Sincere AR0405_Cover C.fh9 6/29/05 15:25 ݦ 1
C M Y CM MY CY CMY K
ƒXƒ¤“” ○○○○○○ ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ CONTENTS
CORPORATE INFORMATION 2 AUDITED FINANCIAL STATEMENTS
NOTICE OF ANNUAL GENERAL CONSOLIDATED: MEETING 3 - 7 PROFIT AND LOSS ACCOUNT 23 MISSION STATEMENT 8 BALANCE SHEET 24 - 25 EXECUTIVE CHAIRMAN’S STATEMENT 9 - 11 STATEMENT OF CHANGES IN EQUITY 26 GROUP MANAGING DIRECTOR’S REVIEW OF OPERATIONS 12 - 15 CASH FLOW STATEMENT 27 - 28
REPORT OF THE DIRECTORS 16 - 21 COMPANY:
REPORT OF THE AUDITORS 22 BALANCE SHEET 29
NOTES TO FINANCIAL STATEMENTS 30 - 69
SCHEDULE OF INVESTMENT PROPERTIES 70
SCHEDULE OF PROPERTIES UNDER DEVELOPMENT/HELD FOR SALE 71
FIVE YEAR SUMMARY 72 2 The Sincere Company, Limited Annual Report 2004-2005
Corporate Information
REGISTERED OFFICE BOARD OF DIRECTORS 24th Floor, Leighton Centre, Walter K W MA 77 Leighton Road, (Executive Chairman) Hong Kong Philip K H MA (Group Managing Director and Executive Director) AUDITORS King Wing MA Ernst & Young Eric K K LO Charles M W CHAN SOLICITORS MANAGEMENT Baker & McKenzie Philip K H MA PRINCIPAL BANKERS Josef Matthias DOHMEN John Y C FU Citibank N.A. Philip Y F KUNG Hang Seng Bank Limited Eileen H Y MA The Hongkong & Shanghai Banking Corporation Limited COMPANY SECRETARY JP Morgan Chase Bank Ada S P CHEUNG SHARE REGISTRARS & TRANSFER OFFICE Tengis Limited Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong Notice of Annual General Meeting
NOTICE IS HEREBY GIVEN THAT the Annual General Meeting of shareholders of the Company will be held at 2nd Floor, Cypress Room, Novotel Century Harbourview, 508 Queen’s Road West, Western District, Hong Kong on 5 August 2005 at 10:00 a.m. for the following purposes:
1. To receive and consider the audited financial statements and the reports of the directors and auditors for the year ended 28 February 2005.
2. To re-elect directors and to fix the directors’ fees.
3. To appoint auditors and to authorise the directors to fix their remuneration.
4. To consider as special business and, if thought fit, pass with or without amendments, the following resolution as an ordinary resolution:
“THAT:
(a) subject to paragraph (b) below, the exercise by the directors of the Company during the Relevant Period of all the powers of the Company to purchase shares of HK$0.50 each in the capital of the Company be and is hereby generally and unconditionally approved;
(b) the total nominal amount of the shares to be purchased pursuant to the approval in paragraph (a) above shall not exceed 10% of the total nominal amount of the share capital of the Company in issue on the date of this Resolution; and
(c) for the purpose of this Resolution, “Relevant Period” means the period from the passing of this Resolution until whichever is the earlier of:
(i) the conclusion of the next Annual General Meeting of the Company;
(ii) the expiration of the period within which the next Annual General Meeting of the Company is required by the Hong Kong Companies Ordinance to be held; or
(iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the shareholders of the Company in general meeting.”
The Sincere Company, Limited Annual Report 2004-2005 3 4 The Sincere Company, Limited Annual Report 2004-2005
Notice of Annual General Meeting
5. To consider as special business and, if thought fit, pass with or without amendments, the following resolution as an ordinary resolution:
“THAT:
(a) subject to paragraph (c) below, the exercise by the directors of the Company during the Relevant Period of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company pursuant to Section 57B of the Hong Kong Companies Ordinance and to make or grant offers, agreements and options which might require the exercise of such powers be and is hereby generally and unconditionally approved;
(b) the approval in paragraph (a) above shall authorise the directors of the Company during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such powers at any time during or after the Relevant Period;
(c) the total nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) and issued by the directors of the Company pursuant to paragraph (a) above, otherwise than pursuant to: (i) a Rights Issue; or (ii) any scrip dividend or similar arrangement providing for the allotment of shares in lieu of the whole part of a dividend on shares of the Company in accordance with the Memorandum and Articles of Association of the Company; or (iii) the exercise of subscription rights under the Share Option Scheme of the Company should not exceed 20% of the total nominal amount of the share capital of the Company in issue on the date of this Resolution and the said approval shall be limited accordingly; and
(d) for the purpose of this Resolution, “Relevant Period” means the period from the passing of this Resolution until whichever is the earlier of:
(i) the conclusion of the next Annual General Meeting of the Company;
(ii) the expiration of the period within which the next Annual General Meeting of the Company is required by the Hong Kong Companies Ordinance to be held; or
(iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the shareholders of the Company in general meeting.
“Rights Issue” means an offer of shares open for a period fixed by the directors of the Company to holders of shares on the Register of Members on a fixed record date in proportion to their holdings of shares (subject to such exclusions or other arrangements as the directors of the Company may deem necessary or expedient in relation to fractional entitlement or having regard to any restrictions and obligations under the laws of, or the requirements of, any recognised regulatory body or any stock exchange in any territory outside Hong Kong).” Notice of Annual General Meeting
6. To consider as special business and, if thought fit, pass with or without amendments, the following resolution as an ordinary resolution:
“THAT the general mandate granted to the directors of the Company and for the time being in force to exercise the powers of the Company to allot shares and to make or grant offers, agreements and options which might require the exercise of such powers, be and is hereby extended by the addition to the total nominal amount of share capital which may be allotted or agreed conditionally or unconditionally to be allotted by the directors of the Company pursuant to such general mandate of an amount representing the total nominal amount of shares in the capital of the Company which has been purchased by the Company since the granting of such general mandate pursuant to the exercise by the directors of the Company of the powers of the Company to purchase such shares, provided that such amount shall not exceed 10% of the total nominal amount of the share capital of the Company in issue on the date of this resolution.”
7. To consider as special business and, if thought fit, pass with or without amendments, the following resolution as a special resolution:
“THAT the Articles of Association of the Company be amended in the following manner:
(a) By deleting Article 78 in its entirety and substituting therefor the following new Article 78:
“78 Any member of the Company, whether an individual or a corporation, entitled to attend and vote at a meeting of the Company or a meeting of the holders of any class of shares in the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him. Votes may be given either personally or by proxy. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. Proxy need not be a member of the Company. In addition, a proxy or proxies representing a member shall be entitled to exercise the same powers on behalf of the member which he or they represent as such member could exercise.”;
The Sincere Company, Limited Annual Report 2004-2005 5 6 The Sincere Company, Limited Annual Report 2004-2005
Notice of Annual General Meeting
(b) By deleting Article 90 in its entirety and substituting therefor the following new Article 90:
“90 Without prejudice to the power of the Company in pursuance of the provisions of the Articles to appoint any person to be a Director and subject to the Ordinance, the Directors may appoint any person to be a Director as an additional Director or to fill a casual vacancy provided that any person so appointed shall hold office only until the first general meeting of the Company after his appointment and shall then be eligible for re-election. In case the aforesaid Director retires at an annual general meeting in pursuance of this Article 90, he shall not be taken into account in determining the Directors who are to retire by rotation at that annual general meeting in accordance with Article 99.”; and
(c) By deleting Article 99 in its entirety and substituting therefor the following new Article 99:
“99 Unless and until the Company in a general meeting shall otherwise determine, every Director (including those appointed for a specific term) shall retire from office by rotation at the second annual general meeting held after his last re- election by the members in a general meeting or such other manner of rotation as may be required by the Listing Rules or other codes, rules, and regulations as may be prescribed by the applicable regulatory authority from time to time. The retiring Directors shall be eligible for re-election.”.
By order of the Board Ada S P CHEUNG Company Secretary
Hong Kong, 30 June 2005 Notice of Annual General Meeting
Notes:
1. A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and vote instead of him. A proxy need not be a member of the Company.
2. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power or authority, must be lodged with the Company’s Share Registrars, Tengis Limited, G/F, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, not less than 48 hours before the time fixed for holding the meeting or any adjournment thereof. Completion and return of a proxy form will not preclude a member from attending the meeting and voting in person.
3. Concerning item 4 above, the Directors will exercise the powers conferred thereby to repurchase shares of the Company in circumstances which they deem appropriate for the benefits of the shareholders.
4. Concerning item 5 above, approval is being sought from the members for a general mandate to authorise allotment of shares under Section 57B of the Hong Kong Companies Ordinance and the Listing Rules. The directors have no immediate plan to issue any new shares of the Company other than shares to be issued pursuant to the Company’s Share Option Scheme for employees.
5. Concerning item 6 above, approval is being sought to increase the number of shares which the Directors may issue under their general mandate by the number of any shares repurchased during the Relevant Period.
6. Concerning item 7 above, approval is being sought to amend the Company’s Articles of Association in order to comply with the Hong Kong Companies Ordinance and certain provisions of the new Code on Corporate Governance Practices in Appendix 14 of the Rules Governing the Listing of Securities on the Stock Exchange.
7. A circular containing further details in respect of the above items 2 and 4 to 7 will be sent to members together with the 2005 Annual Report.
8. As at the date of this notice, Mr. Walter K.W. Ma is Chairman and Executive Director of the Company and Mr. Philip K.H. Ma is Group Managing Director and Executive Director of the Company, Mr. King Wing Ma, Mr. Eric K.K. Lo and Mr. Charles M.W. Chan are independent non-executive directors of the Company.
The Sincere Company, Limited Annual Report 2004-2005 7 8 The Sincere Company, Limited Annual Report 2004-2005
Mission Statement
MISSION STATEMENT
Founded in 1900, The Sincere Company, Limited is one of the Hong Kong’s oldest and most respected retail groups.
At the core of Sincere’s success is its unwavering dedication to quality service and customer satisfaction. Through its chain of department stores, the Company strives to provide consumers with a competitive range of merchandise at affordable prices.
Sincere’s on-going commitment to prudent expansion in Hong Kong and China demonstrates the Company’s determination to sustain its position as a leading retailer into the next century and beyond. Executive Chairman’s Statement
On behalf of the Board of Directors of The Sincere Company, Limited, I would like to present the shareholders with the Annual Report for the year ended 28 February 2005.
RESULTS The year under review is a heartening year for the Group. The Group recorded a turnover of HK$559 million, representing an increase of 40% as compared to last year. Net loss attributable to shareholders was HK$119 million, a 30% year on year improvement and loss per share amounted to 21 HK cents. The increase in turnover was mainly due to the sale of UK properties and the growth in the Hong Kong retail operation. The reduction in the net loss was mainly attributable to the improvement in the Hong Kong retail operation by 46% and the positive stabilizing of Dalian properties.
LIQUIDITY AND FINANCIAL RESOURCES As at 28 February 2005, the Group’s total borrowings less cash and cash equivalents amounted to HK$254 million (2004: HK$416 million). The Group’s gearing was 32.9%, representing a decrease of 17% in total debt to the shareholders’ funds from the previous year (2004: 49.9%). The maturity profile of the Group’s borrowing is set out in note 24 to the financial statements. The bank borrowings were mainly in HK dollars, US dollars and Pound Sterling with interest rates ranging from 1.1% to 6.5%. The net interest expense charged to the consolidated profit and loss account for the year was HK$10 million (2004: HK$8 million).
The current ratio had decreased by 0.43 to 1.65 as the Group’s net current assets decreased from HK$403 million in 2004 to HK$246 million in 2005. There was no significant exposures to foreign currency fluctuation. In addition to the internal generated cash flows, the Group also made use of short term borrowings to finance its operation during the year. All borrowings were secured against certain properties and bank deposits.
EMPLOYEES AND REMUNERATION POLICIES As at 28 February 2005, the Group had 519 (2004: 717) employees including part time staff. The Group operates different remuneration schemes for sales and non-sales employees to motivate front-line and back office staff towards higher sales achievement and operating efficiencies. Sales personnel are remunerated on the basis of goal-oriented packages comprising salary and sales commission. Non-sales personnel are offered discretionary year-end bonuses based on individual merit. The Group provides employee benefits such as subsidized medical care, staff purchase discounts and subsidized internal training.
DIVIDENDS The Board of Directors do not recommend the payment of a dividend for the year ended 28 February 2005.
The Sincere Company, Limited Annual Report 2004-2005 9 10 The Sincere Company, Limited Annual Report 2004-2005
Executive Chairman’s Statement
BUSINESS REVIEW Following the Hong Kong economic rebound, revival of consumer confidence and rising number of inbound tourists, the Group has achieved respectable growth in revenues and profitability. In particular, the turnover from retail operation recorded HK$310 million, representing an increase of 9%. During the year, the Group has continued to bring in more consignment counters, widening the imported brands and expanding the product categories with higher dollar per transaction and profitability. These strategies have proved to be successful. Income from consignment sales recorded HK$105 million, representing an increase of 24% and the segment loss reduced to HK$30 million, representing an improvement of 46%.
The turnover of the advertising business recorded a growth of 27%. During the year, the Company enlarged its market coverage by providing public relation service to clients and the response was well received from the market. The management will continue review the business strategy to expand the customer base.
The home furniture business “Sincere Living” has been operated for a year and contributed to the Group. The company mainly engaged in providing retail furniture sales, show flats and decoration services. With the local property market generally active, the operation management will seize the opportunity to enlarge its market share and scope of services to improve the profitability.
As a result of the inbound tourist from Mainland China, the Group’s restaurant operation “Mövenpick Marché” recorded a turnover of HK$24 million, on a comparable basis representing 31% growth from last year while the turnover generated from tour groups recorded a growth of 42%. With the lease having expired and the landlord having decided to refurbish the entire shopping center, the restaurant was closed in early 2005. The management is currently looking for another suitable location to re-establish the “Marché” restaurant.
The Group’s security investment strategy is a conservative approach. It provides a stable income to the Group.
In China, the Dalian properties received a steady rental income but the service apartments rental showed a decline. Facing intense competition, the convenient chain stores ceased operation in Shanghai in December 2004.
In UK, Pembroke House in Belgravia was completely sold in the second half of the year. For Jubilee Street, over two-third of the units were sold, while the remaining units were reserved and deposits received. The Park Lane Marriott Hotel project generates improved rental income and one of the two remaining flats were sold during the year. The refurbishment for the 14 apartments at Lancaster Gate No. 19-21 was completed and sales had been launched as scheduled. The Hyde Park Lancaster Gate No. 17 project has the mews house only remaining on the market and the other flat has been sold in the first half of year 2005. The prestigious development project Lowndes Square has completed the refurbishment of the duplex penthouse, which has been offered to the market. Executive Chairman’s Statement
PROSPECTS In the coming year, the Group will continue to benefit from the economic growth of Hong Kong and Mainland China. In particular to capture the rising number of inbound tourists to Hong Kong, the department store has expanded the Grand Century Place store by one-third in May 2005, providing a more comfortable shopping experience with an uplifted image.
With the positive local retail environment, the Group will grasp the opportunity to expand the productivity per square foot. Actions to be taken include focusing on products with higher transaction values and hence higher dollar margins, enlarging the sales network, implementing more effective marketing programs and widening the product varieties. Besides, the Group will continue to further improve the profit margins.
In addition to strengthening the retail operation, the Group will be aggressively looking for suitable opportunities to diversify its businesses and to achieve a new business horizon in the coming future.
APPRECIATION On behalf of the board, I wish to take this opportunity to extend my appreciation to our shareholders, customers, business partners and suppliers for their continued support and for their confidence in the Group. I would also like to express our sincere thanks to the management and the staff for their commitment and contribution to the Group throughout the year.
Walter K W MA Executive Chairman
28 June 2005
The Sincere Company, Limited Annual Report 2004-2005 11 12 The Sincere Company, Limited Annual Report 2004-2005
Group Managing Director’s Review of Operations
RETAIL OPERATIONS Hong Kong With the solid economic rebound, the Group’s retail operation recorded a satisfactory growth and the results were encouraging. The retail management has prepared for this opportunity and launched various marketing and sales campaigns with effective coupon programs generating results that exceeded the targeted revenue and profit.
During the year under review, the sales of household, electrical appliances and in particular the healthcare products recorded a significant growth. This upsurge in demand of healthcare products was mainly from local customers as they become more conscious on healthcare and looking for a more comfortable life style. It is expected that demand for healthcare products will continue to grow.
Men and Ladies apparel also recorded a double-digit growth in terms of turnover and gross profit. However, the gross profit dropped marginally by 0.3%. This was mainly attributed to the consistent appreciation of the Euro dollar, the major denominated currency of our apparel imports, of over 7% over last year which impaired our ability to push the products from Europe. To tackle this currency exchange pressure, the retail management had accomplished a series of strategies including importing products from Japan and using forward contracts to leverage the exchange rate risk.
To promote customers’ awareness, apart from television and press advertisements, the retail management made active efforts in exploring sales channels by placing advertisement in the tram station at Central with a slogan “7 minutes to Sincere” which brought a lot of attention. There were better visual merchandising at stores and warehouse sales were also held to promote sales. Besides, attractive seasonal leaflets were distributed through a wider network and discount coupons were sent to selected loyalty customers to promote our products and encourage repeat purchase. These strategies successfully lead to the sales growth and improved market coverage.
On the expenses, there were immediate demands from landlords for rental increases with the economic recovery. The retail management has successfully limited the increases and extended the leasing terms. With effective controls on other costs and overall store expenses, and going along with the healthy business growth, expenses decline of 4.4% of sales was recorded.
With the property market rebound and improvements in the utilization of storage space, the Group disposed part of its warehouse at Gemstar Tower, Hung Hom, Kowloon during the year and such disposal was fully reflected in the current year financial statements. Group Managing Director’s Review of Operations
Central Store With the satisfactory growth in turnover and profitability, this store has turned around the direct operating loss position into profit. Several concession counters on the ladies floor were revamped with a new image and the aisle on L3 was widened to provide a more comfortable shopping environment to customers. The health and household sections on L2 were rearranged with a permanent counter of health products which was well received by customers. In the coming year, an overall re-development plan for the entire store will be initiated, and working jointly with the landlord.
Shamshuipo Dragon Centre Store With turnover growing steadily under effective control over operating expenses, the store has achieved a satisfactory direct operating profit. During the year, the entrances on the 2/F and 3/F were enlarged to enhance the customer flow. Consistent with the operating strategy, this store was still targeting housewives; thus Event hall and household are the major profit generators and both departments recorded a double-digit growth in turnover.
Grand Century Place Store This store recorded a rapid growth and was the best performer among the three stores during the year. Such growth was mainly driven by the increase in inbound tourists from Mainland China as the shopping centre was linked to the KCR Mongkok railway and Huang Gong bus station. To enhance the Sincere brand image and to strengthen the Group’s turnover, the store will be expanded by one-third in two phases. The first phase was completed in May 2005 and the shoes division was expanded. The second phase is expected to complete in August 2005 where the household division will be re-arranged. An internal staircase has been erected inside the store to link up the traffic between the two floors for better customer flow. The management is confident that this will effectively uplift the productivity and positive financial benefits will be reflected in the next financial year.
Advertising The advertising business recorded a favourable performance: the operation in Shanghai was well established and contributed profits to the Group. During the year, in addition to providing general advertising support, the management also introduced public relation and event marketing services in order to provide a one-stop service to clients. Benefiting from WTO, the management expects that there will be more famous labels admitted into China, and the company intends to concentrate more of its efforts to develop this aspect of business.
The Sincere Company, Limited Annual Report 2004-2005 13 14 The Sincere Company, Limited Annual Report 2004-2005
Group Managing Director’s Review of Operations
Home Furniture The home furniture business “Sincere Living” has been successfully getting its operation on track and contributing to the gross profit of the Group. Various show room projects have been successfully completed in Hong Kong and Southern China with positive response from property developers. During the year, two warehouse sales were held and received good response from the market. In view of the intense price competition, the management has recently enhanced its scope of services to maintain its competitive edge including uplifting the product design, enhancing the brand awareness and extending the design and building services to retail shops and offices.
Mainland China In view of the intense market competition of the Shanghai convenient store market and the fact that most players, even the big one, are in loss position, management foresees it would be a long time before this segment would become profitable. Thus, the operation was closed completely in December 2004 to avoid further losses.
Mövenpick Marché The restaurant operation performed well and recorded a substantial growth both in revenue and profitability in its final year of operation. The landlord decided to close the shopping center for a one year major renovation, so the restaurant was closed on 5 January 2005.
Having gained successful and valuable experience, the Group and its strategic partner have decided to look for suitable locations to re-open the restaurant. This not only limited to the Hong Kong territories but might also extend to some major cities of Mainland China.
OTHER OPERATIONS Securities Trading The securities trading recorded a decline in turnover of 77% to HK$10 million. The segment profit was HK$5.2 million, representing a decline of 87% over last year. This was mainly attributable to the substantial improvement in the previous year and the slow down of the financial market in early 2005.
Mainland China Property Investments The rental income derived from the investment properties in Dalian and Shanghai were stable. In Dalian, with the drop in occupancy rate, the rental income recorded a decline of 5%.
Regarding redevelopment of the Dalian Building, there were several schemes considered during the year and the management is currently working out with potential partners on which of the schemes would bring the best return to the Group. Group Managing Director’s Review of Operations
UK Property Investments The remaining unit at Pembroke House at Chesham Street, London was sold and the whole project was completed. The turnover was recognized in the second half of the year.
Following the completion for the re-development of 73 units in Jubilee Street, 53 units were sold and completed in the year. 15 out of the remaining 20 units were sold after the year end and the other remaining units were reserved and deposits received. This project suffered extensive time delays and cost overruns which resulted in a net loss position.
The project Hyde Park Lancaster Gate No. 17 completed the sale of a flat after the year end and only a mews house remains in the market. Several potential buyers have approached and it is expected that the whole project can be completed very soon.
For the London Marriot Hotel with the 140 Parklane project, one of the two remaining apartments was sold during the year. The rental income from the hotel operation recorded a growth of 21% and the occupancy rate achieved almost 80%.
LOOKING AHEAD Sustaining the Group’s profitability and getting the best return will be the target objective for the Group in Year 2005. The department store in particular is targeted to provide a positive bottom line and to build Sincere brand equity featuring Sincere as a department store that provides our customers with the best quality merchandise for the price paid.
Apart from strengthening and uplifting the core retail operation, the Group will further expand its businesses and market share in the advertising and furniture segment, re-establish the restaurant operations and to complete the Dalian building re-development plan. The Group will continue to explore other business and regional opportunities especially in Mainland China where the Group has sufficient expertise and connections.
Philip K H MA Group Managing Director
28 June 2005
The Sincere Company, Limited Annual Report 2004-2005 15 16 The Sincere Company, Limited Annual Report 2004-2005
Report of the Directors
The directors submit their annual report and the audited financial statements of the Company and of the Group for the financial year ended 28 February 2005.
PRINCIPAL ACTIVITIES The principal activities of the Company and its subsidiaries during the financial year consisted of the operation of department stores, the rental of properties, property development, securities trading, the operation of restaurants and the provision of advertising agency services. The operation of convenience chain stores ceased during the year. Furthermore, the operation of a restaurant at the Peak was temporarily closed in January 2005 following the expiry of the lease term of the premise where the restaurant was operating. The management is seeking for another prime location to reopen the restaurant.
RESULTS The Group’s loss for the financial year ended 28 February 2005 and the state of affairs of the Company and of the Group as at that date are set out in the audited financial statements on pages 23 to 69.
A summary of the published results and of the assets, liabilities and minority interests of the Group for the last five financial years is set out on page 72.
CAPITAL As at 28 February 2005, the number of issued shares of HK$0.50 each was 574,308,000. There was no movement in the share capital of the Group in the year under review. Details of the Company’s share capital are set out in note 26 to the financial statements.
CONTINGENT LIABILITIES Details of the contingent liabilities are set out in note 34 to the financial statements.
PLEDGE OF ASSETS Details of the pledge of assets are set out in notes 12, 14, 19, 20 and 22 to the financial statements.
SEGMENT INFORMATION The principal activities of the Company and its subsidiaries have not changed during the year and mainly consisted of the operation of department stores, the rental of properties, property development, securities trading, the operation of restaurants and the provision of advertising agency services.
Details of the segment information are set out in note 4 to the financial statements.
DIVIDENDS The directors do not recommend the payment of a dividend in respect of the financial year ended 28 February 2005. Report of the Directors
FIXED ASSETS Changes to the fixed assets of the Company and of the Group are disclosed in note 12 to the financial statements.
PROPERTIES UNDER DEVELOPMENT Details of the properties under development of the Group are set out in note 14 to the financial statements and on page 71 of the annual report.
PROPERTIES HELD FOR SALE Details of the properties held for sale of the Group are set out in note 20 to the financial statements and on page 71 of the annual report.
RESERVES Movements in the reserves of the Company and of the Group during the financial year are set out in note 29(b) to the financial statements and in the consolidated statement of changes in equity, respectively.
MAJOR CUSTOMERS AND SUPPLIERS For the financial year ended 28 February 2005, the Group’s sales to the five largest customers and purchases from the five largest suppliers accounted for less than 30% of the Group’s turnover and purchases, respectively.
DIRECTORS The directors who served during the financial year were as follows:
Executive Directors: Walter K W MA (Chairman) Philip K H MA (Group Managing Director) John K K MA (Secretary) (resigned on 24 August 2004)
Independent Non-Executive Directors: King Wing MA Eric K K LO Charles M W CHAN
In accordance with article 99 of the Company’s articles of association, Philip K H Ma, Walter K W Ma and Charles M W Chan will retire and, being eligible, will offer themselves for re-election at the forthcoming annual general meeting.
No director has a service contract with the Company which is not determinable by the Company within one year without payment of compensation (other than statutory compensation).
Details of the biographies of the directors and senior executives are set out on page 20.
The Sincere Company, Limited Annual Report 2004-2005 17 18 The Sincere Company, Limited Annual Report 2004-2005
Report of the Directors
PRINCIPAL SHAREHOLDERS At 28 February 2005, according to the register of interests required to be kept by the Company pursuant to Section 336 of Securities and Futures Ordinance (the “SFO”) and so far as is known to the directors, The Sincere Life Assurance Company Limited and The Sincere Insurance & Investment Company, Limited were interested in 183,136,032 and 75,608,064 shares of HK$0.50 each of the Company, representing 31.89% and 13.17% of the issued share capital of the Company, respectively. Save for the above, there were no other shareholders who had registered an interest, directly or indirectly, of 5% or more of the issued share capital of the Company.
DIRECTORS’ INTERESTS IN SHARES At 28 February 2005, the interests of the directors in the share capital of the Company or any of its associated corporations (within the meaning of Part XV of the SFO), as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO, or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, were as follows:
(a) Long position in shares of the Company Number of ordinary shares held Percentage Personal Family Corporate Other of issued Directors interests interests interests interests Total share capital
Walter K W MA 9,925,000 – – – 9,925,000 1.7 Philip K H MA 2,000,000 – – – 2,000,000 0.3 King Wing MA 992,576 – – – 992,576 0.2 Eric K K LO 2,200,400 – – – 2,200,400 0.4 Charles M W CHAN 40,000 – – – 40,000 –
(b) Associated corporations At 28 February 2005, Walter K W MA, Philip K H MA, King Wing MA and Eric K K LO held 527, 713, 575 and 216 ordinary shares, respectively, in The Sincere Life Assurance Company Limited. In addition, at 28 February 2005, Philip K H MA held 500 promoter shares in The Sincere Life Assurance Company Limited.
At 28 February 2005, Walter K W MA, Philip K H MA, King Wing MA and Eric K K LO held 4,521, 2,485, 6 and 1,019 ordinary shares, respectively, in The Sincere Insurance & Investment Company, Limited.
At 28 February 2005, Walter K W MA and Philip K H MA held 10 and 10 ordinary shares, respectively, in The Sincere Company (Perfumery Manufacturers), Limited. Report of the Directors
DIRECTORS’ INTERESTS IN SHARES (continued) In addition to the above, certain directors have non-beneficial personal equity interests in certain subsidiaries held for the benefit of the Company solely for the purpose of complying with minimum company membership requirements.
Save as disclosed herein, as at 28 February 2005, none of the directors or any of their associates had any interests or short position in any of the shares, underlying shares or debentures of the Company or any of its associated corporations that is required to be recorded and kept in the register in accordance with Section 352 of the SFO.
At no time during the financial year was the Company or any of its subsidiaries a party to any arrangements to enable the directors of the Company or their spouses or children under the age of 18 to acquire benefits by means of the acquisition of shares in or debentures of the Company or any other body corporate.
DIRECTORS’ INTERESTS IN CONTRACTS During the financial year, the Company continued to hold its investment made in 1997 of a 10% equity interest in and an interest-free shareholders’ loan to Goldian Limited (“Goldian”), a company incorporated in Hong Kong, of which Walter K W MA and Eric K K LO are directors, and Philip K H MA is an alternate director to Walter K W MA. The aggregate of the investment and loan advancement amounted to HK$12,578,000.
During the financial year, the Group provided advertising services and charged service fees of approximately HK$519,000 thereof to a related company, of which Charles M W Chan, an independent non-executive director of the Company, is an executive director. Details are set out in note 35 to the financial statements.
In the opinion of the directors, the above transactions were transacted on what they considered arm’s length bases among the Company, Goldian and a related company, and were conducted in the ordinary course of business of the relevant companies.
Apart from the above, none of the directors had a significant beneficial interest in any contract of significance to the business of the Company or any of its subsidiaries to which the Company or any of its subsidiaries was a party during the financial year.
No contract concerning the management and administration of the whole or any substantial part of the business of the Company was entered into or existed during the financial year.
The Sincere Company, Limited Annual Report 2004-2005 19 20 The Sincere Company, Limited Annual Report 2004-2005
Report of the Directors
BIOGRAPHIES OF DIRECTORS AND SENIOR EXECUTIVES Directors Walter K W MA, aged 75, is the Executive Chairman. Mr. Ma became a director in 1966, Chairman in 1978 and an executive director in 1982. He has practiced as a Certified Public Accountant in Hong Kong and, is a fellow of the Hong Kong Institute of Certified Public Accountants and an associate of the CPA Australia. Mr. Ma is the cousin of Mr. Philip K H Ma and Mr. King Wing Ma who are also directors of the Company. Save as disclosed above, Mr. Ma does not have any relationship with any other directors and senior management of the Company. He is also a director of The Sincere Life Assurance Company Limited and The Sincere Insurance & Investment Company, Limited.
Philip K H MA, aged 49, is the Group Managing Director. He joined the board of directors in 1990, became an executive director in 1992, has been President since 1993 and was retitled as Group Managing Director in 1996. Mr. Philip Ma holds an MBA degree. He is currently in charge of all aspects of the Group‘s operations. Mr. Philip Ma is the cousin of Mr. Walter K W Ma and Mr. King Wing Ma who are also directors of the Company. Save as disclosed above, Mr. Philip Ma does not have any relationship with any other directors and senior management of the Company. He is also a director of The Sincere Life Assurance Company Limited and The Sincere Insurance & Investment Company, Limited.
King Wing MA, aged 73, has been an Independent Non-executive Director of the Company since 1980. He is a general medical practitioner with over 41 year’ experience in England, the United States of America and Hong Kong. Mr. King Wing Ma is the cousin of Mr. Walter K W Ma and Mr. Philip K H Ma who are also directors of the Company. Save as disclosed above, Mr. King Wing Ma does not have any relationship with any other directors and senior management of the Company.
Eric K K Lo, aged 56, has been an Independent Non-executive Director of the Company since December 1993. He is also a director of Bang & Olufsen (Hong Kong) Limited. Mr. Lo does not have any relationship with any directors and senior management of the Company.
Charles M W CHAN, aged 49, has been an Independent Non-executive Director of the Company since November 1995. Mr. Chan is also an Executive Director of International Hoteliers Limited. He is a member of the American Institute of Certified Public Accountants. Mr. Chan does not have any relationship with any directors and senior management of the Company.
Senior executives Philip Y F Kung, aged 57, joined the Company in July 2002 as General Manager of the Retail Division in charge of Operations, Marketing and Merchandising for the Hong Kong department stores. He has over 30 years’ experience in retailing, tourism and consumer marketing. He holds an MA degree in Economics.
John Y C FU, aged 44, joined the Company in January 2003, as the Group Director of Finance and Administration, in charge of Finance and Accounting, Administration, MIS, Logistics and Warehousing. He has over 16 years of senior management experience in two leading international retail chains with regional exposures. He holds an MBA degree in General Management and an MSc degree in Finance. Report of the Directors
PURCHASE, SALE OR REDEMPTION OF OWN LISTED SECURITIES There was no purchase, sale or redemption by the Company or any of its subsidiaries of the Company’s listed securities during the financial year.
CONNECTED TRANSACTIONS During the financial year, 360 Communications Limited, a 60% owned subsidiary of the Group, acted as the advertising agent which arranged advertising services for a related company of which Charles M W CHAN, an independent non-executive director of the Company, is an executive director. Details are set out in note 35 to the financial statements.
Save as disclosed therein, there were no other transactions needed to be disclosed as connected transactions in accordance with the requirements of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”).
The directors have reviewed and confirmed that those connected transactions were conducted in the ordinary and usual course of the Group’s businesses, and on terms no less favourable than those offered by unrelated third parties.
AUDIT COMMITTEE The Audit Committee of the Company comprises three members all of whom are Independent Non-executive Directors, namely, Mr. Eric K K Lo, Mr. Charles M W Chan and Mr. Ma King Wing. Regular meetings have been held by the Audit Committee since its establishment and the Audit Committee met two times in the year under review. The primary duties of the Audit Committee are to review the Group’s internal control and financial reporting process including interim and annual financial statements before recommending them to the Board of directors for approval. The Group’s audited results for the year ended 28 February 2005 have been reviewed by the Audit Committee.
COMPLIANCE WITH THE CODE OF BEST PRACTICE OF THE LISTING RULES The Company complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules throughout the year ended 28 February 2005.
The Code of Best Practice was replaced by the Code on Corporate Governance Practices (“Code”) and Corporate Governance Report (Appendices 14 and 23 of the Listing Rules) on 1 January 2005. Full compliance of the Code by the Company will be effective in the year ending 28 February 2006.
AUDITORS Ernst & Young retire and a resolution for their reappointment as auditors of the Company will be proposed at the forthcoming annual general meeting.
ON BEHALF OF THE BOARD
Walter K W MA Executive Chairman
Hong Kong, 28 June 2005
The Sincere Company, Limited Annual Report 2004-2005 21 22 The Sincere Company, Limited Annual Report 2004-2005
Report of the Auditors
To the members The Sincere Company, Limited (Incorporated in Hong Kong with limited liability)
We have audited the financial statements on pages 23 to 69 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 141 of the Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
BASIS OF OPINION We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.
OPINION In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 28 February 2005 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance.
Ernst & Young Certified Public Accountants
Hong Kong, 28 June 2005 Consolidated Profit and Loss Account (Year ended 28 February 2005)
2005 2004 Notes HK$’000 HK$’000
TURNOVER 5 558,633 398,733
Cost of sales (374,263) (188,966) Other revenue 8,110 15,125 Selling and distribution costs (126,820) (130,454) General and administrative expenses (106,315) (108,599) Other operating expenses (54,641) (136,120)
LOSS FROM OPERATING ACTIVITIES 6 (95,296) (150,281)
Finance costs 8 (10,390) (8,328) Share of profits less losses of associates (19,305) (25,420)
LOSS BEFORE TAX (124,991) (184,029)
Tax 9 – 843
LOSS BEFORE MINORITY INTERESTS (124,991) (183,186)
Minority interests 6,277 13,492
NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS 10 (118,714) (169,694)
LOSS PER SHARE 11 Basic (20.7 cents) (29.5 cents)
Diluted N/A N/A
The Sincere Company, Limited Annual Report 2004-2005 23 24 The Sincere Company, Limited Annual Report 2004-2005
Consolidated Balance Sheet (As at 28 February 2005)
2005 2004 Notes HK$’000 HK$’000
NON-CURRENT ASSETS Fixed assets 12 252,455 309,762 Goodwill 13 6,067 12,777 Properties under development 14 111,500 123,900 Long term receivables 15 – 3,591 Interests in associates 17 256,235 205,075 Long term investments 18 43,709 49,058 Rental deposits 4,090 3,243 Pension scheme assets 7 5,922 5,774
679,978 713,180
CURRENT ASSETS Properties under development for sale 19 – 235,722 Properties held for sale 20 164,413 19,745 Inventories 46,246 50,407 Debtors 21 912 2,440 Prepayments, deposits and other receivables 30,589 31,631 Marketable securities 22 251,231 312,667 Pledged bank balances 8,402 28,613 Pledged deposits with banks 89,000 46,541 Cash and bank balances 23 35,444 47,095
626,237 774,861
CURRENT LIABILITIES Interest-bearing bank loans and overdrafts, secured 24 289,327 267,727 Creditors, deposits and accrued expenses 25 86,285 99,391 Tax 150 150 Unclaimed dividends 4,605 4,605
380,367 371,873
NET CURRENT ASSETS 245,870 402,988
TOTAL ASSETS LESS CURRENT LIABILITIES 925,848 1,116,168
NON-CURRENT LIABILITIES Interest-bearing bank loans, secured 24 – 195,850
MINORITY INTERESTS 47,576 (7,815)
878,272 928,133 Consolidated Balance Sheet (Continued) (As at 28 February 2005)
2005 2004 Notes HK$’000 HK$’000
CAPITAL AND RESERVES Issued share capital 26 287,154 287,154 Share premium account 27 26 26 Reserves 29(a) 591,092 640,953
878,272 928,133
Walter K W Ma Philip K H Ma Director Director
The Sincere Company, Limited Annual Report 2004-2005 25 26 The Sincere Company, Limited Annual Report 2004-2005
Consolidated Statement of Changes in Equity (Year ended 28 February 2005)
Reserves Investment Issued Share General property share premium and other revaluation Retained Total capital account reserves reserves profits reserves Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 March 2003 287,154 26 38,812 16,967 723,671 779,450 1,066,630 Exchange adjustment – – 22,959 – – 22,959 22,959 Surplus on revaluation for the year – – – 8,238 – 8,238 8,238 Loss for the year – – – – (169,694) (169,694) (169,694)
At 29 February 2004 and 1 March 2004 287,154 26 61,771 25,205 553,977 640,953 928,133 Exchange adjustment – – (11) – – (11) (11) Surplus on revaluation for the year – – – 68,864 – 68,864 68,864 Loss for the year – – – – (118,714) (118,714) (118,714)
At 28 February 2005 287,154 26 61,760 94,069 435,263 591,092 878,272
Represented by: Company and subsidiaries 287,154 26 43,300 – 343,947 387,247 674,427 Associates – – 18,460 94,069 91,316 203,845 203,845
At 28 February 2005 287,154 26 61,760 94,069 435,263 591,092 878,272
Company and subsidiaries 287,154 26 46,050 – 443,356 489,406 776,586 Associates – – 15,721 25,205 110,621 151,547 151,547
At 29 February 2004 287,154 26 61,771 25,205 553,977 640,953 928,133 Consolidated Cash Flow Statement (Year ended 28 February 2005)
2005 2004 Notes HK$’000 HK$’000
CASH FLOWS FROM OPERATING ACTIVITIES Loss before tax (124,991) (184,029) Adjustments for: Interest expense 10,390 8,328 Share of profits less losses of associates 19,305 25,420 Interest income (3,721) (5,023) Depreciation 14,814 16,695 Goodwill amortisation and impairment 6,710 5,988 Impairment on fixed assets in Mainland China 331 7,036 Impairment on fixed assets in Hong Kong (“HK”) 13,575 – Deficit on revaluation of investment properties in Mainland China 6,700 31,816 Impairment on properties under development in Mainland China 12,400 42,401 Impairment on properties under development for sale in the United Kingdom (“UK”) 14,127 40,453 Loss/(gain) on disposal of fixed assets 1,758 (147) Write-back of provision for impairment of a long term investment (2,323) – Gain on liquidation of a subsidiary 31(a) – (1,763)
Operating loss before working capital changes (30,925) (12,825) Decrease in long term receivables 3,591 2,490 Decrease/(increase) in properties under development for sale 31(b) 142,650 (81,067) Decrease/(increase) in properties held for sale 31(b) (61,474) 29,974 Decrease in inventories 4,161 14,559 Decrease/(increase) in debtors 1,528 (705) Decrease/(increase) in prepayments, deposits and other receivables 1,042 (463) Decrease in marketable securities 61,436 78,562 Increase/(decrease) in creditors, deposits and accrued expenses (13,106) 30,530 Increase in pension scheme assets (148) (268)
Cash generated from operations 108,755 60,787 Interest received 3,721 5,023 Interest paid (17,728) (17,368) Hong Kong taxes refunded – 48 Overseas taxes paid – (525)
Net cash inflow from operating activities 94,748 47,965
The Sincere Company, Limited Annual Report 2004-2005 27 28 The Sincere Company, Limited Annual Report 2004-2005
Consolidated Cash Flow Statement (Continued) (Year ended 28 February 2005)
2005 2004 Notes HK$’000 HK$’000
Net cash inflow from operating activities 94,748 47,965
CASH FLOWS FROM INVESTING ACTIVITIES Additions to fixed assets (7,938) (8,538) Advances from associates 1,138 14,273 Liquidation of a subsidiary 31(a) – (74) Repayment from long term investments 7,672 1,100 Refund/(payment) of rental deposits (847) 6,528 Decrease/(increase) in bank balances pledged 20,211 (17,672) Increase in deposits with banks pledged (42,459) (30,750) Proceeds on disposal of fixed assets 28,067 3,104
Net cash inflow/(outflow) from investing activities 5,844 (32,029)
CASH FLOWS FROM FINANCING ACTIVITIES Repayment of loans, secured (208,220) (107,811) New loans, secured 27,396 124,111 Minority interests 61,179 3,770
Net cash inflow/(outflow) from financing activities (119,645) 20,070
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (19,053) 36,006
Cash and cash equivalents at beginning of year 18,584 6,150 Effect of foreign exchange rate changes, net 828 (23,572)
CASH AND CASH EQUIVALENTS AT END OF YEAR 359 18,584
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 23 35,444 47,095 Bank overdrafts (35,085) (28,511)
359 18,584 Balance Sheet (As at 28 February 2005)
2005 2004 Notes HK$’000 HK$’000
NON-CURRENT ASSETS Fixed assets 12 13,428 13,913 Interests in subsidiaries 16 785,349 835,242 Interests in associates 17 16,196 16,611 Long term investments 18 9,171 14,520 Rental deposits 4,090 3,243 Pension scheme assets 7 5,922 5,598
834,156 889,127
CURRENT ASSETS Inventories 46,101 48,290 Debtors, prepayments and deposits 15,458 17,145 Pledged deposits with banks 33,460 34,373 Cash and bank balances 23 4,978 6,930
99,997 106,738
CURRENT LIABILITIES Interest-bearing bank loans and overdrafts, secured 24 41,396 43,709 Creditors, deposits and accrued expenses 25 59,236 50,519 Unclaimed dividends 4,605 4,605
105,237 98,833
NET CURRENT ASSETS/(LIABILITIES) (5,240) 7,905
828,916 897,032
CAPITAL AND RESERVES Issued share capital 26 287,154 287,154 Share premium account 27 26 26 Reserves 29(b) 541,736 609,852
828,916 897,032
Walter K W Ma Philip K H Ma Director Director
The Sincere Company, Limited Annual Report 2004-2005 29 30 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (28 February 2005)
1. CORPORATE INFORMATION The principal activities of the Company and its subsidiaries during the year consisted of the operation of department stores, the rental of properties, property development, securities trading, the operation of restaurants and the provision of advertising agency services. The operation of convenience chain stores ceased during the year. Furthermore, the operation of a restaurant was temporarily closed in January 2005 following the expiry of the lease term of the premise where the restaurant was operating. The management is seeking for another prime location to reopen the restaurant.
2. IMPACT OF RECENTLY ISSUED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRS”) The Hong Kong Institute of Certified Public Accountants has issued a number of new Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards, hereinafter collectively referred to as the new HKFRSs, which are generally effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 28 February 2005. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.
Hong Kong Interpretation 3 “Revenue – Pre-completion Contracts for the Sale of Development Properties” applies to pre-completion contracts for the sale of development properties entered into on or after 1 January 2005. The Group did not elect to retrospectively apply this interpretation to pre-completion contracts for sale of development properties entered into before 1 January 2005, and the Group did not have any pre-completion contracts entered into on or after 1 January 2005. Accordingly, this interpretation has had no impact on these financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation These financial statements have been prepared in accordance with HKFRSs (which also include Statements of Standard Accounting Practice (“SSAPs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the Companies Ordinance. They have been prepared under the historical cost convention, except for the remeasurement of investment properties and investments in securities, as further explained below.
Basis of consolidation The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year together with the Group’s share of the results for the year and post–acquisition reserves of its associates as set out below. The results of subsidiaries and associates acquired or disposed of during the year are consolidated with reference to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation.
Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries. Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Subsidiaries A subsidiary is a company in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors.
The results of subsidiaries are included in the Company’s profit and loss account to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses.
Associates An associate is a company, not being a subsidiary, in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.
The Group’s share of the post-acquisition results and reserves of associates is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group’s interests in associates are stated in the consolidated balance sheet at the Group’s share of the net assets other than goodwill under the equity method of accounting, less any impairment losses.
The results of associates are included in the Company’s profit and loss account to the extent of dividends received and receivable. The Company’s investments in associates are treated as long term assets and are stated at cost less any impairment losses.
Certain associates also hold shares in The Sincere Company, Limited and, in these cases, in computing the Group’s share of results, appropriate elimination is made of any amount by which these companies’ own reported results have been affected by such shareholdings. The enhancement of the Group’s share of the associates’ retained profits resulting from the latters’ receipt of dividends from The Sincere Company, Limited is reflected as a movement in the reserves of associates.
Goodwill Goodwill arising on the acquisition of subsidiaries and associates represents the excess of the cost of the acquisition over the Group’s share of the fair values of the identifiable assets and liabilities acquired as at the date of acquisition.
Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset and amortised on the straight-line basis over its estimated useful life. In the case of associates, any unamortised goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet.
The Sincere Company, Limited Annual Report 2004-2005 31 32 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Goodwill (continued) On disposal of subsidiaries or associates, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of goodwill which remains unamortised and any relevant reserves, as appropriate.
The carrying amount of goodwill is reviewed annually and written down for impairment when it is considered necessary. A previously recognised impairment loss for goodwill is not reversed unless the impairment loss was caused by a specific external event of an exceptional nature that was not expected to recur, and subsequent external events have occurred which have reversed the effect of that event.
Impairment of assets An assessment is made at each balance sheet date of whether there is any indication of impairment of any asset, or whether there is any indication that an impairment loss previously recognised for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use and its net selling price.
An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the profit and loss account in the period in which it arises, unless the asset is carried at a revalued amount, when the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.
A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/ amortisation), had no impairment loss been recognised for the asset in prior years.
A reversal of an impairment loss is credited to the profit and loss account in the period in which it arises, unless the asset is carried at a revalued amount, when the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.
Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis and includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is based on estimated selling prices less any estimated costs necessary to make the sale. Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investments in securities (i) Long term investments in unlisted equity securities, which are intended to be held on a continuing basis, and which are held for an identified long term purpose documented at the time of acquisition or change of purpose and are clearly identifiable for the documented purpose, are stated at cost less any impairment losses, on an individual investment basis.
When impairment in value has occurred, the carrying amounts of the securities are reduced to their fair values, as estimated by the directors, and the amount of impairment is charged to the profit and loss account for the period in which they arise.
When the circumstances and events that led to impairment cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future, the appreciation in fair value is credited to profit and loss account, on an individual investment basis, to the extent of the amount previously charged.
(ii) Investments in marketable securities are stated at their fair values on the basis of their quoted market prices at the balance sheet date on an individual investment basis. The gains or losses arising from changes in their respective fair values are credited or charged to the profit and loss account for the period in which they arise.
Debtors Debtors, which generally have credit terms of one to three months, are recognised and carried at the original invoiced amount. An estimate for doubtful debts is made and deducted when collection of the full amount is no longer probable. Bad debts are written off as incurred.
Fixed assets and depreciation Fixed assets, other than investment properties, are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the fixed assets have been put into operation, such as repairs and maintenance costs, is normally charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalised as an additional cost of the fixed asset.
The Sincere Company, Limited Annual Report 2004-2005 33 34 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fixed assets and depreciation (continued) Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows:
Land Over the remaining lease terms Buildings 2%-4% Furniture, fixtures and equipment 10%-20% 2 Motor vehicles 16 /3%-25% Leasehold improvements Shorter of lease terms and useful lives
The gain or loss on disposal or retirement of a fixed asset recognised in the profit and loss account is the difference between the sales proceeds and the carrying amount of the relevant asset.
Investment properties Investment properties are interests in land and buildings in respect of which construction work and development have been completed and which are intended to be held on a long term basis for their investment potential. Such properties are not depreciated and are stated at their open market values on the basis of annual professional valuations performed at the end of each financial year. Changes in the values of investment properties are dealt with as movements in the investment property revaluation reserve. If the total of this reserve is insufficient to cover a deficit, on a portfolio basis, the excess of the deficit is charged to the profit and loss account. Any subsequent revaluation surplus is credited to the profit and loss account to the extent of the deficit previously charged.
Upon disposal of an investment property, the relevant portion of the investment property revaluation reserve realised in respect of the previous valuation is released to the profit and loss account.
Properties under development Properties under development are stated at cost less any impairment losses plus attributable profits less foreseeable losses and sums received or receivable from buyers. Cost includes all costs attributable to such development, including finance charges capitalised until the earlier of the date of sale of the development or the date of the completion of the development.
When a property under development is pre-sold for which the pre-completion contract was entered into before 1 January 2005, the attributable profit recognised on the pre-sold portion of the property under development is determined by the apportionment of the estimated profit over the entire period of construction to reflect the progress of the development and is calculated by reference to the proportion of construction costs incurred up to the balance sheet date to the estimated total construction costs to completion, with due allowance for contingencies. Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Properties under development (continued) Properties under development which have been pre-sold and in respect of which occupation permits are expected to be granted within one year from the balance sheet date are classified under current assets.
No depreciation is provided for on properties under development.
Properties held for sale Properties held for sale are stated at the lower of their carrying amount and net realisable value. Carrying amount represents the cost or valuation, net of accumulated depreciation, transferred from land and buildings or investment properties in prior years. Income on property sale is recognised when the legally binding sales contracts are signed.
Borrowing costs Borrowing costs directly attributable to the acquisition or construction of an asset which takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the costs of the asset. The capitalisation rate for the year is based on the attributable cost of the specific borrowings. All other borrowing costs are charged to the profit and loss account in the period in which they are incurred.
Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets and rentals receivable under the operating leases are credited to the profit and loss account on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under the operating leases are charged to the profit and loss account on the straight-line basis over the lease terms.
Employee benefits Paid leave carried forward The Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward.
Retirement benefits The Group operates a funded final salary defined benefit pension scheme (the “Scheme”) for those employees who are eligible to participate in the Scheme. The expected costs of providing pensions under the Scheme are charged to the profit and loss account over the periods during which the employees provide the related services to the Group.
The Sincere Company, Limited Annual Report 2004-2005 35 36 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Employee benefits (continued) Retirement benefits (continued) An actuarial estimate is made annually by a professionally qualified independent actuary, using the projected unit credit actuarial valuation method, of the present value of the Group’s future defined benefit obligation under the Scheme earned by the employees as at the balance sheet date (the “Scheme obligation”). The assets contributed by the Group to the scheme (the “Scheme assets”) are held separately from the assets of the Group in an independently administered fund, and are valued at their fair value at the balance sheet date.
The effect of actuarial gains and losses experienced in the estimation of the Scheme obligation and the valuation of the Scheme assets is initially recorded in the balance sheet and is subsequently recognised in the profit and loss account only when the net cumulative actuarial gains or losses in the balance sheet exceed 10% of the higher of the Scheme obligation and the fair value of Scheme assets at the beginning of the period. Such “excess” net cumulative actuarial gains or losses are recognised in the profit and loss account over the expected average remaining working lives of the employees participating in the Scheme.
The net of the Scheme obligation and the fair value of the Scheme assets at the balance sheet date, together with the actuarial gains and losses remaining in the balance sheet at that date, is recognised in the balance sheet within non-current assets or non-current liabilities, as appropriate. If the net amount results in an asset, the amount of the asset is limited to the net total of any net cumulative actuarial losses remaining in the balance sheet, and the present value of any future refunds from the Scheme or reductions in future contributions to the Scheme. Movements in the net asset or liability recognised in the balance sheet during the period, other than those deferred in the balance sheet, are recorded in the profit and loss account for the period.
The amounts of the contributions payable by the Group to the Scheme are determined by the actuary using the projected unit credit actuarial valuation method.
In addition, the Group also operates a defined contribution Mandatory Provident Fund (“MPF”) retirement benefits scheme under the Mandatory Provident Fund Schemes Ordinance. Contributions to the MPF scheme are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the MPF scheme. The Group’s employer contributions are fully and immediately vested in favour of the employees when contributed to the MPF scheme.
The employees in the subsidiaries established in Mainland China are members of the Central Pension Scheme operated by the Mainland China government. The subsidiaries are required to contribute a certain percentage of their covered payroll to the Central Pension Scheme to fund the benefits. The only obligation for the subsidiaries with respect to the Central Pension Scheme is to meet the required contributions under the Central Pension Scheme. Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Employee benefits (continued) Share option scheme The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The financial impact of share options granted under the share option scheme is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the profit and loss account or balance sheet for their cost. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding options.
Income tax Income tax comprises current and deferred tax. Income tax is recognised in the profit and loss account or in equity if it relates to items that are recognised in the same or a different period directly in equity.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences:
• except where the deferred tax liability arises from the initial recognition of an asset or liability and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• in respect of taxable temporary differences associated with investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax assets and unused tax losses can be utilised:
• except where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The Sincere Company, Limited Annual Report 2004-2005 37 38 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income tax (continued) 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 deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Revenue recognition Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:
(a) trading of securities, on the trade day;
(b) interest income, on a time proportion basis taking into account the principal outstanding and the effective rate of interest applicable;
(c) dividends, when the shareholders’ rights to receive payment is established;
(d) rental income, in the period in which the properties are let out and on the straight– line basis over the lease terms;
(e) sales of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(f) sale of properties, when the legally binding unconditional sales contracts are signed and exchanged;
(g) pre-sale of properties under development, when the construction work has progressed to a stage where the ultimate realisation of profit can be reasonably determined and on the basis set out under the paragraph “Properties under development” above;
(h) receipts from restaurant operations and the operation of convenience chain stores, upon the delivery of food, beverages and other consumer goods to customers;
(i) advertising agency fee income, on completion of the services; and
(j) income from counter and consignment sales, when goods are sold by the relevant parties. Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Research and development costs All research costs are charged to the profit and loss account as incurred.
Expenditure incurred on projects to develop new products is capitalised and deferred only when the projects are clearly defined; the expenditure is separately identifiable and can be measured reliably; there is reasonable certainty that the projects are technically feasible; and the products have commercial value. Product development expenditure which does not meet these criteria is expensed when incurred.
Deferred development costs are stated at cost less any impairment losses and are amortised using the straight-line basis over the commercial lives of the underlying products from three to five years, commencing from the date when the products are put into commercial production.
Foreign currencies Foreign currency transactions are recorded at the applicable exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable exchange rates ruling at that date. Exchange differences are dealt with in the profit and loss account.
Forward exchange contracts are valued at the rates of exchange ruling at the balance sheet date and exchange differences are dealt with in the profit and loss account.
On consolidation, the financial statements of overseas subsidiaries and associates are translated into Hong Kong dollars using the net investment method. The profit and loss accounts of overseas subsidiaries and associates are translated into Hong Kong dollars at the weighted average exchange rates for the year, and their balance sheets are translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.
For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.
Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.
The Sincere Company, Limited Annual Report 2004-2005 39 40 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.
For the purpose of the balance sheet, cash and bank balances comprise cash on hand and at banks, including term deposits, which are not restricted as to use.
4. SEGMENT INFORMATION In accordance with the requirements of SSAP 26 “Segment reporting”, the Group has determined that business segments are its primary reporting format and geographical segments are its secondary reporting format.
The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of other business segments. Summary details of the business segments are as follows:
(a) the department store operations segment consists of the operations of department stores and convenience chain stores offering a wide range of consumer products;
(b) the restaurant operations segment consists of the operation of restaurants;
(c) the property rental segment consists of the leasing of premises to generate rental income;
(d) the property development segment consists of the development and sale of properties;
(e) the securities trading segment consists of the trading of Hong Kong and overseas securities; and
(f) the corporate and others segment consists of corporate income and expenses items and advertising agency services.
In determining the Group’s geographical segments, revenues and results are attributed to the segments based on the location of the businesses, and assets are attributed to the segments based on the location of the assets.
Inter–segment sales are transacted based on the direct costs incurred or an agreed rate for rental income and income from the provision of warehouse services, respectively. Notes to Financial Statements (Continued) (28 February 2005)
4. SEGMENT INFORMATION (continued) (a) Business segments The following tables present revenue, profit/(loss) and certain asset, liability and expenditure information for the Group’s business segments.
Department Restaurant Property Property Securities Corporate store operations operations rental development trading and others Eliminations Consolidated 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue: Sales to external customers 309,671 281,305 23,936 22,180 12,895 15,530 196,773 30,084 10,119 44,716 5,239 4,918 – – 558,633 398,733 Inter– segment sales – – – – 15,532 17,607 – – – – 7,217 6,296 (22,749) (23,903) – – Other revenue 731 3,002 – 137 204 (470) – 1,145 554 – – – – (1,165) 1,489 2,649
Total 310,402 284,307 23,936 22,317 28,631 32,667 196,773 31,229 10,673 44,716 12,456 11,214 (22,749) (25,068) 560,122 401,382
Segment results (30,245) (56,001) (49) (1,781) 5,187 7,988 (26,479) (8,433) 5,153 39,556 (3,058) (3,935) – – (49,491) (22,606)
Interest, dividend income and unallocated revenue 6,621 12,476 Unallocated expenses (5,293) (18,445) Impairment on fixed assets in Mainland China – – – – (331) (7,036) – – – – – – – – (331) (7,036) Impairment on fixed assets in Hong Kong – – – – (13,575) – – – – – – – – – (13,575) – Revaluation deficit on investment properties in Mainland China – – – – (6,700) (31,816) – – – – – – – – (6,700) (31,816) Impairment on properties under development in Mainland China – – – – (12,400) (42,401) – – – – – – – – (12,400) (42,401) Impairment on properties under development for sale in the UK – – – – – – (14,127) (40,453) – – – – – – (14,127) (40,453)
Loss from operating activities (95,296) (150,281) Finance costs (10,390) (8,328) Share of profits less losses of associates (19,305) (25,420)
Loss before tax (124,991) (184,029) Tax – 843
Loss before minority interests (124,991) (183,186) Minority interests 6,277 13,492
Net loss from ordinary activities attributable to shareholders (118,714) (169,694)
The Sincere Company, Limited Annual Report 2004-2005 41 42 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
4. SEGMENT INFORMATION (continued) (a) Business segments (continued)
Department Restaurant Property Property Securities Corporate store operations operations rental development trading and others Eliminations Consolidated 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment assets 108,346 115,103 2,958 3,727 374,971 434,223 206,664 316,193 316,076 357,309 8,746 9,431 (24,031) (23,556) 993,730 1,212,430 Unallocated assets 21,165 42,025 Interests in associates – – – – – – 157,554 77,958 – – 98,681 127,117 – – 256,235 205,075 Bank overdrafts included in segment assets 22,413 28,151 – – – – 5,751 360 6,660 – 261 – – – 35,085 28,511 Total assets 1,306,215 1,488,041
Segment liabilities 78,040 75,686 6,698 4,388 7,394 10,695 10,579 22,424 1,114 939 2,037 4,299 (24,031) (23,556) 81,831 94,875 Unallocated liabilities 263,451 444,337 Bank overdrafts included in segment assets 22,413 28,151 – – – – 5,751 360 6,660 – 261 – – – 35,085 28,511 Total liabilities 380,367 567,723
Other segment information: Depreciation 9,121 9,794 229 242 5,033 5,670 – – – – 431 989 – – 14,814 16,695
Capital expenditure 7,653 6,469 57 57 76 838 – – – – 152 1,174 – – 7,938 8,538
Provision for doubtful debts – – – – – – – – – – 579 189 – – 579 189
Write– back of provision for obsolete inventories (2,608) (5,949) – – – – – – – – (5) – – – (2,613) (5,949)
Impairment on fixed assets in HK – – – – 13,575 – – – – – – – – – 13,575 –
Impairment on fixed assets in Mainland China – – – – 331 7,036 – – – – – – – – 331 7,036
Revaluation deficit on investment properties in Mainland China – – – – 6,700 31,816 – – – – – – – – 6,700 31,816
Impairment on properties under development in Mainland China – – – – 12,400 42,401 – – – – – – – – 12,400 42,401
Impairment on properties under development for sale in the UK – – – – – – 14,127 40,453 – – – – – – 14,127 40,453
Amortisation and impairment on goodwill – – – – 6,710 5,988 – – – – – – – – 6,710 5,988 Notes to Financial Statements (Continued) (28 February 2005)
4. SEGMENT INFORMATION (continued) (b) Geographical segments The following table presents revenue and certain assets and expenditure information for the Group’s geographical segments.
Hong Kong Mainland China UK Others Eliminations Consolidated 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue: Sales to external customers 342,788 339,240 14,110 11,296 197,206 30,084 4,529 18,113 – – 558,633 398,733
Segment assets 402,135 503,021 320,375 340,474 369,969 389,162 213,736 255,384 – – 1,306,215 1,488,041
Capital expenditure 7,115 4,527 823 3,000 – – – 1,011 – – 7,938 8,538
5. TURNOVER Turnover represents the invoiced value of goods sold less discounts and returns, rental income net of outgoings, gross proceeds from the sales of properties, net gain or loss on securities trading, the receipts from restaurant operations and operations of convenience stores, and advertising agency fee income. Current year balance of turnover included net income from counter and consignment sales of HK$105,419,000 since the management of the Group anticipates that the counter and consignment sales will be continued in the future as part of the principal activities of the Group. The prior year balance of net income from counter and consignment sales of HK$85,352,000 is now reclassified into turnover in order to be consistent with current year’s presentation.
The Sincere Company, Limited Annual Report 2004-2005 43 44 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
6. LOSS FROM OPERATING ACTIVITIES The Group’s loss from operating activities is arrived at after charging/(crediting):
2005 2004 HK$’000 HK$’000
Depreciation 14,814 16,695 Auditors’ remuneration 1,888 1,780
Staff costs, excluding directors’ remuneration (Note 30) Wages and salaries 57,805 41,535 Pension contributions, including pension costs for defined benefit scheme of HK$2,403,000 (2004: HK$2,220,000) 2,869 2,359
60,674 43,894
Impairment on fixed assets in Mainland China* 331 7,036 Impairment on fixed assets in Hong Kong* 13,575 – Deficit on revaluation of investment properties in Mainland China* 6,700 31,816 Impairment on properties under development in Mainland China* 12,400 42,401 Provision for impairment on properties under development for sale in the UK* 14,127 40,453 Provision for doubtful debts 579 189 Write-back of provision for impairment of a long term investment* (2,323) – Write-back of provision for obsolete inventories** (2,613) (5,949) Amortisation and impairment of goodwill* 6,710 5,988
Operating lease rental payments in respect of land and buildings: Minimum lease payments 64,107 71,557 Contingent rent 9,030 6,204
Loss/(gain) on disposal of fixed assets 1,758 (147) Exchange losses/(gains) – net (109) 2,153
Gross rental income (11,352) (15,810) Less: Outgoings 69 102
Net rental income (11,283) (15,708)
Gain on liquidation of a subsidiary – (1,763) Dividends from listed investments (2,853) (3,590) Gain on securities trading (10,119) (44,716) Interest income (3,721) (5,023)
* Amounts are included in “Other operating expenses” on the face of the consolidated profit and loss account.
** Amount is included in “Cost of sales” on the face of the consolidated profit and loss account. Notes to Financial Statements (Continued) (28 February 2005)
7. PENSION SCHEME ASSETS (a) The movements in the net pension scheme assets in the balance sheets during the year were as follows:
Group
2005 2004 Notes HK$’000 HK$’000
At beginning of year 5,774 5,506
Contribution paid to the pension scheme 2,752 2,672
Net pension scheme cost recognised in the profit and loss account 6, 7(c), 30 (2,604) (2,404)
At 28 February/29 February 7(b) 5,922 5,774
Company
2005 2004 Note HK$’000 HK$’000
At beginning of year 5,598 5,321
Contribution paid to the pension scheme 2,539 2,415
Net pension scheme cost recognised in the profit and loss account (2,215) (2,138)
At 28 February/29 February 7(b) 5,922 5,598
The Sincere Company, Limited Annual Report 2004-2005 45 46 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
7. PENSION SCHEME ASSETS (continued) (b) The components of the pension scheme net assets as at the balance sheet date, were as follows:
Group
2005 2004 Note HK$’000 HK$’000
Present value of defined benefit obligation (35,849) (34,333)
Fair value of scheme assets 36,989 38,065
1,140 3,732
Net cumulative actuarial losses remaining in the balance sheet 4,782 2,042
Net asset recognised at 28 February/29 February 7(a) 5,922 5,774
Company
2005 2004 Note HK$’000 HK$’000
Present value of defined benefit obligation (35,849) (33,421)
Fair value of scheme assets 36,989 37,145
1,140 3,724
Net cumulative actuarial losses remaining in the balance sheet 4,782 1,874
Net asset recognised at 28 February/29 February 7(a) 5,922 5,598 Notes to Financial Statements (Continued) (28 February 2005)
7. PENSION SCHEME ASSETS (continued) (c) The components of the Group’s net pension scheme cost recognised in the consolidated profit and loss account for the year, together with the actual return on the scheme assets for the year, were as follows:
2005 2004 HK$’000 HK$’000
Current service cost 3,241 3,142 Interest cost on defined benefit obligation 1,681 1,531 Expected return on pension scheme assets (2,501) (2,278) Net actuarial losses recognised 6 9 Loss on curtailment and settlement 177 –
2,604 2,404
Actual return/(loss) on scheme assets (2,757) 407
The above amount of the Group’s net pension scheme cost was included in the general and administrative expenses on the face of the consolidated profit and loss account.
(d) The principal actuarial assumptions used in determining the Group’s and Company’s net pension scheme assets as at the balance sheet date, were as follows:
2005 2004 % %
Discount rate 4.0 4.5 Long term average expected return on scheme assets 6.5 6.5 Long term salary increase rate 4.5 4.5
(e) In addition to the above disclosures, the following further information is provided pursuant to the requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). The actuarial valuation of the Group’s pension scheme as at 28 February 2005 was performed by Mr. Aaron Wong, Fellow of the Society of Actuarial, of Watson Wyatt Hong Kong Limited, using the valuation method detailed under the heading “Employee benefits: Retirement benefits” in note 3 to the financial statements.
As at 28 February 2005, the level of funding of the pension scheme was 102% (2004: 111%), as calculated under the projected unit credit actuarial valuation method.
The Sincere Company, Limited Annual Report 2004-2005 47 48 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
8. FINANCE COSTS 2005 2004 HK$’000 HK$’000
Interest on bank loans and other loans wholly repayable within five years 18,217 17,916 Less: Interest capitalised (Notes 19, 20) (7,827) (9,588)
Net interest expense 10,390 8,328
9. TAX No provision for Hong Kong profits tax has been made during the year (2004: Nil) as the Group did not generate any assessable profits arising in Hong Kong.
No overseas tax has been made during the year as the subsidiaries did not generate any assessable profits arising in the countries in which these subsidiaries operate. Last year’s tax credit represented overprovision in prior years for certain subsidiaries operating overseas. Overseas taxes have been provided on the profits of the subsidiaries in accordance with the tax laws of the countries in which these subsidiaries operated for the year ended 29 February 2004.
2005 2004 HK$’000 HK$’000
Group: Current – Hong Kong Charge for the year – –
Current – Overseas Charge for the year – – Overprovision in prior years – (878)
– (878)
Share of tax attributable to associates – 35
Total tax credit for the year – (843) Notes to Financial Statements (Continued) (28 February 2005)
9. TAX (continued) A reconciliation of the tax expense applicable to loss before tax using the statutory rates, ranging from 17.5% to 33%, for the countries in which the Company and its subsidiaries and associates are domiciled to the tax expense at the effective tax rates, are as follows:
Group 2005 2004 HK$’000 HK$’000
Loss before tax (124,991) (184,029)
Tax at the statutory tax rate (42,220) (68,848) Adjustments in respect of current tax of previous periods – (910) Income not subject to tax (4,246) (6,611) Expenses not deductible for tax 31,419 39,508 Deferred tax not recognised (539) (910) Estimated tax losses not recognised 15,586 36,928
Tax credit at the Group’s effective rate – (843)
The Group has tax losses arising in Hong Kong of approximately HK$921,881,000 (2004: HK$876,052,000) that are available indefinitely for offsetting against future taxable profits of the Group. Deferred tax asset has not been recognised in respect of these losses as the Group has been loss-making for some time.
10. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS The net loss from ordinary activities attributable to shareholders dealt with in the financial statements of the Company amounted to HK$68,116,000 (2004: HK$143,722,000).
11. LOSS PER SHARE The calculation of basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the year of HK$118,714,000 (2004: HK$169,694,000) and the 574,308,000 (2004: 574,308,000) shares in issue throughout the year.
No diluted loss per share is presented for both current and last years as there are no dilutive potential ordinary shares in existence during these years.
The Sincere Company, Limited Annual Report 2004-2005 49 50 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
12. FIXED ASSETS Group Furniture, fixtures, Investment Land and equipment and Leasehold properties buildings motor vehicles improvements Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Cost or valuation: At beginning of year 174,500 146,005 46,137 92,119 458,761 Additions – – 2,848 5,090 7,938 Disposals – (50,769) (11,206) (23,300) (85,275) Deficit on revaluation (6,700) – – – (6,700)
At 28 February 2005 167,800 95,236 37,779 73,909 374,724
Accumulated depreciation and impairment: At beginning of year – 32,423 39,009 77,567 148,999 Depreciation provided during the year – 2,956 3,621 8,237 14,814 Impairment provided during the year – 13,906 – – 13,906 Disposals – (23,269) (8,881) (23,300) (55,450)
At 28 February 2005 – 26,016 33,749 62,504 122,269
Net book value: At 28 February 2005 167,800 69,220 4,030 11,405 252,455
At 29 February 2004 174,500 113,582 7,128 14,552 309,762
Analysis of cost or valuation: At cost – 95,236 37,779 73,909 206,924 At valuation 167,800 – – – 167,800
167,800 95,236 37,779 73,909 374,724 Notes to Financial Statements (Continued) (28 February 2005)
12. FIXED ASSETS (continued) Company Furniture, fixtures, equipment and Leasehold motor vehicles improvements Total HK$’000 HK$’000 HK$’000
Cost: At beginning of year 31,058 46,952 78,010 Additions 1,663 4,676 6,339 Disposals (335) – (335)
At 28 February 2005 32,386 51,628 84,014
Accumulated depreciation: At beginning of year 28,529 35,568 64,097 Provided during the year 1,276 5,540 6,816 Disposals (327) – (327)
At 28 February 2005 29,478 41,108 70,586
Net book value: At 28 February 2005 2,908 10,520 13,428
At 29 February 2004 2,529 11,384 13,913
The tenures and locations of the Group’s land and buildings are as follows:
Hong Kong Mainland China Total HK$’000 HK$’000 HK$’000
Net book value: Medium term leasehold 40,618 28,602 69,220
The net book value of land and buildings included impairment losses of HK$13,906,000 (2004: HK$7,036,000), which was charged to the profit and loss account for the year. The impairment loss was determined by management with reference to the open market value as at the balance sheet date.
The Sincere Company, Limited Annual Report 2004-2005 51 52 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
12. FIXED ASSETS (continued) Company (continued) The investment properties are situated in Mainland China and held under medium term leases.
The investment properties were valued on 28 February 2005 by Castores Magi Surveyors Limited, an independent firm of professional valuers, on an open market value basis based on their existing use at HK$167,800,000. A revaluation deficit of HK$6,700,000 resulting from the valuation was charged to the profit and loss account.
The investment properties and certain of the land and buildings which are situated in Mainland China and Hong Kong are pledged as security to banks for bank loans granted (Note 24).
13. GOODWILL The amounts of goodwill capitalised as an asset in the balance sheet, arising from the acquisition of subsidiaries, are as follows:
HK$’000
Cost: At beginning of year and at 28 February 2005 25,870
Accumulated amortisation and impairment: At beginning of year 13,093 Amortisation and impairment provided during the year 6,710
At 28 February 2005 19,803
Net book value: At 28 February 2005 6,067
At 29 February 2004 12,777 Notes to Financial Statements (Continued) (28 February 2005)
14. PROPERTIES UNDER DEVELOPMENT
Group 2005 2004 HK$’000 HK$’000
Carrying value: At beginning of year 123,900 166,301 Provision for impairment (12,400) (42,401)
111,500 123,900
The properties under development are located in Dalian, Mainland China and were valued on 28 February 2005 by Castores Magi Surveyors Limited on an open market value basis based on their existing use at HK$111,500,000. An impairment loss of HK$12,400,000 resulting from the valuation was charged to the profit and loss account.
At the balance sheet date, the properties under development are pledged as security to banks for bank loans granted to the Group (Note 24).
15. LONG TERM RECEIVABLES Long term receivables represent amounts due from purchasers of units in the Sincere House and are secured by those units and bear interest at 2.25% or 2.75% over the best annual lending rate in Hong Kong as quoted from time to time by The Hongkong and Shanghai Banking Corporation Limited.
Group 2005 2004 HK$’000 HK$’000
Total amounts receivable 196 4,886 Amounts receivable within one year classified as current assets (Note 21) (196) (1,295)
Long term portion – 3,591
The Sincere Company, Limited Annual Report 2004-2005 53 54 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
16. INTERESTS IN SUBSIDIARIES
Company 2005 2004 HK$’000 HK$’000
Unlisted shares, at cost 42,024 42,024 Due from subsidiaries 1,423,552 1,415,704 Due to subsidiaries (62,548) (64,682)
1,403,028 1,393,046
Less: Provision for impairment (617,679) (557,804)
785,349 835,242
The balances with subsidiaries are unsecured and not repayable within the next 12 months from the balance sheet date. Certain of the balances bear interest at 4.3% (2004: 4.3%) per annum.
Particulars of the principal subsidiaries are as follows:
Place of Nominal value incorporation/ of issued/ registration registered Class of Percentage and principal share capital/ shares held Nature of Company operations paid-up capital held Directly Indirectly business
Citihood British Virgin US$30,000 Registered 100 – Investment Developments Islands holding Limited
Dalian Sincere Mainland RMB72,000,000 N/A – 100 Property Building China development Co., Ltd.*
Finsbay British Virgin US$10,000 Registered – 51 Investment Investment Islands holding Limited
Jubilee Street UK GBP967 Ordinary – 100 Property Limited “A” shares investment GBP33 Ordinary – – “B” shares Notes to Financial Statements (Continued) (28 February 2005)
16. INTERESTS IN SUBSIDIARIES (continued)
Particulars of the principal subsidiaries are as follows: (continued)
Place of Nominal value incorporation/ of issued/ registration registered Class of Percentage and principal share capital/ shares held Nature of Company operations paid-up capital held Directly Indirectly business
Ottoway Limited British Virgin US$1 Registered 100 – Investment Islands holding
Palatial British Virgin US$50,000 Registered 100 – Investment Estates Islands holding Holding Inc.
Peak Restaurants Hong Kong HK$22,500,000 Ordinary – 70 Operation of Limited restaurants
Prizeport UK GBP2,200,000 Ordinary – 95 Property Limited development
Right View Hong Kong HK$2 Ordinary – 100 Property Limited holding
Silveroute British Virgin US$1 Registered 100 – Securities Limited Islands trading
Sincere B.V.I. British Virgin US$100 Registered 100 – Investment Limited Islands holding
The Sincere British Virgin US$50,000 Registered 100 – Investment Department Islands holding Store (China) Limited
The Sincere Hong Kong HK$2 Ordinary 100 – Provision of Finance finance Company, Limited
The Sincere Company, Limited Annual Report 2004-2005 55 56 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
16. INTERESTS IN SUBSIDIARIES (continued)
Particulars of the principal subsidiaries are as follows: (continued)
Place of Nominal value incorporation/ of issued/ registration registered Class of Percentage and principal share capital/ shares held Nature of Company operations paid-up capital held Directly Indirectly business
Springview Hong Kong HK$500,000 Ordinary 100 – Securities Limited trading
360 Communications Hong Kong HK$100 Ordinary – 60 Advertising Limited agency
Pacific Falcon Hong Kong HK$10,000 Ordinary – 80 Project design Limited and furniture retailing
CPC No. 4 Guernsey GBP100 Ordinary – 90 Property Limited# development
* Dalian Sincere Building Co., Ltd. is registered as a wholly-foreign owned enterprise under the Mainland China law.
# Incorporated during the year.
The above table lists the subsidiaries of the Company, which in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length. Notes to Financial Statements (Continued) (28 February 2005)
17. INTERESTS IN ASSOCIATES
Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Unlisted shares, at cost – – 16,611 16,611 Share of net assets other than goodwill 271,725 219,427 – –
271,725 219,427 16,611 16,611 Due to associates (15,490) (14,352) (415) –
256,235 205,075 16,196 16,611
The Group’s share of the post-acquisition accumulated reserves of associates at 28 February 2005 was HK$203,845,000 (2004: HK$151,547,000).
The balances with associates are unsecured, interest-free and not repayable within the next 12 months from the balance sheet date.
Included in the above is the results of 140 Park Lane Limited which, in the opinion of the directors, is material to the Group’s financial results. Details of the financial position as at 28 February 2005 and the results for the year then ended of the respective associate are as follows:
2005 2004 HK$’000 HK$’000
Total assets 1,495,735 1,319,935 Total liabilities 961,269 1,015,860 Turnover 188,565 163,087 Loss before tax (18,574) (45,160) Loss after tax attributable to the Group (5,572) (13,548)
The Sincere Company, Limited Annual Report 2004-2005 57 58 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
17. INTERESTS IN ASSOCIATES (continued)
Particulars of the associates are as follows:
Place of incorporation Class Percentage Business and principal of shares of issued Nature of Company structure operations held shares held business
Brandlord Limited Corporate UK Ordinary 27.00 Property investment
Tailbay Investments Corporate British Virgin Ordinary 30.00 Investment Limited Islands/UK holding
The Sincere Life Assurance Corporate Hong Kong Ordinary 48.09 Insurance and Company Limited (“Life”) investment
The Sincere Insurance & Corporate Hong Kong Ordinary 40.67 General Investment Company, insurance and Limited (“Insurance”) investment
The Sincere Company Corporate Hong Kong Ordinary 37.15 Investment (Perfumery Manufacturers) holding Limited (“Perfumery”)
140 Park Lane Limited Corporate UK Ordinary 30.00 Property investment
Lancaster Partnership Corporate UK Ordinary 50.00 Property Limited investment
At 28 February 2005, Life, Insurance and Perfumery directly held 31.89%, 13.17% and 0.30%, respectively, of the issued share capital of the Company. Notes to Financial Statements (Continued) (28 February 2005)
18. LONG TERM INVESTMENTS
Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Unlisted investments at cost: Hong Kong 13,052 20,724 13,052 20,724 Taiwan 23,108 23,108 23,108 23,108 Others 34,538 34,538 – –
70,698 78,370 36,160 43,832 Less: Provision for impairment (26,989) (29,312) (26,989) (29,312)
43,709 49,058 9,171 14,520
At 28 February 2005, the unlisted investment in Hong Kong and Taiwan of the Group and of the Company represented interests of 10% (2004: 10%) and 19.9% (2004: 19.9%) in the issued share capital of Goldian Limited and The Sincere Department Store Limited, respectively, against which provisions of HK$12,578,000 (2004: HK$14,901,000) and HK$14,411,000 (2004: HK$14,411,000) have been made for impairment as considered necessary by the directors of the Company.
19. PROPERTIES UNDER DEVELOPMENT FOR SALE
Group 2005 2004 HK$’000 HK$’000
Carrying value at beginning of year 235,722 156,652 Additions 48,135 81,067 Interest capitalised (Note 8) 6,119 9,588 Sale during the year (190,785) – Exchange realignment – 28,868
99,191 276,175
Less: Provision for impairment (14,127) (40,453)
85,064 235,722
Transferred to properties held for sale (Note 20) (85,064) –
– 235,722
Last year balance of the properties under development for sale are pledged to banks to secure bank loans granted to the Group (Note 24).
The Sincere Company, Limited Annual Report 2004-2005 59 60 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
20. PROPERTIES HELD FOR SALE
Group 2005 2004 HK$’000 HK$’000
At beginning of year 19,745 45,018 Additions 81,219 817 Transferred from properties under development for sale (Note 19, 31(b)) 85,064 – Interest capitalised (Note 8) 1,708 – Sale during the year (19,745) (30,791) Exchange realignment (3,578) 4,701
164,413 19,745
At the balance sheet date, the properties held for sale are pledged to banks to secure bank loans granted to the Group (Note 24).
21. DEBTORS
The maturity profile of the current portion of the amounts due from purchasers of units in the Sincere House and debtors from other services at the balance sheet date was as follows:
Group 2005 2004 HK$’000 HK$’000
Current - 3 months 640 1,454 4 - 6 months 176 326 7 - 12 months 96 660
912 2,440 Notes to Financial Statements (Continued) (28 February 2005)
22. MARKETABLE SECURITIES Group 2005 2004 HK$’000 HK$’000
Listed investments, at market value: Hong Kong 26,197 31,800 Elsewhere 225,034 280,867
251,231 312,667
At the balance sheet date, marketable securities with an aggregate market value of approximately HK$243,364,000 (2004: HK$299,143,000) were pledged to banks to secure banking facilities granted to the Group (Note 24).
23. CASH AND BANK BALANCES Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Cash on hand and in banks 29,288 44,738 4,978 6,930 Deposits with banks 6,156 2,357 – –
35,444 47,095 4,978 6,930
24. INTEREST-BEARING BANK LOANS AND OVERDRAFTS, SECURED Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Bank loans and overdrafts, secured 289,327 463,577 41,396 43,709
Portion due within one year included under current liabilities (289,327) (267,727) (41,396) (43,709)
Long term portion – 195,850 – –
The bank loans and overdrafts are repayable in various instalments within a period of: Less than 1 year or on demand 289,327 267,727 41,396 43,709 More than 1 year but less than 2 years – 195,850 – –
289,327 463,577 41,396 43,709
The Sincere Company, Limited Annual Report 2004-2005 61 62 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
25. CREDITORS The age analysis of trade creditors at the balance sheet date included in the total creditors balance was as follows:
Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Current - 3 months 42,414 37,599 42,046 34,563 4 - 6 months 139 921 139 921 7 - 12 months 265 596 265 596 Over 1 year 939 427 900 427
43,757 39,543 43,350 36,507
26. SHARE CAPITAL 2005 2004 HK$’000 HK$’000
Authorised: 600,000,000 ordinary shares of HK$0.50 each 300,000 300,000
Issued and fully paid: 574,308,000 ordinary shares of HK$0.50 each 287,154 287,154
27. SHARE PREMIUM ACCOUNT 2005 2004 HK$’000 HK$’000
At beginning and end of year 26 26 Notes to Financial Statements (Continued) (28 February 2005)
28. SHARE OPTION SCHEME The Company operates the share option scheme (the “Option Scheme”) for the purpose of providing incentives and rewards to eligible participants for their contribution to the Group. Eligible participants of the Option Scheme include any full-time employees and directors, excluding any non-executive directors, of the Group. The Option Scheme became effective on 1 August 2000 and, unless otherwise amended or altered, will remain in force for a period of 10 years from that date.
The maximum number of unexercised share options currently permitted to be granted under the Option Scheme is an amount equivalent, upon their exercise, of up to 10% of the shares of the Company in issue at any time. The maximum number of shares issuable under share options to each eligible participant in the Option Scheme is limited to 25% of the aggregate number of shares issuable under the Option Scheme.
The offer of the grant of a share option may be accepted within 28 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, and commences on a date determinable by the directors, and ends on a date which is not later than 10 years from the commencement date of the exercise period or the expiry date of the Option Scheme, if earlier.
The exercise price of the share options is determinable by the directors, but may not be less than the higher of (i) 90% of the average of the closing price of the Company’s shares on The Stock Exchange of Hong Kong Limited for the five trading days immediately preceding the date of offer of the option; and (ii) the nominal value of the Company’s shares.
No options had been granted or agreed to be granted under the Option Scheme up to the date of approval of these financial statements.
The Sincere Company, Limited Annual Report 2004-2005 63 64 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
29. RESERVES (a) Group The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity.
(b) Company General Retained reserves profits Total HK$’000 HK$’000 HK$’000
At 1 March 2003 46,613 706,961 753,574 Loss for the year – (143,722) (143,722)
At 29 February 2004 and 1 March 2004 46,613 563,239 609,852 Loss for the year – (68,116) (68,116)
At 28 February 2005 46,613 495,123 541,736
At 28 February 2005, the Company’s reserves available for distribution, calculated in accordance with the provisions of Section 79B of the Companies Ordinance, amounted to HK$541,736,000 (2004: HK$609,852,000).
30. REMUNERATION OF THE DIRECTORS AND OF THE FIVE HIGHEST PAID INDIVIDUALS Directors’ remuneration consisted of:
Executive Directors Other Directors Total 2005 2004 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Fees 3,537 3,592 402 402 3,939 3,994 Salaries and allowances 17,319 16,762 – – 17,319 16,762 Pension contributions, including pension cost for defined benefit scheme of HK$201,000 (2004: HK$184,000) 213 204 – – 213 204
21,069 20,558 402 402 21,471 20,960 Notes to Financial Statements (Continued) (28 February 2005)
30. REMUNERATION OF THE DIRECTORS AND OF THE FIVE HIGHEST PAID INDIVIDUALS (continued) There was no arrangement under which a director waived or agreed to waive any remuneration during the year.
The remuneration of the directors fell within the following bands:
Number of directors 2005 2004
Nil – HK$1,000,000 3 3 HK$2,500,001 – HK$3,000,000 1 1 HK$8,500,001 – HK$9,000,000 1 1 HK$10,500,001 – HK$11,000,000 1 1
Of the five highest paid individuals, three are directors of the Company and their remuneration has been included in the directors’ remuneration above. The remuneration of the remaining two highest paid individuals, analysed by the nature thereof and designated bands, is as set out below:
Group 2005 2004 HK$’000 HK$’000
Salaries and allowances 3,125 3,011 Pension contributions 24 24
3,149 3,035
Number of individuals 2005 2004
HK$1,000,001 – HK$1,500,000 – 1 HK$1,500,001 – HK$2,000,000 2 – HK$2,000,001 – HK$2,500,000 – 1
The Sincere Company, Limited Annual Report 2004-2005 65 66 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
31. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Liquidation of a subsidiary
2005 2004 HK$’000 HK$’000
Net liabilities disposed of: Fixed assets – 3,001 Cash and bank balances – 74 Inventories – 2,333 Prepayments, deposits and other receivables – 674 Creditors, deposits and accrued expenses – (5,369) Minority interests – (2,476)
– (1,763)
Gain on liquidation of a subsidiary – 1,763
– –
Satisfied by: Cash – –
An analysis of the net outflow of cash and cash equivalents in respect of the liquidation of a subsidiary is as follows:
2005 2004 HK$’000 HK$’000
Cash consideration – – Cash and bank balances on liquidation – (74)
Net outflow of cash and cash equivalents in respect of the liquidation of a subsidiary – (74)
The results of the subsidiary liquidated for the year ended 29 February 2004 had no significant impact on the Group’s consolidated turnover or consolidated loss after tax and before minority interests for that year.
(b) Major non-cash transaction During the year, the properties under development for sale held by a subsidiary amounting to HK$85,064,000 were transferred at net book value to properties held for sale on completion of the redevelopment project, which were still unsold at 28 February 2005. Notes to Financial Statements (Continued) (28 February 2005)
32. OPERATING LEASE ARRANGEMENTS (a) As lessor The Group leases its investment properties under operating lease arrangements, with leases negotiated for terms ranging from 1 to 20 years.
At the balance sheet date, the Group and the Company had total future minimum lease receivables under non-cancellable operating leases with their tenants falling due as follows:
Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Within one year 7,027 7,684 2,534 2,328 In the second to fifth years, inclusive 22,269 17,802 4,512 45 After five years 55,491 59,930 – –
84,787 85,416 7,046 2,373
During the year, the Group did not receive any contingent rent.
(b) As lessee The Group leases its land and buildings under operating lease arrangements, with leases negotiated for terms ranging from 1 to 7 years.
At the balance sheet date, the Group and the Company had total future minimum lease payments under non-cancellable operating leases falling due as follows:
Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Within one year 57,723 47,013 47,262 36,483 In the second to fifth years, inclusive 116,957 54,068 96,003 48,416 After five years 21,603 – 21,603 –
196,283 101,081 164,868 84,899
A non-cancellable operating lease included above was subject to contingent rent payments, which were charged at the higher of 12% of the gross sales attributable to the leased premises or the base rents as determined in the related lease agreement.
The Sincere Company, Limited Annual Report 2004-2005 67 68 The Sincere Company, Limited Annual Report 2004-2005
Notes to Financial Statements (Continued) (28 February 2005)
33. OUTSTANDING COMMITMENTS Outstanding commitments at the balance sheet date were as follows:
Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Irrevocable letters of credit 12,883 9,885 12,883 9,885 Capital commitments – contracted, but not provided for – 2,000 – – – authorised, but not contracted – 26,555 – – Commitments to purchase foreign currencies 100,969 177,453 6,193 20,508 Commitments to sell foreign currencies 100,772 177,097 6,098 20,549
None of the associates of the Group had outstanding capital commitments as at the balance sheet date, while as at 29 February 2004, certain associates of the Group had capital commitments in aggregate of approximately HK$14,075,000 in respect of the property development projects in London, the United Kingdom. In the opinion of the management, these property development projects were financed by bank borrowings instead of internal financial resources.
34. CONTINGENT LIABILITIES Contingent liabilities at the balance sheet date were as follows:
Group Company 2005 2004 2005 2004 HK$’000 HK$’000 HK$’000 HK$’000
Guarantees executed by the Company in favour of banks to secure loans granted to subsidiaries – – 43,401 167,334
Guarantees executed by the Company in favour of a bank to secure a loan granted to an associate 356,387 336,856 356,387 336,856
In addition to the above, the Group’s share of guarantee provided by certain associates amounted to approximately HK$47,575,000 (2004: HK$25,474,000) and HK$219,532,000 as at the balance sheet date and subsequent to the balance sheet date, respectively, in respect of one banking facility granted to their associate. Notes to Financial Statements (Continued) (28 February 2005)
35. RELATED PARTY TRANSACTIONS Save for the related party transactions disclosed elsewhere in the financial statements, the Group also provided advertising services and charged service fees of approximately HK$519,000 (2004: HK$1,023,000) thereof to a related company, of which Charles M W Chan, an independent non-executive director of the Company, is an executive director. The directors confirm that the related party transaction was carried out in the ordinary course of business of the Group and were effected on prices and terms similar to other customers.
The related party transaction set out above constituted connected transactions as defined in the Listing Rules.
36. COMPARATIVE AMOUNTS As further explained in note 5 to the financial statements, the income from counter and consignment sales in the prior year had been reclassified as turnover to conform with the current year’s presentation. The directors are in the opinion that such presentation would present more fairly the operations of the Group.
37. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorised for issue by the board of directors on 28 June 2005.
The Sincere Company, Limited Annual Report 2004-2005 69 70 The Sincere Company, Limited Annual Report 2004-2005
Schedule of Investment Properties (As at 28 February 2005)
Location Use Tenure
18 Jie Fang Road Commercial/residential Medium term leasehold Zhong Shan District Dalian Mainland China
Zhong Xin Fu Shen Building Residential Medium term leasehold 20 Hubei Road Huangpu District Shanghai Mainland China Schedule of Properties Under Development/Held for Sale (As at 28 February 2005)
Gross Expected Site floor Category Stage of completion Percentage area area Address of lease Use completion date interest (sq.ft.) (sq.ft.)
18 Jie Fang Road Medium Commercial/ 85% End of 2005 100 35,000 540,000 Zhong Shan District term residential constructed Dalian Mainland China
Jubilee Street Centre Freehold Residential Completed N/A 77 61,968 70,694 Jubilee Street London, E1 United Kingdom
Flat 16 Long term Residential Completed N/A 90 N/A 4,006 47 Lowndes Square London SW1 United Kingdom
The Sincere Company, Limited Annual Report 2004-2005 71 72 The Sincere Company, Limited Annual Report 2004-2005
Five Year Summary
The consolidated results, assets, liabilities and minority interests of the Group for the last five financial years, as extracted from the audited financial statements and reclassified as appropriate, are summarised below.
Year ended 28/29 February 2005 2004 2003 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
RESULTS
TURNOVER 558,633 398,733 364,956 427,143 438,252
LOSS BEFORE TAX (124,991) (184,029) (248,099) (57,603) (274,520)
TAX – 843 (5,880) (3,189) (3,092)
MINORITY INTERESTS 6,277 13,492 5,223 2,738 8,802
NET LOSS ATTRIBUTABLE TO SHAREHOLDERS (118,714) (169,694) (248,756) (58,054) (268,810)
The income from counter and consignment sales for the year ended 28/29 February 2001, 2002, 2003 and 2004 are now reclassified into turnover in order to be consistent with current year’s presentation.
As at 28/29 February 2005 2004 2003 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
ASSETS, LIABILITIES AND MINORITY INTERESTS
FIXED ASSETS 252,455 309,762 362,729 363,486 391,749
INTERESTS IN ASSOCIATES 256,235 205,075 223,603 259,424 959,389
OTHER ASSETS 171,288 198,343 258,082 359,840 453,196
NET CURRENT ASSETS 245,870 402,988 226,051 333,607 171,484
LONG TERM LIABILITIES – (195,850) – – (330,946)
MINORITY INTERESTS (47,576) 7,815 (3,835) (5,514) (10,668)
SHAREHOLDERS’ FUNDS 878,272 928,133 1,066,630 1,310,843 1,634,204