2005
is recorded as negative goodwill, which is presented as a deduction from
the assets of the Company in the consolidated balance sheet. The Company
releases the negative goodwill to the statement of income on a systematic
basis over the remaining weighted average useful life of the identifiable
acquired depreciable/amortizable assets. Under US GAAP, the excess of
assigned value of identifiable assets over the cost of an acquired company,
should be allocated on a pro rata basis to the fair values of all acquired
assets except financial assets other than investments accounted for by the
equity method, assets to be disposed of by sale, deferred tax assets,
prepaid assets relating to pension or other postretirement benefit plans,
and any other current assets.
Under HKGAAP, prior to the adoption of new Hong Kong Accounting Standards
on 1 January 2005, the Company does not separately account for
non-detachable conversion features embedded in convertible notes that are
in-the-money on the date of issuance (a "beneficial conversion feature").
Under US GAAP, the embedded beneficial conversion feature should be valued
separately upon issuance. The discount resulting from allocation of
proceeds to the beneficial conversion feature should be recognized as
interest expense over the maturity of the convertible notes. All of the
unamortized discount remaining at the date of conversion should be
immediately recognized as interest expense.
Under HK GAAP, in accordance with the Company's accounting policies,
revaluation of investment properties is performed annually, instead of
providing depreciation on the historical cost. The revalued amount becomes
the deemed cost base of the assets of the Company or its affiliates and no
depreciation is provided. Under US GAAP, financial statements are required
to be prepared on a historical cost basis. Accordingly, an adjustment is
provided so that the investment properties are stated at cost, less
accumulated depreciation.
- 64 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
55. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued
Under HK GAAP, hotel properties are stated at cost less accumulated
impairment loss. No depreciation or amortization is provided on the hotel
properties. Under US GAAP, hotel properties are stated at historical cost
less accumulated depreciation and impairment loss.
These differences in accounting for hotel properties and investment
properties under HK GAAP and US GAAP had a significant impact on the
Company's equity method affiliate's results of operations or financial
position for the year ended 31 December 2003. The equity method affiliate
became a subsidiary of the Company during the year and the adjustments
attributable to this equity method affiliate were reversed to the negative
goodwill arising on its acquisition which were then allocated on a pro rata
basis to the fair values of all acquired assets except financial assets
other than investments accounted for by the equity method, assets to be
disposed of by sale, deferred tax assets, prepaid assets relating to
pension or other post-retirement benefit plans, and any other current
assets.
Under HK GAAP, where an impairment loss subsequently reverses, the
carrying amount of the assets is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not
exceed the carrying amount that would have been determined had no
impairment loss been recognized for the asset in prior years. A reversal of
an impairment loss is recognized as income immediately, unless the relevant
asset is carried at a revalued amount, in which case the reversal of the
impairment loss is treated as a revaluation increase. Under US GAAP, any
reversal of impairment loss is prohibited, and as such, the effects of such
reversals are eliminated.
Under HK GAAP, prior to the adoption of new Hong Kong Financial Reporting
Standards on 1 January 2005, the Company does not make any accounting
entry on grant of share options to its employees and directors. Under US
GAAP, the Company accounts for its share option scheme under the
recognition and measurement provisions of Accounting Principles Board
Opinion No. 25 ("APB No. 25"),"Accounting for Stock Issued to Employees"
and related interpretations. Accordingly, the amount of compensation
expense is determined based on the intrinsic value, i.e. the excess, if
any, of the quoted market price of the shares over the exercise price of
the options at the date of grant and is amortized over the vesting period
of the related options. Since no options have been granted under the
Company's option plans, this difference in accounting under HK GAAP and US
GAAP has had no impact on the Company's results of operations or financial
position.
- 65 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
55. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued
The adjustments necessary to present net profit (loss) and shareholders'
equity in accordance with US GAAP, for the two years ended 31 December 2004
and 2003 and the nine-month period ended 31 December 2002, respectively,
are shown in the tables set out below.
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
Net profit (loss) as reported under HK GAAP 35,377 (370,972) (302,858)
US GAAP adjustments:
Interest expense attributable to amortization
of the beneficial conversion feature
embedded in the convertible notes (17,939) (64,828) (102,233)
Depreciation of hotel properties (38,332) - -
Minority interests' share of depreciation
of hotel properties 12,293 - -
Write-back of reversal of impairment loss in
respect of leasehold land and buildings (4,511) - -
Reversal of release of negative goodwill (1,863) - -
Reversal of amortization of goodwill - 496 165
Difference in amortization attributable to the
excess of fair value of net assets acquired
over the purchase consideration paid for
a business acquired - 568 49
Reversal of revaluation surplus of investment
property - (7) -
Additional loss on disposal of discontinued
operation - (661) -
Additional loss on disposal of an associate - (617) -
Net US GAAP adjustments attributable to
equity method affiliate - 7,712 -
------- ------- -------
Net loss under US GAAP (14,975) (428,309) (404,877)
======= ======= =======
Comprising:
Continuing operation (14,975) (408,519) (396,258)
Discontinued operation - (19,790) (8,619)
------- ------- -------
(14,975) (428,309) (404,877)
======= ======= =======
HK$ HK$ HK$
--------- --------- ---------
Loss per share under US GAAP - basic and
diluted
Continuing operation (0.07) (2.23) (2.40)
Discontinued operation - (0.11) (0.05)
------- ------- -------
(0.07) (2.34) (2.45)
======= ======= =======
In addition, interest income for the year ended 31 December 2004 of
HK$3,381,000 (1.1.2003 to 31.12. 2003: HK$1,150,000 and 1.4.2002 to
31.12.2002: HK$10,679,000) classified as a component of other operating
income for HK GAAP purposes is considered to be non-operating income for US
GAAP purposes.
- 66 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
55. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued
2004 2003
------- -------
HK$'000 HK$'000
Shareholders' equity as reported under HK GAAP 632,742 293,321
US GAAP adjustments:
Reversal of revaluation surplus of investment property (2,170) (170)
Reversal of net US GAAP adjustments attributable to equity
method affiliate which became a subsidiary during the year 7,712 -
Reversal of release of negative goodwill (1,863) -
Depreciation of hotel properties (38,332) -
Minority interests' share of depreciation of hotel properties 12,293 -
Write-back of reversal of impairment loss in respect of
leasehold land and buildings (4,511) -
Reversal of amortization of goodwill - 661
Difference in amortization attributable to negative goodwill - 617
Additional loss on disposal of discontinued operations - (661)
Additional loss on disposal of an associate - (617)
Accounting for beneficial conversion feature present in the
convertible notes - 17,939
Net US GAAP adjustments attributable to equity method
affiliate - 7,712
------- -------
Shareholders' equity under US GAAP 605,871 318,802
======= =======
Other comprehensive loss
1.1.2004 1.1.2003 1.4.2002
to to to
31.12.2004 31.12.2003 31.12.2002
---------- ---------- ----------
HK$'000 HK$'000 HK$'000
US GAAP net loss (14,975) (428,309) (404,877)
Foreign currency translation adjustment (757) (213) (387)
------- ------- -------
Comprehensive loss (15,732) (428,522) (405,264)
======= ======= =======
2004 2003
------- -------
HK$'000 HK$'000
Total assets
Total assets under US GAAP 2,563,277 1,114,893
========= =========
Total liabilities
Total liabilities under US GAAP 1,657,528 766,313
========= =========
At 31 December 2003 and 2002, the unamortized balance of the beneficial
conversion feature present in the convertible notes was included in the
carrying value of the convertible notes.
- 67 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
55. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued
Valuation allowances
--------------------
Roll forward schedule of allowances for doubtful assets (all related to
continuing operations)
For the year ended 31 December 2004
-----------------------------------
Charged to
costs and
1.1.2004 expenses Write-off 31.12.2004
-------- ---------- --------- ----------
HK$'000 HK$'000 HK$'000 HK$'000
Allowance for doubtful debts 32,690 1,262 - 33,952
Allowance for advances to service
suppliers 209,385 - - 209,385
Allowance for short term investment
deposit 23,000 - - 23,000
======= ====== ====== =======
For the year ended 31 December 2003
-----------------------------------
Charged to
costs and
1.1.2003 expenses Write-off 31.12.2003
-------- ---------- --------- ----------
HK$'000 HK$'000 HK$'000 HK$'000
Allowance for doubtful debts 32,690 - - 32,690
Allowance for advances to service
suppliers 209,385 - - 209,385
Allowance for short term investment
deposit 23,000 - - 23,000
======= ====== ====== =======
For the nine-month period ended 31 December 2002
------------------------------------------------
Charged to
costs and
1.4.2002 expenses Write-off 31.12.2002
-------- ---------- --------- ----------
HK$'000 HK$'000 HK$'000 HK$'000
Allowance for doubtful debts 9,877 22,813 - 32,690
Allowance for advances to service
suppliers 47,263 162,122 - 209,385
Allowance for short term investment
deposit - 23,000 - 23,000
======= ====== ====== =======
- 68 -
WING ON TRAVEL (HOLDINGS) LIMITED
- ---------------------------------
55. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN
HONG KONG ("HK GAAP") AND IN THE UNITED STATES ("US GAAP") - continued
Recent Accounting Pronouncements Not Yet Adopted
------------------------------------------------
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments". EITF No. 03-01 provides guidance on
recording other-than-temporary impairments of cost method investments and
requires additional disclosures for those investments. The recognition and
measurement guidance in EITF No. 03-01 should be applied to
other-than-temporary impairment evaluations in reporting periods beginning
after 15 June 15 2004. The disclosure requirements are effective for fiscal
years ending after 15 June 2004 and are required only for annual periods.
The adoption of this standard did not have a material impact on Company's
financial positions or results of operations.
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4.
"This statement amends the guidance in Accounting Research Board ("ARB")
No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for
abnormal amounts of idle facility expenses, freight, handling costs, and
wasted material (spoilage). This Statement require that those items be
recognized as current period charges. In addition, this Statement requires
that allocation of fixed production overheads to the cost of conversion be
based on the normal capacity of the production facilities. This Statement
is effective for inventory costs incurred during fiscal years beginning
after 15 June 2005. The Company does not expect the adoption of this
Statement will have a material effect on the Company's financial position,
cash flows or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS No.
123-R"). "Share-Based Payment", which is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123-R supersedes APB
No. 25, "Accounting for Stock Issued to Employees". Generally, the approach
in SFAS No. 123-R is similar to the approach described in SFAS No. 123,
However, SFAS No. 123-R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on the grant-date fair values. Pro forma disclosure
previously permitted under SFAS No. 123 is no longer an alternative. The
new standard, as recently amended, will be effective for the Company in the
annual reporting period beginning 1 January 2006. Under SFAS No. 123-R, the
Company may elect the modified prospective or the modified retroactive
option for transition on the adoption of this new standard. Under the
modified retroactive option, prior periods are adjusted on a basis
consistent with the pro forma disclosures previously required for those
periods by SFAS No. 123. Under the modified prospective option,
compensation expense for all unvested stock options must be recognized on
or after the required effective date based on the grant-date fair value of
those stock options. The Company has not yet quantified the effect of the
future adoption of SFAS No. 123-R on a going forward basis. Prior to the
adoption of SFAS No. 123-R, the Company will continue to utilize the
accounting method prescribed by APB No. 25 and has adopted the disclosure
requirements of SFAS No. 148 as of 31 December 2003 as allowed by SFAS No.
123.
- 69 -
HANGZHOU ZHONGCE RUBBER CO., LTD.
Report of Independent Registered Public
Accounting Firm and Consolidated Financial Statements
For the years ended December 31, 2002, 2003 and 2004
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HANGZHOU ZHONGCE RUBBER CO., LTD.
Report of Independent Registered Public Accounting Firm..................................................F-1
Consolidated Financial Statements:
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2002, 2003 and 2004...................................................F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004.............................................F-3
Consolidated Statements of Equity for the years
ended December 31, 2002, 2003 and 2004.................................................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2003 and 2004.......................................................................F-6
Notes to Consolidated Financial Statements...............................................................F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Hangzhou Zhongce Rubber Co., Ltd.
We have audited the accompanying consolidated balance sheets of Hangzhou Zhongce
Rubber Co., Ltd. and its subsidiary as of December 31, 2003 and 2004 and the
related consolidated statements of income and comprehensive income, equity and
cash flows for each of the three years in the period ended December 31, 2004,
all expressed in Renminbi. These consolidated 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 Hangzhou Zhongce
Rubber Co., Ltd. and its subsidiary as of December 31, 2003 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company and its subsidiary will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the negative
working capital of the Company and its subsidiary of approximately
Rmb807,842,000 as of December 31, 2004 raises substantial doubt about their
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Our audits also comprehended the translation of Renminbi amounts into United
States Dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2(j). Such United States Dollar amounts
are presented solely for the convenience of the readers.
Deloitte Touche Tohmatsu
Hong Kong
October 26, 2005
F-1
HANGZHOU ZHONGCE RUBBER CO., LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2003 2004 2004
---- ---- ---- ----
RMB RMB RMB US$
REVENUES (Note 14):
- third parties........................................... 2,533,748 3,717,855 4,960,335 599,075
- related parties......................................... 76,328 78,353 60,900 7,355
--------- --------- --------- -------
Total....................................................... 2,610,076 3,796,208 5,021,235 606,430
COST OF REVENUES............................................ (2,250,785) (3,416,622) (4,450,538) (537,505)
--------- --------- --------- -------
Gross profit................................................ 359,291 379,586 570,697 68,925
Selling, general and administrative expenses................ (171,756) (242,100) (342,123) (41,319)
--------- --------- --------- -------
OPERATING INCOME............................................ 187,535 137,486 228,574 27,606
NON-OPERATING INCOME (EXPENSES):
Interest income............................................. 1,491 1,071 1,845 223
Interest expenses........................................... (40,789) (44,582) (82,471) (9,960)
Other income................................................ 2,938 4,333 6,612 798
Equity in earnings of an affiliate.......................... 3,592 23,302 - -
--------- --------- --------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTERESTS.................................... 154,767 121,610 154,560 18,667
Provision for income taxes (note 7)......................... (17,697) (12,764) (35,676) (4,309)
Minority interests.......................................... (3,795) (2,509) (8,814) (1,064)
--------- --------- --------- -------
NET INCOME AND COMPREHENSIVE INCOME......................... 133,275 106,337 110,070 13,294
========= ========= ========= =======
See accompanying notes to consolidated financial statements.
F-2
HANGZHOU ZHONGCE RUBBER CO., LTD.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
AS OF DECEMBER 31,
--------------------------------------------------
2003 2004 2004
---- ---- ----
RMB RMB US$
ASSETS
Current assets:
Cash and cash equivalents................................. 98,900 232,493 28,079
Restricted cash........................................... 44,684 38,924 4,701
Accounts receivable, net of allowance for
doubtful receivables of Rmb58,160 in 2003
and Rmb57,045 in 2004................................... 478,653 654,091 68,581
Other receivables......................................... 4,505 14,497 1,751
Inventories (note 3)...................................... 738,369 924,977 111,712
Prepaid expenses and other current assets................. 39,600 65,832 7,950
Due from related companies, net of allowance
for doubtful receivables of Rmb1,942 in 2003
and Rmb1,942 in 2004 (note 11).......................... 8,242 8,525 11,445
Short-term deferred tax assets (note 7)................... 17,136 29,003 3,503
Other tax recoverable..................................... 2,625 21,395 2,584
--------- --------- -------
Total current assets...................................... 1,432,714 1,989,737 240,306
Investments in and advances to affiliate (note 4)........... 190,109 - -
Due from Chinese joint venture partners (note 12)........... 1,200 873 105
Prepayments for equipment................................... 68,273 120,119 14,507
Property, plant and equipment, net (note 5)................. 769,773 1,949,312 235,424
Long-term deferred tax assets (note 7)...................... 3,189 9,521 1,149
Other assets................................................ 1,085 441 53
--------- --------- -------
Total assets.............................................. 2,466,343 4,070,003 491,544
========= ========= =======
F-3
HANGZHOU ZHONGCE RUBBER CO., LTD.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(AMOUNTS IN THOUSANDS)
AS OF DECEMBER 31,
---------------------------------------------------
2003 2004 2004
---- ---- ----
RMB RMB US$
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank loans (note 6)............................ 917,046 1,577,352 190,501
Long-term bank loans - current portion (note 6)........... 135,000 64,000 7,729
Accounts payable.......................................... 471,967 693,886 83,803
Other payables............................................ 46,708 260,316 31,440
Dividend payable.......................................... 20,116 - -
Accrued liabilities....................................... 106,727 152,419 18,408
Income taxes payable (note 7)............................. 6,007 30,708 3,709
Loans from related companies (note 11).................... - 5,841 -
Other tax liability....................................... - 13,057 1,576
--------- --------- -------
Total current liabilities................................. 1,703,571 2,797,579 337,166
Long-term bank loans, net of current portion
(note 6).................................................. 60,000 289,000 34,903
Due to a shareholder........................................ 67 67 8
Loans from related companies (note 11)...................... 523 - 705
--------- --------- -------
Total liabilities......................................... 1,764,161 3,086,646 372,782
--------- --------- -------
Minority interests.......................................... 18,481 189,586 22,896
--------- --------- -------
Obligations and commitments (note 9)
Shareholders' equity:
Registered capital........................................ 613,603 613,603 74,107
Additional paid-in capital................................ 20,266 20,266 2,448
Retained earnings......................................... 49,832 159,902 19,311
--------- --------- -------
Total shareholders' equity................................ 683,701 793,771 95,866
--------- --------- -------
Total liabilities and shareholders' equity................ 2,466,343 4,070,003 491,544
========= ========= =======
See accompanying notes to consolidated financial statements.
F-4
HANGZHOU ZHONGCE RUBBER CO., LTD.
CONSOLIDATED STATEMENTS OF EQUITY
(AMOUNTS IN THOUSANDS)
ADDITIONAL
REGISTERED PAID-IN RETAINED
CAPITAL CAPITAL EARNINGS TOTAL
---------- ---------- ---------- -------
RMB RMB RMB RMB
Balance at January 1, 2002........................... 469,749 - 33,294 503,043
Increase of capital.................................. - 20,266 - 20,266
Net income........................................... - - 133,275 133,275
Dividends declared................................... - - (40,000) (40,000)
------- ------- ------- -------
Balance at December 31, 2002......................... 469,749 20,266 126,569 616,584
Increase of registered capital....................... 143,854 - (143,854) -
Net income........................................... - - 106,337 106,337
Dividends declared................................... - - (39,220) (39,220)
------- ------- ------- -------
Balance at December 31, 2003......................... 613,603 20,266 49,832 683,701
Net income........................................... - - 110,070 110,070
------- ------- ------- -------
Balance at December 31, 2004......................... 613,603 20,266 159,902 793,771
======= ======= ======= =======
Balance at December 31, 2004
(in US$)........................................... 74,107 2,448 19,311 95,866
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-5
HANGZHOU ZHONGCE RUBBER CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2003 2004 2004
---- ---- ---- ----
RMB RMB RMB US$
Cash flows from operating activities:
Net income.................................................. 133,275 106,337 110,070 13,294
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests........................................ 3,795 2,509 8,814 1,064
Equity in earnings of an affiliate........................ (3,592) (23,302) - -
Deferred income taxes..................................... (6,150) (6,048) (18,199) (2,198)
Loss (gain) on disposal of property, plant and
equipment............................................... 955 (945) (67) (8)
Depreciation and amortization............................. 61,024 71,748 180,272 21,772
Changes in operating assets and liabilities (net of effects
of consolidation of variable interest entity):
Accounts and other receivables, net....................... (71,450) (56,362) (180,190) (21,762)
Inventories............................................... (124,530) (141,044) (182,410) (22,030)
Prepaid expenses and other current assets................. (20,483) 10,543 (5,486) (663)
Due (from) to related companies........................... (2,806) 4,682 (59,833) (7,226)
Other tax recoverable..................................... - (2,625) (18,770) (2,267)
Other assets.............................................. (283) 239 644 78
Accounts payable and other payables....................... 118,776 75,617 304,757 36,806
Accrued liabilities....................................... 38,887 44,947 45,192 5,458
Income taxes payable...................................... 12,437 (7,821) 24,701 2,983
Other taxes liabilities................................... 7,140 (13,187) - -
------- ------- ------- -------
Net cash provided by operating activities................... 146,995 65,288 209,495 25,301
------- ------- ------- -------
F-6
HANGZHOU ZHONGCE RUBBER CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2002 2003 2004 2004
---- ---- ---- ----
RMB RMB RMB US$
Cash flows from investing activities:
Purchase of property, plant and equipment................... (207,603) (368,775) (625,792) (75,579)
Decrease (increase) in restricted bank deposits............. 22,118 (18,501) 12,360 1,493
Investments in and advances to affiliates, net.............. (48,071) (14,890) - -
Increase (decrease) in amount due to Chinese
joint venture partners.................................... 4,263 (50) 327 40
Proceeds from disposal of property, plant and
equipment................................................. 42,053 7,726 15,637 1,888
Proceeds from disposal of trading securities................ 170 50 - -
Decrease in due from a shareholder.......................... 67 - - -
Consolidation of variable interest entity, net cash
acquired.................................................. - - 35,058 4,234
------- ------- ------- -------
Net cash used in investing activities......................... (187,003) (394,440) (562,410) (67,924)
------- ------- ------- -------
Cash flows from financing activities:
Net increase in short-term bank loans....................... 75,158 247,658 474,306 57,284
Proceeds of long-term bank loans............................ 60,000 120,000 147,000 17,754
Payment of dividends to shareholders........................ - (38,838) (20,116) (2,430)
Repayment of long-term bank loans........................... (36,000) (31,600) (120,000) (14,493)
Repayment of loans from a related company................... (11,806) (535) (523) (63)
(Decrease) increase in amount due to Chinese joint
venture partners.......................................... (5,281) (2,369) 5,841 705
Increase in amount due to a shareholder..................... 67 - - -
------- ------- ------- -------
Net cash provided by financing activities..................... 82,138 294,316 486,508 58,757
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................................. 42,130 (34,836) 133,593 16,134
Cash and cash equivalents, beginning of year.................. 91,606 133,736 98,900 11,945
------- ------- ------- -------
Cash and cash equivalents, end of year........................ 133,736 98,900 232,493 28,079
======= ======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid - net of amounts capitalized.............. 37,488 47,138 82,525 9,967
Net income tax paid..................................... 10,649 26,634 30,563 3,691
======= ======= ======= ======
See accompanying notes to consolidated financial statements.
F-7
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND BASIS OF PREPARATION
Hangzhou Zhongce Rubber Co., Ltd. (the "Company") was incorporated in the
People's Republic of China (the "PRC") on June 12, 1992. The Company has a
51.24% equity interest in Hangzhou Fu Chun Jiang Chemical Industrial Co.,
Ltd. ("FCJ"), a company also incorporated in the PRC for a term of 20 years
commencing from September 28, 2001. The Company is engaged in the
manufacture and sale of rubber tires in the PRC. FCJ is engaged in the
manufacture and trade of tire rubber and carbon powder.
In 1998, an agreement was entered into by the Company with three other PRC
enterprises to establish a Sino-foreign equity joint venture, Hangzhou
Sunrise Rubber Co., Ltd. ("Hangzhou Sunrise") in Hangzhou, the PRC, to
construct and operate a radial tire factory. The total investment and
registered capital of this joint venture was US$29,980 (Rmb248,000). The
equity interest owned by the Company was 49.2% and its investment
commitment was satisfied by the contribution of its existing radial tire
project under construction into Hangzhou Sunrise while the other three
shareholders contributed cash for the remaining 50.8% interest in Hangzhou
Sunrise. The radial tire factory of Hangzhou Sunrise commenced operations
in 2000.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46 ("FIN 46") which requires certain variable
interest entities to be consolidated by the primary beneficiary of the
entity if the ownership interest held by the equity investors in the entity
does not have characteristics of a controlling financial interest or does
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. In
December 2003, the FASB issued FIN 46 (revised) which provides for the
deferral of the implementation date to the end of the first reporting
period after March 15, 2004, unless the Company has a special purpose
entity, in which case the provisions must be applied for fiscal years ended
December 31, 2003. The Company had early adopted FIN 46 (revised) effective
January 1, 2004 and has consolidated Hangzhou Sunrise as its variable
interest entity for the year ended December 31, 2004.
The Company is the primary beneficiary of Hangzhou Sunrise because (i) the
Company receives a majority of the expected residual returns of Hangzhou
Sunrise by virtue of its 49.2% equity interest in Hangzhou Sunrise; and
(ii) the Company has guaranteed more than majority portion of bank loans of
Hangzhou Sunrise since fiscal 2000, and accordingly, the Company will
absorb a majority of Hangzhou Sunrise's expected losses disproportional to
its expected return if Hangzhou Sunrise is unable to repay its bank loans
as they fall due.
Since the Company, FCJ and Hangzhou Sunrise (hereinafter collectively
referred to as the "Group") conduct all of their operations in the PRC,
they are subject to special considerations and significant risks not
typically associated with investments in equity securities of the United
States of America (the "US") and western European companies. These include,
among others, risks associated with the political and economic environment,
foreign currency exchange, import restrictions and legal system of the PRC.
The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States ("US GAAP").
F-8
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
1. ORGANIZATION AND BASIS OF PREPARATION - continued
These consolidated financial statements are prepared assuming that the
Group will continue as a going concern, which assumes the realization of
assets and the settlement of liabilities in the normal course of
operations. The Group has net current liabilities of Rmb807,842 as of
December 31, 2004. The Group's negative working capital may not allow it to
meet its financial commitments as presently structured.
The consolidated financial statements do not include any adjustments in the
carrying amounts of the assets and liabilities to their realizable amounts
and the classification thereof that might be necessary should the Group be
unable to continue as a going concern.
The Group's continuation as a going concern is dependent upon its ability
to generate sufficient cash flows to meet its obligations on a timely basis
and to obtain additional financing as may be required.
The Group has historically met cash needs from the proceeds of debt and
operating cash flows. Subsequent to the balance sheet date, certain banks
have extended or provided additional funding to the Group. In addition, the
Group obtained the letter of support from a shareholder to provide
financial support to meet its debts when they fall due in the foreseeable
future. However, there can be no assurances that continuous extension of
facilities or additional funding will be made available to the Group. These
factors raise substantial doubt about the ability of the Group to continue
as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF CONSOLIDATION
For the year ended December 31, 2004, the consolidated financial
statements include the assets, liabilities, revenue and expenses of
the Company, its majority owned and controlled subsidiary, FCJ, and a
variable interest entity, Hangzhou Sunrise. For the years ended
December 31, 2002 and 2003, the consolidated financial statements
include the assets, liabilities, revenue and expenses of the Company
and FCJ. Investment in Hangzuou Sunrise was accounted for using the
equity method. Under the equity method, the Company's proportionate
share of the affiliate's net income or loss is included in the
consolidated statement of income. All significant intercompany
balances and transactions have been eliminated on consolidation.
(b) REVENUES
Revenues represent the invoiced value of goods, net of value-added tax
("VAT") and other sales taxes, supplied to customers. Revenues are
recognized upon delivery and acceptance of goods by the customers. The
Group permits the return of damaged or defective products and accounts
for these returns as deduction from sales. The Group incurred sales
taxes of Rmb40,639, Rmb64,108 and Rmb89,826 for the years ended
December 31, 2002, 2003 and 2004, respectively.
F-9
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(c) SHIPPING AND HANDLING FEES AND COSTS
Costs for transportation of products to customers is recorded as a
component of selling, general and administrative expense, and amounted
to Rmb62,707, Rmb91,563 and Rmb141,031 for the years ended December
31, 2002, 2003 and 2004, respectively.
(d) CASH AND CASH EQUIVALENTS
The Group considers cash on hand, demand deposits with banks and
liquid investments which are unrestricted as to withdrawal or use and
with an original maturity of three months or less when purchased to be
cash and cash equivalents. Included in cash and cash equivalents as of
December 31, 2003 and 2004 were United States dollar deposits of
US$2,916 (Rmb24,144) and US$7,214 (Rmb59,731), respectively.
(e) INVENTORIES
Inventories are stated at the lower of cost, on an average cost basis,
or market value. Costs of work-in-progress and finished goods comprise
direct materials, direct labor and an attributable proportion of
production overheads. Provision for potentially obsolete or
slow-moving inventory is made based on management's analysis of
inventory levels.
(f) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost of acquisition less
accumulated depreciation and provision for impairment loss. The cost
of major improvements and betterments is capitalized whereas the cost
of maintenance and repairs is expensed in the year incurred.
Depreciation of property, plant and equipment is computed using the
straight-line method over the assets' remaining estimated economic
useful lives and an estimated residual value of 4% to 10% of the costs
except for land use rights which have no residual value. The estimated
useful lives of property, plant and equipment are as follows:
Land use rights 50 years
Buildings 20 years
Machinery and equipment 10 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress represents factory and office buildings under
construction and plant and machinery pending installation. This
includes the costs of construction, the costs of plant and machinery
and interest capitalized on borrowings during the period of
construction or installation. Assets under construction are not
depreciated until construction completed and the assets are ready for
their intended use. Interest capitalized was Rmb3,954, Rmb4,000 and
Rmb7,904 for the years ended December 31, 2002, 2003 and 2004,
respectively.
F-10
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(g) IMPAIRMENT
The Group evaluates the impairment of long-lived assets based on the
projection of undiscounted cash flows whenever events or changes in
circumstances indicate that the carrying amounts of such assets may
not be recoverable. In the event such cash flows are not expected to
be sufficient to recover the recorded value of the assets, the assets
are written down to their estimated fair values.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and to operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply when those temporary differences
are expected to reverse. Valuation allowances are established to
reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all of, the deferred tax
asset will not be realized.
(i) VAT AND CONSUMPTION TAX ("CT")
The Group is subject to VAT and CT. They are recognized on an accrual
basis and revenues are recorded net of these taxes.
The Group is required to provide for VAT and CT which are the
principal taxes on the sales of tangible goods and the provision of
certain specified services. The general VAT rate applicable to the
Company and FCJ is 17% while CT is calculated at 10% on the domestic
sales amount, except that the 10% CT on radial tire products was
abolished since January 1, 2001. VAT and CT are recognized on an
accrual basis and sales are recorded net of these taxes.
(j) FOREIGN CURRENCIES
The Group maintains its books and records in Renminbi, its functional
currency. Foreign currency transactions are translated into Renminbi
at the applicable exchange rates quoted by the People's Bank of China
(the "unified exchange rates") prevailing at the dates of
transactions. Monetary assets and liabilities denominated in foreign
currencies are translated into Renminbi using the applicable unified
exchange rates prevailing at the balance sheet dates. Non-monetary
assets and liabilities are translated at the unified exchange rates
prevailing at the time the assets or liabilities were acquired. The
resulting exchange differences are included in the consolidated
statement of income. The Group had foreign exchange gains of Rmb2,006,
Rmb4,333 and Rmb2,782 in 2002, 2003 and 2004, respectively.
F-11
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(j) FOREIGN CURRENCIES - continued
The Renminbi currently is not a generally freely convertible currency.
The State Administration for Foreign Exchange, under the authority of
the People's Bank of China, controls the conversion of Renminbi into
foreign currencies. The value of the Renminbi is subject to changes in
central government policies and to international economic and
political developments affecting supply and demand in the China
Foreign Exchange Trading System market.
The Group conducts business in the PRC and its financial performance
and position is measured in terms of Renminbi. Any devaluation of the
Renminbi against the United States dollar would consequently have an
adverse effect on the financial performance and asset values of the
Group when measured in terms of United States dollars.
The translation of Renminbi (Rmb) amounts into United States dollar
(US$) amounts are included solely for the convenience of readers in
the United States of America and have been made at US$1.00 = Rmb8.28,
the unified exchange rate on December 31, 2004. No representation is
made that the Renminbi amounts could have been, or could be, converted
into United States dollar at that or at any other rate.
(k) DEDICATED CAPITAL
In accordance with the relevant laws and regulations for Sino-foreign
equity joint venture enterprises, the Group maintains discretionary
dedicated capital, which includes a general reserve fund, an
enterprise expansion fund, and a staff welfare and incentive bonus
fund. The Company and FCJ have to set aside 5% of or a higher
percentage as determined by the respective board of directors of the
Company and FCJ of its net income after tax as reflected in their
statutory financial statements for each of general reserve fund and
enterprise expansion fund (except where the fund has reached 50% of
the registered capital of the Company and FCJ, respectively). There is
no specific requirement for appropriation to dedicated capital for
Hangzhou Sunrise. The Group's appropriations to the general reserve
fund and the enterprise expansion fund are included in retained
earnings and are non-distributable; however, the appropriation for the
staff welfare and incentive bonus fund is charged to consolidated
statement of income and the unused portion is recorded as a current
liability.
Included in the retained earnings of the Group as of December 31,
2002, 2003 and 2004, were non-distributable dedicated capital of
Rmb61,548, Rmb3,932 and Rmb12,933, respectively.
F-12
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(l) USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
Significant items subject to such estimates and assumptions include
the carrying value and estimated useful lives of long-lived assets;
valuation allowances for receivables, inventories and deferred tax
assets; liability for product warranty; and the valuation of certain
financial instruments.
(m) CONCENTRATION OF CREDIT RISK
The Group's financial instruments that are exposed to concentration of
credit risk consist primarily of its cash and cash equivalents,
restricted cash, accounts and other receivables and advances to
affiliate and Chinese joint venture partners. The Group's cash and
cash equivalents and restricted cash are high-quality deposits placed
with banking institutions with high credit ratings; therefore, the
credit risk is limited. The accounts receivable largely represent
amounts due from the Group's customers and are typically on an open
account basis. Concentrations of credit risk associated with the
accounts receivable are considered minimal due to the Group's diverse
customer base. In no period did sales to any one customer accounts for
10% or more of the Group's sales. The Group maintains allowances to
cover potential bad debts and believes that no significant credit risk
exists as a result of its diverse group of customers. Credit losses,
when realized, have historically been within the range of management's
expectations. The other receivables comprise principally deposits to
suppliers and receivable from local government. The Company does not
believe there is a significant credit risk from any of these
counterparties as they are either major suppliers of the Group or
local government authorities. The Group has reviewed the credit
worthiness and financial position of its affiliate and Chinese joint
venture partners for credit risks associated with advances to these
entities. This affiliate and Chinese joint venture partners have good
credit standing and the Group does not expect to incur significant
loss for uncollected advances from these entities.
The Group does not purchase derivative instruments to manage risks.
F-13
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of current financial assets and current financial
liabilities approximates fair value due to the short-term nature of
these instruments. Bank loans approximate their carrying value as the
interest rates approximate those which would have been available for
loans of similar remaining maturity at the respective year ends. The
fair value of the financial guarantees issued by the Group is
determined based on the sum of probability-weighted present values in
a range of estimated cash flows, all discounted using the same
interest rate convention.
(o) COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under US GAAP, are excluded from
net income. Comprehensive income only represents the Group's net
income and has been disclosed within the consolidated statements of
income and comprehensive income.
(p) SEGMENT INFORMATION
The Group is organized and operates in one reportable segment which
comprises the manufacture and sale of tires.
(q) RELATED PARTIES
Parties are considered to be related to the Group if the parties that,
directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company and/or
its subsidiary. Related parties also include principal owners of the
Company or its subsidiary, their management, members of the immediate
families of principal owners of the Company or its subsidiary and
their management and other parties with which the Group may deal if
one party controls or can significantly influence the management or
operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own
separate interests. A party which can significantly influence the
management or operating policies of the transacting parties or if it
has an ownership interest in one of the transacting parties and can
significantly influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own
separate interests is also a related party.
F-14
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(r) ADVERTISING EXPENSES
The Group expenses advertising costs as incurred. Advertising expenses
were Rmb6,580, Rmb5,808 and Rmb2,856 for the years ended December 31,
2002, 2003 and 2004, respectively.
(s) GOVERNMENT SUBSIDIES
Government subsidies are recognized when received and all the
conditions for their receipt have been met. Government subsidies are
recognized as other income in the consolidated statements of income
and comprehensive income in the period in which the related
expenditure are recorded. Capital grants for the acquisition of
equipment are recorded as a liability until earned and then offset
against the related capital assets.
(t) GUARANTEES
The Group discloses and recognizes a liability for the fair value of
the obligation it assumes under the guarantees. The initial
recognition and measurement provision of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. As of December
31, 2003 and 2004, the carrying amount of the liability for the
Group's obligations under the guarantees is Rmb2,000 and Rmb3,102,
respectively.
(u) RESTRICTED CASH
Bank deposits are classified as restricted cash when they are
restricted as to withdrawal or use. Bank deposits pledged as security
for bank guarantees and bank drafts, and those retained for staff
housing benefits (see note 13) amounted to Rmb44,684 and Rmb38,924 as
of December 31, 2003, and 2004, respectively, and are presented as
restricted cash in the consolidated balance sheets.
(v) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development expenses were Rmb1,301, Rmb6,248 and Rmb4,706 for the
years ended December 31, 2002, 2003 and 2004, respectively.
F-15
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(w) RECENT ACCOUNTING PRONOUNCEMENT
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4". SFAS No. 151 clarifies the
accounting that requires abnormal amounts of idle facility expenses,
freight, handling costs, and spoilage costs to be recognized as
current-period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 will be effective
for inventory costs incurred on or after July 1, 2005. The Company is
currently evaluating the impact of this standard on its consolidated
financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets-An Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions". SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive
assets in paragraph 21(b) of Accounting Principles Board Opinion No.
29 "Accounting for Nonmonetary Transactions", and replaces it with an
exception for exchanges that do not have commercial substance. SFAS
No. 153 specifies that a nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective
for the fiscal periods beginning after June 15, 2005. The Company is
currently evaluating the effect that the adoption of SFAS No. 153 will
have on its financial statements but does not expect it to have a
material impact.
3. INVENTORIES
Inventories by major categories are summarized as follows:
2003 2004
---- ----
Rmb Rmb
Raw materials.............................................. 279,238 360,769
Work-in-progress........................................... 25,570 52,823
Finished goods............................................. 433,561 511,385
------- -------
738,369 924,977
======= =======
F-16
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
4. INVESTMENTS IN AND ADVANCES TO AFFILIATE
The following table presents summarized comparative financial information
for Hangzhou Sunrise, which the Company accounted for using the equity
method for the years ended December 31, 2002 and 2003 until it adopted FIN
46 effective January 1, 2004:
2002 2003
---- ----
Rmb Rmb
Revenues.................................................... 197,544 341,538
Operating income............................................ 23,759 64,721
Net income.................................................. 8,958 45,704
Current assets.............................................. 84,319 71,842
Non-current assets.......................................... 580,367 725,032
Current liabilities......................................... 214,382 271,852
Non-current liabilities..................................... 176,535 205,549
Shareholders' equity........................................ 273,769 319,473
Advances to Hangzhou Sunrise are Rmb45,534 and Rmb60,424 as of December 31,
2002 and 2003, respectively. The amounts are interest free and are not
repayable within 12 months from the respective balance sheet date.
As of December 31, 2002, 2003 and 2004, the Company had a 49.2% equity
ownership in Hangzhou Sunrise.
Upon the early adoption of FIN 46 effective January 1, 2004 (see note 1),
Hangzhou Sunrise is classified as a variable interest entity for which the
Company is the primary beneficiary. Accordingly, the consolidated financial
statements of the Company for the year ended December 31, 2004 included the
assets, liabilities, revenue and expenses of Hangzhou Sunrise, which was no
longer accounted for using the equity method beginning January 1, 2004.
5. PROPERTY, PLANT AND EQUIPMENT
2003 2004
---- ----
Rmb Rmb
Property, plant and equipment consists of the following:
At cost:
Buildings and land use rights....................................... 189,460 514,731
Machinery and equipment............................................. 827,663 1,861,917
Motor vehicles...................................................... 18,291 20,675
Furniture, fixtures and office equipment............................ 23,296 27,638
Construction-in-progress............................................ 83,498 248,613
--------- ---------
Total............................................................... 1,142,208 2,673,574
Less: Accumulated depreciation and amortization..................... (372,435) (724,262)
--------- ---------
Total net book value................................................ 769,773 1,949,312
========= =========
F-17
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
6. BANK LOANS
As of December 31, 2003, Rmb40,000 of the long-term bank loans were
guaranteed by an affiliate. As of December 31, 2003, Rmb100,000 of the
long-term bank loans were guaranteed by a related party. Also, long-term
bank loans of RmbNil and Rmb60,000 were secured by buildings and equipment
of the Group as of December 31, 2003 and 2004. Long-term bank loans bear
fixed interest rates and had average annual interest rates of approximately
7.86% in 2002, 5.63% in 2003 and 5.59% in 2004.
The outstanding balances of long-term bank loans as of December 31, 2004
were repayable as follows:
Rmb
2005................................................................ 64,000
2006................................................................ 97,000
2007................................................................ 144,000
2008................................................................ 48,000
-------
353,000
=======
As of December 31, 2003 and 2004, short-term bank loans are repayable on
demand or within twelve months from the balance sheet dates.
As of December 31, 2003, Rmb475,646 of the short-term bank loans were
guaranteed by an affiliate. As of December 31, 2003 and 2004, Rmb100,000
and RmbNil of the short-term bank loans were guaranteed by related
companies, respectively, and Rmb40,000 and Rmb630,000 of the short-term
bank loans were also guaranteed by third parties. Also, short-term bank
loans of RmbNil and Rmb26,000 were secured by buildings and equipment of
the Group as of December 31, 2003 and 2004, respectively. The short-term
bank loans carried fixed interest rates and the average annual interest
rates were approximately 5.11% in 2002, 4.20% in 2003 and 4.21% in 2004.
In addition to the above loan facilities provided by banks, the Group had
available import credit facilities amounting to Rmb355,340 in 2003 and
Rmb210,223 in 2004, of which Rmb155,830 in 2003 and Rmb48,933 in 2004 had
been utilized. Interest rates are generally based on the banks' best
lending rates plus 1% to 2% per annum, subject to fluctuations at the
banks' discretion. The banking facilities are subject to annual review by
the banks.
F-18
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
7. PROVISION FOR INCOME TAXES
Provision for income taxes consists of:
2002 2003 2004
---- ---- ----
Rmb Rmb Rmb
Current.............................................. 23,847 18,812 53,875
Deferred............................................. (5,071) (6,000) (18,199)
Adjustment of valuation allowance.................... (1,079) (48) -
------- ------- -------
17,697 12,764 35,676
======= ======= =======
The Group's profit before income taxes and minority interests for fiscal
2002, 2003 and 2004 is all derived in the PRC.
The Group is subject to income taxes calculated at a tax rate ranging from
15% to 33% on the taxable income as reported in the statutory financial
statements adjusted for taxation based on tax laws prevailing in the PRC.
In accordance with the relevant income tax laws applicable to Sino-foreign
joint ventures in the PRC, the Company, having a joint venture term of not
less than 10 years and engaging in production industries, is exempt from
the PRC local income tax during fiscal 2002. A summary of the tax
concessions available to the Company for fiscal 2002 is as follows:
CHINESE STATE
UNIFIED CHINESE LOCAL CONCESSION YEAR OF
INCOME TAX INCOME TAX FROM CHINESE COMMENCEMENT
RATE (%) RATE (%) LOCAL INCOME TAX OF TAX HOLIDAYS
-------- -------- ---------------- ---------------
15.0 1.5 Full exemption for 1993
10 years starting from
the commencement
of tax holidays
During fiscal 2003 and 2004, the Company was not entitled to any tax
concessions as all tax concession periods expired, and therefore the
Company was subject to a State united income tax rate of 15% and a local
income tax rate of 1.5%. FCJ and Hangzhou Sunrise was not entitled to any
tax concession during fiscal 2002, 2003 and 2004 and was subject to the
State united income tax rate of 30% and the local income tax rate of 3%.
During fiscal 2002, if the Company were neither in the tax holiday period
nor had been specifically allowed special tax concessions, it would have
recorded additional income tax expenses of Rmb1,960, and the consolidated
net income would have been decreased by the same amount for the year ended
December 31, 2002.
F-19
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
7. PROVISION FOR INCOME TAXES - CONTINUED
The reconciliation of the effective income tax rate based on profit before
income taxes and minority interests stated in the consolidated statements
of income to the statutory income tax rates in the PRC is as follows:
2002 2003 2004
---- ---- ----
Weighted average statutory tax rates................. 18% 18% 21%
Effect of tax holiday................................ (1%) - -
Underprovision from prior years...................... - - 6%
Permanent differences relating to
non-taxable income and non-deductible
expenses........................................... (3%) (5%) (3%)
Valuation allowance.................................. (1%) - -
Others............................................... (2%) (3%) (1%)
---- ---- ----
Effective tax rate................................... 11% 10% 23%
==== ==== ====
The tax impact of temporary differences give rise to the following deferred
tax assets:
2003 2004
---- ----
Rmb Rmb
Allowance for doubtful receivables......................................... 9,917 9,896
Allowance for inventory obsolescence....................................... 1,102 1,102
Provision for warranty expenses............................................ 9,850 21,318
Impairment loss provision for long-lived assets............................ 297 297
Depreciation............................................................... 3,586 10,338
------- -------
Total deferred tax assets.................................................. 24,752 42,951
Valuation allowance for deferred tax assets................................ (4,427) (4,427)
------- -------
20,325 38,524
======= =======
The valuation allowance refers to the portion of the deferred tax assets
that are not "more likely than not" going to be realized.
The net deferred tax asset is classified as follows:
2003 2004
---- ----
Rmb Rmb
Short-term deferred tax assets...................................... 17,136 29,003
Long-term deferred tax assets....................................... 3,189 9,521
------- -------
20,325 38,524
======= =======
F-20
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
8. REGISTERED CAPITAL
The Company was incorporated with an initial registered capital of
Rmb469,749. On August 18, 2003, the registered capital of the Company was
further increased from Rmb469,749 to Rmb613,603 by the capitalization of
dedicated capital and retained earnings amounting to Rmb83,841 and
Rmb60,013, respectively, as allowed under the laws and regulations in the
PRC.
There was no movement in the Company's registered capital for the year
ended December 31, 2004.
9. OBLIGATIONS AND COMMITMENTS
As of December 31, 2003 and 2004, the Group had outstanding capital
commitments for construction of factory premises and purchase of equipment
amounting to approximately Rmb225,198 and Rmb123,123, respectively.
The Group leases certain of its warehouses under non-cancelable operating
leases expiring at various dates through fiscal 2009. Rental expense under
operating leases was Rmb4,397, Rmb3,141 and Rmb12,079 for the years ended
December 31, 2002, 2003 and 2004, respectively.
The following is a schedule of future minimum lease payments required under
operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 31, 2004:
Rmb
2005................................................................ 6,138
2006................................................................ 817
2007................................................................ 817
2008................................................................ 763
-----
Total minimum lease payments........................................ 8,535
=====
The Group also records an estimate of the product warranty obligation at
the time of sale based on the Group's historical experience. Changes in
product warranty provision are as follows:
2002 2003 2004
---- ---- ----
Rmb Rmb Rmb
Balance at beginning of year......................... 19,972 23,720 59,700
Warranties paid...................................... (56,183) (72,396) (132,992)
Warranty provision................................... 59,931 108,376 116,892
------- ------- -------
Balance at end of year............................... 23,720 59,700 43,600
======= ======= =======
F-21
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
9. OBLIGATIONS AND COMMITMENTS - CONTINUED
In addition, the Group provided guarantees to related companies as of
December 31, 2004, details of which are detailed in note 11(c). These
guarantees are full and unconditional and would require the Group to make
scheduled payments immediately if the related companies failed to do so.
As of December 31, 2004, the Group estimated the maximum potential future
payments of the guarantees to be Rmb430,198. Historically, the Group had
not made any payment for these guarantees and considered the probability of
the default by the related companies to below. As a result, the Group
estimated that the fair value of the obligations assumed under guarantees
as of December 31, 2004 to be Rmb3,102 and recognized a liability for such
amount in the financial statements.
In addition, the Company and its subsidiary are parties to a variety of
contractual agreements under which the Group may be obligated to indemnify
the other party for certain matters. These contracts primarily relate to
the operating leases, financial agreements and various other agreements.
Under these contracts the Group may provide certain routine
indemnifications relating to representations and warranties (e.g.,
ownership of assets, environmental or tax indemnifications) or personal
injury matters. Historically, the Group has not made any payment for these
indemnifications and believes that if the Group were to incur a loss in any
of these matters, the loss would not have a material effect on our
financial condition or results of operations.
10. DISTRIBUTION OF PROFIT
The Group declares dividends based on the profits as reported in their
statutory financial statements. Such profits will be different from the
amounts reported under US GAAP. The Company and FCJ had an aggregate
retained earnings of Rmb107,726 as of December 31, 2003 and the Group had
an aggregate retained earnings of Rmb183,964 as at December 31, 2004, as
reported in their statutory financial statements.
11. RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS
(a) DUE FROM/TO RELATED COMPANIES
The amounts due from related companies primarily arise from sales of
tires and are unsecured, non-interest bearing and repayable at the end
of credit periods granted ranging from 90 days to 180 days.
Historically, the management reviewed the recoverability of these
receivables and recognized an allowance for doubtful accounts of
Rmb1,942, in the consolidated statement of income for fiscal 2002 and
2003, respectively.
The loans from related companies represent funds advanced to the Group
and are unsecured, non-interest bearing and are not repayable on
demand expect for the amount as of December 31, 2003 which was not
repayable within 12 months from the balance sheet date.
F-22
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
11. RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS - CONTINUED
(b) SALES TO/PURCHASES FROM RELATED PARTIES
The Group recorded sales to related companies of approximately
Rmb76,328, Rmb78,353 and Rmb44,631 that have been reflected in the
Group's consolidated financial statements for the years ended December
31, 2002, 2003 and 2004, respectively.
The Company paid sub-contracting charges to Hangzhou Sunrise of
approximately Rmb199,373 and Rmb341,112 for tire processing that have
been reflected in the Group's consolidated financial statements for
the years ended December 31, 2002 and 2003, respectively. The Company
also paid sub-contracting charges to a related company of
approximately Rmb23,486 for tire processing that have been reflected
in the Group's consolidated financial statements for the year ended
December 31, 2004.
The Group recorded purchases from a related company of approximately
Rmb6,568, Rmb11,055 and Rmb28,188 that have been reflected in the
Group's consolidated financial statements for the years ended December
31, 2002, 2003 and 2004, respectively.
The Company received labor cost from a related company of
approximately Rmb2,796 for tire processing that have been reflected in
the Group's consolidated financial statements for the year ended
December 31, 2004.
These transactions were carried out after negotiations between the
Group and the respective related companies in the ordinary course of
business and on the basis of the estimated market value as determined
by the management of the Company.
(c) CONTINGENT LIABILITIES
As of December 31, 2003 and 2004, the Group had outstanding bank
guarantees as follows:
2003 2004
---- ----
RMB RMB
Beneficiaries
Affiliate..................................................... 220,195 -
Related companies............................................. 127,444 -
Third party................................................... 40,000 430,198
------- -------
Total......................................................... 387,639 430,198
======= =======
F-23
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
11. RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS - CONTINUED
(d) LOAN GUARANTEES PROVIDED BY RELATED COMPANIES
Certain parties have guaranteed certain of the Group's bank borrowings
at no cost to the Group. Details of the borrowings are shown in note
6.
(e) USE OF TRADEMARKS
For the years ended December 31, 2002, 2003 and 2004, the Group is
entitled to use the trademarks owned by one of its shareholders free
of charge for a period up to June 27, 2009.
12. DUE FROM/TO CHINESE JOINT VENTURE PARTNERS
(i) The amounts due from Chinese joint venture partners represented:
(a) advances made from FCJ to the Chinese joint venture partner; and
(b) payment of various operating expenses by FCJ on behalf of their
Chinese joint venture partners.
These amounts are unsecured, non-interest bearing and have no fixed
repayment terms.
(ii) The amounts due to Chinese joint venture partners represented advances
provided by the Chinese joint venture partners to the Group to finance
their working capital requirements.
These amounts are unsecured and non-interest bearing and are repayable
on demand.
13. STAFF RETIREMENT PLANS
All of the Chinese employees of the Group are entitled to an annual pension
on retirement, which is equal to their ending basic salaries at their
retirement dates. The Chinese government is responsible for the pension
liabilities to these retired employees. The Group is only required to make
specified contributions to the state-sponsored retirement plan calculated
at rates ranging from 20% to 23.5% of basic monthly salaries for the years
ended December 31, 2002 and 2003, and at rates ranging from 14% to 22% of
basic monthly salaries for the year ended December 31, 2004. The expenses
reported in the consolidated statements of income and comprehensive income
related to these arrangements were Rmb26,549, Rmb23,920 and Rmb23,934 for
the years ended December 31, 2002, 2003 and 2004, respectively.
The Group and their employees are also required to contribute 5% of the
monthly salaries to designated bank accounts opened by the Group under a
regulation implemented by certain PRC municipal governments. Upon
resignation or retirement of the employees, they are entitled to withdraw
the principal and related interest from these bank accounts to purchase
housing. These bank deposits cannot be withdrawn for other uses by the
Group. As of December 31, 2003 and 2004, such restricted bank deposits
amounted to Rmb10,034 and Rmb12,339, respectively.
F-24
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
14. SEGMENT INFORMATION
The Company's chief decision-maker is the Chief Executive Officer, who
evaluates the Group's performance based on revenues and operating income.
The Group operates principally in the tire manufacturing industry and has
only one reportable segment, which is managed based on PRC GAAP. All
manufacturing is conducted in the PRC.
Analysis of Reportable Segments (Management Information - PRC GAAP basis)
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------
2002 2003 2004
---- ---- ----
Rmb Rmb Rmb
Net revenue from external
customers................................. 2,537,476 3,753,855 5,029,835
Net revenue from related parties............ 76,328 78,353 60,900
Operating income............................ 191,263 175,486 299,176
Reconciliations of Reportable Segment Totals to Consolidated Totals - The
amounts presented for reportable segments reconcile to the consolidated
totals as follows:
YEAR ENDED DECEMBER 31,
2002 2003 2004
---- ---- ----
Rmb Rmb Rmb
Net revenue from external customers.................. 2,537,476 3,753,855 5,029,835
US GAAP adjustments:
Warranty provision................................. (3,728) (36,000) (69,500)
--------- --------- ---------
Total net revenue from external customers............ 2,533,748 3,717,855 4,960,335
========= ========= =========
Net revenue from related parties..................... 76,328 78,353 60,900
US GAAP adjustments.................................. - - -
--------- --------- ---------
Total net revenue from related parties............... 76,328 78,353 60,900
========= ========= =========
Operating income..................................... 191,263 175,486 299,176
US GAAP adjustments:
Warranty provision................................. (3,728) (36,000) (69,500)
Fair value of the obligations assumed under
guarantees....................................... - (2,000) (1,102)
--------- --------- ---------
Total operating income............................... 187,535 137,486 228,574
========= ========= =========
F-25
HANGZHOU ZHONGCE RUBBER CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED)
14. SEGMENT INFORMATION - CONTINUED
Revenues of the Group are primarily derived from sales of tires and their
geographical analysis of revenues is as follows:
YEAR ENDED DECEMBER 31,
2002 2003 2004
---- ---- ----
Rmb Rmb Rmb
The PRC.............................................. 2,061,236 3,057,152 3,552,954
Middle East Countries................................ 165,664 249,212 466,542
US and Canada........................................ 137,933 140,283 314,456
United Kingdom....................................... - 40,693 317,735
South East Asia...................................... 80,252 94,849 152,412
Others............................................... 164,991 214,019 217,136
--------- --------- ---------
2,610,076 3,796,208 5,021,235
========= ========= =========
* * * * * *
F-26
Part III
ITEM 18. FINANCIAL STATEMENTS
CHINA ENTERPRISES LIMITED
Report of Independent Registered Public Accounting Firm
and Consolidated Financial Statements
For the years ended December 31, 2002, 2003 and 2004
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CHINA ENTERPRISES LIMITED
Report of Independent Registered Public Accounting Firm................................ F-1
Consolidated Financial Statements:
Consolidated Statements of Operations and Comprehensive (Loss) Income
for the years ended December 31, 2002, 2003 and 2004................................. F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004........................... F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2002, 2003 and 2004............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2003 and 2004..................................................... F-6
Notes to Consolidated Financial Statements............................................. F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders of China Enterprises Limited
We have audited the accompanying consolidated balance sheets of China
Enterprises Limited and its subsidiaries as of December 31, 2003 and 2004 and
the related consolidated statements of operations and comprehensive (loss)
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2004, all expressed in Renminbi. These consolidated
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 China Enterprises
Limited and its subsidiaries as of December 31, 2003 and 2004, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.
Our audits also comprehended the translation of Renminbi amounts into United
States dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2(h). Such United States dollar amounts
are presented solely for the convenience of the readers.
DELOITTE TOUCHE TOHMATSU
Hong Kong
October 26, 2005
F - 1
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2003 2004 2004
---------- ---------- ------- ------
RMB RMB RMB US$
REVENUES:
- third parties ....................................... 2,400,964 2,613,398 - -
- related parties ..................................... 209,112 194,971 - -
---------- ---------- ------- ------
Total (note 16) ......................................... 2,610,076 2,808,369 - -
COST OF REVENUES ........................................ (2,250,785) (2,502,413) - -
---------- ---------- ------- ------
Gross profit ............................................ 359,291 305,956 - -
Selling, general and administrative expenses ............ (192,211) (205,210) (13,344) (1,612)
Recovery on amounts due from related
companies (note 14) ................................... 5,016 - - -
---------- ---------- ------- ------
OPERATING INCOME (LOSS) ................................. 172,096 100,746 (13,344) (1,612)
NON-OPERATING INCOME (EXPENSES):
Interest income ......................................... 40,413 9,228 21,533 2,601
Interest expenses ....................................... (53,997) (33,027) (601) (72)
Other income ............................................ 191 1,810 48 6
Change in fair value of call option (note 7) ............ (45,328) - 59,929 7,238
Provision for interest receivables from
notes receivable ...................................... - - (502) (61)
Loss on disposal of a subsidiary (note 3) ............... - (1,158) - -
Gain on disposal of partial interests in an affiliate ... - - 23,040 2,783
Provision for income taxes (note 9) ..................... (17,697) (10,592) - -
Impairment loss provision for advance to affiliate ...... (4,451) (2,619) (530) (64)
Equity in (losses) earnings of affiliates ............... (85,069) (74,829) 92,369 11,155
Minority interests ...................................... (69,101) (46,340) - -
---------- ---------- ------- ------
(LOSS) PROFIT FROM CONTINUING OPERATIONS ................ (62,943) (56,781) 181,942 21,974
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of applicable
income taxes of RmbNil in 2002 and 2003 (note 4) ...... (199,838) (7,760) - -
---------- ---------- ------- ------
NET (LOSS) INCOME ....................................... (262,781) (64,541) 181,942 21,974
Other comprehensive income (expenses)
- translation adjustments relating to an affiliate .... 38 1,636 (1,092) (132)
---------- ---------- ------- ------
COMPREHENSIVE (LOSS) INCOME ............................. (262,743) (62,905) 180,850 21,842
========== ========== ======= ======
F - 2
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002 2003 2004 2004
--------- --------- --------- ---------
RMB RMB RMB US$
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE
Continuing operations ................................... (6.98) (6.30) 20.18 2.44
Discontinued operations ................................. (22.16) (0.86) - -
--------- --------- --------- ---------
Basic and diluted (loss) earnings per common share ...... (29.14) (7.16) 20.18 2.44
========= ========= ========= =========
Number of common shares used in the calculation of basic
and diluted (loss) earnings per common share ........... 9,017,310 9,017,310 9,017,310 9,017,310
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F - 3
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND THEIR PAR VALUES)
AS OF DECEMBER 31,
-----------------------------------
2003 2004 2004
--------- --------- -------
RMB RMB US$
ASSETS
Current assets:
Cash and cash equivalents ......................... 63,623 41,414 5,002
Other receivables ................................. 2,697 7,590 917
Prepaid expenses and other current assets ......... 20 20 2
Due from ultimate parent company (note 14) ........ 4,030 37,426 4,520
Notes receivable (note 5) ......................... 48,016 103,968 12,556
--------- --------- -------
Total current assets .............................. 118,386 190,418 22,997
Investments in and advances to affiliates
(note 6) .......................................... 309,826 437,539 52,843
Convertible note receivable from an affiliate, net
(note 7) .......................................... 81,448 45,008 5,436
Derivative instruments (note 7) ..................... - 68,355 8,255
Deposit paid for acquisition of properties
(note 8)........................................... - 50,000 6,039
Other assets ........................................ 6 6 1
--------- --------- -------
Total assets ...................................... 509,666 791,326 95,571
========= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Other short-term loan payable ..................... 27,708 - -
Subscription payable (note 6) ..................... - 62,989 7,607
Accounts payable .................................. 311 311 38
Other payables .................................... 1,310 1,320 160
Accrued liabilities ............................... 4,759 5,972 721
Other taxes payable ............................... 2,753 2,753 332
--------- --------- -------
Total current liabilities ......................... 36,841 73,345 8,858
Due to a fellow subsidiary (note 14) ................ - 50,000 6,039
--------- --------- -------
Total liabilities ................................. 36,841 123,345 14,897
--------- --------- -------
Obligations and commitments (note 12)
Shareholders' equity:
Supervoting common stock - par value US$0.01
per share (20,000,000 shares authorized;
3,000,000 shares outstanding at
December 31, 2003 and 2004) (note 10) ........... 244 244 29
Common stock - par value US$0.01 per share
(50,000,000 shares authorized; 6,017,310
shares outstanding at December 31, 2003
and 2004) (note 10) ............................. 526 526 64
Additional paid-in capital ........................ 1,033,253 1,047,559 126,517
Accumulated other comprehensive income ............ 1,131 39 5
Accumulated deficit ............................... (562,329) (380,387) (45,941)
--------- --------- -------
Total shareholders' equity ........................ 472,825 667,981 80,674
--------- --------- -------
Total liabilities and shareholders' equity ........ 509,666 791,326 95,571
========= ========= =======
See accompanying notes to consolidated financial statements.
F - 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
ACCUMULATED
OTHER
SHARES OF COMPRE-
SUPERVOTING SHARES OF SUPERVOTING ADDITIONAL HENSIVE
COMMON COMMON COMMON COMMON PAID-IN (LOSSES) ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL INCOME DEFICIT TOTAL
------------ ----------- ---------- ----- ---------- -------- --------- --------
RMB RMB RMB RMB RMB RMB
Balance at January 1, 2002............. 3,000,000 6,017,310 244 526 1,039,501 (543) (235,531) 804,197
Net loss............................... - - - - - - (262,781) (262,781)
Loss on dilution of interest
in an affiliate and a subsidiary
of an affiliate....................... - - - - (6,248) - - (6,248)
Foreign currency translation
adjustment relating to an affiliate... - - - - - 38 - 38
---------- --------- --------- ----- ---------- -------- --------- --------
Balance at December 31, 2002........... 3,000,000 6,017,310 244 526 1,033,253 (505) (498,312) 535,206
Net loss............................... - - - - - - (64,541) (64,541)
Foreign currency translation
adjustment relating to an affiliate.. - - - - - 1,636 - 1,636
Share of dedicated capital of
an affiliate......................... - - - - - - 524 524
---------- --------- --------- ----- ---------- -------- --------- --------
Balance at December 31, 2003........... 3,000,000 6,017,310 244 526 1,033,253 1,131 (562,329) 472,825
Net income............................. - - - - - - 181,942 181,942
Gain on dilution of interest in
an affiliate ........................ - - - - 14,306 - - 14,306
Foreign currency translation
adjustment relating to an affiliate.. - - - - - (1,092) - (1,092)
---------- --------- --------- ----- ---------- -------- --------- --------
Balance at December 31, 2004........... 3,000,000 6,017,310 244 526 1,047,559 39 (380,387) 667,981
========== ========= ========= ===== ========== ======== ========= ========
See accompanying notes to con solidated financial statements.
F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2003 2004 2004
-------- ------- -------- -------
RMB RMB RMB US$
Cash flows from operating activities:
Net (loss) income........................................... (262,781) (64,541) 181,942 21,974
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
(Gain) loss on disposition of discontinued components..... (20,144) 7,017 - -
Loss on disposal of a subsidiary.......................... - 1,158 - -
Minority interests........................................ (76,073) 46,340 - -
Change in fair value of call option....................... 45,328 - (59,929) (7,238)
Equity in losses (earnings) of affiliates................. 89,520 74,829 (104,529) (12,625)
Gain on disposal of partial interest in an affiliate...... - - (23,040) (2,783)
Deferred income taxes..................................... (6,150) (3,139) - -
Impairment loss provision for advances to affiliates...... 4,451 2,619 530 64
Impairment loss provision for long-lived assets........... 291,648 150 - -
Recovery on amounts due from related companies............ (5,016) - - -
(Gain) loss on disposal of property, plant and
equipment............................................... (895) 581 - -
Depreciation and amortization............................. 106,015 50,889 - -
Amortisation of discount on subscription of the
convertible note receivable............................... (21,914) (6,301) (4,194) (505)
Changes in operating assets and liabilities
(net of effects of acquisition and disposition):
Accounts and other receivables, net....................... (91,973) (67,339) (4,893) (591)
Inventories............................................... (97,220) 31,942 - -
Prepaid expenses and other current assets................. (21,832) (4,661) - -
Due from related companies................................ (10,641) 1,495 - -
Other assets.............................................. (223) 194 - -
Accounts payable and other payables....................... 159,801 35,151 10 1
Accrued liabilities....................................... 28,154 14,408 1,213 146
Income taxes payable...................................... 12,437 (7,087) - -
Other taxes payable....................................... 9,002 (8,904) - -
-------- ------- -------- -------
Net cash provided by (used in) operating activities......... 131,494 104,801 (12,890) (1,557)
-------- ------- -------- -------
F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2003 2004 2004
-------- -------- ------- -------
RMB RMB RMB US$
Cash flows from investing activities:
Subscription of convertible note receivable................. (127,284) - (74,926) (9,049)
Increase in subscription payable............................ - - 62,989 7,607
Increase in notes receivable................................ (464,961) (114,001) (99,399) (12,005)
Repayment of notes receivable............................... 140,412 91,304 43,447 5,247
Decrease (increase) in restricted bank deposits............. 31,596 (14,431) - -
Investments in and advances to affiliates, net.............. (180,612) (197,358) 72,142 8,713
Purchase of property, plant and equipment................... (287,536) (256,872) - -
Proceeds from disposal of interest in an affiliate.......... - - 47,532 5,741
Proceeds from disposal of property, plant and equipment..... 77,320 4,601 - -
Proceeds from disposal of trading securities................ 170 - - -
Increase in amount due from ultimate parent company......... (1,772) (4,030) (33,396) (4,033)
Decrease (increase) in amount due from Chinese joint venture
partners.................................................... 5,356 (200) - -
Proceeds from disposal of business components, net.......... 833 (104,128) - -
-------- ------- ------- -------
Net cash (used in) provided by investing activities........... (806,478) (595,115) 18,389 2,221
-------- ------- ------- -------
Cash flows from financing activities:
Payment of dividends to minority interests.................. (5,801) (1,527) - -
Net increase in notes payable............................... 299,230 - - -
Repayment of loans from a related company................... (22,809) (1,058) - -
Increase (decrease) in bank and other short-term loans...... 84,858 238,498 (27,708) (3,346)
Proceeds from long-term bank loans.......................... 144,410 100,000 - -
Repayment from long-term bank loans......................... (36,000) (26,600) - -
Decrease in amount due to Chinese joint venture partners.... (19,936) - - -
-------- -------- ------- -------
Net cash provided by (used in) financing activities........... 443,952 309,313 (27,708) (3,346)
-------- -------- ------- -------
Net decrease in cash and cash equivalents..................... (231,032) (181,001) (22,209) (2,682)
Cash and cash equivalents, beginning of year.................. 475,656 244,624 63,623 7,684
-------- -------- ------- -------
Cash and cash equivalents, end of year........................ 244,624 63,623 41,414 5,002
======== ======== ======= =======
F - 7
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2003 2004 2004
------- ------ ------- -------
RMB RMB RMB US$
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid - net of amounts capitalized................... 74,873 33,375 - -
Net income tax paid.......................................... 11,410 20,228 - -
======= ====== ======= =======
Supplemental schedule of non-cash investing and financing
activities:
Assignment of notes receivable to a holder of notes payable.. 299,230 - - -
Conversion of convertible note receivable, and the related
transfer from derivative instruments, to equity interest
in an affiliate (see note 7)............................... 50,531 - 119,161 14,391
Deposit paid for acquisition of properties by a fellow
subsidiary on behalf of the Company........................ - - 50,000 6,039
======= ====== ======= =======
See accompanying notes to consolidated financial statements.
F - 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
1. ORGANIZATION AND BASIS OF PREPARATION
China Enterprises Limited (the "Company") was incorporated in Bermuda on
January 28, 1993. Its common stock traded on the New York Stock Exchange
(the "NYSE") until September 27, 2002 when it was suspended from trading
as a result of the Company's failure to meet the NYSE's continuing listing
standards. On November 26, 2002, the Company's common stock began trading
on the OTC (Over-the-Counter) Bulletin Board. On December 30, 2002, the
common stock of the Company was delisted from trading on the NYSE.
As of December 31, 2004, the Company had the following principal
subsidiaries (together with the Company, collectively referred to as the
"Group"):
- Container Limited ("Container", incorporated in the British Virgin
Islands (the "BVI"));
- Capital Canton Limited ("Capital Canton", incorporated in the BVI);
- Century Lead Limited ("Century Lead", incorporated in the BVI);
- Honest Map Limited ("Honest Map", incorporated in the BVI);
- Leading Returns Limited ("Leading Returns", incorporated in the
BVI);
- Manwide Holdings Limited ("Manwide", incorporated in the BVI);
- Million Good Limited ("Million Good", incorporated in the BVI);
- Orion Tire Corporation ("Orion Tire", incorporated in the United
States of America (the "US"));
- Orion (B.V.I.) Tire Corporation ("Orion BVI", incorporated in the
BVI);
- Sincere Ocean Limited ("Sincere Ocean", incorporated in the BVI);
and
- Ventures Kingdom Limited ("Ventures Kingdom", incorporated in the
BVI).
- [CHINIES CHARACTERS]("Rosedale", incorporated in the People's
Republic of China (the "PRC"));
All of these subsidiaries are separate legal entities with limited
liability.
F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT CAPITAL, NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
1. ORGANIZATION AND BASIS OF PREPARATION - CONTINUED
Details of these subsidiaries are summarized as follows:
Capital Century Honest Leading Million
Container Canton Lead Map Returns Good
---------- ---------- ---------- ----------- ----------- ----------
Legal status Limited Same as Same as Same as Same as Same as
liability Container Container Container Container Container
company
Principal activities Investment Investment Investment Investment Investment Investment
holding holding holding holding and holding and holding
financing financing
Registered capital/ US$1 US$1 US$1 US$1 US$1 US$1
Issued capital
(amount as stated)
Percentage of 100 100 100 100 100 100
ownership by the
Company (%)
Sincere Ventures Orion Orion
Ocean Kingdom Manwide Rosedale Tire BVI
---------- ----------- ---------- ------------ ---------- ----------
Legal status Same as Same as Same as Same as Same as Same as
Container Container Container Container Container Container
Principal activities Investment Investment Investment Property Investment Investment
holding holding and holding holding holding holding
financing
Registered capital/ US$1 US$1 US$1 US$3,000,000 US$1 US$100
Issued capital
(amount as stated)
Percentage of 100 100 100 100 60 60
ownership by the
Company (%)
As of December 31, 2004, the Company had the following significant equity
method affiliates:
- Wing On Travel (Holdings) Limited (formerly known as Ananda Wing On
Travel (Holdings) Limited and incorporated in Bermuda, hereinafter
together with its subsidiaries collectively referred to as "Wing
On"); and
- Hangzhou Zhongce Rubber Co., Limited ("HZ", located in Hangzhou,
Zhejiang Province, the PRC).
As of December 31, 2003, the Company had a 32.21% equity interest in Wing
On. As a result of the transactions as detailed in note 6, the Company's
equity interest in Wing On had been reduced to 19.58% as of December 31,
2004. Wing On is engaged in the provision of package tours, travel and
other related services and hotel operation with its shares listed on The
Stock Exchange of Hong Kong Limited.
HZ and its consolidated subsidiaries (the "PRC entities") is engaged in
the manufacture of rubber tires in the PRC, and remained as a consolidated
subsidiary of the Company for the periods presented until the Company sold
a 25% equity interest in HZ on September 30, 2003. See note 3 for details
of this disposition. Thereafter, HZ became a 26% owned equity affiliate of
the Company.
The PRC entities conduct their operations in the PRC. The Company is,
accordingly, subject to special considerations and significant risks not
typically associated with investments in equity securities of the US and
western European companies. These include, among others, risks associated
with the political and economic environment, foreign currency exchange,
import restrictions and legal system of the PRC.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the US ("U.S. GAAP").
F - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the assets,
liabilities, revenue and expenses of the Company and its
consolidated subsidiaries.
All significant intercompany balances and transactions have been
eliminated on consolidation. Investments in 50% or less owned
companies over which the Company exercises significant influence but
not control, are accounted for using the equity method. Under the
equity method, the Company's proportionate share of the affiliate's
net income or loss is included in the consolidated statement of
operations.
(b) REVENUES
Revenues represent the invoiced value of goods, net of value-added
tax ("VAT") and other sales taxes, supplied to customers. Revenues
are recognized upon delivery and acceptance of goods by the
customers. The Company permits the return of damaged or defective
products and accounts for these returns as deduction from sales.
(c) SHIPPING AND HANDLING FEES AND COSTS
Costs for transportation of products to customers is recorded as a
component of selling, general and administrative expense (see note
17).
(d) CASH AND CASH EQUIVALENTS
The Company considers cash on hand, demand deposits with banks and
liquid investments with an original maturity of three months or less
when purchased to be cash and cash equivalents. Included in cash and
cash equivalents as of December 31, 2003 and 2004 were Renminbi
deposits of Rmb21 (US$3) and Rmb637 (US$77), respectively.
(e) IMPAIRMENT
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company evaluates the impairment of
long-lived assets based on the projection of undiscounted cash flows
whenever events or changes in circumstances indicate that the
carrying amounts of such assets may not be recoverable. In the event
such cash flows are not expected to be sufficient to recover the
recorded value of the assets, the assets are written down to their
estimated fair values (see note 4).
F - 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(f) INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes". Under
this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and to operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply when those
temporary differences are expected to reverse. Valuation allowances
are established to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of, the
deferred tax asset will not be realized.
(g) VAT AND CONSUMPTION TAX ("CT")
All of the Group's PRC entities are subject to VAT and CT. Such
taxes are recognized on an accrual basis and revenues are recorded
net of these taxes.
(h) FOREIGN CURRENCIES
The PRC entities of the Group maintain their books and records in
Renminbi, their functional currency. Foreign currency transactions
are translated into Renminbi at the applicable exchange rates quoted
by the People's Bank of China (the "unified exchange rates")
prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated into
Renminbi using the applicable unified exchange rates prevailing at
the respective balance sheet dates. Non-monetary assets and
liabilities are translated at the unified exchange rates prevailing
at the time the assets or liabilities were acquired. The resulting
exchange differences are included in the consolidated statement of
operations.
The translation of Renminbi (Rmb) amounts into United States dollar
(US$) amounts are included solely for the convenience of readers in
the United States of America and have been made at US$1.00 =
Rmb8.28, the unified exchange rate on December 31, 2004. No
representation is made that the Renminbi amounts could have been, or
could be, converted into United States dollar at that or at any
other rate.
F - 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(i) PROFIT APPROPRIATION
In accordance with the relevant laws and regulations for
Sino-foreign equity joint venture enterprises, the PRC entities is
required to make appropriation of 5% of after tax profit as prepared
in accordance with accounting principles generally accepted in the
PRC to non-distributable reserve funds as determined by the Board of
Director of the PRC entities. These reserves include a general
reserve fund, an enterprise expansion fund, and a staff welfare and
incentive bonus fund. The general reserve fund is used to offset
future extraordinary losses. The PRC entities may, upon resolution
passed by the shareholders, convert the general reserve fund into
capital. The enterprises expansion fund is used for the expansion of
the PRC entities' operation and can be converted to capital subject
to approval by the relevant authorities. The staff welfare and
incentive bonus fund is used for the collective welfare of the
employees of the PRC entities. In addition, certain of the PRC
entities were granted special reserve fund by the government for
specific projects carried out by the relevant PRC entities. The
appropriation for the staff welfare and incentive bonus fund is
charged to consolidated statements of operations of the PRC
entities. All other reserve funds are included in retained earnings
of the PRC entities but can only be used for specific purpose and
are not distributable as cash dividend.
Included in the accumulated deficit of the Group as of December
2002, 2003 and 2004 was non-distributable reserves attributable to
the Group of Rmb39,708, Rmb524 and Rmb1,736, respectively.
(j) BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
The Company calculates basic and diluted (loss) earnings per share
in accordance with SFAS No. 128, "Earnings Per Share". Basic (loss)
earnings per share is computed using the weighted-average number of
common shares outstanding during the year. Diluted (loss) earnings
per share is computed using the weighted-average number of common
shares and common stock equivalent shares outstanding during the
year. Common stock equivalent shares such as shares issuable upon
the exercise of stock options are excluded from the computation if
their effect is anti-dilutive. During 2002 and 2003, all outstanding
options were anti-dilutive (see note 11). There were no outstanding
share options during fiscal 2004.
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those
estimates.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(l) FINANCIAL INSTRUMENTS
The Company recognizes all derivative instruments on the balance
sheet at fair value in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Company does not
purchase derivative instruments to manage risks.
The Group's financial instruments that are exposed to concentration
of credit risk consist primarily of its cash and cash equivalents,
other receivables, notes receivable, amount due from ultimate parent
company, advances to affiliates and convertible notes. The Group's
cash and cash equivalents are high-quality deposits placed with
banking institutions with high credit ratings; therefore, the credit
risk is limited. Other receivables comprise principally interest
receivable from note holders. As of December 31, 2004, the notes
receivable and related interest receivable are due from six parties
and the Group has reviewed their credit worthiness and does not
expect to incur significant losses for uncollected accounts. The
Group has also reviewed the credit worthiness and financial position
of its ultimate parent company and affiliates for credit risks
associated with amount due from an ultimate parent company, advances
to affiliates and convertible notes receivable from an affiliate.
These entities have good credit standing and the Group does not
expect to incur significant losses for uncollected advances from
these entities.
The carrying value of current financial assets and current financial
liabilities approximate their fair value due to the short-term
nature of these instruments. The fair value of convertible notes
receivable as of December 31, 2003 and 2004 was Rmb89,947 and
Rmb113,363, respectively, which was determined based on the
estimated net amount the Company would receive as of December 31,
2003 and 2004 from the note issuer, the interest rates of similar
instruments from market, and the estimated fair value of the call
option embedded in the convertible note.
(m) COMPREHENSIVE (LOSS) INCOME
The Company reports comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income". Comprehensive income consists
of net income (loss) and other gains and losses affecting
shareholders' equity that, under U.S. GAAP are excluded from net
income (loss). Comprehensive (loss) income for 2002, 2003 and 2004
includes translation adjustment relating to an affiliate.
Comprehensive (loss) income has been disclosed within the
consolidated statements of operations and comprehensive (loss)
income.
(n) SEGMENT INFORMATION
The Company reports information about operating segments on a basis
consistent with the Company's internal organization structure as
well as information about geographic areas and major customers in
accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(o) RELATED PARTIES
Parties are considered to be related to the Company if the parties
that, directly or indirectly, through one or more intermediaries,
control, are controlled by, or are under common control with the
Company. Related parties also include principal owners of the
Company, its management, members of the immediate families of
principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can
significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be
prevented from fully pursuing its own separate interests. A party
which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership
interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting
parties might be prevented from fully pursuing its own separate
interests is also a related party.
(p) STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees", and has adopted the disclosure-only
requirements of SFAS No. 123, "Accounting of Stock-Based
Compensation". Compensation expense related to employee stock
options is recorded only if, on the measurement date, the quoted
market price of the underlying stock exceeds the exercise price.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R "Share-Based Payment". This statement is a
revision to SFAS No. 123 and supersedes APB No. 25 (see Note 2(s)).
(q) ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising
expenses were Rmb7,550, Rmb5,145 and RmbNil for the years ended
December 31, 2002, 2003 and 2004, respectively.
(r) DILUTION OF INTEREST IN EQUITY AFFILIATE/SUBSIDIARY
The Company records the gains or losses arising from issuance by an
equity affiliate or subsidiary of its own stock in additional
paid-in capital account within shareholders' equity in the
consolidated financial statements.
F - 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(s) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R that will require
compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date
fair value of the equity or liability instruments issued. In
addition, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. SFAS No. 123R
replaces SFAS No. 123, and supersedes APB Opinion No. 25. SFAS No.
123R is effective as of the beginning of the first annual reporting
period that begins after June 15, 2005. The Company does not expect
the adoption of SFAS No. 123R to have a material impact on the
Company's financial position, cash flows or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29." SFAS No.
153 is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged.
APB Opinion No. 29, "Accounting for Nonmonetary Transactions,"
provided an exception to its basic measurement principle (fair
value) for exchanges of similar productive assets. Under APB Opinion
No. 29, an exchange of a productive asset for a similar productive
asset was based on the recorded amount of the asset relinquished.
SFAS No. 153 eliminates this exception and replaces it with an
exception of exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 is effective for the Company as
of July 1, 2005. The Company will apply the requirements of SFAS No.
153 prospectively and does not expect its adoption to have a
material impact on the Company's financial position, cash flows or
result of operations.
(t) RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform to the
current year presentation. These reclassifications had no effect on
the results of operations or financial position for any year
presented.
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
3. DIVESTITURE
On September 30, 2003, the Company completed the sale of its 25% equity
interest in HZ, for Rmb164,660 in cash, and recognized a loss of Rmb1,158
on the sale. As a result of this transaction, the Company's equity
interest in HZ is reduced from 51% to 26%, and the Company can only
exercise significant influence but not control over HZ, which becomes an
equity method affiliate of the Company. The Company has included the
results of the operations of HZ for the nine-month period ended September
30, 2003 in its consolidated financial statements for the year ended
December 31, 2003, and has accounted for HZ's results of operations from
October 1, 2003 to December 31, 2003 and for the year ended December 31,
2004 using equity method of accounting.
See note 4 for other divestitures that have been classified as
discontinued operations.
4. DISCONTINUED OPERATIONS
During 2002, the Company disposed of certain of its subsidiaries which
included Double Happiness Tyre Industries Corporation Limited ("DH"),
Yantai C.S.I. Rubber Co., Limited ("YT"), Shandong C.S.I. Synthetic Fiber
Co., Limited ("SD") and Yinchuan C.S.I. (Greatwall) Rubber Co., Ltd.
("YC").
(a) DH
DH consisted of a bias tire factory and a radial tire factory under
construction. All of DH's revenue was contributed by the bias tire
factory as trading and manufacturing activities were only carried
out in this factory. In fiscal 1995, DH temporarily suspended
construction of the radial tire factory. Total costs incurred for
the factory up to December 31, 2002, net of provisions, were
approximately Rmb39,886, and had been included in
construction-in-progress under property, plant and equipment.
In late September 2001, the Company's management adopted a plan to
dispose of its entire interest in DH and subsequently entered into a
share transfer agreement with a third party to dispose of its entire
interest in the bias tire factory only for a consideration of
Rmb41,000. Although the completion of the sale was pending upon
certain approvals being obtained from government authorities, the
Company transferred substantially all its risks and benefits of
ownership of the factory to the buyer in early December 2001 and had
ceased to account for the results of operations and the assets and
liabilities of the factory from the disposal date. The sales
proceeds were received by the Company in cash during fiscal 2001.
F - 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
4. DISCONTINUED OPERATIONS - continued
(a) DH - continued
The Company had also recognized an impairment loss of Rmb31,187 in
fiscal 2001 for the planned disposition of the radial tire factory
calculated on the basis of anticipated sales value of Rmb30,000
which was expected to be received in fiscal 2002 less a loss of
Rmb73,728 from the waiver of loan advances by the Company to the
factory.
The estimated selling price of Rmb30,000 was derived from prior
discussions with potential purchasers of the factory; however, the
market conditions worsened in fiscal 2002 and, as a result, the
factory remained unsold as of December 31, 2002. The Company
recognized an additional impairment expense of Rmb42,479 in the
fourth quarter of fiscal 2002 to write down the net assets of the
factory to a nominal value of Rmb1 in view of the deteriorating
market conditions.
In June 2003, the Company entered into a share transfer agreement
with a third party and completed the disposition of the radial tire
factory for a consideration of Rmb10,000. The Company recognized a
gain on such disposition of Rmb11,211 in 2003.
Interest expense incurred on the outstanding loans used to finance
the construction of the factory, amounting to Rmb7,000 and Rmb743
for the years ended December 31, 2002 and 2003, respectively, has
been included in loss from discontinued operations.
(b) YT
In the fourth quarter of fiscal 2001, the Company decided to sell
its interests in YT as a result of the change in business climate on
the demand of traditional pneumatic tire. The Company subsequently
entered into a share transfer agreement with a third party to
dispose of its entire interest in YT and the respective
shareholder's advance of Rmb20,167 for an aggregate consideration of
Rmb26,000. The sale was completed in 2002 and the direct selling
costs were Rmb550. The Company recognized a gain on such disposition
of Rmb7,967 in 2002.
(c) SD
In January 2002, the Company signed a transfer agreement to sell its
entire interest in SD to its Chinese joint venture partner for a
consideration of Rmb10. The sale was completed in July 2002 upon
obtaining approval from the relevant government authorities. The
Company transferred substantially all its risks and benefit of
ownership of SD to the buyer and recognized a gain on such
disposition of Rmb12,177 in the third quarter of 2002.
F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
4. DISCONTINUED OPERATIONS - continued
(d) YC
In the second quarter of 2002, the Company recognized an impairment
loss provision for the long-lived assets of YC of Rmb174,384. Due to
poor operating results and continued weakness in markets operated by
YC, the Company reviewed and revised the projected future operating
results of YC and determined that its expected future undiscounted
cash flows were less than the carrying amount of its long-lived
assets resulting in the recognition of this non-cash impairment
charge.
In the second half of fiscal 2002, the Company initiated a process
to sell YC. The Company recognized an additional non-cash impairment
charge of Rmb74,785 to write down the carrying value of the
long-lived assets of YC representing management's best estimate of
the loss to be recognized on the sale.
In January 2003, the Company entered into a share transfer agreement
with the Chinese joint venture partner of YC to dispose of its
entire interest in YC for an initial aggregate consideration of
Rmb35,000 approximating the carrying value as of December 31, 2002.
In September 2003, the Company entered into a supplemental agreement
with the Chinese joint venture partner of YC to reduce the sale
consideration to Rmb29,000. The sale was completed in January 2003
and the Company recognized a loss on this disposition of Rmb14,724
in 2003.
Accordingly, the operating results of DH, YT, SD and YC have been
segregated from continuing operations and reported as a separate line item
on the consolidated statement of operations.
Operating results of the discontinued operations are summarized below:
YEAR ENDED DECEMBER 31,
---------------------------
2002 2003 2004
-------- ------ ------
Rmb Rmb Rmb
Revenues.................................................. 621,653 - -
======== ====== ======
Loss from operations of discontinued components before
income taxes and minority interests (including
impairment write-downs for those business components of
Rmb291,648 in 2002, RmbNil in 2003 and 2004, gain on
disposition of Rmb20,144 in 2002, loss on disposition
of Rmb7,017 in 2003 and RmbNil in 2004, respectively),
net of applicable income tax of RmbNil
in 2002, 2003 and 2004................................... (345,012) (7,760) -
Minority interests........................................ 145,174 - -
-------- ------ ------
Loss from discontinued operations ........................ (199,838) (7,760) -
======== ====== ======
F - 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
5. NOTES RECEIVABLE
The notes, carrying interest at commercial rates, are unsecured and
receivable from unrelated parties. Other than Rmb26,183 which is repayable
on demand, the remaining balance is due in 2005.
6. INVESTMENTS IN AND ADVANCES TO AFFILIATES
WING ON:
In April 2002, Million Good subscribed for 4,800,000,000 new ordinary
shares of HK$0.01 each ("Subscription Shares") in Wing On, representing
approximately 34.6% of the then outstanding share capital of Wing On, at
an issue price of HK$0.027 per Subscription Shares for an aggregate
subscription price of HK$132,715 (Rmb140,784, including transaction costs
of Rmb3,304), pursuant to an agreement entered into in February 2002. The
excess of the equity in the fair value of net assets of Wing On over
Million Good's aggregate investment costs of Rmb146,552 was allocated on a
pro rata basis to Wing On's non-current assets pursuant to the rules
specified in SFAS No. 141, "Business Combinations" and out of which
Rmb84,538 was allocated to property, plant and equipment that are subject
to depreciation and amortisation. As a result, Million Good has a
different basis in those assets than Wing On has, and such difference is
amortised over the average depreciable lives of the underlying property,
plant and equipment. The remainder was allocated to other equity method
affiliates and long-term investments of Wing On.
As part of the acquisition of an equity interest in Wing On, Million Good
also subscribed for a two-year convertible note (the "Old Note") issued by
Wing On in the principal amount of HK$120,000 (Rmb127,284). In July 2002,
Million Good exercised certain of its conversion rights under the terms of
the Old Note, resulting in the issuance of 1,100,000,000 new ordinary
shares of Wing On to Million Good. This additional investment amounted to
HK$47,639 (Rmb50,531) which comprised HK$15,373 (Rmb16,306) of the
carrying value of the Old Note (net of unamortized discount on
subscription) and the fair value of the related convertible feature of
HK$32,266 (Rmb34,225). No conversion rights were exercised by Million Good
or other convertible note holders during fiscal 2003.
On January 13, 2004, March 17, 2004 and May 4, 2004, Wing On entered into
agreements with the Company and another holder of its convertible notes in
relation to the issuance of new convertible notes, whereby Wing On issued
new convertible notes to the Company (the "New Note") for a consideration
of HK$155,000 (Rmb164,873), of which HK$84,800 (Rmb89,947) was settled by
the cancellation of the Company's then unsettled Old Note and the
remaining balance was satisfied in cash by the Company. The New Note is
convertible into new shares of Wing On during a period of three years from
the date of issue, at an initial conversion price of HK$0.02 per share,
subject to adjustments.
In October and November 2004, the Company exercised certain of its
conversion rights under the terms of the New Note, resulting in the
issuance of 5,000,000,000 new ordinary shares of Wing On to Million Good.
The additional investment amounted to HK$100,000 (Rmb106,370) which
represented the carrying value of the New Note. In November 2004, the
Group disposed of its 2,250,000,000 shares in Wing On at the price of
HK$0.02 per share to unrelated parties, resulting in a gain on disposal of
Rmb23,040.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
6. INVESTMENTS IN AND ADVANCES TO AFFILIATES - CONTINUED
WING ON: - CONTINUED
In November 2004, the Company also entered into two placing and
subscription agreements with Wing On and a placing broker (the "Placing
Agent") pursuant to which the Placing Agent agreed to place 6,000,000,000
shares of HK$0.01 each in Wing On then held by the Company at the price of
HK$0.028 per share to independent investors and the Company would
subscribe for up to 6,000,000,000 new shares in Wing On at the same price
of HK$0.028 per share. This "top-up placing" arrangement was agreed by the
Company as the major shareholder of Wing On in order to expedite the
capital raising activities of Wing On. The first placing and subscription
agreement and the second placing and subscription agreement related to the
placing and the conditional subscription of 3,660,000,000 and
2,340,000,000 shares in Wing On, respectively. The subscription of the
shares under the second placing and subscription agreement was conditional
upon, among others, the approval of the independent shareholders of Wing
On. As such, the Company is entitled to complete the second placement
without the obligation to complete the second subscription. In December
2004, the Company completed the first placing and subscription agreement
and the second placement. As of December 31, 2004, proceeds received from
the second placement were shown in the balance sheet as subscription
payable and was settled when the second subscription was completed in
January 2005. Details of these are set out in note 19.
From May through September of 2002, several note holders of Wing On
exercised the conversion right under the Old Note and Wing On also
repurchased certain of its ordinary shares through unsolicited block
transactions. From October through November of 2004, another note holder
of the New Note exercised their conversion right under the New Note. These
transactions resulted in a net dilution of the Company's interest in Wing
On and the recognition by the Company of a net unrealized loss on dilution
of Rmb5,622, and an unrealized gain of Rmb14,306 during each of the years
ended December 31, 2002 and 2004, respectively, recorded in addition
paid-in-capital. The Company also recorded its share of unrealized loss of
Rmb626 in additional paid-in capital as a result of dilution of interest
in a subsidiary of Wing On during fiscal 2002.
HZ:
In June 2003, the Group entered into a share transfer agreement for the
disposition of a 25% equity interest in its then 51% owned subsidiary, HZ
(which in turn owns a 51.24% equity interest of FCJ). HZ and FCJ are
hereinafter collectively referred to as "HZ Tire". The sale was completed
in September 2003 and as a result of this disposition, HZ Tire became an
equity affiliate of the Group. See note 1 for details of HZ and note 16
for segment information of HZ Tire prior to the disposition.
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
6. INVESTMENTS IN AND ADVANCES TO AFFILIATES - CONTINUED
The following table presents summarized comparative financial information
for the Company's investments in 50% or less owned investments, over which
the Company has the ability to exercise significant influence but does not
control, which are accounted for using the equity method:
2002 2003 2004
--------- --------- ---------
Rmb Rmb Rmb
Revenues............................................. 1,603,559 5,307,123 6,853,459
Operating (loss) gain................................ (258,975) (83,656) 232,267
Net (loss) gain...................................... (323,191) (355,237) 94,148
Current assets....................................... 671,185 2,106,765 2,590,185
Non-current assets................................... 1,416,045 1,575,892 4,206,376
Current liabilities.................................. 735,234 2,277,462 3,410,373
Non-current liabilities.............................. 511,772 326,991 1,439,385
Shareholders' equity................................. 840,224 1,027,988 1,438,236
Advances to the affiliates are Rmb95,695 and Rmb91,384 as adjusted for the
equity method loss of Rmb60,906 and RmbNil as of December 31, 2003 and
2004, respectively. As of December 31, 2004, other than aggregated
advances to an affiliate of Rmb78,743 which bear interest at Hong Kong
Prime Rate, the amounts are interest free. Advances to affiliates are
repayable upon demand except for an amount of RMB78,743 which is repayable
in nine months upon serving a demand notice by the Company to the
affiliate; however, the Company has agreed not to require repayment prior
to January 2006. An allowance relating to these advances amounting to
Rmb4,451, Rmb2,619 and Rmb530 was charged to expense as a component of
selling, general and administrative expenses for fiscal 2002, 2003 and
2004.
Equity ownership percentages for these affiliates are presented below:
Place of
incorporation/
AFFILIATE registration 2003 2004
- --------- -------------- ------ ------
Wing On............................................. Bermuda 32.21% 19.58%
X One Holding Limited............................... Hong Kong 33.33% 33.33%
HZ.................................................. PRC 26% 26%
F - 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
7. CONVERTIBLE NOTE RECEIVABLE FROM AN AFFILIATE, NET/DERIVATIVE INSTRUMENT
As of December 31, 2003, the Old Note consisted of Rmb81,448 principal
amount, net of unamortized discount on subscription of the Old Note. The
Old Note bore interest at a rate of 2% per annum payable semi-annually in
arrears. The unsettled Old Note was cancelled upon the issuance of the New
Note (see note 6). As of December 31, 2004, the New Note consisted of
Rmb45,008 principal amount, net of unamortized discount on subscription of
the New Note. The New Note bears interest at a rate of 2% per annum
payable semi-annually in arreas. The Company has a right to convert the
New Note into ordinary shares of Wing On at a rate per share equal to
HK$0.02, subject to adjustments, at any time prior to the New Note's
maturity date, which will be three years from the date the New Note is
issued.
In accordance with SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", as amended, the conversion option element of the Old
Note and New Note represents an embedded derivative instrument which must
be accounted for separately from the Note and, as such, to be measured at
fair value when initially recorded and at subsequent reporting dates. The
fair value of this conversion option, representing a discount on
subscription of the Old Note and the New Note, was estimated using the
Black-Scholes option pricing model at the date of its subscription and as
of each subsequent balance sheet date. The impact of changes in fair value
of this conversion option, taking into account the portion of the
conversion option exercised during fiscal 2002, 2003 and 2004 (see note
6), was loss of Rmb45,328, RmbNil and gain of Rmb59,929, which have been
recognized in the consolidated statement of operations for fiscal 2002,
2003 and 2004, respectively.
8. DEPOSIT PAID FOR ACQUISITION OF PROPERTIES
On June 16, 2004, Manwide entered into a conditional sale and purchase
agreement with Shanghai Jiu Cheng Investment Limited ("Jiu Cheng"), an
unrelated property developer, for the acquisition of a parcel of land
situated in Shanghai, the PRC (the "Land") and the 24-storey building and
carpark being constructed (the "Building", hereinafter with the Land are
collectively referred to as the "Xiang Zhang Garden").
The total consideration for the acquisition of Xiang Zhang Garden, on a
completion basis, is Rmb450,000. A deposit of Rmb50,000 was paid by
Manwide to Jiu Cheng on June 18, 2004 and recorded as deposit paid for
acquisition of properties as of December 31, 2004.
The remaining consideration of Rmb400,000 is to be settled by the
assumption of bank loans of Rmb380,000 and cash consideration of Rmb20,000
upon the grant of bank loan and the transfer of the ownership of Xiang
Zhang Garden to Manwide. The closing of the acquisition is subject to
certain conditions precedent.
F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
8. DEPOSIT PAID FOR ACQUISITION OF PROPERTIES - CONTINUED
According to the conditional sale and purchase agreement, prior to the
completion of the acquisition, Jiu Cheng should (i) obtain the certificate
in respect of the land use rights of the Land and the ownership of the
Building; (ii) obtain an approval from the relevant government authorities
in Shanghai that the authorized usage of the properties be changed from
office to both commercial and residential and that all relevant fees and
charges arising from the sale of the Land payable to the relevant
government authorities having been settled in full; (iii) agree with
Manwide on the specification of installation, fixtures and furniture and
other internal decoration of the properties; (iv) procure all the
contractors engaged in the development/construction of the properties to
enter into agreements with Manwide to bind these contractors with
obligations to Manwide to rectify all defects of the properties which may
arise after the completion of the development/construction; and (v)
procure the granting of a loan ("Loan") to be granted by PRC banks to
Manwide to finance the remaining consideration.
Provided that if the conditions are not fulfilled on or before June 1,
2005, Manwide shall agree to a further extension of not less than 60 days
without imposing any fine on Jiu Cheng. If the conditions are not
fulfilled within the extended period, Manwide shall be entitled to
terminate the agreement and Jiu Cheng shall refund the deposit to Manwide
together with interests accrued during the period from the date of the
agreement to the date of deposit is refunded and calculated on the
relevant prevailing market interest rate.
It is one of the conditions for completion of the acquisition that Jiu
Cheng should obtain approval for the change of authorized usage of the
properties from office to both commercial and residential. Should Jiu
Cheng fail to obtain such approval within 150 days from the date of the
agreement, Manwide is entitled to either (i) to proceed with the agreement
in accordance with the existing terms and conditions; or (ii) to acquire
the 1st to 7th floors and the 23rd floor of the properties together with
the two levels underground carparks for a consideration of Rmb70,000.
However, the conditions stated above for the change of use of Xiang Zhang
Garden had not been fulfilled within the said period and accordingly, Jiu
Cheng and the Group entered into another agreement dated February 3, 2005
pursuant to which, among other things, (i) the Group will pay, on behalf
of Jiu Cheng, RMB22,000 to the main contractor of Xiang Zhang Garden (the
"Main Contractor"); and (ii) the amount paid by the Group in (i) will be
deducted from the sales consideration of Xiang Zhang Garden.
Further, the Group had advanced an additional RMB8,000 to Jiu Cheng
pursuant to this additional agreement and the aggregate sum paid by the
Group to Jiu Cheng amounted to RMB58,000 as of the date of this report.
In June 2005, the Group had commenced legal proceedings against Jiu Cheng,
among other things, to demand Jiu Cheng to fulfill its obligations under
the above two agreements and applied to a PRC court an injunction order on
Xiang Zhang Garden to stop Xiang Zhang Garden from being transferred (the
"Injunction Order(s)"). It had also come to the attention of the Group
that one of the three secured creditors of Jiu Cheng and the Main
Contractor had already applied to and being granted the Injunction Orders
and they, together with the other two secured creditors, had priority over
the Group on Xiang Zhang Garden.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
8. DEPOSIT PAID FOR ACQUISITION OF PROPERTIES - CONTINUED
As a condition precedent to the application of the Injunction Order, the
Group had issued a counter guarantee of RMB402,000 to an institution in
the PRC which provided a guarantee of the same amount to the PRC court on
behalf of the Group.
At the same time, the directors of the Group are also in discussion with
Jiu Cheng for settlement of the above matters; however, there can be no
assurance that such matter can be resolved and settled with Jiu Cheng
eventually.
Despite the above developments, the directors of the Group have consulted
its legal counsel and decided to proceed with the acquisition of Xiang
Zhang Garden in consideration of the following:
(a) the legal title of Xiang Zhang Garden can be transferred to the
Group when the debts of Jiu Cheng owed to the three secured
creditors and the Main Contractor are settled by the Group;
(b) the usage of Xiang Zhang Garden can be changed to both commercial
and residential when the Group obtains the legal title to Xiang
Zhang Garden and makes the application to the relevant authority;
(c) the acquisition of Xiang Zhang Garden, on a completion basis, is
expected to bring economic benefits to the Group taking into account
of the estimated market value of Xiang Zhang Garden as of June 30,
2005; and
(d) the ability of the Group to meet the cash flow requirements to
finance the acquisition and completion of Xiang Zhang Garden, given
the current financial position of the Group and financial resources
available to the Group from internally generated funds, advances
from its holding companies and/or financial institutions.
9. PROVISION FOR INCOME TAXES
The components of profit (loss) from continuing operations before income
taxes and minority interests are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2003 2004
-------- -------- -------
Rmb Rmb Rmb
The PRC.............................................. 154,900 117,650 29,696
All other jurisdictions.............................. (131,045) (117,499) 152,246
-------- -------- -------
23,855 151 181,942
======== ======== =======
F - 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
9. PROVISION FOR INCOME TAXES - CONTINUED
The Company was incorporated under the laws of Bermuda and, under current
Bermuda law, is not subject to tax on income or on capital gains. The
Company has received an undertaking from the Ministry of Finance of Bermuda
pursuant to the provisions of the Exempted Undertakings Tax Protection Act,
1966, as amended, that in the event that Bermuda enacts any legislation
imposing tax computed on profits or income, including any dividend or
capital gains withholding tax, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax,
then the imposition of any such tax shall not be applicable to the Company
or to any of its operations or the shares, debentures or other obligations
of the Company until March 28, 2016. This undertaking is not to be
construed so as to (i) prevent the application of any such tax or duty on
such person as an ordinary resident in Bermuda; or (ii) prevent the
application of any tax payable in accordance with the provision of the Land
Tax Act, 1967 or otherwise payable in relation to any land leased to the
Company in Bermuda.
Except as stated in the following paragraphs, the Group's PRC entities and
subsidiaries are subject to income taxes calculated at tax rates (ranging
from 15% to 44%) on the taxable income as reported in the statutory
financial statements adjusted for taxation based on tax laws prevailing at
their respective places of incorporation and operations.
In accordance with the relevant income tax laws applicable to Sino-foreign
joint ventures in the PRC, the Group's PRC entities, other than FCJ, having
a joint venture term of not less than 10 years and engaging in production
industries, are fully exempt from the Chinese State unified income tax for
two years starting from the first profit-making year (after utilization of
available accumulated losses carried forward), followed by a 50% reduction
of the Chinese State unified income tax for the next three years thereafter
("tax holiday"). In accordance with the same tax laws, the PRC entities,
other than FCJ, are also exempt from the PRC local income tax. Accumulated
losses brought forward by the PRC entities, not exceeding a period of five
years, can be offset against the profits to arrive at the assessable
profits for income tax computation purposes. A summary of the tax
concessions available to the PRC entities for fiscal 2002 is as follows:
CHINESE STATE
UNIFIED CHINESE LOCAL CONCESSION FROM CONCESSION YEAR OF
INCOME TAX INCOME TAX CHINESE STATE FROM CHINESE COMMENCEMENT
PRC ENTITIES RATE (%) RATE (%) UNIFIED INCOME TAX LOCAL INCOME TAX OF TAX HOLIDAY
- ------------ -------- -------- ------------------ ---------------- --------------
HZ 15.0 1.5 None Full exemption for 1993
10 years starting
from the commencement
of tax holiday
DH 24.0 3.0 None Same as HZ 1992
YC 24.0 3.0 Specifically Full exemption for 1994
allowed to extend 6 years starting from
the 50% reduction commencement of
for 2001 tax holiday followed
by a 50% reduction
for the next 4 years
thereafter
FCJ 30.0 3.0 None None N/A
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
9. PROVISION FOR INCOME TAXES - CONTINUED
During fiscal 2003 and 2004, the PRC entities are not entitled to any tax
concessions as all tax concession periods have expired. During fiscal 2002,
if the PRC entities were neither in the tax holiday period nor had they
been specifically allowed special tax concessions, they would have recorded
additional income tax expenses of Rmb1,960, the consolidated net loss would
have been increased by Rmb1,000, and basic and diluted net loss per share
would have been increased to Rmb29.03 for the year ended December 31, 2002.
The PRC entities are required to provide for VAT and CT which are the
principal taxes on the sales of tangible goods and the provision of certain
specified services. The general VAT rate applicable to the PRC entities is
17% while CT is calculated at 10% on the domestic sales amount, except that
the 10% CT on radial tire products was abolished since January 1, 2001. VAT
and CT are recognized on an accrual basis and sales are recorded net of
these taxes.
The reconciliation of the effective income tax rate based on profit (loss)
from continuing operations before income taxes and minority interests to
the statutory income tax rates in Hong Kong, the PRC and the United States
is as follows:
2002 2003 2004
---- ---- ----
Rmb Rmb Rmb
Weighted average statutory tax rates................. 17% 18% 17%
Effect of tax holiday................................ (8%) - -
Permanent differences relating to non-taxable
income and non-deductible expenses.................. 74% 8,272% (17%)
Valuation allowance.................................. (5%) - -
Others............................................... (4%) (1,275%) -
-- ------ ---
Effective tax rate................................... 74% 7,015% -
== ====== ===
Provision for income taxes consists of:
2002 2003 2004
---- ---- ----
Rmb Rmb Rmb
Current.............................................. 23,847 13,732 -
Deferred............................................. (5,071) (3,140) -
Adjustment of valuation allowance.................... (1,079) - -
------ ------ --
(6,150) (3,140) -
------ ------ --
17,697 10,592 -
====== ====== ==
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
9. PROVISION FOR INCOME TAXES - CONTINUED
The tax impact of temporary differences gives rise to the following
deferred tax assets:
2003 2004
---- ----
Rmb Rmb
Tax losses carried forward................................................. 16,562 16,562
Valuation allowance for deferred tax assets................................ (16,562) (16,562)
------- -------
- -
======= =======
As of December 31, 2003 and 2004, the tax losses from continuing operations
carried forward derived principally from subsidiaries subject to US income
tax, which amounted to Rmb37,641 and expire at various times through 2006.
The loss carry forwards can only be utilized by the subsidiaries generating
the losses. The valuation allowance refers to the deferred tax assets that
are not more likely than not going to be realized.
10. CAPITAL STOCK
CAPITAL STOCK
Each share of Supervoting Common Stock is entitled to 10 votes whereas each
share of Common Stock is entitled to one vote. The Common Stock is
identical to the Supervoting Common Stock as to the payment of dividends.
Except for the difference in voting rights described above, the Supervoting
Common Stock and the Common Stock rank pari passu in all respects.
SHARE CAPITAL
The Company was incorporated with an initial share capital of 1,200,000
Common Stock with a par value of US$0.01 each which was later reclassified
to Supervoting Common Stock. On May 14, 1993, the authorized share capital
of the Company was further increased from US$12 to US$700 by the creation
of 50,000,000 shares of Common Stock of par value US$0.01 each and
18,800,000 shares of Supervoting Common Stock of par value US$0.01 each.
6,000,000 shares of Supervoting Common Stock (including the 1,200,000
Common Stock reclassified to Supervoting Common Stock) were issued to the
ultimate parent company of the Company as a consideration for the transfer
of two PRC entities to the Company and on June 23, 1993, the Company
redeemed 3,000,000 shares of its outstanding Supervoting Common Stock at
their par value of US$0.01 per share.
There were no movements in share capital of the Company during fiscal 2002,
2003 or 2004.
F - 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
11. STOCK OPTIONS
Pursuant to an executive stock option scheme adopted on June 7, 1994, the
Company grants options to officers and employees, and directors who are
also employees, of the Company and its subsidiaries to subscribe Common
Stock of the Company, subject to a maximum of 910,000 shares. Shares of
Common Stock to be issued upon the exercise of options will be authorized
and unissued shares. An independent committee (the "Committee") of the
Board of Directors, consisting of non-employee directors has been formed to
monitor and consider the granting of options under the scheme. The
subscription price will be determined by the Committee, and will not be
less than 80% of the average closing market price of shares of Common Stock
over the five trading days immediately preceding the date of offer of the
option.
A summary of stock options activity during the three years ended December
31, 2002, 2003 and 2004 is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
US$
Outstanding at January 1, 2002 and December 31, 2002....................... 20,000 9.94
Lapsed..................................................................... (20,000) 9.94
-------
Outstanding at December 31, 2003 and 2004.................................. -
=======
No stock options were granted in fiscal 2002, 2003 or 2004.
All the above share options vested immediately upon the date of grant and
the exercise prices were set at 100% of the market prices of the shares of
the Company prevailing at the dates of grant. Accordingly, no compensation
expense was recognized in the consolidated statements of operations.
12. OBLIGATIONS AND COMMITMENTS
As of December 31, 2004, the Group had outstanding capital commitments for
acquisition of properties amounting to approximately Rmb400,000.
Prior to the full disposition of its tire manufacturing and trading
subsidiaries in September 2003, the Group leased certain of its warehouses
under non-cancellable operating leases expiring at various dates through
2008. Rental expense under these operating leases was Rmb4,397 and Rmb2,250
for the years ended December 31, 2002 and 2003, respectively. As of
December 31, 2004, the Group's subsidiaries did not have any significant
commitments under operating leases.
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
12. OBLIGATIONS AND COMMITMENTS - CONTINUED
Prior to the full disposition of its tire manufacturing and trading
subsidiaries in September 2003, the Company also recorded an estimate of
the product warranty obligation at the time of sale based on the Company's
historical experience. Details of the changes in product warranty provision
are as follows:
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS
--------------------- -----------------
2002 2003 2002 2003
------- ------- ------ --------
Rmb Rmb Rmb Rmb
Balance at beginning of year............ 19,972 23,720 18,000 13,337
Warranties paid......................... (56,183) (46,019) (9,988) -
Warranty provision...................... 59,931 66,799 5,325 -
Eliminated on disposition of
business components................... - (44,500) - (13,337)
------- ------- ------ -------
Balance at end of year.................. 23,720 - 13,337 -
======= ======= ====== =======
13. DISTRIBUTION OF PROFIT
Dividends from the PRC entities will be declared based on the profits as
reported in their statutory financial statements. Such profits will be
different from the amounts reported under U.S. GAAP. As of December 31,
2003 and 2004, the Company had no subsidiaries established in the PRC and
the Company's affiliates in the PRC had an aggregate accumulated profits of
Rmb106,454 and Rmb199,320, respectively, as reported in their statutory
financial statements.
The Company did not propose or pay any dividends for the years ended
December 31, 2002, 2003 and 2004 on the outstanding Supervoting Common
Stock and Common Stock.
F - 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
14. RELATED PARTY BALANCES, TRANSACTIONS AND ARRANGEMENTS
(a) DUE FROM/TO RELATED COMPANIES
As of December 31, 2002, the amounts due from related companies
primarily arise from sales of tires and are unsecured, non-interest
bearing and repayable at the end of credit periods granted ranging
from 90 days to 180 days. The management reviewed the recoverability
of these receivables during fiscal 2002 and recognized a net recovery
of Rmb5,016 in the consolidated statement of operations for fiscal
2002.
As of December 31, 2003 and 2004, the amount due from ultimate parent
company was unsecured, non-interest bearing and had no fixed repayment
terms.
As of December 31, 2004, the amount due to a fellow subsidiary was
unsecured, non-interest bearing and had no fixed repayment terms. As
the fellow subsidiary has confirmed not to demand repayment of the
amount within one year from the balance sheet date, the amount is
shown as non-current.
As of December 31, 2003 and 2004, the Company had no amounts due
from/to related companies as a result of the disposition of its
subsidiaries in the PRC.
(b) MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to a management and administrative services agreement between
the Company and the ultimate parent company in 1993 and renewed in
1997, 2000 and 2003, for a term of three years, the ultimate parent
company will provide certain management services to the Company for an
annual fee of US$30 (Rmb248). In addition, the Company has agreed to
reimburse the ultimate parent company for administrative services of
approximately Rmb4,731, Rmb5,708 and Rmb6,200 for the years ended
December 31, 2002, 2003 and 2004, respectively, rendered on behalf of
the Company on a cost plus 5% basis.
(c) SALES TO/PURCHASES FROM RELATED PARTIES
HZ recorded sales to related companies of approximately Rmb209,112 and
Rmb194,971 that have been reflected in the Company's consolidated
financial statements for the years ended December 31, 2002 and 2003,
respectively.
HZ paid subcontracting charges to an affiliate of approximately
Rmb199,373 and Rmb277,470 for tire processing that have been reflected
in the Company's consolidated financial statements for the years ended
December 31, 2002 and 2003, respectively.
These transactions were carried out after negotiations between HZ and
the respective related companies in the ordinary course of business
and on the basis of the estimated market value as determined by
management of HZ.
F - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
15. STAFF RETIREMENT PLANS
All of the Chinese employees of the PRC entities are entitled to an annual
pension on retirement, which is equal to their ending basic salaries at
their retirement dates. The Chinese government is responsible for the
pension liabilities to these retired employees. The PRC entities are only
required to make specified contributions to the state-sponsored retirement
plan calculated at rates ranging from 20% to 23.5% of average monthly
salaries for the years ended December 31, 2002 and 2003. The expenses
reported in the consolidated statements of operations related to these
arrangements were Rmb26,549 and Rmb17,940 for the years ended December 31,
2002 and 2003, respectively.
16. SEGMENT INFORMATION
After the Group's disposition of HZ in September 2003 (see note 3), the
Group had no reportable segments. Prior to such divestiture, the Group
operated principally in the tire manufacturing industry and had only one
reportable segment for continuing operations based on HZ Tire, the
Company's major PRC entities operating in Hangzhou. This reportable segment
was a strategic business unit and was managed separately. The accounting
policies of this segment were the same as those described in the summary of
significant accounting policies. All intercompany transactions had been
eliminated.
The remaining segment included other subsidiaries of the Company except for
DH, SD, YT and YC which are presented separately under the discontinued
operations segment. Corporate identifiable assets included primarily cash.
The chief operating decision maker evaluated the operating income of each
segment in assessing performance and allocating resources between segments.
2002
-----------------------------------------------------------------
DISCONTINUED
CONTINUING OPERATIONS OPERATIONS
-----------------------------------------------------------------
(RMB) HZ TIRE OTHERS CORPORATE TOTAL
--------- ------- --------- ---------
Revenues .................................... 2,610,076 - - 2,610,076 621,653
Depreciation and amortization ............... 63,687 - - 63,687 42,328
Impairment loss provision for long-lived
assets .................................... - - - - 291,648
Change in fair value of call option ......... - (45,328) - (45,328) -
Operating income (loss) ..................... 188,429 (4,854) (11,479) 172,096 (70,965)
Equity in (earnings) losses of affiliates ... (3,591) 93,111 - 89,520 -
Gain on disposition of discontinued
components ................................ - - - - 20,144
Capital expenditures ........................ 210,264 - - 210,264 77,272
Identifiable assets ......................... 1,969,286 148,181 44,345 2,161,812 718,868
Included in identifiable assets above are
the following:
- Investments in and advances to affiliates 137,156 95,826 - 232,982 -
- Deferred income taxes assets ............ 14,277 - - 14,277 -
F - 32
\
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
16. SEGMENT INFORMATION - CONTINUED
2003
------------------------------------------------------------------
DISCONTINUED
CONTINUING OPERATIONS OPERATIONS
------------------------------------------------------------------
(RMB) HZ TIRE OTHERS CORPORATE TOTAL
--------- ------- --------- ---------
Revenues .................................... 2,808,369 - - 2,808,369 -
Depreciation and amortization ............... 50,889 - - 50,889 -
Operating income (loss) ..................... 121,849 (456) (20,647) 100,746 -
Equity in (earnings) losses of affiliates ... (15,120) 92,568 - 77,448 -
Impairment loss provision for advance to
affiliate ................................. - 2,619 - 2,619 -
Loss on disposition of discontinued
components ................................ - - - - (7,017)
Capital expenditures ........................ 256,872 - - 256,872 -
Identifiable assets ......................... 176,547 310,123 22,996 509,666 -
Included in identifiable assets above are
the following:
- Investments in and advances to affiliates 176,547 133,279 - 309,826 -
Revenues of the Group are primarily derived from sales of tires and their
geographical analysis of revenues is as follows:
CONTINUING OPERATIONS DISCONTINUED OPERATIONS
----------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2002 2003 2002 2003
---- ---- ---- ----
Rmb Rmb Rmb Rmb
PRC............................ 2,061,236 2,248,825 422,878 -
Middle East Countries.......... 165,664 101,718 99,682 -
US and Canada.................. 137,933 143,054 67,178 -
Others......................... 245,243 314,772 31,915 -
--------- --------- ------- ----
2,610,076 2,808,369 621,653 -
========= ========= ======= ====
17. OTHER SUPPLEMENTAL INFORMATION
The following items are included in the consolidated statements of
operations:
CONTINUING OPERATIONS DISCONTINUED OPERATIONS
--------------------------------- --------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2002 2003 2004 2002 2003 2004
------ ------ ------ ------ ------ ------
Rmb Rmb Rmb Rmb Rmb Rmb
Foreign exchange losses (gain),
net ......................... (152) (1,810) 21 153 - -
Sales taxes.................... 40,639 48,954 - 33,137 - -
Shipping and handling costs.... 62,707 80,296 - 34,072 - -
F - 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES, PER SHARE/
SHARE OPTION DATA AND UNLESS OTHERWISE STATED)
18. LEGAL PROCEEDINGS
On June 7, 2004, the Company, Orion Tire and a major United States
manufacturer of tires and rubber products (the "Tire Manufacturer") had
entered into a settlement and general release agreement and agreed to
compromise, settle and forever resolve all dispute and matters between them
relating to certain legal proceedings which commenced in 1994. Pursuant to
the terms of the agreement, the claim lodged by Orion Tire against the Tire
Manufacturer to the US Court of Appeals for further proceeding was
dismissed and subject to the fulfillment of certain conditions, which,
among others, include a payment by the Tire Manufacturer to Orion Tire for
an amount up to US$350,000 within two years from the date of the agreement.
19. SUBSEQUENT EVENTS
In addition to those disclosed in note 8, subsequent to December 31, 2004,
the following events have taken place:
(a) On January 31, 2005, the Company subscribed 2,340,000,000 of new
shares of HK$0.01 each in Wing On at the price of HK$0.028 per share
under the second placing and subscription agreement as mentioned in
note 6 upon approval by the independent shareholders of Wing On at the
special general meeting held on January 11, 2005.
(b) On February 4, 2005, the Company entered into a placing and
subscription agreement with Wing On and Tai Fook Securities Company
Limited ("Tai Fook") pursuant to which Tai Fook agreed to place up to
6,400,000,000 shares in Wing On then held by the Company at the price
of HK$0.022 per share to independent investors and the Company would
subscribe for up to 6,400,000,000 new shares of Wing On at the same
price of HK$0.022 per share. The subscription was completed on
February 18, 2005.
Following the issue of shares in Wing On pursuant to the placing and
subscription agreement dated February 4, 2005, the conversion price of
the convertible notes was adjusted to HK$0.0197 per share in
accordance with its terms and conditions. On March 14, 2005, the day
immediately preceding the effective date of the share consolidation of
every one hundred shares of HK$0.01 each in the issued and unissued
ordinary share capital of Wing On into one share of HK$1.00 each. The
conversion price at the note was adjusted to HK$1.97 per new
consolidated share.
(c) On April 29, 2005, the Company exercised all of the conversion rights
of the convertible note of HK$55,000 (Rmb58,803) at the adjusted
conversion price of HK$1.97 per share under the terms of the New Note,
resulting in the issuance of 27,918,781 new ordinary shares of Wing On
to Million Good.
* * * * * *
F - 34
ITEM 19. EXHIBITS
The following exhibits are filed as part of this annual report:
EXHIBIT
NUMBER DESCRIPTION
1 Memorandum and Articles of Association (incorporated by reference
to Exhibit 1 to the Company's Form 20-F for the fiscal year ended
December 31, 2001, Document Control Number: 02048962)
4(a)1 Contract dated January 8, 2003 between Ningxia Yinchuan Rubber
Manufacturing, the Chinese joint venture partner of Yinchuan CSI,
as buyer and the Company as seller for the sale of seller's
interest in Yinchuan CSI (incorporated by reference to Exhibit
4(a)2 to the Company's Form 20-F for the fiscal year ended
December 31, 2002, Document Control Number: 3822216)
4(a)2 Contract dated June 15, 2003 between Hangzhou Industrial &
Commercial Trust & Investment Co. Ltd. as buyer and the Company
as seller for the sale of 25% interests in Hangzhou Zhongce
(incorporated by reference to Exhibit 4(a)3 to the Company's Form
20-F for the fiscal year ended December 31, 2002, Document
Control Number: 3822216)
4(a)3 Contract dated January 13, 2004 between Wing On and the Company
for the issue of 2% convertible note to the Company or its
nominee
4(a)4 Contract dated June 16, 2004 between Shanghai Jiu Sheng
Investment Company Limited and the Company for the acquisition of
the Properties
4(a)5 Contract dated November 30, 2004 among the Company, Wing On and
the placing agent for the placing and subscription of 3,660
million shares of Wing On at a price of HK$0.028 per share
4(a)6 Contract dated November 30, 2004 among the Company, Wing On and
the placing agent for the placing and subscription of 2,340
million shares of Wing On at a price of HK$0.028 per share
4(a)7 Contract dated February 4, 2005 among the Company, Wing On and
the placing agent for the placing and subscription of 6,400
million shares of Wing On at a price of HK$0.022 per share
4(c)4 Executive Share Option Scheme (incorporated by reference to
Exhibit 4(c) to the Company's Form 20-F for the fiscal year ended
December 31, 2001, Document Control Number: 02048962)
8 Subsidiaries of the Company
12(1) Certification of the CEO of the Company pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended
12(2) Certification of the CFO of the Company pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended
13(1) Certification of the CEO of the Company pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
13(2) Certification of the CFO of the Company pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
14(1) Code of Ethics for Chief Executive and Senior Financial Officers
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
CHINA ENTERPRISES LIMITED
(REGISTRANT)
/s/ Chow Chun Man, Jimmy
--------------------------
CHOW CHUN MAN, JIMMY
Chief Financial Officer
Date: March 14, 2006
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
1 Memorandum and Articles of Association (incorporated by reference
to Exhibit 1 to the Company's Form 20-F for the fiscal year ended
December 31, 2001, Document Control Number: 02048962)
4(a)1 Contract dated January 8, 2003 between Ningxia Yinchuan Rubber
Manufacturing, the Chinese joint venture partner of Yinchuan CSI,
as buyer and the Company as seller for the sale of seller's
interest in Yinchuan CSI (incorporated by reference to Exhibit
4(a)2 to the Company's Form 20-F for the fiscal year ended
December 31, 2002, Document Control Number: 3822216)
4(a)2 Contract dated June 15, 2003 between Hangzhou Industrial &
Commercial Trust & Investment Co. Ltd. as buyer and the Company
as seller for the sale of 25% interests in Hangzhou Zhongce
(incorporated by reference to Exhibit 4(a)3 to the Company's Form
20-F for the fiscal year ended December 31, 2002, Document
Control Number: 3822216)
4(a)3 Contract dated January 13, 2004 between Wing On and the Company
for the issue of 2% convertible note to the Company or its
nominee
4(a)4 Contract dated June 16, 2004 between Shanghai Jiu Sheng
Investment Company Limited and the Company for the acquisition of
the Properties
4(a)5 Contract dated November 30, 2004 among the Company, Wing On and
the placing agent for the placing and subscription of 3,660
million shares of Wing On at a price of HK$0.028 per share
4(a)6 Contract dated November 30, 2004 among the Company, Wing On and
the placing agent for the placing and subscription of 2,340
million shares of Wing On at a price of HK$0.028 per share
4(a)7 Contract dated February 4, 2005 among the Company, Wing On and
the placing agent for the placing and subscription of 6,400
million shares of Wing On at a price of HK$0.022 per share
4(c)4 Executive Share Option Scheme (incorporated by reference to
Exhibit 4(c) to the Company's Form 20-F for the fiscal year ended
December 31, 2001, Document Control Number: 02048962)
8 Subsidiaries of the Company
12(1) Certification of the CEO of the Company pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
12(2) Certification of the CFO of the Company pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
13(1) Certification of the CEO of the Company pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
13(2) Certification of the CFO of the Company pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
14(1) Code of Ethics for Chief Executive and Senior Financial Officers